AT – July 2023 – L3 – Q2a – Mergers, amalgamation, and reorganization

Evaluating the tax impact of acquiring interest in a Ghanaian company and strategies to reduce tax exposure

Question

Cradle Ltd, a company based in the United Kingdom, has proposed to acquire interest in Mamen Ltd, a company incorporated in Ghana and engaged in the sale of ceramics in Ghana. As part of Cradle Ltd’s investigation to acquire Mamen Ltd, the following financial indicators caught the attention of the management of Cradle Ltd:

The company has large staff numbers made up of fresh graduates and employees with enormous work experience.
There is a bad debt in the books of Mamen Ltd amounting to GH¢20 million.
The company has a financial cost from arbitrage arrangements amounting to GH¢14 million.
Tax loss unrelieved and unexpired was GH¢2 million.
According to the Accountant, carryover loss amounted to GH¢1 million.

Required:
Evaluate the tax impact of the above financial indicators on the operations of Cradle Ltd and advise the management of Cradle Ltd on how to reduce its tax exposure if any.

Answer

The acquisition of interest in Mamen Ltd by Cradle Ltd may or may not have tax implications. The tax impact of each financial indicator is as follows:

Fresh graduate employment:
Cradle Ltd should ensure that Mamen Ltd continues to recruit more fresh graduates to benefit from the fresh graduate incentive. Under the tax laws, companies employing fresh graduates who have completed tertiary education in Ghana and have not worked elsewhere after national service may benefit from tax incentives.
(2 marks)
Bad debts:
The bad debt of GH¢20 million in the books of Mamen Ltd will not be deductible by Cradle Ltd after the acquisition, as it relates to the period before the acquisition. As a result, Cradle Ltd cannot claim this bad debt as an allowable deduction for tax purposes.
(1.5 marks)
Financial cost from arbitrage arrangements:
The GH¢14 million financial cost from arbitrage arrangements cannot be transferred to Cradle Ltd after the acquisition. Hence, Cradle Ltd will not benefit from any tax deductions related to this financial cost.
(1.5 marks)
Tax loss unrelieved and unexpired:
The unrelieved tax loss of GH¢2 million cannot be carried forward to benefit Cradle Ltd after the acquisition. The law restricts the carry forward of losses where there is a significant change in ownership, especially if there is more than a 50% change in ownership.
(1.5 marks)
Carryover loss:
Similarly, the carryover loss of GH¢1 million will not be available to Cradle Ltd. Tax laws disallow the transfer of carryover losses to new owners in the event of a significant change in underlying ownership.
(1.5 marks)

Conclusion:
Cradle Ltd must carefully consider these tax impacts before acquiring Mamen Ltd. To reduce its tax exposure, Cradle Ltd should ensure that Mamen Ltd continues to employ fresh graduates to benefit from tax incentives. Additionally, it should explore other strategies to minimize the financial costs associated with the acquisition, as the bad debts and carryover losses will not benefit the new owners.

Tags: Carryover losses, Financial cost, Mergers and Acquisitions, Reorganization, Tax impact
Level: Level 3

Topic: Mergers, amalgamation, and reorganization
Series: JULY 2023

Uploader: Theophilus