- 10 Marks
Question
Baimbil LTD, based in Australia, has decided to acquire a company in Ghana instead of starting a new one.
The shareholders of Borketey LTD, a resident company in Ghana, have decided to sell the company due to cash flow challenges. As a result, Baimbil LTD approached the management of Borketey LTD and engaged a consultancy firm to perform due diligence checks. Following this, Baimbil LTD acquired 70% of the equity of Borketey LTD.
Below is an extract from the books of Borketey LTD for the 2023 year of assessment:
| Description | Amount (GH¢) |
|---|---|
| Share Capital | 1,000,000 |
| Retained Earnings | (500,000) |
| Shared Deals | 50,000 |
| Bad Debts (Sold to MN LTD, now bankrupt) | 1,000,000 |
Proposed Financing by Baimbil LTD:
The following proposals have been tabled for consideration after the acquisition:
- Baimbil LTD to provide GH¢100 million as debt with 2% interest above the market rate.
- Baimbil LTD to provide GH¢100 million as additional equity capital.
- Baimbil LTD to provide collateral for a bank facility of GH¢100 million in Ghana.
Required:
(i) Evaluate the tax implications of the 70% equity acquisition.
(ii) Evaluate the tax implications of the three proposed financing options.
Answer
(i) Tax Implications of 70% Equity Acquisition
- The acquisition of 70% equity in Borketey LTD constitutes a change in ownership, which could lead to a requirement for two tax returns – one before and one after the change.
- Bad debts of GH¢1,000,000 previously written off by Borketey LTD shall not be deductible by Baimbil LTD.
- Capital allowance on existing assets will continue to be claimed based on the written-down value (WDV) and not the acquisition price paid by Baimbil LTD.
- Any unutilized tax losses may be subject to review by the Ghana Revenue Authority (GRA). Under Section 62 of the Income Tax Act, 2015 (Act 896), tax losses are only transferable in a merger situation, not in a standard equity acquisition.
(ii) Tax Implications of the Proposed Financing Options
| Financing Option | Tax Implication |
|---|---|
| Option 1: GH¢100 million Debt (2% interest above market rate) | – This may create thin capitalization concerns if the debt-to-equity ratio exceeds 3:1 (as per Ghana’s tax laws). – Interest on excessive debt beyond the 3:1 ratio will be disallowed for tax purposes. – The 2% interest above market rate shall be considered a non-deductible expense. – Interest payments to Baimbil LTD (non-resident) will attract 8% withholding tax (WHT). |
| Option 2: GH¢100 million Additional Equity Capital | – No tax deduction is allowed for capital injections. – Provides long-term financing stability for Borketey LTD. – Future dividends paid to Baimbil LTD may attract 8% withholding tax (WHT). |
| Option 3: Bank Loan of GH¢100 million with Baimbil LTD’s Guarantee | – No thin capitalization concerns, as the debt is from a third-party financial institution. – Interest paid on the loan is tax-deductible. – Baimbil LTD does not incur withholding tax (WHT) liability on interest payments. |
Conclusion
- If Baimbil LTD chooses debt financing, they must maintain a compliant debt-to-equity ratio to avoid interest disallowance.
- Equity financing is tax-neutral but may lead to higher dividend tax obligations.
- A third-party bank loan offers full tax deductibility on interest payments without WHT implications.
- Topic: Business income - Corporate income tax
- Series: Nov 2024
- Uploader: Salamat Hamid