I. The income tax implications of the acquisition of shares by AIG.

• Section 38(1)(f) and section 62 of Act 896 provide that where the underlying ownership of an entity changes by more than fifty percent at any time within a period of three years, the assets and liabilities of that entity immediately before the change is deemed to be realized.
• Underlying ownership in relation to an entity is defined in section 133 of Act 896 to mean membership interests owned in the entity, directly or indirectly through one or more interposed entities, by individuals or by entities in which no person has a membership interest.
• Since AIG would acquire fifty-five percent of the shares of Fluid Logistics, there will be more than fifty percent change in the ownership of Fluid Logistics. Thus, the assets and liabilities of Fluid Logistics will be deemed to have realized immediately before the change.
• Section 62(2) of Act 896 provides that where the underlying ownership of Fluid Logistics changes by more than fifty percent, Fluid Logistics cannot; a. deduct financial costs carried forward under section 16 (3) that were incurred by the entity before the change; b. deduct a loss under section 17 (1) that was incurred by the entity before the change; c. claim a deduction under section 23 (2), (4) or (5) after the change, in a case where the entity has included an amount in calculating income under those provisions before the change; or d. carry back a loss under section 24 (6) that was incurred after the change to a year of assessment before the change.
• In addition, where the underlying ownership changes by more than fifty percent during a year of assessment of Fluid Logistics, the period before the change and the period after the change shall be treated as separate years of assessment under section 62(3) of Act 896. [9 marks]

ii. The income tax implications of providing the loan of GH₵6,500,000

• Candidates are expected to discuss that the loan being provided must comply with the arm’s length rules and the thin capitalization provisions in Act 896.
• Arm’s length transactions
  • Section 31 of Act 896 provides that the income and tax implications of arrangements between persons in a controlled relationship must reflect the arm’s length standard. The arm’s length standard requires persons who are in a controlled relationship to quantify, characterize, apportion and allocate amounts to be included in or deducted from income to reflect that which would have been made between independent persons.
  • Therefore, the terms of the loan which includes the interest payable on the loan must reflect the interest an independent person in a similar circumstance would have paid on the loan.
• Thin capitalization
  • Section 33 of Act 896 provides that where a resident entity which is not a financial institution and in which 50% or more of the underlying ownership is held by an exempt person either alone or together with associates has a debt to equity ratio in excess of 3:1 at any time during a basis period, a deduction is disallowed for any interest paid by that entity on the part of the debt which exceeds the 3:1 ratio.
  • Exempt person is defined in section 33 of Act 896 as either a non-resident person or a resident person for whom interest paid by a resident entity constitutes exempt income. Regulation 20 of the Income Tax Regulations, 2016 (L.I. 2244) defines “debt” to mean an obligation to pay an amount owed to an exempt person and “equity” to mean the sum of Stated Capital and Income Surplus.
  • AIG is an exempt person within the meaning of section 33 because it is a non-resident person. If AIG acquires fifty-five percent of the shares in Fluid Logistics, the loan amount must not exceed the 3:1 debt to equity ratio. Since the stated capital of Fluid Logistics is GH₵1,500,000, the maximum amount of debt AIG can provide to Fluid Logistics to make the interest fully deductible in the books of Fluid Logistics is GH₵4,500,000. [9 Marks]

iii. Measures the parties can adopt to mitigate the tax effects (if any) of the proposed transaction.

• Candidates are expected to discuss that the restrictions placed on the deductions under section 62 of Act 896 are linked with a change of ownership occurring within a three-year period.
• To mitigate the effects, AIG can spread the acquisition the shares over a period such that it will not amount to a change of ownership of Unicom within a three-year period.
• On the restriction placed by the thin capitalization provisions on interest deductibility, AIG can opt to inject GH₵500,000 out of the GH₵6,500,000 as equity in Fluid Logistics. This would increase the stated capital of Fluid Logistics to GH₵2,000,000 thereby increasing the permissible debt threshold to GH₵6,000,000 which would be the same as the remaining amount AIG intends to invest in Fluid Logistics.