- 20 Marks
STP – Aug 2018 – L2 – Q2 – Tax Strategies for New Business Formation
Discuss tax implications of financing a company with debt or equity and recommend the preferable option.
Question
(a). The Chief Executive Officer (CEO) of Expedia intends expanding his business operations in Ghana. The CEO is particularly interested in the income tax consequences of financing the activities of businesses in Ghana. As a tax consultant of high repute, the CEO seeks your opinion on the income tax implications of equity financing and debt financing.
Required:
Write an opinion on the tax implications of financing the activities of a company with either debt or equity and state the preferable option of financing.
(b). Some entrepreneurs hold the view that it is better to finance the activities of a business with related-party loans than with loans provided by unrelated parties. This view is based on the idea that all interest paid on loans are deductible for tax purposes in the books of the borrower and the entrepreneur can manipulate the interest rate which will ultimately affect the corporate taxes the business will pay.
Required: Based on your knowledge of the tax treatment of loans provided by related parties, discuss the truthfulness or otherwise of the above assertion.
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