Question Tag: Interest Deduction

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  • 20 Marks

TAX – Nov 2021 – L2 – Q2 – Companies Income Tax (CIT)

Computation of interest deductible under section 24 of CITA 2004 and treatment of excess interest for XYZ Limited.

XYZ Limited was incorporated on August 31, 2012, and it commenced business on May 31, 2013. Diki (Malaysia) Limited is its subsidiary in Malaysia. An extract of the financial statements of XYZ Limited for the year ended December 31, 2020, revealed the following:

Assessable profit: N2,000,000

Interests and depreciation deducted before arriving at the assessable profit are:

  • Interest on loan paid to Diki (Malaysia) Limited: N1,050,000
  • Interest on loan paid to other creditors: N1,000,000
  • Depreciation: N400,000

It was discovered that N450,000 of the loan paid to other creditors was in respect of a loan obtained to generate tax-exempt profits.

The Managing Director of XYZ Limited has asked you as a tax consultant to explain the provisions of section 24 of CITA 2004 (as amended) and the Seventh Schedule in respect of the interest deductible by a Nigerian company.

Required:
a. Compute the interest deductible in the relevant assessment year. (16 Marks)
b. Explain how the excess interest not deducted in the relevant assessment year would be treated. (4 Marks)

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  • 8 Marks

AT – NOV 2021 – L3 – Q1b – Permanent Establishment | International Taxation

Discusses the tax implications of establishing a permanent establishment or a subsidiary in Ghana.

Muda Atesigbe is a major shareholder of Malka Ltd, a company based in Dubai–United Arab Emirates. As part of giving the company a global outlook, it intends to have a presence in Ghana. What is not too clear to the company’s management is the mode of entry into the country that would serve its business interests. It is contemplating establishing a company in Ghana or using the Permanent Establishment route to make its presence in Ghana.

Required:
He has tasked you, as a final level student of the Institute of Chartered Accountants, Ghana, to advise him on the tax implications of both routes and which is a better option. (8 marks)

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  • 8 Marks

AT – Dec 2023 – L3 – Q2a – Tax Planning

Computation of tax implications under thin capitalization rules and definition of exempt persons in corporate taxation.

Scenario:
Papana Ltd, a resident company in Ghana, has cash flow challenges after a major customer ceased business dealings. Dawadawa Ltd, another resident company, negotiated with Papana Ltd and acquired 52% of its underlying ownership. As part of this arrangement, Dawadawa Ltd secured a loan facility of GH¢100 million for Papana Ltd at an interest rate of 4% above the average rate of 25%. The total interest paid in 2021 was GH¢2 million. Dawadawa Ltd is exempt from tax on all its income.

The capital structure of Papana Ltd for the 2021 year of assessment is as follows:

Required:
i) Compute the tax implications of the above arrangement.
ii) What constitutes an exempt person?

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  • 12 Marks

AT – Nov 2019 – L3 – Q1a – Tax planning

Analyze the tax implications of a loan arrangement under thin capitalization rules for Kelkadadi Ltd.

The management of Kelkadadi Ltd, a company resident in Ghana since the year of assessment 2007, is a wholly owned subsidiary of Danlerigu Ltd, a company resident in Nigeria. The Finance Manager of Kelkadadi has invited you as a final level three candidate of ICAG and also a Tax Intern with Danlerigu to analyze the transaction below and provide tax implications thereon.

Kelkadadi Ltd contracted a loan of $10 million from Danlerigu Ltd to help it meet its operational activities. The balance standing on the loan account at the beginning of 2018 stood at $5 million and $4.1 million at the end of 2018 year of assessment. The exchange rates are as follows:

  • Year Start (2018) $1 = GH¢5.20
  • Year End (2018) $1 = GH¢5.21

The extract of the financial statement at the beginning of the year 2018 was as follows:

  • Stated Capital: GH¢200,000
  • Retained Earnings: GH¢1,235,000
  • Capital Surplus: GH¢40,000
  • Share Deals: GH¢30,000

Interest on the debt paid during the year amounted to GH¢90,124 and foreign exchange loss on the loan repayment stood at GH¢147,000.

Required:

Write a memo on the possible tax implication(s) on this arrangement to the Finance Manager.

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  • 20 Marks

TAX – Nov 2021 – L2 – Q2 – Companies Income Tax (CIT)

Computation of interest deductible under section 24 of CITA 2004 and treatment of excess interest for XYZ Limited.

XYZ Limited was incorporated on August 31, 2012, and it commenced business on May 31, 2013. Diki (Malaysia) Limited is its subsidiary in Malaysia. An extract of the financial statements of XYZ Limited for the year ended December 31, 2020, revealed the following:

Assessable profit: N2,000,000

Interests and depreciation deducted before arriving at the assessable profit are:

  • Interest on loan paid to Diki (Malaysia) Limited: N1,050,000
  • Interest on loan paid to other creditors: N1,000,000
  • Depreciation: N400,000

It was discovered that N450,000 of the loan paid to other creditors was in respect of a loan obtained to generate tax-exempt profits.

The Managing Director of XYZ Limited has asked you as a tax consultant to explain the provisions of section 24 of CITA 2004 (as amended) and the Seventh Schedule in respect of the interest deductible by a Nigerian company.

Required:
a. Compute the interest deductible in the relevant assessment year. (16 Marks)
b. Explain how the excess interest not deducted in the relevant assessment year would be treated. (4 Marks)

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  • 8 Marks

AT – NOV 2021 – L3 – Q1b – Permanent Establishment | International Taxation

Discusses the tax implications of establishing a permanent establishment or a subsidiary in Ghana.

Muda Atesigbe is a major shareholder of Malka Ltd, a company based in Dubai–United Arab Emirates. As part of giving the company a global outlook, it intends to have a presence in Ghana. What is not too clear to the company’s management is the mode of entry into the country that would serve its business interests. It is contemplating establishing a company in Ghana or using the Permanent Establishment route to make its presence in Ghana.

Required:
He has tasked you, as a final level student of the Institute of Chartered Accountants, Ghana, to advise him on the tax implications of both routes and which is a better option. (8 marks)

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  • 8 Marks

AT – Dec 2023 – L3 – Q2a – Tax Planning

Computation of tax implications under thin capitalization rules and definition of exempt persons in corporate taxation.

Scenario:
Papana Ltd, a resident company in Ghana, has cash flow challenges after a major customer ceased business dealings. Dawadawa Ltd, another resident company, negotiated with Papana Ltd and acquired 52% of its underlying ownership. As part of this arrangement, Dawadawa Ltd secured a loan facility of GH¢100 million for Papana Ltd at an interest rate of 4% above the average rate of 25%. The total interest paid in 2021 was GH¢2 million. Dawadawa Ltd is exempt from tax on all its income.

The capital structure of Papana Ltd for the 2021 year of assessment is as follows:

Required:
i) Compute the tax implications of the above arrangement.
ii) What constitutes an exempt person?

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  • 12 Marks

AT – Nov 2019 – L3 – Q1a – Tax planning

Analyze the tax implications of a loan arrangement under thin capitalization rules for Kelkadadi Ltd.

The management of Kelkadadi Ltd, a company resident in Ghana since the year of assessment 2007, is a wholly owned subsidiary of Danlerigu Ltd, a company resident in Nigeria. The Finance Manager of Kelkadadi has invited you as a final level three candidate of ICAG and also a Tax Intern with Danlerigu to analyze the transaction below and provide tax implications thereon.

Kelkadadi Ltd contracted a loan of $10 million from Danlerigu Ltd to help it meet its operational activities. The balance standing on the loan account at the beginning of 2018 stood at $5 million and $4.1 million at the end of 2018 year of assessment. The exchange rates are as follows:

  • Year Start (2018) $1 = GH¢5.20
  • Year End (2018) $1 = GH¢5.21

The extract of the financial statement at the beginning of the year 2018 was as follows:

  • Stated Capital: GH¢200,000
  • Retained Earnings: GH¢1,235,000
  • Capital Surplus: GH¢40,000
  • Share Deals: GH¢30,000

Interest on the debt paid during the year amounted to GH¢90,124 and foreign exchange loss on the loan repayment stood at GH¢147,000.

Required:

Write a memo on the possible tax implication(s) on this arrangement to the Finance Manager.

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