Question Tag: Tax implications

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  • 9 Marks

AT – Nov 2024 – L3 – Q2b – Tax Implications of 100% Acquisition in Mining Operations

Explain the tax implications of a 100% acquisition and compute the gains from the acquisition.

Tongo LTD (Tongo) is a mining company operating in the Upper East Region of Ghana. The following relates to the operations of Tongo for the 2023 year of assessment:

Description GH¢
Revenue (Gross) 200,000,000
Cost of Operations 80,000,000
Margin/Profit 120,000,000

Additional Information:

  1. Tempane Mines LTD acquired 100% interest in Tongo for a consideration of GH¢310,000,000 at the end of 2023.
  2. The cost of assets acquired at their respective acquisition dates are as follows:
Year Cost of Assets (GH¢)
2020 100,000,000
2021 75,000,000
2023 50,000,000

Required:

i) Explain the tax implication of the 100% acquisition.

ii) Compute the gains from the above acquisition and determine how the gains should be treated.

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  • 20 Marks

AT – Nov 2016 – L3 – SB – Q3 – Capital Gains Tax

Compute chargeable gains, capital gains tax, and new cost of remaining plant and machinery after a sale.

since 2015. It has been a leading name in the production of a popular brand of household vegetable oil known as “Abop,” which is in high demand.

Given the fact that the company is doing very well, it secured funds from its bankers and bought additional Plant and Machinery in excess of its immediate needs on June 1, 2013, for ₦24,600,000.

The Finance Director convinced the Board to dispose of part of the plant and machinery to boost the company’s working capital. Consequently, on December 31, 2015, the company sold part of the Plant and Machinery for ₦37,925,000 and spent ₦5,125,000 as expenses incidental to the sale. The market value of the remaining Plant and Machinery was ₦15,375,000 as of December 31, 2015.

However, the issue of the tax implications of these transactions is worrisome to the Managing Director, who is visibly disturbed that the Federal Inland Revenue Service (FIRS) might come after the company.

You are required to:
a. State any FOUR Chargeable Assets. (2 Marks)
b. State any FOUR conditions for granting Roll-Over Relief. (8 Marks)
c. Compute the Chargeable Gains on the asset sold. (4 Marks)
d. Compute the Capital Gains Tax. (2 Marks)
e. Compute the new cost of the remaining asset. (4 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q3 – Taxation of Mergers and Acquisitions

Explaining acquisitions versus mergers, outlining tax implications for companies, and evaluating AfCFTA's impact on transactions.

The price of crude oil had fallen from over US$100 per barrel in the past few years to under US$40 per barrel recently in the international market. This has resulted in squeezed margins despite efforts to cut costs.

Krude Explora Nigeria Limited, an indigenous oil servicing company operating in the oil and gas sector for 23 years, faces a going concern risk due to falling profitability and liquidity challenges. It is probable that the company will default on its loan facility of US$122.5 million from B2B Energy Bank Plc. If this happens, the company will likely be taken over by Asset Management Corporation of Nigeria (AMCON).

Coincidentally, Wakanda Oil Exploration Limited, a multinational oil servicing company operating across Africa and the Middle East, has just sent an offer to acquire Krude Explora Nigeria Limited. The proposed acquisition will solve the liquidity problems in the short term, while efficiency and scale from the acquisition will hopefully return the company to profitability.

As the lead tax advisor for the proposed transaction, you are required to:

a. Explain the term “acquisition” as compared to a “merger” and give one example each of a recent merger and acquisition in the Nigerian petroleum industry. (4 Marks)

b. Outline and explain briefly the areas that may have tax implications for:
i. Krude Explora Nigeria Limited (4 Marks)
ii. Wakanda Oil Exploration Limited (4 Marks)

c. Discuss the likely impact of the African Continental Free Trade Area agreement and the local economy on a proposed acquisition or merger. (7 Marks)

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  • 15 Marks

ATAX – May 2022 – L3 – Q7 – Petroleum Profits Tax (PPT)

Identify allowable expenses under the PIA and explain implications of mergers in upstream petroleum operations.

In the last three years, some major oil producing companies have decided to divest their investments from the Nigerian oil and gas sector. One of the reasons for this might be the new global energy order, which seems to favour the evolution of a “green environment” as against the present use of hydrocarbons with its inherent environmental degradation and pollution.

Similarly, in response to the yearnings of various stakeholders in the oil and gas sector, the Federal Government enacted the Petroleum Industry Act (PIA) 2021. Generally, the Act provides the legal, governance, regulatory, and fiscal framework for the Nigerian petroleum industry, the development of host communities, and for related matters.

Notable commentators and professionals in the sector suggest that the divestment of major oil and gas operators in Nigeria could be beneficial to local investors if funds are sourced and deployed to businesses in the sector. Mergers and acquisitions of indigenously owned oil-producing companies have been noted as one valuable option in this regard.

Required:

a. In respect of the Petroleum Industry Act 2021, identify the expenses allowable in the computation of adjusted profit of a company in upstream petroleum operations. (6 Marks)
b. Identify and explain SIX implications of mergers and acquisitions in respect of a situation where a new company takes over an existing company. (9 Marks)

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  • 15 Marks

ATAX – May 2022 – L3 – Q6 – Taxation of Non-Resident Companies and Individuals

Discuss the tax implications of an overseas branch and compute the associated tax liabilities.

Maigona Agro Limited is a Nigerian company operating in the agricultural sector. It has a large expanse of land in the Northern part of the country, which is used strictly for the cultivation of cotton seeds. As a result of the collapse of the textile/garment industry, specifically due to the unfavourable business climate in Nigeria, the company in 2015 established a branch, BAM Textile Mills, in the United Kingdom. Part of the cotton produced locally is sold to BAM Textile Mills at a competitive price, for the production of finished product (branded textile clothing).

A tax dispute recently arose between the Management of Maigona Agro Limited and officials of the Federal Inland Revenue Service (FIRS) on the correct assessment of profits made by BAM Textile Mills. The Managing Director is of the opinion that the tax paid by BAM Textile Mills in the United Kingdom should be the final tax since the company is only an overseas branch. He further averred that the provisions of the Companies and Allied Matters Act 2020 (as amended) are only applicable to companies incorporated in Nigeria. The Managing Director was furious when the company received a reminder of notice of assessment from the FIRS and has therefore threatened to approach the Tax Appeal Tribunal for redress.

You have been engaged by the company as its Tax Consultant to provide professional advice on the tax implication of the profit made by BAM Textile Mills, UK and possibly representation at the Tax Appeal Tribunal sittings. The statement of profit or loss for the year ended October 31, 2021 (BAM Textile Mills’ result has been converted to Nigerian Naira at the prevailing exchange rate) and other relevant documents were handed over to you by the Managing Director.

The extracts from the statements of profit or loss of the two corporate entities revealed the following:

Maigona Agro Ltd (N’000) BAM Textile Mills (N’000) Total (N’000)
Gross Turnover 975,100 1,820,500 2,795,600
Less:
Cost of materials/inputs 350,200 672,000 1,022,200
Salaries and Wages 122,530 400,400 522,930
Administrative Expenses 45,700 110,900 156,600
Depreciation 75,600 147,300 222,900
Donation 8,500 0 8,500
Share of Head Office Expenses 33,300 50,000 83,300
Income Tax Paid in the UK 0 72,200 72,200
Total Expenses 635,830 1,452,800 2,088,630
Net Profit 339,270 367,700 706,970

Additional Information:

  1. The capital allowances of Maigona Agro Limited in respect of plant and equipment, farming tools, and other qualifying capital expenditure as agreed with the tax authorities was N45,000,000. The amount of capital allowances of N57,000,000 claimable by BAM Textile Mills on qualifying assets was also certified by the tax authorities.
  2. Included in the donation was N5,000,000 given to victims of the COVID-19 (Omicron variant) pandemic in Nigeria.
  3. The UK tax rate is assumed to be 35%.

Required:

a. Advise the management of Maigona Agro Limited on the tax implications of the overseas branch. (4 Marks)
b. Compute the tax liabilities of the company in line with your submission in (a) above. (11 Marks)

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  • 15 Marks

ATAX – Nov 2016 – L3 – Q4b – Corporate Tax Compliance and Reporting

Compute the relevant tax liabilities for Gringrin Nigeria Ltd. in scenarios with different accounting dates

Gringrin Nigeria Limited is proposing to embark on two courses of action:

i) Change its accounting date from March 31 to June 30; or
ii) Change its accounting date from March 31 to December 31.

The adjusted profits in each scenario are as follows:

  • Change to June 30:
Period Adjusted Profits (N’000)
Year ended March 31, 2011 30,000
Year ended March 31, 2012 33,000
Period ended June 30, 2013 (15 months) 78,000
Year ended June 30, 2014 34,000
  • Change to December 31:
Period Adjusted Profits (N’000)
Year ended March 31, 2011 50,000
Year ended March 31, 2012 60,000
Period ended December 31, 2013 (21 months) 180,000
Year ended December 31, 2014 70,000

As the Tax Consultant, you are required to:

Compute the relevant tax liabilities. (15 Marks)

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  • 20 Marks

ATAX – Nov 2021 – L3 – Q4 – Capital Gains Tax (CGT)

Explanation of tax implications for transactions considered artificial involving connected persons.

Colends Nigeria Limited, Abeokuta, is a manufacturer of plastic materials. The company is well known for prompt payment of taxes as at when due. The cordial relationship between the company and the Federal tax authorities is about to be breached as a result of disagreement in the classification of some transactions made by the company. The tax authorities considered those transactions to be artificial or fictitious, while the Managing Director, who is not an accountant, felt otherwise.

The company is in the process of re-organising its operations so as to compete favorably with its contemporaries, particularly with the implementation of the Africa Continental Free Trade Area Agreement (ACFTA) by some African countries.

The following transactions were concluded by the company during the financial year ended December 31, 2020:

  1. Land and building acquired for ₦70 million on March 6, 2015, were sold for ₦125 million. Advertisement cost was ₦500,000, while the estate agent received a 5% commission of the sale proceeds.
  2. Plant and machinery, which originally cost ₦28 million, were sold for ₦32 million to one of its subsidiaries, Colmas Limited. The market value of the assets sold was ₦40 million.
  3. A saloon motor vehicle acquired for ₦5 million in 2017 was sold to the General Manager of the company for ₦3.5 million. The market value of the car was put at ₦5.5 million.
  4. A giant generator that was acquired in 2018 for ₦12 million was disposed of for ₦15 million. The cost of disposal amounted to ₦200,000.

At a recent meeting of the board, the following transactions were approved and implemented in December 2020:

  • Acquisition of a large acreage of land and a building in the outskirts of the city-center for the business at ₦100 million.
  • Purchase of a modern plant and machinery for ₦50 million.
  • A saloon motor vehicle was purchased for ₦10 million.
  • A brand new generator costing ₦20 million was acquired.

Colends Nigeria Limited has recently appointed you as its tax consultant.

Required:

Draft a report to the Managing Director of the company explaining:

a. The concept of connected persons and artificial transactions. (4 Marks)
b. The tax implications, if any, on transactions executed by the company in accordance with the provisions of the Capital Gains Tax Act Cap C1 LFN 2004 (as amended). (16 Marks)

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  • 15 Marks

FM – Nov 2018 – L3 – Q5 – Capital Budgeting under Uncertainty

Analyze whether replacing a machine after three or four years is more beneficial based on economic costs and tax implications.

Kuku Plc. had a need for a machine. After four years of purchase, the machine will no longer be capable of efficient working at the level of use by the company. The company typically replaces machines every four years. The production manager has noted that in the fourth year, the machine will require additional maintenance to maintain normal efficiency. This raises the question of whether the machine should be replaced after three years instead of four years, as per company practice.

Relevant information is as follows:

(i) A new machine will cost N240,000. If retained for four years, it will have zero scrap value at the end. If retained for three years, it will have an estimated disposal value of N30,000. The machine qualifies for capital allowance of 20% on a reducing balance basis each year, except in the last year. In the final year, if the disposal proceeds are less than the tax written-down value, the difference will be an additional tax relief.

The machine is assumed to be bought and disposed of on the last day of the company’s accounting year.

(ii) The company tax rate is 30%, payable on the last day of the relevant accounting year.

(iii) Maintenance costs are covered by the supplier in the first year. In the second and third years, maintenance costs average N30,000 annually. In the fourth year, they increase to N60,000. Maintenance costs are tax-allowable and payable on the first day of the accounting year.

(iv) The company’s cost of capital is 15%.

Required:

a. Prepare calculations to determine whether it is economically beneficial to replace the machine after three years or four years. (12 Marks)

b. Discuss two additional factors that could influence the company’s replacement decision, including any potential weaknesses in the decision criteria. (3 Marks)

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  • 20 Marks

FM – Nov 2018 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate financing options for machine acquisition using present value and compare traditional financing with Islamic finance.

Tamilore Limited (TL) is an agro-based firm, specializing in yam and rice production in Benue State of Nigeria. One of the harvesters is due to be replaced on November 30, 2018, the last day of TL’s current financial year. An investment appraisal exercise has recently been completed which confirmed that it is financially beneficial to replace the machine at this point. TL is now considering how best to finance the acquisition of the harvester to be replaced. TL is already highly geared.

A government development agency has offered the following two alternative methods of financing the machine:

Alternative 1
A loan of N49,200,000 at 6% interest rate to buy the machine on November 30, 2018. If this option is selected, the machine will be depreciated on a straight-line basis over its estimated useful life of 5 years.

Alternative 2
Enter into a finance lease. This will involve payment of annual rental of N12 million with the first payment due on November 30, 2019. The lease payments will be for the entire estimated useful life of the machine, which is 5 years, after which ownership will pass to TL without further payment.

Other information

(i) Whether leased or purchased outright, maintenance would remain the responsibility of TL and would be N450,000 payable annually in advance.
(ii) TL is liable to tax at a rate of 25%, payable annually at the end of the year in which the tax charge or tax saving arises.
(iii) TL is able to claim capital allowances on the full capital cost of the machine in equal installments over the first four years of the machine.
(iv) Assume that TL has sufficient taxable profits to benefit from any savings arising therefrom.
(v) All workings in N’000.

Required:

a. Show that the implied interest rate in the lease agreement is 7%. (3 Marks)

b. Advise, using present value method, whether Tamilore Limited should borrow to buy the machine or lease it. (12 Marks)

c. Instead of lease financing, one director has suggested an equivalent Islamic finance.

i. Explain briefly the principles of Islamic finance. (2 Marks)

ii. Explain three main advantages of Islamic finance. (3 Marks)

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  • 20 Marks

ADV – Nov 2018 – L3 – SA – Q1 – Taxation of Companies

Analyze tax implications for XYZ Nigeria Ltd based on provided financial data, assessing allowable expenses and adjustments for tax liability.

XYZ Nigeria Limited is a manufacturing company that produces ice cream. It was incorporated on January 7, 2009, with an authorized share capital of N12,000,000 consisting of 12,000,000 ordinary shares of N1.00 each. All shares were fully allotted and paid for.

The company commenced business on January 2, 2012. The statement of profit or loss for the year ending December 31, 2017, is as follows:

You are provided with the following information:

The breakdown is as follows:

The auditors submitted the audited financial statements to the tax office on June29, 2018. This was evidenced by the stamped copy of the covering letter in the auditors‟ file. The tax inspector raised a Best of Judgement (BOJ) assessment of N10,000,000 and late returns penalty of N75,000 on September 7, 2018. The managing director was concerned that despite efforts by the management to comply with tax regulations, the tax office still raised the B.O.J assessment and the late returns penalty. During discussions at the management meeting of the company, the blame was attributed to the auditors.

You are required to:
a. Compute the tax liabilities of XYZ Nigeria Limited for the relevant assessment years. Show all workings. (25 Marks)
b. Based on the result in (a) above, advise the managing director of XYZ Nigeria Limited on the validity or otherwise of the best of judgement assessment and the penalty raised by the tax office. (5 Marks)

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  • 20 Marks

AX – Nov 2016 – L2 – Q3 – Taxation of Partnerships and Sole Proprietorships

Discuss the tax implications of converting a partnership into a limited liability company and the treatment of incorporation costs.

Johnson, Seyi, and Bernard, based in Kaduna State, have run the firm Johnson, Seyi & Bernard (Estate Managers) for several years. The partnership agreement provides the following:

(i) Salary paid to partners:

  • Johnson: N288,000
  • Seyi: N576,000
  • Bernard: N1,152,000

(ii) Profit-sharing ratio:

  • Johnson: 2
  • Seyi: 3
  • Bernard: 5

In April 2015, there was a decision to review the partnership agreement. Messrs Johnson, Seyi, and Bernard were unable to find worthy successors to take over as partners. Rather than review the partnership agreement, they agreed to convert the partnership into a limited liability company.

A firm of legal practitioners was contacted to incorporate a new company, JSB Consultants Limited. The Authorised Share Capital was agreed at N50,000,000, made up of 50,000,000 Ordinary Shares of N1.00 each. The shareholding structure is as follows:

  • Johnson: 20%
  • Seyi: 30%
  • Bernard: 50%

The Certificate of Incorporation was dated July 15, 2015, and the company commenced business on September 1, 2015. The cost of incorporation includes:

  • Payment for Stamp Duty: N400,000
  • Professional fee for incorporation: N250,000
  • Corporate Affairs Commission (CAC) registration fee: N500,000
  • Miscellaneous costs: N200,000
    Total: N1,350,000

The financial results for the year ended December 31, 2015, are as follows:

  • Revenue: N20,000,000
  • Expenses:
    • Cost of incorporation: N1,350,000
    • Transport and travelling: N675,000
    • Medical: N600,000
    • Hotel and accommodation: N625,000
    • Audit and accountancy: N550,000
    • Postages and telephone: N750,000
    • Salaries:
      • Johnson: N1,440,000
      • Seyi: N2,880,000
      • Bernard: N5,760,000
        Total expenses: N14,630,000
  • Net Profit: N5,370,000

Required:
As the Tax Consultant, you are required to write a report to Messrs Johnson, Seyi, and Bernard highlighting:
a. Tax implications of the decision to convert to a limited liability company, limiting yourself to the details provided. (11 Marks)
b. Your comment on the breakdown of the cost of incorporation of N1,350,000 and the tax implication of each item. (9 Marks)

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  • 3 Marks

PT – April 2022 – L2 – Q3d – Income Tax Liabilities

Calculate the tax liability on Eunice Danso's bonus income for 2021.

Eunice Danso works with Gyidi Ltd and earns an annual basic salary of GH¢50,000. She was paid a bonus of GH¢6,000 in 2021.

Required:
Determine the tax liability on the bonus. (3 marks)

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  • 8 Marks

AFM – Nov 2017 – L3 – Q5b – Dividend policy in multinationals and transfer pricing

Discusses the factors that affect dividend repatriation policies in multinational companies.

The amount of dividends subsidiaries pay to the parent company depends on the parent company’s dividend policies. Dividend repatriation represents significant flow for parent companies and contributes to dividend payments.

Required:
Discuss FOUR factors that affect dividend repatriation policies of Multinational Companies. (8 marks)

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  • 10 Marks

AT – Nov 2018 – L3 – Q3a – Permanent establishment, International taxation

Tax policy implications on the establishment of a permanent entity, finance lease acquisitions, and dividend policies by a foreign company.

The management of Smith Plc, a UK-based company, is considering the possibility of launching its presence in Ghana and it is not sure of the tax implication of the following under the tax laws of Ghana:

i) It is considering making its presence through incorporation in Ghana or creating an external company that is a Permanent Establishment (Branch) instead.
ii) It intends to acquire all its non-current assets through finance lease as against buying the assets outright when it makes its presence in Ghana.
iii) It intends to bring some staff from the United Kingdom to work in Ghana who will be paid half salary in Ghana and the other half paid directly to their accounts in the United Kingdom as against paying their full salary in Ghana.
iv) Management intends to acquire shares in many companies in Ghana as part of efforts to create value for shareholders through dividend receipts as against granting loans to interested companies in Ghana if it is unable to make its presence in Ghana.

Required:
Evaluate the above policy interventions and advise on the tax implication of each to enable the management of Smith Plc to make a decision.

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  • 8 Marks

TX – May 2019 – L3 – Q5b – Petroleum Operations

Compute the royalty payable by a petroleum company and discuss the tax implications of production costs and the relevance of government interest in upstream operations.

b) The following relates to Ablorh Ltd from petroleum operations relating to 2017 year of assessment:

Production (in barrels): 100,000,000
Selling Price per barrel ($): 100
Production cost per barrel ($): 50
Capital allowance agreed ($): 800,000
Required: i) Compute the royalty payable to the Government of Ghana by Ablorh Ltd and state the tax implication of production cost on Royalty. (5 marks)

ii) Explain THREE (3) relevance of initial interest of Government in the Upstream Petroleum Operations. (3 marks)

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  • 3 Marks

AT – May 2021 – L3 – Q2b – Mergers, Amalgamation, and Reorganisation

Explain the tax implications of transferring Tanko Ltd to Agoo Ltd as a going concern.

Tanko Ltd has been involved in tree cropping for some time now. Over the last four years, the business has boomed, and its fruits are sold before they are even harvested. Tanko Ltd intends to transfer the entity to Agoo Ltd as a going concern.

Required:
Explain the tax implication of the transfer of Tanko Ltd to Agoo Ltd.

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  • 8 Marks

AT – May 2021 – L3 – Q1a – Mergers, Amalgamation and Reorganisation

Discuss the tax implications if Farmer Ltd acquires more than 50% of Bugum Ltd's underlying ownership.

Farmer Ltd is a non-resident company based in the USA. Farmer Ltd has succeeded over the years in acquiring and selling companies in distress alongside its primary objectives of buying and selling cosmetics. In the 2020 year of assessment, it decided to announce its presence in Ghana by acquiring Bugum Ltd, a resident company. Bugum Ltd has had financial setbacks in its fortunes over the last couple of years and became vulnerable to predators.

Required:
Advise the management of Farmer Ltd, what the tax implications are if Farmer Ltd acquires more than 50% of the underlying ownership of Bugum Ltd.

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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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  • 6 Marks

AT – Nov 2020 – L3 – Q4b – Business income – Corporate income tax

Evaluate the tax implications of financing a vehicle through a finance lease arrangement versus an outright purchase for a mining company.

A mining company in Ghana intends to buy a vehicle (Pajero) for official use under a finance lease arrangement or an outright purchase. The cost profile of the vehicle is as follows:

i) Outright Purchase: Cost at GH¢80,000.

ii) Finance Lease Arrangement: Cost inclusive of interest is GH¢105,000, to be paid over three years. The interest component is GH¢30,000 to be spread over the three years.

Required:
Determine which of the options you would advise to be adopted.

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  • 6 Marks

AT – Nov 2020 – L3 – Q3a – International taxation

Tax implications of a loan from a parent company and foreign exchange losses for Mandy Ltd, a subsidiary of Menkay Incorporated.

The following information is relevant to Mandy Ltd (Ghana), a subsidiary of Menkay Incorporated, a company resident in Japan.

Following Mandy Ltd’s operational challenges, a loan of US$1,500,000 was secured from its parent company in 2019 year of assessment.

Additional information relevant to Mandy Ltd’s operations:

Description Amount (GH¢)
Interest on loan paid in 2019 300,000
Foreign exchange loss 105,000
Equity:
Share capital 150,000
Retained earnings 300,000
Total equity 450,000

Exchange rate: 1US$ = GH¢5.73

Required:
Determine the tax implication of the above transaction.

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