Question Tag: Thin Capitalization

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  • 15 Marks

STP – Feb 2020 – L2 – Q5 – Anti-Avoidance Provisions

Identify and discuss three anti-avoidance provisions in the Income Tax Act, 2015 (Act 896) and their limitations on tax planning.

Although tax planners have the liberty to devise schemes which reduce the tax liability of their clients, the Income Tax Act, 2015 (Act 896) contains provisions which limit tax planning schemes.

Required:
Identify any three (3) anti-avoidance provisions in Act 896 and discuss how each of these provisions places a limitation on the ability of a person to engage in tax planning.

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  • 20 Marks

STP – Aug 2020 – L2 – Q4 – Debt vs Equity Financing

Discuss whether debt financing offers more tax benefits than equity financing for companies, with references to Ghanaian tax law.

Some scholars argue that from a strategic tax planning perspective, debt financing provides more tax benefits to companies than equity financing for investors.

Required
With the aid of appropriate authorities, discuss the accuracy or otherwise of the above assertion.

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  • 20 Marks

STP – Aug 2020 – L2 – Q1 – Tax Planning vs. Tax Avoidance

Discuss distinction between tax planning and tax avoidance under Ghanaian tax law with examples and references.

The Council of the Chartered Institute of Taxation, Ghana (CITG) has invited you to speak at a Continuous Development Program (CPD) on the topic “The distinction between tax planning schemes and tax avoidance arrangements under Ghanaian tax laws”.
In the letter of invitation, the Council indicated that you are to submit a detailed write-up of your presentation.

Required
With the aid of appropriate examples and specific references to Ghanaian tax law provisions, write in sufficient detail, the content of your presentation.

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  • 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.

(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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  • 12 Marks

STP – Feb 2021 – L2 – Q4 – Taxation and Operating Strategies

Explain three anti-avoidance provisions in Ghana's Income Tax laws and their impact on tax planning.

State and explain three (3) anti-avoidance provisions found in the Income Tax laws of Ghana and how these provisions place a limitation on the tax planning opportunities available to taxpayers.

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  • 25 Marks

STP – Feb 2021 – L2 – Q1 – Strategic Tax Planning

Advise on tax implications of AIG acquiring 55% stake in Fluid Logistics Ghana and providing a GH₵6.5M loan, plus tax planning options.

The President of America Is Great (AIG) Group, a US Corporation, is exploring the possibility of acquiring a fifty-five percent stake in Fluid Logistics Ghana Limited. The stated capital of Fluid Logistics Ghana Limited is GH₵1,500,000. AIG Corporation intends providing a loan of GH₵6,500,000 to Fluid Logistics Ghana Limited when the transaction for the acquisition of the fifty-five percent stake is completed. The President of AIG Corporation is seeking your advice on the tax implications of the proposed transactions.

Required: Advise the President on: i. The income tax implications of the acquisition of a fifty-five percent stake in Fluid Logistics Ghana Limited. 9 marks ii. The income tax implications of providing the loan of GH₵6,500,000. 9 marks iii. The tax planning options available to minimize the tax effects of the proposed transactions.

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  • 10 Marks

AT – Nov 2024 – L3 – Q5b – Tax Implications of Foreign Acquisition

Evaluate the tax implications of a 70% equity acquisition by a foreign company and the proposed funding option

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:

  1. Baimbil LTD to provide GH¢100 million as debt with 2% interest above the market rate.
  2. Baimbil LTD to provide GH¢100 million as additional equity capital.
  3. 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.

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  • 7 Marks

ATAX – May 2017 – L3 – Q6a – Tax Planning and Management

Explain thin capitalization and non-tax factors in tax planning with examples.

Tax planning encompasses many different considerations, including the timing of income, purchases and other expenditure, the selection of investments, and the taxpayer’s filing status. Put differently, tax planning is the analysis of a financial situation or plan from a tax perspective.

Given the current government’s drive to boost revenue, there is the compelling need for companies to adopt vigorous tax planning strategies.

You are required to briefly explain with examples the following:
i. Thin Capitalization (4 Marks)
ii. Non-Tax Factors (3 Marks)

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  • 10 Marks

AT – Aug 2022 – L3 – Q5b – Tax Planning

Advise Wina Ltd on the tax implications of acquiring shares and providing a financial facility to Fatia Ltd in Ghana.

Wina Ltd (Wina) is a company incorporated in the United States of America and also resident
in the United States of America. The Company has been looking for opportunities across Africa
to invest its idle funds in support of shareholders’ decision.
In the latter part of 2021, the management of Wina identified Ghana as a country with huge
potentials for foreign investments. Wina intends to acquire 60% shares in Fatia Ltd (Fatia), a
company resident in Ghana with indigenous ownership but with unimpressive financial
records.When the deal is approved, it would provide a financial facility, the equivalent of
GH¢10,000,000 as a loan with interest at the rate of 22.5% comparable to all other interest
rates.
The equity of Fatia amounts to GH¢500,000 comprising Stated Capital of GH¢250,000,
Retained Earnings of GH¢200,000 and Revaluation Reserves of GH¢50,000.
Required:
Using the format of a memo:
Advise the management of Wina as a final level candidate on the tax implications of this
investment and the credit support that Wina can give without any restriction from the Ghana
Revenue Authority.

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  • 6 Marks

AT – NOV 2021 – L3 – Q2c – International taxation | Business income – Corporate income tax

Advise on tax implications of loan forgiveness between a Korean parent company and its Ghanaian subsidiary.

Yelbateng Ltd is a Korean company and has a subsidiary in Ghana, by the name Yelbateng Ghana Ltd.

The parent company in 2008 gave a loan facility to the subsidiary to support its operations. However, interest on the loan from 2009 to 2019 came to $8,000,000 after applying a thin capitalisation rule in taxation. As a result, the total amount was accrued by Yelbateng Ghana Ltd, as the company did not have money to pay the interest as agreed in the loan contract.

The total amount of the loan was $20 million. In the year 2020, the Board took a decision to relief the subsidiary of the loan obligation, meaning the loan with its interest was not going to be repaid by the subsidiary.

Required:

You have been invited as a final level candidate to advise the company on the tax implication of this arrangement. (6 marks)

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  • 15 Marks

STP – Feb 2020 – L2 – Q5 – Anti-Avoidance Provisions

Identify and discuss three anti-avoidance provisions in the Income Tax Act, 2015 (Act 896) and their limitations on tax planning.

Although tax planners have the liberty to devise schemes which reduce the tax liability of their clients, the Income Tax Act, 2015 (Act 896) contains provisions which limit tax planning schemes.

Required:
Identify any three (3) anti-avoidance provisions in Act 896 and discuss how each of these provisions places a limitation on the ability of a person to engage in tax planning.

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  • 20 Marks

STP – Aug 2020 – L2 – Q4 – Debt vs Equity Financing

Discuss whether debt financing offers more tax benefits than equity financing for companies, with references to Ghanaian tax law.

Some scholars argue that from a strategic tax planning perspective, debt financing provides more tax benefits to companies than equity financing for investors.

Required
With the aid of appropriate authorities, discuss the accuracy or otherwise of the above assertion.

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  • 20 Marks

STP – Aug 2020 – L2 – Q1 – Tax Planning vs. Tax Avoidance

Discuss distinction between tax planning and tax avoidance under Ghanaian tax law with examples and references.

The Council of the Chartered Institute of Taxation, Ghana (CITG) has invited you to speak at a Continuous Development Program (CPD) on the topic “The distinction between tax planning schemes and tax avoidance arrangements under Ghanaian tax laws”.
In the letter of invitation, the Council indicated that you are to submit a detailed write-up of your presentation.

Required
With the aid of appropriate examples and specific references to Ghanaian tax law provisions, write in sufficient detail, the content of your presentation.

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  • 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.

(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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  • 12 Marks

STP – Feb 2021 – L2 – Q4 – Taxation and Operating Strategies

Explain three anti-avoidance provisions in Ghana's Income Tax laws and their impact on tax planning.

State and explain three (3) anti-avoidance provisions found in the Income Tax laws of Ghana and how these provisions place a limitation on the tax planning opportunities available to taxpayers.

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  • 25 Marks

STP – Feb 2021 – L2 – Q1 – Strategic Tax Planning

Advise on tax implications of AIG acquiring 55% stake in Fluid Logistics Ghana and providing a GH₵6.5M loan, plus tax planning options.

The President of America Is Great (AIG) Group, a US Corporation, is exploring the possibility of acquiring a fifty-five percent stake in Fluid Logistics Ghana Limited. The stated capital of Fluid Logistics Ghana Limited is GH₵1,500,000. AIG Corporation intends providing a loan of GH₵6,500,000 to Fluid Logistics Ghana Limited when the transaction for the acquisition of the fifty-five percent stake is completed. The President of AIG Corporation is seeking your advice on the tax implications of the proposed transactions.

Required: Advise the President on: i. The income tax implications of the acquisition of a fifty-five percent stake in Fluid Logistics Ghana Limited. 9 marks ii. The income tax implications of providing the loan of GH₵6,500,000. 9 marks iii. The tax planning options available to minimize the tax effects of the proposed transactions.

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  • 10 Marks

AT – Nov 2024 – L3 – Q5b – Tax Implications of Foreign Acquisition

Evaluate the tax implications of a 70% equity acquisition by a foreign company and the proposed funding option

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:

  1. Baimbil LTD to provide GH¢100 million as debt with 2% interest above the market rate.
  2. Baimbil LTD to provide GH¢100 million as additional equity capital.
  3. 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.

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  • 7 Marks

ATAX – May 2017 – L3 – Q6a – Tax Planning and Management

Explain thin capitalization and non-tax factors in tax planning with examples.

Tax planning encompasses many different considerations, including the timing of income, purchases and other expenditure, the selection of investments, and the taxpayer’s filing status. Put differently, tax planning is the analysis of a financial situation or plan from a tax perspective.

Given the current government’s drive to boost revenue, there is the compelling need for companies to adopt vigorous tax planning strategies.

You are required to briefly explain with examples the following:
i. Thin Capitalization (4 Marks)
ii. Non-Tax Factors (3 Marks)

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  • 10 Marks

AT – Aug 2022 – L3 – Q5b – Tax Planning

Advise Wina Ltd on the tax implications of acquiring shares and providing a financial facility to Fatia Ltd in Ghana.

Wina Ltd (Wina) is a company incorporated in the United States of America and also resident
in the United States of America. The Company has been looking for opportunities across Africa
to invest its idle funds in support of shareholders’ decision.
In the latter part of 2021, the management of Wina identified Ghana as a country with huge
potentials for foreign investments. Wina intends to acquire 60% shares in Fatia Ltd (Fatia), a
company resident in Ghana with indigenous ownership but with unimpressive financial
records.When the deal is approved, it would provide a financial facility, the equivalent of
GH¢10,000,000 as a loan with interest at the rate of 22.5% comparable to all other interest
rates.
The equity of Fatia amounts to GH¢500,000 comprising Stated Capital of GH¢250,000,
Retained Earnings of GH¢200,000 and Revaluation Reserves of GH¢50,000.
Required:
Using the format of a memo:
Advise the management of Wina as a final level candidate on the tax implications of this
investment and the credit support that Wina can give without any restriction from the Ghana
Revenue Authority.

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  • 6 Marks

AT – NOV 2021 – L3 – Q2c – International taxation | Business income – Corporate income tax

Advise on tax implications of loan forgiveness between a Korean parent company and its Ghanaian subsidiary.

Yelbateng Ltd is a Korean company and has a subsidiary in Ghana, by the name Yelbateng Ghana Ltd.

The parent company in 2008 gave a loan facility to the subsidiary to support its operations. However, interest on the loan from 2009 to 2019 came to $8,000,000 after applying a thin capitalisation rule in taxation. As a result, the total amount was accrued by Yelbateng Ghana Ltd, as the company did not have money to pay the interest as agreed in the loan contract.

The total amount of the loan was $20 million. In the year 2020, the Board took a decision to relief the subsidiary of the loan obligation, meaning the loan with its interest was not going to be repaid by the subsidiary.

Required:

You have been invited as a final level candidate to advise the company on the tax implication of this arrangement. (6 marks)

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