• 12 Marks

AT – Dec 2023 – L3 – Q3a – Business income – Corporate income tax

Computing tax payable for Conti Ltd with adjustments for lunch, interest on loans, derivative transactions, and dividends.

Conti Ltd has been in the business of buying and selling baskets. The company’s chargeable income for the 2021 year of assessment is GH¢7,000,000.

The chargeable income includes the following adjustments:

  1. GH¢200,000 was spent on staff lunch, with management stating that the staff were not affected by this payment.
  2. Financial cost from derivative transactions amounted to GH¢20,000,000.
  3. Financial gain from swaps arrangement was GH¢1,000,000.
  4. Goods invoiced to a related company amounted to GH¢12,000,000, although these goods would have been sold to unrelated parties at GH¢13,130,000.

Additional information:

  • Interest on loans amounting to GH¢3,200,000 was added to the financial cost. 80% of the interest relates to capital work in progress, and the remainder supports working capital.
  • GH¢500,000 in net dividends was received from Ann Ltd, a resident company where Conti Ltd holds 24% voting power. The dividend has been added to revenue.

Required:
i) Compute the tax payable.
ii) What are the tax implications of the lunch for staff, interest paid, and the dividend received?
iii) Identify tax planning measures to reduce the tax liability related to the dividend.
iv) What is the tax implication of the financial cost from derivative transactions, and what is its impact on the company?

i) Computation of Tax Payable:

ii) Tax Implications of Staff Lunch, Interest Paid, and Dividend Received:

  1. Staff Lunch (GH¢200,000):
    • If the benefit provided by the lunch cannot be allocated to specific staff members, it is considered a non-deductible expense for corporate tax purposes.
    • The expense is personal in nature, not related to business operations, and should be disallowed for tax purposes.
  2. Interest Paid on Loans (GH¢3,200,000):
    • Interest related to capital work in progress (80% of the total interest, GH¢2,560,000) must be capitalized and cannot be deducted in the current year.
    • Interest related to working capital (20%, GH¢640,000) is an allowable expense and can be deducted for tax purposes.
  3. Dividend Received (GH¢500,000):
    • Dividends from a resident company where the recipient holds less than 25% voting power are subject to an 8% withholding tax. In this case, GH¢500,000 is taxable at 8%.

iii) Tax Planning Measures to Reduce Tax Liability Related to Dividend:

  • Increase Ownership in Ann Ltd:
    Under Section 59 of the Income Tax Act, 2015 (Act 896), dividends from a resident company where the recipient holds at least 25% of the voting power are exempt from tax. Conti Ltd currently holds 24% in Ann Ltd, so increasing its ownership to 25% or more would make the dividend income exempt from tax.

iv) Tax Implication of Financial Cost from Derivative Transactions:

  • Financial costs from derivative transactions (GH¢20,000,000) are only deductible up to the sum of the financial gain from derivatives (GH¢1,000,000) and 50% of the chargeable income before adjusting for the financial cost.
  • Any financial cost exceeding this limit is not deductible in the current year and can be carried forward for the next five years.
  • Impact: The disallowed portion of the financial cost erodes the company’s profitability and increases its tax liability, as it cannot be deducted in the current year.
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