- 20 Marks
Question
A) Mrs. Boateng is a successful businesswoman who is in the highest income tax bracket. She owns a commercial property that generates a net rental income of GH¢80,000 per year. Her son, Kwame, is 19 years old, a full-time university student and has no other source of income.
To manage the family’s overall tax burden, Mrs. Boateng transfers the legal title of the commercial property to Kwame. They have a verbal agreement that Kwame will receive the rental payments into his bank account but must then transfer 90% of the net rent back to Mrs. Boateng each month for “family upkeep”. For tax purposes, the full GH¢80,000 rental income is declared in Kwame’s name, resulting in a significantly lower tax liability than if Mrs. Boateng had declared it.
The West African Revenue Authority (WARA) is now reviewing the arrangement.
Required: Discuss the specific tax issue at hand and describe the actions the Commissioner-General is empowered to take.
B) A resident company is licensed to operate in a West African country. It is 60% owned by a non-resident parent company.
The new Chief Finance Officer (CFO) is reviewing the company’s capital structure. The financial position extract shows the following: Share Capital: GH¢80,000,000. Statutory Reserve Fund: GH¢25,000,000. Income Surplus (Retained Earnings): GH¢20,000,000. Total Interest-Bearing Debt: GH¢400,000,000.
The CFO is concerned that the company’s high leverage might breach the country’s thin capitalization rules and has asked for urgent clarification on the matter.
Required: As the company’s tax consultant: i) Determine whether the thin capitalization rules have been breached. ii) What will be the tax implications if the company is a financial institution?
C)
GlobalCorp LTD is a company based in the UK with tremendous influence across the Global North and South. By way of launching operations in a West African country to increase its Global South story, it decided to acquire Local Firm LTD in the country. The acquisition was done piece-meal culminating into total acquisition in 2024.
It took the company about two and half years to acquire 51% of the company’s equity despite protestation from many resident companies.
The following observations were made after the acquisition of the company:
- It has a policy to revalue its building every 5 years to reflect the current market value and has built so much retained earnings.
- The company has been paying 30% of its income surplus every year as dividend and about the same percentage transferred to support its share capital.
- The company is into the free zone operation and does exports of processed pepper and cow hides. The company also sells some of the products in the local market. The company has both local and expatriate staff. The company is in its 8th year of operations.
Required: i) What are the possible tax implications of each of the observations in (1) to (3) above? ii) What are the tax obligations of the new company?
Answer
A) The specific tax issue is tax avoidance through artificial or fictitious transactions under anti-avoidance provisions. The transfer appears to be a sham as Mrs. Boateng retains substantial benefit from the income despite legal title transfer.
The Commissioner-General is empowered to disregard the transaction, re-characterize it, and assess the tax liability on Mrs. Boateng as if the transfer did not occur, including potential penalties for avoidance.
B)
i) Equity = Share capital + Statutory reserve + Retained earnings = 80,000,000 + 25,000,000 + 20,000,000 = GH¢125,000,000
Debt = GH¢400,000,000
Debt: Equity ratio = 400m: 125m = 3.2:1
The thin capitalization rule is typically 3:1, so yes, it has been breached. Interest on excess debt (above 3:1) is not deductible.
ii) If the company is a financial institution, thin capitalization rules do not apply, so no breach and full interest deductibility.
C)
i) 1) Revaluation of building: No immediate tax on unrealized gains from revaluation but may trigger tax on change in underlying ownership if control changes over 50% within a period, leading to deemed disposal at market value.
- Paying 30% as dividend: Dividends are subject to final withholding tax. Transfer to share capital may be seen as capitalization, potentially no tax, but scrutinized for avoidance.
- Free zone: In 8th year, still within 10-year tax holiday for exports, but local sales are taxable at reduced rate. Expatriate staff income taxable unless exemptions apply.
ii) The new company must file corporate income tax returns, pay taxes on chargeable income, withhold taxes on payments, comply with transfer pricing, and handle VAT if applicable.
Summary report of all changes:
- Changed Mrs. Amegashie to Mrs. Boateng, son Doe to Kwame, Ghana Revenue Authority to West African Revenue Authority (WARA), and Ghana to a West African country where appropriate to subtly alter without losing context.
- Changed Lewin LTD to Global Corp LTD, Nzole LTD to Local Firm LTD.
- No other locations changed as they are integral to tax laws (e.g., UK kept as is).
- Ensured educational value preserved by keeping tax concepts intact.
- No tables were modified beyond name changes; no tables present in Q5 except financial extracts in b, which were rendered exactly with figures unchanged.
- Topic: Anti-avoidance measures
- Series: NOV 2025
- Uploader: Samuel Duah