- 15 Marks
Question
The prevailing economic condition has led to the business cessation of many SMEs. Aba Foods Limited, a well-known food and beverage company in Abia State, faced difficulties in securing long-term loans, preventing the replacement of its outdated equipment and leading to losses. To ensure continuity, the company considered mergers or acquisitions and entered discussions with Chief Egodi of Ifedi Group. Chief Egodi, concerned about the tax implications of potential arrangements, sought advice from your firm, Aliyara & Co., Chartered Accountants.
Required:
Provide a presentation in the form of advice:
(a) Explain the tax implications of Aba Foods Limited merging with Ifedi Foods and Beverage Limited, with Ifedi inheriting all assets and liabilities. (5 Marks)
(b) Explain the tax implications if Ifedi Foods and Beverage Limited is reconstituted to take over Aba Foods’ assets and liabilities. (5 Marks)
(c) Explain the tax implications if Ifedi Foods and Aba Foods enter a Joint Venture or Partnership Agreement. (5 Marks)
Answer
MEMO
Date: November 17, 2017
To: Chief Egodi, Ifedi Group of Companies
From: Aliyara & Co., Chartered Accountants
Subject: Tax Implications of Proposed Merger and Acquisition Options
The following provides a breakdown of tax implications for each scenario.
(a) Tax Implications of a Merger:
- Annual Returns: Ifedi Ltd. would continue to file annual returns within six months after the end of its accounting year, per section 55(3)a of CITA Cap C21 LFN 2004.
- Commencement Rules: These rules will not apply to Ifedi Ltd.; it will be assessed on a Preceding Year basis (PYB).
- Asset Transfers: No initial allowance on transferred assets. Annual Allowance claims will be based on the Tax Written Down Values (TWDV) of the assets.
- Fees and Taxes: All fees paid will be liable for VAT and Withholding Tax (WHT).
- Stamp Duties: Stamp duties apply on any increase in share capital.
- Capital Gains Tax: Aba Foods shareholders must pay Capital Gains Tax on cash received for surrendered shares to Ifedi Ltd.
- Cessation: Aba Foods would cease operations, invoking cessation provisions for determining assessable profit.
(b) Tax Implications if Ifedi is Reconstituted:
- Commencement and Cessation Rules: Not applicable in this scenario.
- Asset Transfers: All assets/qualified capital expenditures are transferred at their TWDV.
- Capital Allowances: No initial allowance, and annual allowance will be based on the remaining tax life of the qualifying expenditures.
- Unutilised Capital Allowances: These can be transferred for relief by the reconstituted Ifedi Foods Ltd.
- Stamp Duties: Applicable on share capital increases resulting from this arrangement.
- Unrelieved Losses: Aba Foods’ unrelieved losses will be carried forward for relief by the reconstituted entity.
(c) Tax Implications for a Joint Venture or Partnership Agreement:
- Taxation: The Joint Venture/Partnership is not subject to tax.
- Profit Taxation: Each partner’s profit share is taxable individually.
- Loss Relief: Losses from the Joint Venture/Partnership can only be offset against the profits of that specific business.
- Capital Allowances: These will be divided based on the agreed profit and loss ratio among partners.
- Separate Business Lines: If any partner has a separate business, losses from the joint business cannot offset profits from other business lines.
Please review this information, and reach out for any further clarification regarding these tax implications.
Yours faithfully,
Aliyara & Co.
Chartered Accountants
- Tags: Acquisition, Capital gains tax, FIRS, Merger, Partnership, Taxation, VAT, WHT
- Level: Level 3
- Topic: Tax Implications of Mergers and Acquisitions
- Series: NOV 2017
- Uploader: Dotse