- 9 Marks
Question
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:
- Tempane Mines LTD acquired 100% interest in Tongo for a consideration of GH¢310,000,000 at the end of 2023.
- 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.
Answer
Tax Implication of 100% Acquisition
-
Change in Ownership Without Realization of Assets and Liabilities
- A 100% acquisition does not constitute an immediate realization of assets and liabilities for tax purposes.
- The company will continue as a going concern without requiring a new valuation for capital allowance purposes.
-
Capital Allowance Continuity
- The written-down value (WDV) of the acquired assets remains the same and continues to be used for capital allowance computations.
- The consideration paid by Tempane Mines LTD (GH¢310,000,000) does not impact the WDV for capital allowance computation.
-
No Immediate Tax Liability on Purchase Price
- The acquisition price is ignored for tax purposes; it does not generate an immediate taxable gain or loss for the acquiring company.
-
Future Tax Treatment of Acquired Assets
- Any gains realized when the assets are eventually disposed of will be subject to capital gains tax at the prevailing tax rate.
- The acquired business will continue to be taxed as per the standard mineral and mining tax regulations in Ghana.
ii) Computation of Gains from the Acquisition
| Computation of Gains | GH¢ |
|---|---|
| Consideration Received | 310,000,000 |
| Less: Written-Down Value (WDV) | |
| – 2020 Assets (WDV) | 20,000,000 |
| – 2021 Assets (WDV) | 30,000,000 |
| – 2023 Assets (WDV) | 40,000,000 |
| Total WDV | 90,000,000 |
| Taxable Gain | 220,000,000 |
Tax Treatment of the Gain
- The GH¢220,000,000 gain from the acquisition is classified as taxable income under the mining tax regulations.
- The taxable gain is added to the company’s chargeable income for the year.
- The applicable corporate tax rate for mining companies in Ghana is 35%.
Computation of Tax Liability
| Description | GH¢ |
|---|---|
| Chargeable Income Before Gain | 120,000,000 |
| Add: Taxable Gain from Acquisition | 220,000,000 |
| Total Chargeable Income | 340,000,000 |
| Tax at 35% | 119,000,000 |
- Tags: Acquisition, Capital Allowance, Corporate Restructuring, Deferred Tax, Mining Tax, Tax implications
- Level: Level 3
- Topic: Minerals and mining
- Series: Nov 2024
- Uploader: Salamat Hamid