Subject: ADVANCED TAXATION

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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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  • 10 Marks

AT – Nov 2024 – L3 – Q5a – Transfer Pricing Documentation and Compliance

Explain the required transfer pricing documentation and exemptions under Ghana’s Transfer Pricing Regulations, 2020 (L.I. 2412).

You are a Senior Transfer Pricing Associate of Fameye and Associates. You have received the following email from a former client, Asew LTD, who has received a Transfer Pricing audit assessment from the Ghana Revenue Authority (GRA) for the 2021, 2022, and 2023 years of assessment.

Subject: Transfer Pricing Compliance Assistance

Hello Team,

I came to the office today and received a letter from the GRA regarding a tax assessment on transfer pricing issues. According to the letter, our company owes the GRA some penalties for non-compliance with the transfer pricing regulations. I am confused as to what our compliance obligations are. I would need your assistance on how we can comply with the transfer pricing laws of Ghana.

I hope to hear from you soon.

Kind regards,

Nii Armaah
Managing Director, Asew LTD

Required:

In line with the provisions of the Transfer Pricing Regulations, 2020 (L.I. 2412), draft a response for the review of your Tax Partner, covering the following:

(i) The required transfer pricing documentation that must be maintained by companies in Ghana under the three-tier transfer pricing documentation requirements, including the time by which these must be filed with the GRA, where applicable.                      (ii) TWO conditions or circumstances under which a company may be exempted from compliance with any of the above documentation requirements.

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  • 5 Marks

AT – Nov 2024 – L3 – Q4b – Crowding Out Effect in Fiscal Policy

Explain the concept of ‘Crowding Out’ in fiscal policy, using relevant examples.

Expansionary Fiscal Policy has been criticised on the grounds that it can lead to ‘Crowding Out’.

Required:

Explain with appropriate examples what is meant by ‘Crowding Out’ as used under Fiscal Policy.

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  • 10 Marks

AT – Nov 2024 – L3 – Q4a – Value Added Tax Deductibility

Determine the deductible input VAT for a VAT-registered company operating multiple business divisions under different VAT treatments.

The two scenarios below relate to ClearTel LTD, a VAT-registered company in Ghana. Each scenario is an independent scenario and should be considered separately.

Scenario 1

ClearTel LTD operates three divisions (XYZ). Division X deals in the sale of computers and mobile phones. Division Y deals in the sale of locally-manufactured sanitary towels. Division Z is into the supply of fertilizers to farmers in Ghana.

Revenue from each division for 2024 is shown below:

Division Description Revenue (GH¢)
X Computers and mobile phones 1,005,700
Y Sale of locally-manufactured sanitary towels 2,500,000
Z Supply of fertilizers to farmers 78,800,000

ClearTel LTD has incurred total input VAT of GH¢50,500,000, and the Finance Manager of the company is unable to determine specifically which division of the business this input VAT amount relates to.

Required:

Determine the amount of input VAT ClearTel LTD can deduct, in line with the provisions of the Value Added Tax Act, 2013 (Act 870 as amended). Justify your answer

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  • 5 Marks

AT – Nov 2024 – L3 – Q3c – Automatic Stabilizers vs Discretionary Fiscal Policies

Explain the difference between automatic stabilizers and discretionary fiscal policies with examples.

Some commentators in Ghana have argued that economic policymakers should allow automatic stabilizers to shape and direct the destiny of the economy rather than discretionary fiscal policies since the latter has failed woefully.

Required:
Distinguish between automatic stabilizers and discretionary fiscal policies as economic tools. Illustrate with examples.

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  • 3 Marks

AT – Nov 2024 – L3 – Q3b – Prohibitions on Representation and Tax Advice

Explain the prohibitions on representation and tax advice in relation to tax consultants under the Revenue Administration Act, 2016 (Act 915).

With reference to the Revenue Administration Act, 2016 (Act 915), what constitutes prohibitions on representation and tax advice in relation to tax consultants?

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  • 12 Marks

AT – Nov 2024 – L3 – Q3a – Tax Planning and Objection to Tax Assessment

Advise Poyooyo LTD on provisions in tax laws to challenge a disputed tax liability.

The Directors of Poyooyo LTD have heard of the Maxims of Tax Planning, which outline strategies for minimizing tax liabilities legally.

In a recent visit by the Domestic Tax Revenue Division of the Ghana Revenue Authority (GRA), the Large Taxpayers Office (LTO) in Accra conducted a tax audit on the company, resulting in tax assessments raised against Poyooyo LTD for settlement.

Management of the company, in their last meeting with the directors, presented the outcome of the tax audit and strongly argued that the assessment was erroneous. They claimed that the liabilities raised were based on legitimate tax planning strategies the company employed.

They believe that the company is in full compliance with the tax laws and should not be required to settle the tax liabilities assessed. However, payment of the liability would significantly impact the company’s cash flow and disrupt its operations.

Poyooyo LTD has approached your tax consulting firm for assistance and guidance.

Required:

Advise Poyooyo LTD on the provisions of the tax laws that could be taken advantage of to avert the payment of the liability.

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  • 5 Marks

AT – Nov 2024 – L3 – Q2c – Extension of Time and Early Filing of Tax Returns

Explain the conditions for tax return extension and early filing requirements.

Akosua Sokode has set up a small business to sell cosmetics in Accra. She just called you, an associate member of the Institute of Chartered Accountants Ghana, to seek your advice on tax returns and payment of taxes. Akosua Sokode told you that she cannot meet her tax payment deadlines and cannot file tax returns by the due dates. She also confided in you that maintenance of documents is a big problem for her.

Required:

Address the concerns of Akosua Sokode by briefing her on the following:

i) THREE factors regarding the extension of time for filing tax returns.

ii) TWO circumstances under which the Commissioner-General may request for filing of tax returns before the due date.

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  • 9 Marks

AT – Nov 2024 – L3 – Q2b – Tax Implications of 100% Acquisition in Mining Operations

Explain the tax implications of a 100% acquisition and compute the gains from the acquisition.

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:

  1. Tempane Mines LTD acquired 100% interest in Tongo for a consideration of GH¢310,000,000 at the end of 2023.
  2. 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.

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  • 5 Marks

ATAX – May 2019 – L3 – Q7b – Corporate Tax Compliance and Reporting

Compute the total tax liabilities for Alaba Trading Limited for the 2018 assessment year, considering its assessable profit, capital allowances, and dividend payable.

For the assessment year 2018, below are the extracts from the tax computations of Alaba Trading Limited:

Item Amount (₦)
Assessable profit 8,200,000
Capital allowances 5,400,000
Dividend payable 6,000,000

Required:
Determine the total tax liabilities of Alaba Trading Limited for the assessment year.

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  • 10 Marks

ATAX – May 2019 – L3 – Q7a – Taxation of Specialized Businesses

Provide a report on fiscal incentives in Nigeria’s oil and gas sector, including gas production, exploitation of associated gas, and free trade zone investments.

The Federal Government of Nigeria, in the third quarter of 2018, announced the discovery of a huge hydro-carbon deposit in the Chad Basin area of Borno State. This information has attracted interest from local and foreign investors in the Nigerian oil and gas sector. One such foreign investor is a Japanese billionaire, Mr. Sun Nagasaki, who has investments in oil and gas operations in the Middle East and Latin America.

Mr. Nagasaki is, however, not familiar with the regulations guiding operations and the incentives available to investors in the oil and gas sub-sector in Nigeria. You have been appointed as a tax consultant by Mr. Nagasaki’s representative in Nigeria.

Required:
a. Draft a report addressed to Mr. Nagasaki explaining the following issues of interest:

i. Fiscal incentives available in the gas production phase (2 Marks)
ii. Six incentives for the encouragement of exploitation and utilization of associated gas for commercial purposes (downstream operations) (3 Marks)
iii. Six incentives and fiscal measures that favour and encourage large investment in oil and gas free trade zones (4 Marks)

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  • 15 Marks

ATAX – May 2019 – L3 – Q6 – Transfer Pricing

Outline key aspects of transfer pricing regulations in Nigeria, including objectives, key concepts, and methods.

The need for monitoring and controlling the operations of multi-national enterprises (MNEs) and their local subsidiaries or associate companies around the world has necessitated special interest in various governments putting in place mechanisms for the treatment of transfer pricing. Although transfer pricing is not new in Nigeria, the law regulating it, the Income Tax (Transfer Pricing) Regulation Act, was enacted in August 2012. It specifies that “every taxpayer” is expected to develop a transfer pricing policy in regard to transfer pricing and control transactions, as well as treatment of transactions of permanent establishments (PE) and dispute resolutions.

You have been invited by the Nigerian Association of Chambers of Commerce, Industry, Mines and Agriculture (NACCIMA) to present a paper at a workshop on transfer pricing regulations in Nigeria. The primary objective of the workshop is to provide the participants, both local and foreign stakeholders in the Nigerian business environment, necessary information on transfer pricing issues in Nigeria.

You are required to outline relevant points to address the following issues:

a. Objectives of application of transfer pricing regulation in Nigeria (3 Marks)
b. The concepts of:
i. Connected taxable persons (3 Marks)
ii. Arm’s length principle (3 Marks)
c. Description of three transfer pricing methods (6 Marks)

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  • 7 Marks

ATAX – May 2019 – L3 – Q5c – Double Taxation Reliefs and Credits

Advise on double taxation relief for SOKGlobal Limited and compute the applicable relief.

SOKGlobal Limited is a wholly owned Nigerian company that deals with stationery items. It has a functional business unit in Cape Town, South Africa. The company’s operating results for the year ended December 31, 2017, are as follows:

Profit attributable to South Africa business: ₦8,740
Capital allowances agreed with tax officials for Nigeria and South Africa businesses were ₦5,500,000 and ₦2,210,000, respectively.

Required:
Advise the company on the double taxation relief applicable to the company, showing the necessary computations.

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  • 6 Marks

ATAX – May 2019 – L3 – Q5b – Double Taxation Reliefs and Credits

State provisions on business profits, dividends, and director's fees under double taxation arrangements between countries.

With respect to double taxation arrangements, state precisely the provisions on the following:

i. Business profits not arising through a permanent establishment. (2 Marks)
ii. Dividend derived by one company resident in one country from another company resident in another country.
iii. Directors’ fees and other similar payments derived by a resident of a country in his capacity as a director of a company which is a resident of another country.

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  • 2 Marks

ATAX – May 2019 – L3 – Q5a – Double Taxation Reliefs and Credits

State provisions regarding double taxation agreements between Nigeria and another country, as provided in Sections 34 and 35 of the Companies Income Tax Act.

a. State four of the specific provisions of the law as provided in Sections 34 and 35 of the Companies Income Tax Act Cap C2 LFN 2004 (as amended) regarding where there is a double taxation agreement between one country and Nigeria. (2 Marks)

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  • 18 Marks

ATAX – May 2019 – L3 – Q4b – Capital Gains Tax (CGT)

Advise on capital gains arising from various business transactions, deemed disposal, and roll-over relief for Smaposu Nigeria Limited.

Smaposu Nigeria Limited is based in Ibadan, Oyo State, and is involved in the manufacturing of computer accessories. The company undertook the following transactions during the year ended December 31, 2018:

(i) Plant and machinery: Part of the plant and machinery was purchased in the year 2014 at an all-inclusive price of ₦12,500,000. A machinery was sold for ₦8,100,000, and the value of the undisposed part was ₦5,740,000. Selling expenses incurred amounted to ₦150,000.

(ii) Motor vehicle: A motor vehicle, which was acquired in 2016 for ₦3,000,000 for the purpose of the business, was sold to the company’s general manager for ₦2,900,000. The market value of the car as at the point of disposal was ₦3,500,000. The company re-acquired a similar car for ₦3,500,000.

(iii) As a result of an unfavorable business climate in Ibadan, the company relocated to Ikeja, Lagos State. The land and buildings acquired in Ibadan in 2009 for ₦30,000,000 were sold for ₦65,500,000. The cost of valuation and professional fees incurred on disposal was ₦2,000,000. A reinvestment was made in Ikeja through the acquisition of another landed property valued at ₦50,000,000.

Smaposu Nigeria Limited has just appointed your firm as the company’s tax consultant.

You are required to advise the management on:

i. “Deemed” disposal of an asset. (5 Marks)
ii. The capital gains (if any) arising from these transactions. (6 Marks)
iii. The roll-over relief (if any) on re-investment made on the acquisition of new assets by the company. (4 Marks)
iv. Capital gains tax payable. (3 Marks)

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  • 2 Marks

ATAX – May 2019 – L3 – Q4a – Capital Gains Tax (CGT)

Define when acquisition or disposal is effective under the Capital Gains Tax Act.

a. With respect to the Capital Gains Tax Act Cap C1 LFN 2004 (as amended), when is acquisition or disposal effective? (2 Marks)

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  • 20 Marks

ATAX – May 2019 – L3 – Q3 – Taxation of Companies

Prepare capital allowance computations and tax liabilities for Pardo Nigeria Limited based on its financial data and asset acquisitions.

Pardo Nigeria Limited is a manufacturer of polythene bags. It was incorporated on January 1, 2013, but commenced business operations on March 1, 2013. The following is the summary of its adjusted profits for the respective years:

Period Ended Adjusted Profit (₦’000)
December 31, 2013 7,200
December 31, 2014 10,700
December 31, 2015 12,650
December 31, 2016 15,220
December 31, 2017 19,850

The company acquired the following assets:

Date Asset Type Amount (₦’000)
April 5, 2013 Factory building 5,400
January 17, 2014 Office furniture 2,750
December 1, 2014 Motor vehicle 4,500
January 3, 2015 Production plant 1,820

The company sold some of its assets on December 31, 2017 as follows:

Asset Type Cost (₦’000) Proceeds (₦’000)
Office furniture 250,000 35
Production plant 650,000 60

As the newly appointed tax consultant to the company, the managing director sought your advice on both capital allowances available to the company and the tax liabilities resulting from them for the relevant years. He, however, informed you during the finalization of the engagement that the factory building was purchased second-hand from a company that had ceased operation six months earlier.

Required:
Prepare a report addressed to the managing director of the company showing, for all the relevant years:

a. Capital allowance computations (9 Marks)
b. Tax liabilities payable (11 Marks)

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  • 20 Marks

ATAX – May 2019 – L3 – Q2 – Tax Administration and Dispute Resolution

Discuss the distinction between tax evasion and avoidance, provide solutions, and evaluate Nigeria’s anti-avoidance legislation.

You have been approached by the managing director of a manufacturing company, Ojieaga Integrated Limited, for professional advice on tax evasion and tax avoidance and their challenges to an equitable tax system in Nigeria. Your report is expected to guide the operation of the business, having been subjected in the last three years to various forms of fines and penalties by the Federal Inland Revenue Service on confirmed cases of sharp business practices with their attendant loss of tax revenue to the government.

Required:
Having accepted the terms of engagement, you are to write a report to management for consideration at its next meeting, dealing with the following areas of concern:

a. Distinction between tax evasion and tax avoidance, highlighting THREE examples of each case. (6 Marks)
b. Seven solutions to the problem of tax evasion and tax avoidance. (7 Marks)
c. Comment on anti-avoidance legislations in Nigeria. (7 Marks)

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