Topic: Taxation of Mergers and Acquisitions

a) The global mobile technology industry is rapidly growing and Amega Cell LTD (AMC), has established itself as a leading Multinational Entity (MNE) in this industry. The AMC group is made up of entities involved in the manufacture, distribution and sale of media and communications processors (MCPs) that deliver advanced technologies and unmatched performance to desktop, mobile and professional systems.

Sarpeiman Technologies LTD (STL), in country A is responsible for conducting research and development, creating new MCPs for use in the telecommunication and mobile technology industry, as well as improvements in the design of MCPs. STL employs a number of highly skilled technical staff, including qualified software and electronic engineers. All of the AMC group’s intellectual property is legally owned by STL.

Resident in Country B is STL-Sub1, a wholly owned subsidiary of STL. STL-Sub1 is the entity in charge of manufacturing all of AMC’s products, making use of the know-how and intellectual property of STL. STL-Sub1 makes royalty payments to STL for the use of know-how in the manufacturing process for the MCPs. STL-Sub1 sells finished products to STL-Sub2 and STL-Sub3.

Resident in Country C is STL-Sub2, an entity which purchases finished goods from STL-Sub1 which it then distributes to end customers in the Country C. STL-Sub2 makes royalty payments to STL for use of the intellectual property attached to the products it sells to end customers.

Resident in Country D is STL-Sub3, an entity which purchases finished goods from STL-Sub1, which it then distributes to end customers in Country D. STL-Sub3 makes royalty payments to STL for the use of the intellectual property attached to the products it sells to end customers.

Each distributor entity within the group has an office, and employs highly-skilled staff involved in activities including administration, procurement, marketing and sales. Marketing and sales staff employed in this industry need to possess strong technical knowledge and communicate this to potential customers.

Required:

From a transfer pricing perspective, prepare a functional analysis of the parent company, indicating the entity characterisation for each group entity.

b) Chariston LTD, a US based company intends investing in Ghana for the first time. In the evaluation of the acquisition proposal, the following options are offered:

i) To acquire 50%

ii) To acquire 51%

The Ghanaian company identified as the target is into ceramic manufacturing and is located at Adukrom, a district capital in the Eastern Region of Ghana.

Required:

With practical illustrations, explain what Chariston LTD stands to benefit from both acquisition and also the implication for holding either option.