- 8 Marks
Question
Muda Atesigbe is a major shareholder of Malka Ltd, a company based in Dubai–United Arab Emirates. As part of giving the company a global outlook, it intends to have a presence in Ghana. What is not too clear to the company’s management is the mode of entry into the country that would serve its business interests. It is contemplating establishing a company in Ghana or using the Permanent Establishment route to make its presence in Ghana.
Required:
He has tasked you, as a final level student of the Institute of Chartered Accountants, Ghana, to advise him on the tax implications of both routes and which is a better option. (8 marks)
Answer
i) Permanent Establishment (PE)
- Registration: A PE does not have equity, and therefore no stamp duty payment is required upon registration.
- Tax on Profits: Branch profit tax at 8% is imposed on the profits of a PE, which is an automatic payment required under the tax laws.
- Dividend: Since a PE does not declare dividends, there is no dividend tax to pay.
- Interest Deduction: Interest on a loan borrowed from the parent company is not an allowable deduction in the PE’s books.
ii) Subsidiary
- Registration: A subsidiary must register as an entity incorporated in Ghana with a stated capital, and pay stamp duty at the rate of 0.5% on the capital.
- Tax on Profits: There is no branch profit tax for a subsidiary. Instead, it declares dividends, and dividends paid to shareholders are taxed at 8%.
- Dividend: Dividend declarations are subject to the approval of the Annual General Meeting (AGM) and can be managed based on company strategy.
- Interest Deduction: Interest on loans borrowed from the parent company is allowable for tax purposes, although it may be subject to thin capitalization rules.
Conclusion:
Establishing a subsidiary is generally a better option for Muda Atesigbe as it offers more flexibility in managing dividend payments, tax-deductible interest, and the potential avoidance of automatic branch profit tax. Although the subsidiary will incur stamp duty, the overall tax structure may offer more advantages compared to a PE.
- Topic: International taxation, Permanent establishment
- Series: NOV 2021
- Uploader: Joseph