Question Tag: International Taxation

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  • 6 Marks

AT – NOV 2021 – L3 – Q2c – International taxation | Business income – Corporate income tax

Advise on tax implications of loan forgiveness between a Korean parent company and its Ghanaian subsidiary.

Yelbateng Ltd is a Korean company and has a subsidiary in Ghana, by the name Yelbateng Ghana Ltd.

The parent company in 2008 gave a loan facility to the subsidiary to support its operations. However, interest on the loan from 2009 to 2019 came to $8,000,000 after applying a thin capitalisation rule in taxation. As a result, the total amount was accrued by Yelbateng Ghana Ltd, as the company did not have money to pay the interest as agreed in the loan contract.

The total amount of the loan was $20 million. In the year 2020, the Board took a decision to relief the subsidiary of the loan obligation, meaning the loan with its interest was not going to be repaid by the subsidiary.

Required:

You have been invited as a final level candidate to advise the company on the tax implication of this arrangement. (6 marks)

The loan from the parent company to a subsidiary shall be subject to the thin capitalisation rule. The interest on the loan is tax deductible provided it is within the thin capitalisation rule.

With the accumulated interest of $8,000,000 and a loan amount of $20 million forgiven by the parent company, both become income in the books of Yelbateng Ghana limited and therefore taxable.

Tax implication

The withholding tax on the amount of interest on the loan shall be deducted and paid to the Ghana Revenue Authority in line with the tax provision.

Additionally, the amount of $800,000 forgiven and the loan of $20 million shall be treated as income in the company’s books for tax purposes.

  • 10 Marks

AT – May 2020 – L3 – Q2b – International taxation

Analyze tax implications for an Italian company constructing a fuel depot in Ghana, distinguishing between trading in Ghana and trading with Ghana

XYZ Parks Ltd, an Italian Company, had a contract for the construction of a fuel depot in Ghana. It was clear from the contract agreement that the production and fabrication costing $500,000 would be carried out outside Ghana. The installation works in Ghana and related services would cost $200,000 and GH¢2,400,000 respectively.

XYZ Parks Ltd has asked of your professional advice on the above transaction.

Required:
i) What is the tax implication of trading in Ghana and trading with Ghana? (4 marks)
ii) What will be your professional advice to XYZ Parks Ltd on the tax implication of other contract? (6 marks)

i) Tax implication of trading in Ghana and trading with Ghana:

Trading in Ghana is having presence in Ghana, doing business in Ghana and making profits in Ghana. Trading in Ghana is taxable in Ghana while trading with Ghana is not having presence in Ghana and not doing business in Ghana. Trading with Ghana is not taxable in Ghana.

ii) Tax implication of XYZ Park Co contract for fuel depot in Ghana:

Production and Fabrication works – $500,000. This work is to be carried out outside Ghana. Therefore, permanent establishment cannot be established in Ghana. The income therefore not liable to tax in Ghana.

Installation Work and related service $200,000 and GH¢2,400,000 respectively.

  • Installation site is in Ghana. This will serve as a permanent establishment for the performance of the work in Ghana.
  • Related services will also be performed in Ghana and therefore will constitute a permanent establishment for XYZ Park in Ghana.
  • If there is double tax agreement (i.e. tax treaty) between Ghana and the country of residence of XYZ Park, Ghana tax will apply to both the installation works and related service and appropriate relief provided.
  • 20 Marks

AT – Dec 2023 – L3 – Q1 – International taxation

Calculating tax adjustments for related party transactions between Abirem Ltd and Gomoa Ltd, including pricing and dividend issues.

Gomoa Ltd, a resident of the United States of America, established two companies, Komenda Ltd (resident in South Africa) and Abirem Ltd (resident in Ghana). The Ghana Revenue Authority (GRA) requested information about Abirem Ltd for tax purposes.

The details for the 2021 year of assessment are as follows:

Additional information:
i) Gomoa Ltd invoiced goods to Abirem Ltd at a price of GH¢1,900,000, which is 10% higher than the market price.
ii) Dividend of GH¢700,000 paid by Abirem Ltd to Gomoa Ltd has been incorporated into Abirem Ltd’s cost.
iii) Management and technical services fee of GH¢1,290,000 paid to the group by Abirem Ltd has been added to operating expenses.
iv) Goods invoiced to Komenda Ltd by Gomoa Ltd amounted to GH¢1,000,000, priced 15% below the arm’s length price.
v) Dividend of GH¢200,000 received by Abirem Ltd from a resident company is included in its revenue. Abirem Ltd holds 25% of the resident company’s voting power.
vi) The Managing Director of Abirem Ltd took goods for personal use, valued at GH¢200,000 (cost), with a margin of 20%.
vii) The Managing Director of Abirem Ltd took additional goods worth GH¢130,000 at cost for home consumption, which was not added to the cost of goods above. The goods were sold at a 10% markup.
viii) Abirem Ltd paid GH¢20,000 in tax in South Africa at a rate of 27% on goods sold, which was included in its revenue.
ix) Abirem Ltd received a loan from Komenda Ltd for operations. Loan details are as follows:

  • Loan amount: GH¢10 million
  • Interest on loan payable: GH¢1,000,000
  • Foreign exchange loss on the loan: GH¢200,000
    x) Equity at the start of the year: GH¢2,000,000, and at the end of the year: GH¢2,800,000
    xi) GH¢400,000 was transferred from retained earnings to share capital.
    xii) Financial gain from derivative: GH¢2.5 million, and financial cost from derivative: GH¢6 million, included in operating expenses.

Required:
Calculate the tax payable by Abirem Ltd for the 2021 year of assessment.

Abirem Ltd – Computation of Tax Payable for Year of Assessment 2021

Workings:
W1 – Loan Interest and Foreign Exchange Loss Adjustments:

  • Loan amount: GH¢10 million
  • Interest on loan: GH¢1,000,000
  • Foreign exchange loss: GH¢200,000
  • Equity: GH¢2,000,000
  • Debt-to-equity ratio: 3:1
  • Allowable debt: 3 × GH¢2,000,000 = GH¢6,000,000
  • Allowable interest: (GH¢6,000,000 / GH¢10,000,000) × GH¢1,000,000 = GH¢600,000
  • Disallowed interest: GH¢1,000,000 – GH¢600,000 = GH¢400,000
  • Allowable foreign exchange loss: (GH¢6,000,000 / GH¢10,000,000) × GH¢200,000 = GH¢120,000
  • Disallowed foreign exchange loss: GH¢200,000 – GH¢120,000 = GH¢80,000

Withholding Tax on Management and Technical Services:
20% × GH¢1,290,000 = GH¢258,000

  • 12 Marks

AT – July 2023 – L3 – Q1a – International taxation

Analyzing the tax implications of share capital, loan interest, revaluation reserves, and thin capitalization

On 1 January 2022, Frost Ltd based in the United States of America acquired 100% shares in Nzungu Ltd in the Gambia. Also, Nzungu Ltd acquired 60% shares in Gyakye Ltd in Ghana.

Frost Ltd granted a loan equivalent of GH¢100 million to Nzungu Ltd. The loan was subsequently passed on to Gyakye Ltd in Ghana to strengthen its capital structure.

The interest equivalent on the loan from Frost Ltd to Nzungu Ltd was GH¢6,000,000. Gyakye Ltd ended up paying GH¢8,000,000 as interest to Nzungu Ltd. The difference in interest payment was a service charge for the role played in transferring the loan to Ghana by Nzunga.

Gyakye Ltd has the following extracts from its Statement of Financial Position as at 2022:

Required:
Evaluate the tax implications of the following:

  1. The movement in the Share Capital.
  2. The loan interest paid.
  3. The movement in the retained earnings.
  4. The movement in the revaluation reserves.
  5. Thin capitalization implications from the above.
  1. The movement in the stated capital expenses the company to payment of stamp duty of 0.5%. Additional shares issued: Stamp duty @ 0.5% on the amount of the increase that is GH¢10,000,000. If it is as a result of transfer from retained earnings, two issues:
    • Deemed dividend withholding tax at 8% on the amount transferred.
    • Stamp Duty on the amount transferred @ 0.5%. (2 marks)
  2. The interest of GH¢8,000,000 paid shall be subject to a withholding tax at the rate of 8%. Additionally, the interest that shall be subject to the thin capitalisation rule shall be interest of GH¢6,000,000 and not the GH¢8,000,000 paid. The movement in the retained earnings implies a stamp duty of 0.5% on the amount transferred and also a deemed dividend withholding tax at 8%. Retained Earnings is treated as deemed dividend and taxed @ 8% on the difference (13,000,000-6,000,000) 8% * 7,000,000 = GH¢560,000.00 (2 marks)
  3. If the reduction in the loss is as a result of loss, that loss shall be carried forward. The movement in the revaluation reserves has no tax implication and therefore not taxable. If it was made a deductible expense, it would be reversed. (2 marks)
  4. The movement in the revaluation reserves has no tax implication except that the GRA must ensure that no asset revalued enjoys capital allowance on the revalued amount. (2 marks)
  5. Thin Capitalisation:
  • 5 Marks

AT – Nov 2019 – L3 – Q2b – International taxation

Explain the benefits that countries A and B stand to gain from a Double Taxation Agreement (DTA).

Countries A and B are contemplating a Double Taxation Agreement (DTA). The two countries are of the view that the Double Taxation Agreement will create a lot of tax benefits to citizens and other persons in both countries. Others have criticized this move as counter-productive and not worth the time of either country.

Your inputs are being solicited as an ICAG Finalist and a patriotic citizen of Country A to provide the benefits to be put on the website of the Ministry of Finance of Country A to enable people to read, appreciate, and support the agreement.

Required:

Explain FIVE (5) benefits that the two countries stand to gain from this arrangement.

The benefits of a Double Taxation Agreement (DTA) between Countries A and B include:

  1. Fiscal Certainty for Investors: It creates fiscal certainty for investors in the affected countries, ensuring they understand the tax obligations in each country.
  2. Tax Exemptions: It provides for certain income to be exempt from tax in one of the contracting states, thereby avoiding double taxation.
  3. Promotion of Foreign Investment: The DTA promotes foreign investment by providing clear rules on how income will be taxed in both countries, making investment decisions easier.
  4. Assistance in Revenue Collection: Countries may obtain help in revenue collection from the contracting state, facilitating the enforcement of tax laws.
  5. Prevention of International Tax Avoidance: The DTA specifies income to be taxed at lower rates and prevents international tax avoidance and evasion by providing clear rules for taxation.
  • 3 Marks

AT – Nov 2019 – L3 – Q2a – International taxation

Outline the conditions required to satisfy before foreign tax credit relief is granted.

Any resident person other than a partnership may be allowed a foreign tax credit relief on any income that is earned outside Ghana subject to the fulfillment of certain conditions, which are critical in the granting of the relief.

Required:

What are the conditions to satisfy before the foreign tax credit relief is granted?

The foreign tax credit relief is granted subject to the following conditions:

  1. Income Assessment: The income corresponding to the tax must have been assessed.
  2. Tax Credit Certificate: Submission of a tax credit certificate from the tax department of the foreign country signifying the nature of income and the quantum of taxes paid by the taxpayer.
  3. Official Receipt: Providing an official receipt or a functional equivalent of a tax credit certificate from the tax department of the foreign country.
  • 3 Marks

AT – Nov 2019 – L3 – Q1c – International taxation | Tax administration in Ghana

Explain the tax implications of "Trading in Ghana" versus "Trading with Ghana."

What is the tax implication of the concepts “Trading in Ghana” and “Trading with Ghana” in tax administration arrangement?

Trading in Ghana connotes a non-resident person having business presence in Ghana and competing with local businesses. It implies, in simple terms, having a permanent establishment. This creates tax obligations for the non-resident person within Ghana.

Trading with Ghana, on the other hand, does not imply having a business presence in Ghana. It means conducting business with entities in Ghana from outside the country without establishing a permanent establishment within Ghana. This does not create any tax obligations for the non-resident person within Ghana.

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