Question Tag: Tax Credit

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  • 4 Marks

AT – May 2021 – L3 – Q2d – International Taxation

Compute the tax payable for Ganigani Ltd considering foreign income and relinquished tax credit.

Ganigani Ltd is a company based in Ghana and has a business dealing mainly in Nigeria. In the 2020 year of assessment, the following data is relevant to parts of its operation:

  • Global income: GH¢25,000,000
  • Tax paid in Nigeria: ₦1,000,000
  • Exchange rate: GH¢1 = ₦67.59

Ganigani Ltd elects to relinquish a foreign tax credit for the year in line with section 112 of the Income Tax Act, 2015 (Act 896) as amended.

Required:
Compute the tax payable.

Computation of tax payable for the 2020 year of assessment:

Description GH¢
Global income 25,000,000.00
Less: Tax paid in Nigeria (₦1,000,000 / 67.59) (14,795.09)
Taxable income 24,985,204.91
Tax payable @ 25% 6,246,301.23

Explanation:
The taxable income is derived from the global income minus the tax paid in Nigeria, converted to Ghana cedis using the exchange rate provided. The tax is then computed at the rate of 25%.

  • 10 Marks

AT – Aug 2022 – L3 – Q5b – Tax Planning

Advise Wina Ltd on the tax implications of acquiring shares and providing a financial facility to Fatia Ltd in Ghana.

Wina Ltd (Wina) is a company incorporated in the United States of America and also resident
in the United States of America. The Company has been looking for opportunities across Africa
to invest its idle funds in support of shareholders’ decision.
In the latter part of 2021, the management of Wina identified Ghana as a country with huge
potentials for foreign investments. Wina intends to acquire 60% shares in Fatia Ltd (Fatia), a
company resident in Ghana with indigenous ownership but with unimpressive financial
records.When the deal is approved, it would provide a financial facility, the equivalent of
GH¢10,000,000 as a loan with interest at the rate of 22.5% comparable to all other interest
rates.
The equity of Fatia amounts to GH¢500,000 comprising Stated Capital of GH¢250,000,
Retained Earnings of GH¢200,000 and Revaluation Reserves of GH¢50,000.
Required:
Using the format of a memo:
Advise the management of Wina as a final level candidate on the tax implications of this
investment and the credit support that Wina can give without any restriction from the Ghana
Revenue Authority.

To: Management of Wina Ltd
From: Final Level Student
Date: [Insert Date]
Subject: Tax Implications of Investment in Fatia Ltd and Provision of Financial Facility

Introduction:
This memo addresses the tax implications associated with the proposed acquisition of 60% shares in Fatia Ltd, a resident company in Ghana, and the provision of a financial facility of GH¢10,000,000 with an interest rate of 22.5%. The focus will be on the applicable tax laws, particularly thin capitalization rules, and allowable credit support.

1. Thin Capitalization Rules:

  • According to the Ghana Income Tax Act, 2015 (Act 896), if a non-resident entity controls 50% or more of a resident company, thin capitalization rules apply. The safe harbor debt-to-equity ratio is 3:1.
  • Fatia Ltd has total equity of GH¢500,000 (comprising GH¢250,000 Stated Capital, GH¢200,000 Retained Earnings, and GH¢50,000 Revaluation Reserves).
  • Based on the 3:1 ratio, Fatia Ltd can only support up to GH¢1,500,000 of debt without restriction (GH¢500,000 * 3).

2. Excess Debt Disallowed:

  • The financial facility proposed (GH¢10,000,000) exceeds the allowable debt by GH¢8,500,000 (GH¢10,000,000 – GH¢1,500,000).
  • Interest on the excess debt will not be allowed as a deduction for tax purposes in Ghana.

3. Withholding Tax on Interest Payments:

  • Interest paid on the loan will attract withholding tax at a rate of 8%.
  • The withholding tax on interest constitutes a final tax for Wina Ltd, meaning it satisfies the tax liability on the interest income received.

4. Foreign Exchange Implications:

  • Any foreign exchange fluctuations related to the loan repayment and interest payments will follow the same tax treatment as the interest itself.

5. Recommendations:

  • To minimize tax liabilities and avoid disallowed interest, Wina Ltd should consider increasing Fatia Ltd’s equity base, thereby allowing a higher debt capacity under the 3:1 ratio.
  • Alternatively, Wina Ltd could restructure the financial arrangement to remain within the allowable debt limits.

Conclusion:
By adhering to the thin capitalization rules and managing the debt-to-equity ratio, Wina Ltd can minimize the risk of disallowed interest and ensure compliance with Ghana’s tax laws.

Best Regards,
[Your Name]
Final Level Student

  • 16 Marks

AT – May 2016 – L3 – Q5a – International taxation

Calculate tax credit relief available for a resident with income from the UK under a double taxation agreement.

Mrs. Olivia Quartey is a resident in Ghana and works as the Finance Director of Ghana Trustees Limited. She earned a gross salary of GH¢30,000.00 for the 2014 year of assessment. She contributed 5.5% of her salary to the social security fund. In 2014, the gross royalties that accrued to her was £4,000 from the United Kingdom from which tax of £800 had been deducted with the remainder of £3,200 being remitted to her in Ghana.

Granted that Ghana has a double taxation agreement with the United Kingdom, you are required to calculate the tax credit relief (if any) available to Mrs. Olivia Quartey for the year 2014.
[Exchange rate: GH¢4.50 = £1.] (16 marks)

Tax Rate Table

Income (GH¢) Rate (%)
First             1,584.00 Free
Next              792.00 5
Next              1,104.00 10
Next              28,200.00 17.5
Exceeding     31,680.00 25
  1. Effective Rate of Tax of the UK Income:

Tax Charged ×100=800×4.504,000×4.50×100=20%\text{Tax Charged } \times 100 = \frac{800 \times 4.50}{4,000 \times 4.50} \times 100 = 20\%

  1. Exchange Rate:
    800 × 4.50 = 3,600
    4,000 × 4.50 = 18,000

Effective Rate = 20%

  1. Computation of Ghana Tax Liability:
  • Salary in Ghana: GH¢30,000
  • Gross Income from UK: GH¢18,000
  • Total Income: GH¢48,000
  • Less SSF Contribution (5.5% of GH¢30,000): GH¢1,650
  • Chargeable Income: GH¢46,350

Income Tax Computation:

  • First GH¢1,584: Free
  • Next GH¢792 @ 5%: GH¢39.60
  • Next GH¢1,104 @ 10%: GH¢110.40
  • Next GH¢28,200 @ 17.5%: GH¢4,935.00
  • Remaining GH¢14,670 @ 25%: GH¢3,667.50

Total Ghana Tax Payable: GH¢8,752.50

  1. Average Tax Rate of Ghana:

Tax PayableChargeable Income×100=8,752.5046,350×100=18.88%\frac{\text{Tax Payable}}{\text{Chargeable Income}} \times 100 = \frac{8,752.50}{46,350} \times 100 = 18.88\%

Comparison of UK and Ghana effective rates shows Ghana’s rate is lower.
Thus, the UK income will be taxed at Ghana’s average rate:

  • Tax on Total Income: GH¢8,752.50
  • Less Foreign Tax Credit (18.88% of GH¢18,000): GH¢3,398.40
  • Final Tax Liability: GH¢5,354.10
  • 10 Marks

AT – May 2016 – L3 – Q4a – Tax administration in Ghana

Explains the circumstances under which a taxable person can claim VAT refund or credit.

Under what circumstances will a taxable person be entitled to a tax refund or tax credit where the amount of input tax which is deductible exceeds the amount of output tax due in respect of the tax period. (10 marks)

The following conditions have to be satisfied before a registered VAT trader can get a refund paid on his/her inputs for business purposes:

  1. The business must be registered for VAT, that is, he/she must be a registered VAT trader.
  2. The business must have submitted returns for all months for which it has been in operations.
  3. The business must complete and submit a prescribed VAT claim form for the refund of the VAT paid to the VAT Service.
  4. The business must be engaged in the export of 25% or more of the output.
  5. Total export proceeds should have been repatriated by importer’s bank to exporter’s authorized dealer banks in Ghana.
  6. The VAT paid should qualify as deductible input VAT.
  7. The input VAT paid should exceed the output VAT paid.
  8. Possession of all original tax (VAT) invoices.
  9. Where the credit remains outstanding for a continuous period of three months or more.

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