Question Tag: Tax Loss

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  • 10 Marks

AT – May 2021 – L3 – Q5b – Mergers, amalgamation and reorganisation

Advise on the tax implications of Japan Rocks acquiring 60% of shares in Konadu Yiadom Ltd.

The shareholders of Japan Rocks, a computer chip manufacturing company based in Japan, are planning on acquiring 60% of the shares in Konadu Yiadom Ltd in Ghana. The return on income for Konadu Yiadom Ltd for the year ended 31 December 2020 showed a loss of GH¢3,600,000 and the financial cost of GH¢900,000.

Required:
Advise Japan Rocks and its shareholders on the income tax implications of the acquisition of shares by Japan Rocks and the treatment of financial cost.

Income Tax Implications of the Share Acquisition:
The acquisition of 60% of the shares in Konadu Yiadom Ltd by Japan Rocks will trigger several tax implications:

  1. Change in Underlying Ownership:
    Under section 62 of the Income Tax Act, 2015 (Act 896), a change in underlying ownership of more than 50% results in the following:

    • Deemed Realisation of Assets and Liabilities:
      The assets and liabilities of Konadu Yiadom Ltd will be treated as though they were realised immediately before the change in ownership. This may lead to the recognition of gains or losses, which would be subject to tax.
  2. Disallowance of Loss Carryforward:
    Konadu Yiadom Ltd’s prior losses of GH¢3,600,000 cannot be carried forward after the change in ownership. This means that Japan Rocks will not benefit from the pre-existing tax losses. The loss incurred before the acquisition is not deductible under section 62(2)(b) of the Income Tax Act.
  3. Disallowance of Financial Cost:
    The financial cost of GH¢900,000 incurred by Konadu Yiadom Ltd prior to the acquisition will not be deductible after the change in ownership. According to section 16(3) of the Income Tax Act, the financial cost incurred before the change in underlying ownership cannot be deducted by the new owners.
  4. Separate Year of Assessment:
    Due to the significant change in ownership, the year before and after the acquisition will be treated as separate years of assessment for tax purposes. Konadu Yiadom Ltd will be required to file two separate tax returns: one for the period before the acquisition and another for the period after.
  5. Potential Tax on Gains:
    If there is any revaluation of assets during the acquisition process, any gains on these assets may be subject to corporate income tax, depending on the nature of the transaction (e.g., asset purchase vs. share purchase). However, the acquisition structured as a share purchase would typically avoid capital gains tax in Ghana.

Conclusion:
The acquisition of 60% of Konadu Yiadom Ltd by Japan Rocks brings about critical tax implications, particularly the disallowance of the pre-existing loss and financial cost incurred before the acquisition. Japan Rocks should carefully consider the tax impact of the transaction and ensure compliance with Ghana’s Income Tax Act.

  • 10 Marks

AT – July 2023 – L3 – Q3a – Mergers, amalgamation, and reorganization

Discussing the tax implications of a 51% share acquisition and strategies to mitigate tax exposure.

Exclusif Homes Ghana Ltd is a wholly owned Ghanaian real estate company. The basis period of the company ends on 31 December each year. The company has obtained a government contract to build low-cost houses across the country. In order to raise additional capital to undertake this project, the company is looking for an investor who would acquire at least 51% of the shares of the company. The managers of the company are engaged in negotiations with several potential investors, and there is the likelihood of having an investor and agreements signed on 31 January 2022.

The financial statements of Exclusif Homes Ghana Ltd revealed that the company made a loss of GH¢2,500,000 for the period ended 31 December 2021. Included in the expenses of the company are financial costs and bad debt amounting to GH¢100,000 and GH¢150,000 respectively.

The company also has a parcel of land located at Abokobi which the company purchased three years ago at the cost of GH¢100,000. The current value of the land is GH¢500,000.

Required:
Advise Exclusif Homes Ghana Ltd on the following:

  1. The income tax implications for the company if an investor acquires 51% of the company’s shares and the tax planning opportunities available which could reduce the income tax exposure of the company if an investor acquires 51% of the company’s shares.
  2. Measures the acquirer can adopt to mitigate the tax effects (if any) of the proposed transaction.
  1. Income tax implications and tax planning opportunities:
    • Change in underlying ownership:
      If an investor acquires 51% or more of the company’s shares, this will result in a change in underlying ownership as per Section 62(1) of Act 896. When there is a change of more than 50% in the underlying ownership of a company within a three-year period, the assets and liabilities of the company are deemed to be realized immediately before the change.
    • Deemed realization of assets:
      Section 42 of Act 896 provides that if there is a change in underlying ownership, the assets of the company will be deemed realized at their market value. In this case, the land at Abokobi, which has appreciated from GH¢100,000 to GH¢500,000, will be considered realized, resulting in a gain of GH¢400,000, which will be subject to a 25% tax on the gain.
      (3 marks)
    • Losses and financial costs:
      Section 62 of Act 896 further stipulates that when there is a change in ownership exceeding 50%, the following consequences arise:

      • Financial costs carried forward (GH¢100,000) incurred before the change cannot be deducted.
      • The loss of GH¢2,500,000 incurred before the change cannot be carried forward for tax deduction.
      • Any unrealized gains on the company’s assets (e.g., the GH¢400,000 gain on the land) will be taxed.
        (2 marks)
    • Tax planning opportunity:
      The company could explore the possibility of spreading the sale of shares over a period longer than three years to avoid triggering the tax implications of a change in underlying ownership. Alternatively, it could negotiate to structure the investment as a loan rather than equity to avoid a change in underlying ownership and preserve the tax benefits associated with losses and financial costs.
      (2 marks)
  2. Measures to mitigate tax effects:
    • Staggered acquisition:
      The investor could stagger the acquisition of shares to ensure that the change in ownership does not exceed 50% within a three-year period, thus avoiding the triggering of deemed realization rules and the loss of financial cost and tax loss deductions. This can be done by acquiring less than 50% of the shares initially and the remaining over the next three years.
      (1.5 marks)
    • Loan financing:
      Another strategy could be for the investor to provide financing to the company in the form of a loan rather than an equity investment. This would help the company avoid the deemed realization of its assets and the loss of carried-forward tax losses and financial costs while allowing the company to benefit from tax-deductible interest payments.
      (1.5 marks)
  • 6 Marks

AT – Nov 2019 – L3 – Q2c – Mergers, amalgamation, and reorganization

Analyze the tax implications for Lawomba Ltd after acquiring 68% equity shares of Mbangba Ltd.

The following has been extracted from the tax records of Mbangba Ltd relating to the 2018 year of assessment, which it intends to benefit in terms of tax outcome from the 2019 year of assessment.

Item Amount (GH¢)
Tax loss recorded for the first time in 2018 Y/A 400,000
Financial Cost carried forward from derivatives- 2018 100,000
Bad Debts from Customers crystallized but not utilized in 2018 1,200,000

Lawomba Ltd in March 2019, acquired 68% equity shares of Mbangba Ltd and rebranded the name as Lawomba Ltd and conveyed the circumstance after the deal was clinched to the Ghana Revenue Authority to amend its records accordingly and recognize them as the legitimate persons in control of Mbangba Ltd.

The management of Lawomba Ltd has written to you making available the above disclosures for your tax opinion.

Required:

What is the tax implication of the above transactions in the records of Lawomba Ltd?

The acquisition of 68% of Mbangba Ltd will result in a change in the underlying ownership of Mbangba Ltd by more than 50%.

Tax Implications:

  1. Separate Years of Assessment: The period before the change and the period after the change in underlying ownership in the assets shall be treated as separate years of assessment.
  2. Disallowed Tax Loss: The tax loss of GH¢400,000 incurred in the 2018 year of assessment cannot be utilized by Lawomba Ltd.
  3. Disallowed Financial Cost: The financial cost of GH¢100,000 from derivatives brought forward from 2018 cannot be benefited by Lawomba Ltd.
  4. Disallowed Bad Debts: Bad debts of GH¢1,200,000 crystallized but not utilized in 2018 cannot be accounted for by Lawomba Ltd.
  5. Taxable Gains on Realization: Any gain on the realization of assets during this period is taxable.

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