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- 12 Marks
Question
The management of Kelkadadi Ltd, a company resident in Ghana since the year of assessment 2007, is a wholly owned subsidiary of Danlerigu Ltd, a company resident in Nigeria. The Finance Manager of Kelkadadi has invited you as a final level three candidate of ICAG and also a Tax Intern with Danlerigu to analyze the transaction below and provide tax implications thereon.
Kelkadadi Ltd contracted a loan of $10 million from Danlerigu Ltd to help it meet its operational activities. The balance standing on the loan account at the beginning of 2018 stood at $5 million and $4.1 million at the end of 2018 year of assessment. The exchange rates are as follows:
- Year Start (2018) $1 = GH¢5.20
- Year End (2018) $1 = GH¢5.21
The extract of the financial statement at the beginning of the year 2018 was as follows:
- Stated Capital: GH¢200,000
- Retained Earnings: GH¢1,235,000
- Capital Surplus: GH¢40,000
- Share Deals: GH¢30,000
Interest on the debt paid during the year amounted to GH¢90,124 and foreign exchange loss on the loan repayment stood at GH¢147,000.
Required:
Write a memo on the possible tax implication(s) on this arrangement to the Finance Manager.
Answer
MEMO
TO: Tax Manager
FROM: Tax Intern
DATE: 7th July 2019
SUBJECT: Tax Implication on Thin Capitalization Rules
INTRODUCTION
Following your request for me to provide the tax implication on the thin capitalization, I furnish as follows:
ISSUES
Kelkadadi Ltd is a subsidiary of Danlerigu and any loan that is granted shall be subject to Thin capitalization rule which states that the debt secured should not be more than 3 times the equity of the entity.
In this particular situation, the debt exceeds the three times. Consequently, the interest paid or payable that exceeds the 3:1 ratio shall be added to income and taxed and also the foreign exchange loss paid or payable.
Additionally, the total interest paid or payable attracts a withholding tax at the rate of 8%.
Summary of Interest
Total Interest: GH¢90,124.00
Interest Allowable: GH¢14,922.45
Interest to be disallowed (difference): GH¢75,201.55
From W2 as attached, total interest of GH¢90,124.00 shall attract interest at 8% which is (90,124.00 * 8%)=GH¢7,209.92
Interest of GH¢75,201.55 shall be disallowed, meaning it should not be an allowable deduction out of GH¢90,124 with GH¢14,922.45 allowable.
Summary of Foreign Exchange Loss
Total Foreign Exchange: GH¢147,000.00
Foreign Exchange Allowable: GH¢24,339.81
Foreign Exchange unallowable: GH¢122,660.19
From W3 as per the schedule attached, the total foreign exchange loss of GH¢147,000 only GH¢24,339.81 shall be allowable with GH¢122,660.19 not allowable for tax purposes.
CONCLUSION
In conclusion, the attached schedule will aid your comprehension of the issues as stated above.
Thank you.
Yours faithfully,
- Tags: Foreign Exchange Loss, Interest Deduction, Thin Capitalization, Withholding Tax
- Level: Level 3
- Topic: Tax planning
- Series: NOV 2019
- Uploader: Theophilus