Topic: International taxation

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  • 8 Marks

AT – May 2021 – L3 – Q1c – International Taxation | Business Income – Corporate Income Tax

Compute the tax payable by Kaeka Ltd considering both foreign and domestic income.

Kaeka Ltd is a resident company providing cleaning services in Ghana. For the first time in the history of the entity, it launched operations as an external company in January 2020 in Lusaka, Zambia. It came to light that the entity earned the equivalent of GH¢2,500,000, which was evenly made for the 2020 year of assessment. On the home front, it earned GH¢16,000,000 in the 2020 year of assessment as income in Ghana. Assume that allowable costs of GH¢12,000,000 were incurred. It received a dividend net of tax from a company in Israel it acquired shares from, amounting to GH¢20,000 in December 2020. Tax of GH¢5,000 was paid on the dividend received.

Required:
i) Compute the tax payable by Kaeka Ltd.
ii) Explain the tax implication if the company made the income from Zambia in the last quarter of 2020.

i) Computation of tax payable

Explanation:
Income received from a foreign country loses its character; hence, the dividend is added to the income, and the tax paid in the foreign country is given as credit. Additionally, the branch of the entity in Ghana has become a foreign PE, and therefore, its income for the first 183 days is taxable in Ghana. After that, it is exempt from tax.

ii) Computation of tax payable if the income from Zambia was earned in the last quarter of 2020

Description GH¢ GH¢
Income from business (Ghana) 16,000,000
Add foreign income:
Dividend 25,000
Gross Income 16,025,000
Deduct allowable deduction (12,000,000)
Chargeable Income 4,025,000
Tax Charged @ 25% 1,006,250
Less tax paid on dividend (5,000)
Tax payable in Ghana 1,001,250

Explanation:
Since the foreign Permanent Establishment did not earn the income in the first 183 days or first 6 months, the income shall be exempt from tax in Ghana in line with section 111 of Act 896 (Act 2015).

  • 4 Marks

AT – May 2021 – L3 – Q1b – International Taxation

Evaluate the accuracy of the statement about withholding tax on global payments for goods, works, and services.

At a public symposium, a tax administrator made a statement to the effect that withholding taxes must be exacted from any payment made to persons around the world for goods, works, and services.

Required:
Evaluate the extent to which this statement is true in the light of the tax provisions of the Income Tax Act, 2015 (Act 896) as amended.

An authorised agent is required to withhold tax from payment to a withholdee. The withholdee could be resident or non-resident. In the case of the resident, there are some situations where there is an exemption. In the case of a non-resident, withholding is only relevant when the person is trading in Ghana. In the case of trading with Ghana, withholding taxes do not apply to such transactions.

  • 20 Marks

AT – Aug 2022 – L3 – Q3 – Tax planning | International taxation

Provide a briefing paper on tax planning options available for an individual and their companies.

John Zookay is a Ghanaian Citizen who has lived in the Republic of Liberia for many years.
He is also a citizen of Liberia. He is an employee of a Multinational Company that has a
subsidiary company in Ghana and Liberia. He works for the Ghanaian subsidiary company,
but his role makes him work for the other subsidiary in Liberia as well. John has chosen Ghana
as a place of his permanent home even though his immediate family is based in the Republic
of Liberia and he visits Ghana anytime during the year.
In 2018, John spent more than 184 days outside Ghana working for the Liberia office. In
addition to his employment income in Ghana, he earned some income from a high yielding
fixed deposit accounts maintained with Bank of Africa, Ghana. His gross interest income for
the year 2018 was GH¢10,000 from Bank of Africa. A few years back, whilst studying in the
United Kingdom, he maintained some high yielding interest bearing account from which he
earned £3,500 in 2018. John does not know how the current income tax law “Income Tax Act,
2015 (Act 896)” will affect his incomes earned from Ghana and elsewhere in the United
Kingdom and is worried that he would be liable to tax on all his incomes in Ghana. He is keen
on getting tax planning advice from you to enable him reduce his tax liability (if any).
John also had serious business interests in Ghana. In view of this interests, he set up two
companies limited by shares in Ghana in which he implemented his business ideas. The
following are the objects of his two companies:
1) farming and production of palm fruits on commercial scale; and
2) processing of palm fruits into oil for both the local and international market

John together with his management team strategically decided that each of the companies
maintains equity in each other in order to avoid difficulties with sourcing for external funding
thus using income from dividends within his companies effectively. John intends that at some
point, he will merge the two companies into one to avoid all the legal compliance obligations
and duplication of cost associated with running separate companies. All the two companies are
instalment taxpayers and are required to file their self-assessment estimate at their various tax
offices.
John desperately needs your assistance to enable him structure his personal and business
interest so as to minimise his tax liability.
Required:
a) Prepare a briefing paper to John on the tax implications on him and his companies. (10 marks)
b) Advise him on the compliance obligations of his companies under self-assessment. (10 marks)

a)

BRIEFING PAPER ON: Tax Planning Options Available to John Zookay and His Companies
From: Final Level Candidate
To: John Zookay
Date: August 2022

Introduction:
Further to your request for tax planning options available for your personal tax situation and your companies, I provide below matters for consideration:

OPTIONS FOR PERSONAL TAX PLANNING

  • Global Income of a Resident Person:
    Section 111 of the Income Tax Act, 2015 (Act 896) provides that the global income of a resident person derived from any source is taxable in Ghana.
  • Resident Status:
    Even though you were in Liberia, you are still considered a resident person in Ghana because you are a Ghanaian citizen, and you have not been outside the country for more than 365 consecutive days.
  • Employment Income:
    Since you have now returned to Ghana, your employment income as the Managing Director of Glofix Ltd will be taxable in Ghana. However, under Section 111(2) of the Act, income from employment exercised outside Ghana is exempt from tax if it satisfies specific conditions, such as being with a non-resident employer.
  • Interest Income:
    Interest earned from resident financial institutions is exempt from tax under Section 7(1)(c) of the Income Tax (Amendment) Act, 2016 (Act 907). Thus, any interest income you earn from Bank of Africa, Ghana, will be tax-exempt.

OPTIONS FOR COMPANY TAX PLANNING

  • Agro-processing Business:
    If any of your companies engage in agro-processing, their income will benefit from a concessionary tax rate of 1% for the first five years of operation.
  • Dividends:
    Dividends received by a resident company from another resident company are exempt from tax if the recipient company holds at least 25% of the voting power in the company paying the dividend, under Section 59(3) of the Income Tax Act.

Conclusion:
These planning strategies will help minimise tax liabilities for both your personal and corporate income. Kindly review them and feel free to seek further clarification where necessary.

Yours faithfully,
Final Level Candidate

b)

Compliance obligations of companies under self-assessment

  •  Section 122 (1) of the ITA provides that a person (individual, company or trusts) who
    is an installment payer for a year of assessment shall file with the CommissionerGeneral (CG) by the date for payment of the first installment (i.e. end of the first
    quarter of the company’s accounting or basis period), an estimate of tax payable for
    the year;
  • An installment taxpayer is one that is required to pay tax by quarterly instalment if
    the person derives or expects to derive assessable income during a year of assessment
    from a business or investment or from an employment where the employer is not
    required to withhold tax;
  •  Except where the CG instructs to the contrary, the estimate filed must be on a
    prescribed form which indicates the estimate of the following:
  • The assessable income of the person for the year of assessment from each
    employment, business and investment and the source of that income; and
  • The chargeable income of the person for the year and the tax to become payable with
    respect to that income;
  • Any other information that the CG may require shall be attached to the estimate;
  • The tax charged on the chargeable income of a person is the estimated tax payable for
    the year of assessment. In estimating the tax payable, a person may take into account:
  • A foreign tax credit to be claimed; and
  •  Foreign income tax, only if the person has paid the tax or the person reasonably
    estimates that the tax will be paid during the year
  •  The estimate of an installment payer remains in force for the whole of the basis period
    unless the person files a revised estimate with the CG together with a statement of
    reasons for the revision.
  • A revised estimate is the estimated tax payable by that person for the year of
    assessment, and shall be used in calculating the quarterly installments payable only
    after it has been filed with the CG;
  • An installment taxpayer shall pay tax instalments:
  •  Where the basis period of that instalment payer is a 12-month period beginning at the
    start of a calendar month, on or before the last day of the 3rd, 6th, 9th & 12th months of
    the basis period; or
  •  In any other case, at the end of each 3-month period commencing at the beginning of
    each year of assessment, unless it coincides with the end of one of the 3-month
    periods. (10 marks)
  • 10 Marks

AT – Aug 2022 – L3 – Q2a – International taxation

Discuss whether bilateral double taxation conventions are essential for resolving international tax problems.

Despite the growing number of contributions to bilateral double taxation, some tax analysts have questioned whether bilateral double taxation conventions relating to the taxation of income and capital are essential for the resolution of international tax problems.

Required:
Discuss the above statement.
(10 marks)

The interrogation is based on the idea that bilateral double taxation conventions may be dispensed with. In other words, such conventions are not necessary to resolve the international tax problems that normally fall within their purview. However, this premise assumes that it is possible to ascertain why such conventions exist and what they are intended to do.

Therefore, the following purposes of double taxation conventions are stated, expressly, to serve:

  • A major goal of bilateral tax treaties is to remove impediments to international trade and investment by reducing the threat of double taxation that can occur when both Contracting States impose tax on the same income. This goal is advanced in four distinct ways:
    1. A bilateral tax treaty generally increases the extent to which exporters residing in one Contracting State can engage in trading activity in the other Contracting State without attracting tax liability in that latter State.
    2. When a resident of a Contracting State does engage in a sufficient activity in the other Contracting State for that State to have the right to tax, the treaty establishes certain guidelines on how that income is to be taxed.
    3. A bilateral tax treaty provides a dispute resolution mechanism that the Contracting States may invoke to relieve double taxation in particular circumstances not dealt with explicitly under the treaty.
    4. Where income or gains remain taxable in both Contracting States, the State of residence of the taxpayer will relieve the double taxation by either allowing a credit for the tax paid in the other State or by exempting the income or gain from its own tax.
  • The scope of a bilateral tax treaty typically is not limited to commercial and business activities. Treaties may remove tax impediments to scientific, educational, cultural, artistic, and athletic interchanges. Additionally, they may address issues related to pension plans, Social Security benefits, and even stipends for scholars.
  • The fundamental principle is that treaties should apply to ensure that income is taxed once and only once, thus eliminating double taxation. In addition, most tax treaties also focus on preventing tax evasion and avoidance. The objective is to ensure that double non-taxation does not occur.
  • One ancillary objective is the elimination of discrimination against foreign nationals and non-residents. A treaty ensures that residents of one Contracting State who carry on business in the other State are treated the same as residents of that State.
  • Another ancillary objective is to facilitate administrative cooperation between the Contracting States. This includes exchange of information, assistance in tax collection, and dispute resolution.

Despite these benefits, there are challenges associated with double taxation treaties. Some of these include:

  • Immediate revenue costs.
  • Limitations on certain domestic tax laws.
  • Risk of treaty shopping and abuse.
  • Risk of double non-taxation.

There are alternatives to having double taxation treaties. These alternatives include:

  • The grant of unilateral relief where appropriate.
  • Multilateral tax conventions.
  • Dealing with taxation through multilateral trade and investment treaties.
  • Harmonisation of tax law.
  • Introduction of a universal model tax law.
  • 4 Marks

AT – Aug 2022 – L3 – Q1a – International taxation

Tax treatment for a non-resident company using a subsidiary to execute a project.

Jantua Ltd (Jantua) is a company incorporated in the Republic of Israel with subsidiaries across other countries, including Frankaa Company Ltd (Frankaa) in Ghana. All subsidiaries were incorporated in their respective countries by Jantua.

Jantua won a contract with the Ministry of Roads and Highways to construct a road in Ghana. Jantua used its subsidiary, Frankaa, to carry out the project. Jantua billed the Ministry of Roads and Highways for the work done. Likewise, Frankaa billed Jantua for management and technical services on the road project.

Required:
What is the tax treatment of this arrangement?
(4 marks)

The winning of contract by Jantua Ltd to construct roads, makes Jantua Ltd a
permanent establishment in Ghana for a period of 90 days or more. This means that
once the 90 days’ period is reached, Jantua Ltd will be required to file its tax returns.
Its withholding tax is not final after it attains the status of a permanent establishment
in Ghana.
Additionally, it is required to withhold on the payment to Frankaa Ltd on the
management and technical service fees.

  • 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.

  • 4 Marks

AT – NOV 2021 – L3 – Q2b – International taxation

Explain the underlying principle of transfer pricing in international taxation.

What is the principle underlying the concept of Transfer Pricing? (4 marks)

The principle is that the price used in invoicing to unrelated person should be used
in invoicing to a related party to help reflect the market price. The principle is that
prices reflect arm’s length transactions.

  • 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 – May 2020 – L3 – Q1 – International taxation

Explanation of the concept of permanent establishment in Ghana and the differences between economic and juridical double taxation.

The spectrum of investment opportunities in Ghana has heightened and this has attracted some investors who intend to visit next month to assess the potential for investment. The Ministry of Finance has written to your Tax Consulting Firm to make a presentation on behalf of the Ministry to these Investors. The letter from the Ministry contains in part the following:

“International trade has given persons the ability to carry out separate aspects of their business operations in different countries. Even though it will be inconceivable to compel a person to pay taxes in every country where that person carries out business operations, the level of business activity carried on by a person in a particular country may expose that person to tax liabilities under the laws of that country. In Ghana, assessable income of a non-resident person includes income effectively connected with a Ghanaian permanent establishment of the person irrespective of the source of the income…”

Required: Prepare a report highlighting the following:

a) What constitutes a Ghanaian permanent establishment with reference to the Income Tax Act, 2015 (Act 896)?
(4 marks)

b) Explain the taxation rules on Ghanaian permanent establishment as enshrined in the Income Tax Act, 2015 (Act 896).
(10 marks)

c) There are economic double taxation and juridical double taxation. Explain these TWO (2) concepts of double taxation.
(6 marks)

Report

To: Tax Partner
From: Tax Intern
Date: July 7, 2020
Subject: Ghanaian Permanent Establishment

a) What Constitutes a Ghanaian Permanent Establishment:

Under the Income Tax Act, 2015 (Act 896), a Ghanaian permanent establishment could be any of the following:

  1. A place in Ghana where a non-resident person carries on business or that is at the disposal of the person for business purposes.
  2. A place in Ghana where a person is using or installing substantial equipment or machinery.
  3. A place in Ghana where a person is engaged in construction, assembly, or installation for at least 90 days, including supervisory activities.
  4. A place for providing services in Ghana.
  5. A place in Ghana where an agent performs functions on behalf of a non-resident person’s business, except for a general agent of independent status acting in the ordinary course of business.

(4 marks)

b) Taxation Rules on Ghanaian Permanent Establishment:

  1. Tax Treatment:
    A permanent establishment is treated as an independent entity and taxed accordingly in Ghana. Income attributable to the permanent establishment is subject to tax in the same manner as a resident company.
  2. Branch Profit Tax:
    A Ghanaian permanent establishment may be subject to branch profit tax at the applicable rate if the income is remitted abroad.
  3. Withholding Tax:
    The permanent establishment must withhold tax on payments made to non-residents and is entitled to claim tax credits on taxes withheld on its behalf.
  4. Tax on Transactions:
    Transactions between a non-resident owner and the Ghanaian permanent establishment must satisfy the arm’s length principle. Interest on loans or debts between the non-resident owner and the permanent establishment may be recognized for tax purposes if it reflects in both books of accounts.
  5. Asset and Liability Attribution:
    Assets used or employed in the activity of the permanent establishment are treated as its assets, and any liabilities arising from borrowing for the establishment’s activity are recognized as its liability.
  6. Control and Business Activity:
    The law considers any business activity carried out by the non-resident that is similar to the permanent establishment’s operations as conducted by the permanent establishment.

(10 marks)

c) Economic Double Taxation and Juridical Double Taxation:

  1. Economic Double Taxation:
    This occurs when the same income from an economic activity is taxed twice in the hands of different taxpayers. For example, the income of a corporation and the dividends distributed to shareholders may both be taxed, leading to economic double taxation.
  2. Juridical Double Taxation:
    Juridical double taxation occurs when a taxpayer is taxed on the same income by two or more countries due to conflicting tax laws. This is common when a resident of one country earns income from another country and both countries claim taxing rights over the income. For example, a resident of Ghana receiving foreign income may face double taxation unless there is a tax treaty in place to avoid this.
  • 8 Marks

AT – NOV 2021 – L3 – Q1b – Permanent Establishment | International Taxation

Discusses the tax implications of establishing a permanent establishment or a subsidiary in Ghana.

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)

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.

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