Topic: International taxation

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  • 6 Marks

AT – NOV 2021 – L3 – Q1a – Business income – Corporate income tax | International taxation

Compute tax payable for a Free Zone Enterprise based on income from local and export sales and determine the treatment of certain adjustments.

Orga Ltd has the following information relating to its operation as a Free Zone Enterprise for the 2020 year of assessment with a basis period from January to December each year:

Description Amount (GH¢)
Revenue 35,000,000
Cost (21,000,000)
Profit 14,000,000

Additional information:

  • Depreciation of GH¢200,000 has been added to the cost above.
  • Revenue: Local sales GH¢25,000,000; Exports GH¢10,000,000.
  • The Managing Director was provided with a mini bar and a swimming pool as part of his employment package costing GH¢1,200,000 in his private residence. The employer added only GH¢200,000 as part of the employment income for tax purposes. The total cost has been adjusted to the cost above.
  • The dividend received from the United States of America net of taxes of 10% was GH¢22,500. This income has not yet been recorded, although it has been credited in the bank statement.
  • The excess proceeds from the sale of a depreciable asset over the written down value amount to GH¢300,000. This has not yet been recorded in the company’s accounts.

Required:
i) Compute the tax payable. (6 marks)
ii) Explain the tax treatment of the cost of the swimming pool and mini bar. (2 marks)

i) Computation of Tax Payable

Description Amount (GH¢)
Profit for the year (given) 14,000,000
Add back non-allowable expenses:
Depreciation 200,000
Domestic expenditure (Swimming pool & minibar) 1,000,000
Adjusted profit 15,200,000
Add other income:
Dividend (grossed up from GH¢22,500) 25,000
Excess of proceeds over WDV 300,000
Chargeable income 15,525,000

Tax computation (Local sales and exports):

Description Local Sales Exports
Chargeable income allocation 11,089,285.71 4,435,714.29
Tax rate 25% 15%
Tax payable 2,772,321.43 665,357.14
Total tax payable GH¢3,437,678.57

ii) Tax Treatment of Swimming Pool and Mini Bar
The cost of the swimming pool and mini bar is considered domestic expenditure and is generally not allowable for tax purposes. However, since the company added GH¢200,000 to the Managing Director’s employment income, that portion is allowable for tax purposes. The remaining GH¢1,000,000 must be added back to the company’s income for tax purposes.

  • 6 Marks

AT – Nov 2020 – L3 – Q3c – International taxation

A paper to the Commissioner-General outlining factors to consider in a related party transaction for SuccessVehicles Ltd.

Two vehicles of the same model and brand were sold by SuccessVehicles Ltd to two buyers at different prices. The first buyer bought one of the vehicles at the equivalent of US$84,500 and the second buyer bought the other vehicle at US$91,000. This arrangement, the Tax Authority finds difficult to accept and plans to confront SuccessVehicles Ltd on the matter.

The Commissioner-General has invited you as a final level student of ICAG to advise him on the factors to consider before approaching SuccessVehicles Ltd on the matter, as the Commissioner-General suspects related party issues.

Required:
Write a paper to the Commissioner-General on the issues to consider before approaching SuccessVehicles Ltd on the matter.

ICAG
Accra

12th December 2020

COMMISSIONER-GENERAL
GHANA REVENUE AUTHORITY
ACCRA

Subject: Comparability Factors for Investigating Related Party Issues in SuccessVehicles Ltd

Introduction:
The sale of two vehicles of the same model and brand at different prices (US$84,500 and US$91,000) to different buyers by SuccessVehicles Ltd raises concerns regarding transfer pricing and related party transactions. Before approaching SuccessVehicles Ltd, the following factors should be considered:

1. Contractual Terms:

The contractual terms between the company and the two buyers should be reviewed. Differences in terms (e.g., delivery conditions, payment terms, warranties) could justify the price differential.

2. Nature of the Vehicles:

There is a need to assess whether the two vehicles are identical in every aspect. Variations in specifications, additional features, or customizations could explain the pricing disparity.

3. FAR Analysis (Function, Asset, Risk):

The FAR analysis looks at the following aspects to determine if the pricing is justified:

  • Function: The specific function each vehicle serves in the transaction should be assessed.
  • Asset: Differences in the use of assets or resources should be considered, especially if the vehicles were produced or sold under different conditions.
  • Risk: The level of risk assumed by the seller in each transaction (e.g., foreign exchange, market conditions) could affect pricing.

4. Economic Conditions:

Economic factors at the time of each sale, such as inflation, foreign exchange rates, and market demand, should be examined. Differences in these conditions could account for the pricing discrepancy.

5. Market Penetration Strategy:

If one of the sales was made as part of a market penetration strategy to introduce the vehicle to a new market or gain market share, this could justify a lower price. New products often carry introductory pricing.

Conclusion:

The factors outlined above will provide a basis for determining whether the price differences between the two vehicles sold by SuccessVehicles Ltd are justified or if there is an issue of related party transactions that require further scrutiny.

Yours faithfully,
Boys Abre3
Final Level Student

  • 8 Marks

AT – Nov 2020 – L3 – Q3b – International taxation

Tax computation for Andrew Soweah as an individual, granting relief under the Ghana/UK Double Taxation Agreement using the credit method.

Andrew Soweah recently relocated to Ghana to commence his business after retirement from TaskForce (UK) Ltd, a security company he served for over 20 years. The nature of the business was to provide private security to diplomats and the very affluent.

Before coming to Ghana, he rented out his apartment in the UK for a yearly rent of £18,000. He also maintained a healthy balance in his account with Diamond Bank in London.

His income for 2019 year of assessment is summarized as follows:

  • Business Income (net of all taxes): GH¢126,000.
  • Dividend received from Faithful Ltd, a resident company at gross amount was GH¢18,000.
  • Rent of £16,200 was paid into his account with Diamond Bank. Withholding tax amounting to £1,800 had been deducted.
  • Diamond Bank credited his account with net of £8,100 bank interest. UK tax rate on interest is 10%.

Additional Information:

  • Exchange rate is GH¢7.5 for £1.
  • Andrew Soweah does not contribute to social security in Ghana.

Required: Compute his tax liability as an individual for the relevant year of assessment while granting him relief for double taxation under the Ghana/UK Double Taxation Agreement using the credit method.


  • 6 Marks

AT – Nov 2020 – L3 – Q3a – International taxation

Tax implications of a loan from a parent company and foreign exchange losses for Mandy Ltd, a subsidiary of Menkay Incorporated.

The following information is relevant to Mandy Ltd (Ghana), a subsidiary of Menkay Incorporated, a company resident in Japan.

Following Mandy Ltd’s operational challenges, a loan of US$1,500,000 was secured from its parent company in 2019 year of assessment.

Additional information relevant to Mandy Ltd’s operations:

Description Amount (GH¢)
Interest on loan paid in 2019 300,000
Foreign exchange loss 105,000
Equity:
Share capital 150,000
Retained earnings 300,000
Total equity 450,000

Exchange rate: 1US$ = GH¢5.73

Required:
Determine the tax implication of the above transaction.


  • 4 Marks

AT – Mar 2024 – L3 – Q3b – International taxation

Explaining the difference between economic and juridical double taxation.

The Organisation for Economic Co-operation and Development (OECD) describes two kinds of double taxation agreements: economic and juridical.

Required:
Explain economic and juridical double taxation.

Economic Double Taxation:
Economic double taxation occurs when income from the same economic activity is taxed in the hands of different persons in more than one country. This typically happens when a company’s profits are taxed first at the corporate level and then taxed again as dividends in the hands of shareholders when distributed. The income is taxed twice, but in the hands of two different entities.
(2 marks)

Juridical Double Taxation:
Juridical double taxation arises when the same person is taxed on the same income by more than one jurisdiction. This occurs, for example, when a taxpayer is subject to tax in both their country of residence and the source country where the income was earned. The same income is taxed twice, but in the hands of the same taxpayer.
Juridical double taxation usually arises due to the following:
  • Source Principles or Rules
  • Residence Principles or Rules
    (2 marks)
  • 4 Marks

AT – Mar 2024 – L3 – Q2a – International taxation

Discussing the tax implications of cross-border profit and transfer payments for non-resident companies.

Trolex Ltd was incorporated in the United Kingdom. It manufactures watches for sale only in the Asian Markets. The company is a success story from its commercial enterprise in its production of “wonder watches.”

Vielo Ltd, a locally incorporated company with 4 shareholders, scanned the environment with the bid to start a business that would make it successful. The management of Vielo Ltd heard of the “wonder watches” sold by Trolex Ltd. Consequently, the management of Vielo Ltd placed an order for 10 million watches from Trolex Ltd. From the analysis, Trolex Ltd would make £600,000 from this transaction as profit. The sales value to be transferred to Trolex Ltd by Vielo Ltd amounts to £900 million.

The management of Vielo Ltd has written to the Kaneshie Office of the Ghana Revenue Authority on the tax implication of the payment.

Required:
Advise the Commissioner-General through the office manager on the tax implication of the profit and the transfer payment.

From the available information, Trolex Ltd is not trading in Ghana but with Ghana. The profit generated from the transaction and the payment transferred are not subject to tax in Ghana. Vielo Ltd approached Trolex Ltd for the purchase of the wonder watches, and there is no indication that Trolex Ltd has any presence in Ghana that would make it liable to taxation in Ghana.

Conclusion:
Both the profit (£600,000) and the amount transferred (£900 million) are not liable to tax in Ghana.
(4 marks)
  • 8 Marks

AT – Mar 2024 – L3 – Q1b – International taxation

Discussing the challenges posed by double taxation agreements and the methods of granting double taxation relief.

There is growing attention on the question of tax treaties signed by developing countries. The costs of tax treaties to developing countries have been highlighted in recent years by NGOs such as ActionAid and SOMO (Lewis, 2013). During 2014, an influential IMF paper warned that developing countries “would be well-advised to sign treaties only with considerable caution” (IMF, Spillovers on International Corporate Taxation, 2014) and the OECD, as part of its Base Erosion and Profit Shifting (BEPS) project, proposes to add text to the commentary of its model treaty to help countries decide “whether a treaty should be concluded with a State but also whether a State should seek to modify or replace an existing treaty or even, as a last resort, terminate a treaty” (OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, 2014).

Required:

i) Examine the challenges double taxation agreements pose to Ghana.
(4 marks)

ii) Explain the methods of granting double taxation reliefs.
(4 marks)

i) Challenges of Double Taxation Agreements to Ghana include:

  1. No credible evidence that tax treaties significantly boost Foreign Direct Investment (FDI) activity.
  2. Treaty negotiations are complex and may not fully meet the political and economic interests of both countries.
  3. Double taxation agreements (DTAs) can erode the tax base by shifting taxing rights away from Ghana.
  4. DTAs can be exploited by foreign and local companies to minimize or avoid tax entirely, often by profit-shifting practices.
    (4 marks)

ii) Methods of granting double taxation reliefs include:

  1. Exemption method: The income is taxed in the source country and not taxed again in the second country.
  2. Deduction method: Residual income is taxed in the second country after being taxed in the original country.
  3. Credit method: Taxes paid in the source country are credited against taxes due in the second country, ensuring no double taxation occurs.
  • 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

  • 8 Marks

AT – July 2023 – L3 – Q1b – International taxation

Calculating the tax payable for a resident company with cross-border income from Ghana and Nigeria.

Libir Ltd is a resident company incorporated in Ghana. Its trading partners have been customers and suppliers from Ghana and also from Nigeria. The company supplies animal feed.

Its operation for 2021 year of assessment is as follows:
Income from Ghana: GH¢10,000,000
Income from Nigeria: ₦1,000,000,000

Additional information:

  1. Allowable expense granted by the Ghana Revenue Authority is GH¢6,000,000.
  2. The allowable expense in 1 does not include capital allowance of GH¢1,200,000 which was legitimately claimable by the company.
  3. The tax paid in Nigeria amounted to ₦40,000,000. The withholding taxes paid in Ghana with evidence of tax credit certificates amounted to GH¢1,000,000.
  4. The taxpayer has written to the Commissioner-General to relinquish its right under the double taxation arrangement.
  5. Exchange rate is GH¢1 = ₦60.

Required:
Compute the tax payable.

Libir Ltd
Computation of tax payable for the Year of Assessment 2021

  • 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:

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