GHANA INSTITUTE OF TAXATION



CHARTERED INSTITUTE OF TAXATION, GHANA

PROFESSIONAL EXAMINATION

AUGUST, 2020

FINAL LEVEL 2

PAPER 10 - STRATEGIC TAX PLANNING

MARKING SCHEME

ATTEMPT ALL QUESTIONS. YOU ARE REQUIRED TO STATE YOUR

ASSUMPTIONS WHERE APPLICABLE

TIME ALLOWED: 3 HOURS

Question 1

Required

With the aid of appropriate examples and specific references to Ghanaian tax law provisions, write in sufficient detail, the content of your presentation.

ANSWER

The write-up by the candidates must entail the following:

Tax planning can be defined as arrangement of a person’s business or private affairs in order to minimize tax liability. It usually involves making the best use of the various tax exemptions, deductions and benefits to minimize a person’s tax liability.

Candidates are expected to provide examples of the temporary concessions found in the First and Sixth Schedules of the Income Tax Act, 2015 (Act 896) to support their discussion on tax planning.

The International Tax Glossary defines tax avoidance as behaviour aimed at reducing tax liability that falls short of tax evasion. While the expression may be used to refer to “acceptable” forms of behaviour, such as tax planning, or even abstention from consumption, it is more often used in a pejorative sense to refer to something considered “unacceptable” or “illegitimate” (but not in general “illegal”). In other words, tax avoidance is often within the letter of the law but against the spirit of the law. It generally contains elements of artificiality.

In addition, candidates are expected to state the definition of tax avoidance found in section 34 of the Income Tax Act, 2015 (Act 896) which involves “an arrangement, the main purposes of which is to avoid or reduce tax liability”.

Candidates are also expected to state the definition of tax avoidance arrangement found in section 99 of the Revenue Administration Act, 2016 (Act 915). The section defines tax avoidance arrangement as

(a) an arrangement that has as a main purpose the provision of a tax benefit for a person; or

(b) an arrangement where the main benefit that might be expected to accrue from the arrangement is a tax benefit for a person; and

"tax benefit", in relation to a person, means

(a) avoiding, reducing or postponing a tax liability of the person;

(b) increasing a claim of the person for a refund of tax; or

(c) preventing or obstructing collection of tax from the person.

However, an arrangement is a "tax avoidance arrangement" only if it involves a misuse or abuse of a tax law provision having regard to the purpose of the provision and the wider purposes of the law in which the provision is situated. 

Candidates are expected to provide examples of tax avoidance arrangements in the Income Tax Act, 2015 (Act 896) such as:

a. Transfer Pricing

b. Thin capitalization

c. Income Splitting

d. Indirect payments

e. Change in Accounting Year

Candidates are expected to conclude that from the various definitions of “tax avoidance” or “tax avoidance arrangement” in our tax laws, one cannot help but conclude that under Ghanaian law, tax avoidance is used in the limited or narrow sense to refer to something unacceptable or illegitimate.

(20 marks)

Question 2

You are required to help Mr. Kofi Opoku restructure his companies in a manner that would provide a cheaper financing option for Speed Transport Ghana Limited and reduce his overall tax exposure on the investments.

ANSWER

Candidates are expected to discuss the following:

• Since Unique Farms Ghana Limited is engaged in tree crop farming, the chargeable income derived by the company would be taxed at the rate of 1% for a period of 10 years starting from the year 2019 which the year first harvest occurred. (See paragraph 1(1) of the Sixth Schedule to Act 896)

• The returns Mr. Kofi Opoku would receive for his shares in Unique Farms Ghana Limited is dividend. (See definition of dividend in section 133 of Act 896).

• Dividend is not deductible for tax purposes in the books of Unique Farms Ghana Limited. (See section 130(4) of Act 896).

• Dividend paid to Mr. Kofi Opoku would be subject to a withholding tax of 8%. (See section 115 and First Schedule to Act 896).

• Speed Transport Ghana Limited does not enjoy any concession and thus, the chargeable income derived by the company would be taxed at the rate of 25%.

• The returns Mr. Kofi Opoku would receive for his shares in Speed Transport Ghana Limited is dividend. (See definition of dividend in section 133 of Act 896).

• Dividend is not deductible for tax purposes in the books of Speed Transport Ghana Limited. (See section 130(4) of Act 896).

• Dividend paid to Mr. Kofi Opoku would be subject to a withholding tax of 8%. (See section 115 and First Schedule to Act 896).

• A dividend paid by a resident company to another resident company is exempt from tax if the company receiving the dividend controls either directly or indirectly at least 25% of the voting power of the company paying the dividend.

• This provides Mr. Kofi Opoku with a tax planning opportunity. If Unique Farms Ghana Limited becomes a subsidiary of Speed Transport Ghana Limited, the dividend paid by Unique Farms Ghana Limited to Speed Transport Ghana Limited would be exempt from tax.

• Since Unique Farms Ghana Limited is enjoying a concessionary tax rate of 1% on chargeable income, the after tax profits of Unique Farms Ghana Limited can be transferred to Speed Transport Ghana Limited as dividend and this dividend would be exempt from tax making this financing option ideal.

• To achieve the above, Mr. Kofi Opoku would have to exchange the shares he holds directly in Unique Farms Ghana Limited with additional shares issued by Speed Transport Ghana Limited. This arrangement would make Speed Transport Ghana Limited the direct shareholder and Mr. Kofi Opoku the indirect shareholder of Unique Farms Ghana Limited.

• The share swap arrangement would amount to a replacement of the realized asset under section 46 of Act 896 and thus provide a deferral on the payment of tax on any gains Mr. Kofi Opoku would make on the realization of his shares in Unique Farms Ghana Limited.

(20 marks)

Question 3

The managers of the Obibini Ghana are seeking your opinion on the following:

i. the income tax implications for the company if an investor acquires 51% of the company’s shares.

ii. The tax planning opportunities available which could reduce the income tax exposure of company if an investor acquires 51% of the company’s shares.

Candidates are expected to discuss the following tax implications:

• The acquisition of 51% or more of the shares of Obibini Ghana Limited by the potential investor will amount to a change in ownership of Obibini Ghana Limited. (See section 62(1) of Act 896).

• Section 38(1)(f) and section 62 of Act 896 provide that where the underlying ownership of an entity changes by more than 50% at any time within a period of three years, the assets and liabilities of that entity immediately before the change is deemed to be realised.

• Underlying ownership in relation to an entity is defined in section 133 of Act 896 to mean membership interests owned in the entity, directly or indirectly through one or more interposed entities, by individuals or by entities in which no person has a membership interest.

• Since there will be more than 50% change in the ownership of Obibini Ghana Limited, the assets and liabilities of Obibini Ghana Limited will be deemed to have realised immediately before the change.

• Section 42 of Act 896 provides that Obibini Ghana Limited would be deemed to have parted with ownership its assets and derived an amount equal to the market value at the time of realization and re-acquired the asset at a cost equal to the market value at the time of realization. This means the land Obibini Ghana Limited owns would be deemed to have been realized with the consideration received being GHS500,000. Given the fact that the original cost of the asset is GHS100,000, the company would make a gain of GHS400,000 and would be required to pay tax at the rate of 25% on the gain made.

• Section 62(2) of Act 896 provides that where the underlying ownership of Obibini Ghana Limited changes by more than 50%, Obibini Ghana Limited cannot;

a. deduct financial costs carried forward under section 16 (3) that were incurred by the entity before the change. Thus, financial cost of GHS100,000 stated in the Audited Accounts cannot be carried forward.

b. deduct a loss under section 17 (1) that was incurred by the entity before the change. Thus, the loss of GHS2,500,000 cannot be deducted in determining the chargeable income of the company in the future.

c. claim a deduction under section 23 (2), (4) or (5) after the change, in a case where the entity has included an amount in calculating income under those provisions before the change; or

d. carry back a loss under section 24 (6) that was incurred after the change to a year of assessment before the change.

• If the underlying ownership changes by more than 50% during a year of assessment of Obibini Ghana Limited, the period before the change and the period after the change shall be treated as separate years of assessment under section 62(3) of Act 896. Thus, if the transaction is completed by 31st January 2020, the period from 1st to 31st January 2020 would be one year of assessment for Obibini Ghana Limited and the period from 1st February 2020 would be another year of assessment.

[20 marks]

iii. measures the parties can adopt to mitigate the tax effects (if any) of the proposed transaction.

Candidates are expected to discuss that the restrictions placed on the deductions under section 62 of Act 896 are linked with a change of ownership occurring within a three year period.

To mitigate the effects, the potential investor can spread the acquisition the shares over a period such that it will not amount to a change of ownership of Obibini Ghana Limited within a three year period.

[5 marks]

(25 marks)

Question 4

Some scholars argue that from a strategic tax planning perspective, debt financing provides more tax benefits to companies than equity financing for investors.

Required

With the aid of appropriate authorities, discuss the accuracy or otherwise of the above assertion

ANSWER

The discussion by candidates must cover the following:

Equity

• The returns a person receives for holding equity in a company is dividend. (See definition of dividend in section 133 of Act 896)

• Dividend is not deductible for tax purposes in the books of the company which pays the dividends. (See section 130(4) of Act 896)

• Dividend paid is subject to a withholding tax of 8%. (See section 115 and First Schedule to Act 896)

• A dividend paid to a resident company by another resident company is exempt from tax where the company which receives the dividend controls either directly or indirectly at least 25% of the voting power of the company paying the dividend. (See section 59(3) of Act 896)

• Where a company which is controlled by not more than five persons and their associates does not distribute to its shareholders as dividends, a reasonable part of the income of the company, the Commissioner-General may treat any part of the company’s profit as dividend after considering the current business requirement of the company and any other requirement necessary for the maintenance and development of the business. (See section 59(8) & (9) of Act 896).

Debt

• The returns on a loan or debt obligation is interest. (See definition of interest in section 133 of Act 896)

• Interest paid on debt obligations which is employed in the business or used to purchase an asset which is employed in business is generally deductible for tax purposes thereby reducing the corporate income on which tax is imposed. (See section 10 of Act 896)

• With the exception of interest received by an individual from a resident financial institution or interest received by a person on bonds issued by Government of Ghana, interest on debt paid to an individual is subject to a withholding tax at 1%. (See section 115 and the First Schedule to Act 896)

• Interest on debt paid to a person other than an individual is subject to a withholding tax at 8%. (See section 115 and the First Schedule to Act 896)

From the above information it appears that the restriction placed on a company from deducting dividends before the computation of chargeable income appears to make debt financing a better tax planning option due to the fact that interest paid on debt is usually deductible for tax purposes.

Candidates are expected to discuss that debt financing by an investor may expose the investor to transfer pricing scrutiny and thin capitalization restrictions on interest deductibility.

Candidates must explain that the terms of related party lending arrangement must comply with the arm’s length rules in Act 896 and the terms must be compatible with the thin capitalization provisions where the person providing the loan is an exempt person and the entity receiving the loan in Ghana is a resident entity which is not a financial institution.

(20 marks)

Question 5

Required

As an expert in strategic tax planning, the Chamber has invited you to speak on the tax incentives available for such investments and whether the location of the factory would have an impact on the tax incentives the investors can enjoy.

ANSWER

Candidates are expected to discuss the following:

• Tax incentives available to manufacturing business can be found in the Ghana Investment Promotion Centre Act, 2013 (Act 865), the Free Zone Act, 1995 (Act 504) and the Income Tax Act, 2015 (Act 896) among others.

• For entities registered with the Ghana Investment Promotion Centre, section 26 of Act 865 provides that an enterprise whose plant, machinery, equipment or parts of the plant machinery or equipment are not zero-rated under the Harmonized System: ECOWAS Common External Tariff, the entity can apply to the Board for exemption of import duties and related charges, on the plant, machinery, or equipment to the Centre for onward submission to the Minister responsible for Finance.

• In addition, for the purpose of promoting identified strategic or major investments, the Board of GIPC may in consultation with appropriate government agencies and with the approval of the President—

o specify priority areas of investment and their applicable benefits and incentives; and

o negotiate specific incentive packages for strategic investments in addition to the incentives available to any enterprise under the tax, customs and other laws.

• For entities registered with the Free Zone Authority under the Free Zone Act, 1995 (Act 504), the entity must export at least 70% of the total annual production of the entity. (See section 23(1) of Act 504). Entities registered with the Free Zone Authority enjoy the following tax incentives:

Non-application of import laws to free zones (s. 21)

Exemption from the payment of income tax on profits for the first ten years from the date of commencement of operation (S. 28)

Tax rate applicable to income from export of goods outside the national customs territory after the ten-year concessionary period is 15%. (First Schedule to Act 896)

Shareholders exempted from the payment of withholding taxes on dividends arising out of free zone investments. (S. 28)

• Under the Income Tax Act, the First Schedule provides the following locational incentives for manufacturing companies.

|LOCATION |RATE OF INCOME TAX |

|Accra and Tema |25% |

|Regional Capitals |25% rebate on tax rate [18.75%] |

|Outside Regional Capitals |50% rebate on tax rate [12.5%] |

• Under Paragraph 1(4) of the Sixth Schedule to Act 896 defines “agro processing business” to mean the business of processing crops, fish or livestock produced, caught or raised in the country from their raw state into an edible canned or packaged product.

• Thus, the establishment of a chocolate manufacturing plant can qualify as an agro-processes business if the raw materials for making the chocolate are produced in the country. Paragraph 1(2) of the Sixth Schedule to Act 896 provides that the income of a person from agro-processing business conducted wholly in the country is subject to tax at the rate of 1 percent for a period of five years commencing from the year in which commercial production commences.

• If the chocolate making process qualifies as agro-processing business, the location of the factory would have an impact on the tax exposure of the business after the initial five-year concessionary period where the company pays tax at the rate of 1%.

• The Income Tax (Amendment) (No. 2) Act, 2016 (Act 924) added the following applicable tax rates for the next five-year period after the initial temporary concession period of five years:

|LOCATION |RATE OF INCOME TAX |

|Accra and Tema |20% |

|Other Regional Capitals outside the Northern Savannah Ecological Zone |15% |

|Outside other Regional Capitals |10% |

|The Northern Savannah Ecological Zone |5% |

(15 marks)

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