Question Tag: Tax implications

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  • 9 Marks

AT – Nov 2024 – L3 – Q2b – Tax Implications of 100% Acquisition in Mining Operations

Explain the tax implications of a 100% acquisition and compute the gains from the acquisition.

Tongo LTD (Tongo) is a mining company operating in the Upper East Region of Ghana. The following relates to the operations of Tongo for the 2023 year of assessment:

Description GH¢
Revenue (Gross) 200,000,000
Cost of Operations 80,000,000
Margin/Profit 120,000,000

Additional Information:

  1. Tempane Mines LTD acquired 100% interest in Tongo for a consideration of GH¢310,000,000 at the end of 2023.
  2. The cost of assets acquired at their respective acquisition dates are as follows:
Year Cost of Assets (GH¢)
2020 100,000,000
2021 75,000,000
2023 50,000,000

Required:

i) Explain the tax implication of the 100% acquisition.

ii) Compute the gains from the above acquisition and determine how the gains should be treated.

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  • 20 Marks

AT – Nov 2016 – L3 – SB – Q3 – Capital Gains Tax

Compute chargeable gains, capital gains tax, and new cost of remaining plant and machinery after a sale.

since 2015. It has been a leading name in the production of a popular brand of household vegetable oil known as “Abop,” which is in high demand.

Given the fact that the company is doing very well, it secured funds from its bankers and bought additional Plant and Machinery in excess of its immediate needs on June 1, 2013, for ₦24,600,000.

The Finance Director convinced the Board to dispose of part of the plant and machinery to boost the company’s working capital. Consequently, on December 31, 2015, the company sold part of the Plant and Machinery for ₦37,925,000 and spent ₦5,125,000 as expenses incidental to the sale. The market value of the remaining Plant and Machinery was ₦15,375,000 as of December 31, 2015.

However, the issue of the tax implications of these transactions is worrisome to the Managing Director, who is visibly disturbed that the Federal Inland Revenue Service (FIRS) might come after the company.

You are required to:
a. State any FOUR Chargeable Assets. (2 Marks)
b. State any FOUR conditions for granting Roll-Over Relief. (8 Marks)
c. Compute the Chargeable Gains on the asset sold. (4 Marks)
d. Compute the Capital Gains Tax. (2 Marks)
e. Compute the new cost of the remaining asset. (4 Marks)

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  • 20 Marks

ATAX – May 2021 – L3 – Q3 – Taxation of Mergers and Acquisitions

Explaining acquisitions versus mergers, outlining tax implications for companies, and evaluating AfCFTA's impact on transactions.

The price of crude oil had fallen from over US$100 per barrel in the past few years to under US$40 per barrel recently in the international market. This has resulted in squeezed margins despite efforts to cut costs.

Krude Explora Nigeria Limited, an indigenous oil servicing company operating in the oil and gas sector for 23 years, faces a going concern risk due to falling profitability and liquidity challenges. It is probable that the company will default on its loan facility of US$122.5 million from B2B Energy Bank Plc. If this happens, the company will likely be taken over by Asset Management Corporation of Nigeria (AMCON).

Coincidentally, Wakanda Oil Exploration Limited, a multinational oil servicing company operating across Africa and the Middle East, has just sent an offer to acquire Krude Explora Nigeria Limited. The proposed acquisition will solve the liquidity problems in the short term, while efficiency and scale from the acquisition will hopefully return the company to profitability.

As the lead tax advisor for the proposed transaction, you are required to:

a. Explain the term “acquisition” as compared to a “merger” and give one example each of a recent merger and acquisition in the Nigerian petroleum industry. (4 Marks)

b. Outline and explain briefly the areas that may have tax implications for:
i. Krude Explora Nigeria Limited (4 Marks)
ii. Wakanda Oil Exploration Limited (4 Marks)

c. Discuss the likely impact of the African Continental Free Trade Area agreement and the local economy on a proposed acquisition or merger. (7 Marks)

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  • 15 Marks

ATAX – May 2022 – L3 – Q7 – Petroleum Profits Tax (PPT)

Identify allowable expenses under the PIA and explain implications of mergers in upstream petroleum operations.

In the last three years, some major oil producing companies have decided to divest their investments from the Nigerian oil and gas sector. One of the reasons for this might be the new global energy order, which seems to favour the evolution of a “green environment” as against the present use of hydrocarbons with its inherent environmental degradation and pollution.

Similarly, in response to the yearnings of various stakeholders in the oil and gas sector, the Federal Government enacted the Petroleum Industry Act (PIA) 2021. Generally, the Act provides the legal, governance, regulatory, and fiscal framework for the Nigerian petroleum industry, the development of host communities, and for related matters.

Notable commentators and professionals in the sector suggest that the divestment of major oil and gas operators in Nigeria could be beneficial to local investors if funds are sourced and deployed to businesses in the sector. Mergers and acquisitions of indigenously owned oil-producing companies have been noted as one valuable option in this regard.

Required:

a. In respect of the Petroleum Industry Act 2021, identify the expenses allowable in the computation of adjusted profit of a company in upstream petroleum operations. (6 Marks)
b. Identify and explain SIX implications of mergers and acquisitions in respect of a situation where a new company takes over an existing company. (9 Marks)

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  • 15 Marks

ATAX – May 2022 – L3 – Q6 – Taxation of Non-Resident Companies and Individuals

Discuss the tax implications of an overseas branch and compute the associated tax liabilities.

Maigona Agro Limited is a Nigerian company operating in the agricultural sector. It has a large expanse of land in the Northern part of the country, which is used strictly for the cultivation of cotton seeds. As a result of the collapse of the textile/garment industry, specifically due to the unfavourable business climate in Nigeria, the company in 2015 established a branch, BAM Textile Mills, in the United Kingdom. Part of the cotton produced locally is sold to BAM Textile Mills at a competitive price, for the production of finished product (branded textile clothing).

A tax dispute recently arose between the Management of Maigona Agro Limited and officials of the Federal Inland Revenue Service (FIRS) on the correct assessment of profits made by BAM Textile Mills. The Managing Director is of the opinion that the tax paid by BAM Textile Mills in the United Kingdom should be the final tax since the company is only an overseas branch. He further averred that the provisions of the Companies and Allied Matters Act 2020 (as amended) are only applicable to companies incorporated in Nigeria. The Managing Director was furious when the company received a reminder of notice of assessment from the FIRS and has therefore threatened to approach the Tax Appeal Tribunal for redress.

You have been engaged by the company as its Tax Consultant to provide professional advice on the tax implication of the profit made by BAM Textile Mills, UK and possibly representation at the Tax Appeal Tribunal sittings. The statement of profit or loss for the year ended October 31, 2021 (BAM Textile Mills’ result has been converted to Nigerian Naira at the prevailing exchange rate) and other relevant documents were handed over to you by the Managing Director.

The extracts from the statements of profit or loss of the two corporate entities revealed the following:

Maigona Agro Ltd (N’000) BAM Textile Mills (N’000) Total (N’000)
Gross Turnover 975,100 1,820,500 2,795,600
Less:
Cost of materials/inputs 350,200 672,000 1,022,200
Salaries and Wages 122,530 400,400 522,930
Administrative Expenses 45,700 110,900 156,600
Depreciation 75,600 147,300 222,900
Donation 8,500 0 8,500
Share of Head Office Expenses 33,300 50,000 83,300
Income Tax Paid in the UK 0 72,200 72,200
Total Expenses 635,830 1,452,800 2,088,630
Net Profit 339,270 367,700 706,970

Additional Information:

  1. The capital allowances of Maigona Agro Limited in respect of plant and equipment, farming tools, and other qualifying capital expenditure as agreed with the tax authorities was N45,000,000. The amount of capital allowances of N57,000,000 claimable by BAM Textile Mills on qualifying assets was also certified by the tax authorities.
  2. Included in the donation was N5,000,000 given to victims of the COVID-19 (Omicron variant) pandemic in Nigeria.
  3. The UK tax rate is assumed to be 35%.

Required:

a. Advise the management of Maigona Agro Limited on the tax implications of the overseas branch. (4 Marks)
b. Compute the tax liabilities of the company in line with your submission in (a) above. (11 Marks)

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  • 15 Marks

ATAX – Nov 2016 – L3 – Q4b – Corporate Tax Compliance and Reporting

Compute the relevant tax liabilities for Gringrin Nigeria Ltd. in scenarios with different accounting dates

Gringrin Nigeria Limited is proposing to embark on two courses of action:

i) Change its accounting date from March 31 to June 30; or
ii) Change its accounting date from March 31 to December 31.

The adjusted profits in each scenario are as follows:

  • Change to June 30:
Period Adjusted Profits (N’000)
Year ended March 31, 2011 30,000
Year ended March 31, 2012 33,000
Period ended June 30, 2013 (15 months) 78,000
Year ended June 30, 2014 34,000
  • Change to December 31:
Period Adjusted Profits (N’000)
Year ended March 31, 2011 50,000
Year ended March 31, 2012 60,000
Period ended December 31, 2013 (21 months) 180,000
Year ended December 31, 2014 70,000

As the Tax Consultant, you are required to:

Compute the relevant tax liabilities. (15 Marks)

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  • 20 Marks

ATAX – Nov 2021 – L3 – Q4 – Capital Gains Tax (CGT)

Explanation of tax implications for transactions considered artificial involving connected persons.

Colends Nigeria Limited, Abeokuta, is a manufacturer of plastic materials. The company is well known for prompt payment of taxes as at when due. The cordial relationship between the company and the Federal tax authorities is about to be breached as a result of disagreement in the classification of some transactions made by the company. The tax authorities considered those transactions to be artificial or fictitious, while the Managing Director, who is not an accountant, felt otherwise.

The company is in the process of re-organising its operations so as to compete favorably with its contemporaries, particularly with the implementation of the Africa Continental Free Trade Area Agreement (ACFTA) by some African countries.

The following transactions were concluded by the company during the financial year ended December 31, 2020:

  1. Land and building acquired for ₦70 million on March 6, 2015, were sold for ₦125 million. Advertisement cost was ₦500,000, while the estate agent received a 5% commission of the sale proceeds.
  2. Plant and machinery, which originally cost ₦28 million, were sold for ₦32 million to one of its subsidiaries, Colmas Limited. The market value of the assets sold was ₦40 million.
  3. A saloon motor vehicle acquired for ₦5 million in 2017 was sold to the General Manager of the company for ₦3.5 million. The market value of the car was put at ₦5.5 million.
  4. A giant generator that was acquired in 2018 for ₦12 million was disposed of for ₦15 million. The cost of disposal amounted to ₦200,000.

At a recent meeting of the board, the following transactions were approved and implemented in December 2020:

  • Acquisition of a large acreage of land and a building in the outskirts of the city-center for the business at ₦100 million.
  • Purchase of a modern plant and machinery for ₦50 million.
  • A saloon motor vehicle was purchased for ₦10 million.
  • A brand new generator costing ₦20 million was acquired.

Colends Nigeria Limited has recently appointed you as its tax consultant.

Required:

Draft a report to the Managing Director of the company explaining:

a. The concept of connected persons and artificial transactions. (4 Marks)
b. The tax implications, if any, on transactions executed by the company in accordance with the provisions of the Capital Gains Tax Act Cap C1 LFN 2004 (as amended). (16 Marks)

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  • 15 Marks

FM – Nov 2018 – L3 – Q5 – Capital Budgeting under Uncertainty

Analyze whether replacing a machine after three or four years is more beneficial based on economic costs and tax implications.

Kuku Plc. had a need for a machine. After four years of purchase, the machine will no longer be capable of efficient working at the level of use by the company. The company typically replaces machines every four years. The production manager has noted that in the fourth year, the machine will require additional maintenance to maintain normal efficiency. This raises the question of whether the machine should be replaced after three years instead of four years, as per company practice.

Relevant information is as follows:

(i) A new machine will cost N240,000. If retained for four years, it will have zero scrap value at the end. If retained for three years, it will have an estimated disposal value of N30,000. The machine qualifies for capital allowance of 20% on a reducing balance basis each year, except in the last year. In the final year, if the disposal proceeds are less than the tax written-down value, the difference will be an additional tax relief.

The machine is assumed to be bought and disposed of on the last day of the company’s accounting year.

(ii) The company tax rate is 30%, payable on the last day of the relevant accounting year.

(iii) Maintenance costs are covered by the supplier in the first year. In the second and third years, maintenance costs average N30,000 annually. In the fourth year, they increase to N60,000. Maintenance costs are tax-allowable and payable on the first day of the accounting year.

(iv) The company’s cost of capital is 15%.

Required:

a. Prepare calculations to determine whether it is economically beneficial to replace the machine after three years or four years. (12 Marks)

b. Discuss two additional factors that could influence the company’s replacement decision, including any potential weaknesses in the decision criteria. (3 Marks)

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  • 20 Marks

FM – Nov 2018 – L3 – Q2 – Financing Decisions and Capital Markets

Evaluate financing options for machine acquisition using present value and compare traditional financing with Islamic finance.

Tamilore Limited (TL) is an agro-based firm, specializing in yam and rice production in Benue State of Nigeria. One of the harvesters is due to be replaced on November 30, 2018, the last day of TL’s current financial year. An investment appraisal exercise has recently been completed which confirmed that it is financially beneficial to replace the machine at this point. TL is now considering how best to finance the acquisition of the harvester to be replaced. TL is already highly geared.

A government development agency has offered the following two alternative methods of financing the machine:

Alternative 1
A loan of N49,200,000 at 6% interest rate to buy the machine on November 30, 2018. If this option is selected, the machine will be depreciated on a straight-line basis over its estimated useful life of 5 years.

Alternative 2
Enter into a finance lease. This will involve payment of annual rental of N12 million with the first payment due on November 30, 2019. The lease payments will be for the entire estimated useful life of the machine, which is 5 years, after which ownership will pass to TL without further payment.

Other information

(i) Whether leased or purchased outright, maintenance would remain the responsibility of TL and would be N450,000 payable annually in advance.
(ii) TL is liable to tax at a rate of 25%, payable annually at the end of the year in which the tax charge or tax saving arises.
(iii) TL is able to claim capital allowances on the full capital cost of the machine in equal installments over the first four years of the machine.
(iv) Assume that TL has sufficient taxable profits to benefit from any savings arising therefrom.
(v) All workings in N’000.

Required:

a. Show that the implied interest rate in the lease agreement is 7%. (3 Marks)

b. Advise, using present value method, whether Tamilore Limited should borrow to buy the machine or lease it. (12 Marks)

c. Instead of lease financing, one director has suggested an equivalent Islamic finance.

i. Explain briefly the principles of Islamic finance. (2 Marks)

ii. Explain three main advantages of Islamic finance. (3 Marks)

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  • 20 Marks

ADV – Nov 2018 – L3 – SA – Q1 – Taxation of Companies

Analyze tax implications for XYZ Nigeria Ltd based on provided financial data, assessing allowable expenses and adjustments for tax liability.

XYZ Nigeria Limited is a manufacturing company that produces ice cream. It was incorporated on January 7, 2009, with an authorized share capital of N12,000,000 consisting of 12,000,000 ordinary shares of N1.00 each. All shares were fully allotted and paid for.

The company commenced business on January 2, 2012. The statement of profit or loss for the year ending December 31, 2017, is as follows:

You are provided with the following information:

The breakdown is as follows:

The auditors submitted the audited financial statements to the tax office on June29, 2018. This was evidenced by the stamped copy of the covering letter in the auditors‟ file. The tax inspector raised a Best of Judgement (BOJ) assessment of N10,000,000 and late returns penalty of N75,000 on September 7, 2018. The managing director was concerned that despite efforts by the management to comply with tax regulations, the tax office still raised the B.O.J assessment and the late returns penalty. During discussions at the management meeting of the company, the blame was attributed to the auditors.

You are required to:
a. Compute the tax liabilities of XYZ Nigeria Limited for the relevant assessment years. Show all workings. (25 Marks)
b. Based on the result in (a) above, advise the managing director of XYZ Nigeria Limited on the validity or otherwise of the best of judgement assessment and the penalty raised by the tax office. (5 Marks)

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  • 10 Marks

AT – May 2017 – L3 – Q4c – Business income – Corporate income tax

Calculate the capital allowance for the year 2016 after the exchange of assets, and discuss the treatment of goodwill.

c) Sakote Ltd, a trading company, has the following extracts from its financial records:

  • It bought a 4 X 4 Vehicle for an amount of GH¢225,000.00 in the year 2015. The cost of the vehicle was limited to an amount of GH¢75,000 for capital allowance purposes in the year 2015.
  • It also put up a building at a cost of GH¢150,000.00 in the same year. The cost of the land was GH¢20,000 and GH¢130,000 was the cost of the building.
  • The Company accordingly informed the Commissioner-General about putting the assets into use and in the generation of its income in 2015 year of assessment.
  • In the year 2016, it exchanged the vehicle for 4 plots of land. The value of the plots of land agreed with the landowners was GH¢220,000. The exchange was deemed satisfactory to both parties, and documentations were carried through.

Required:

i) Calculate the amount of capital allowance claimable for 2016 year of assessment by Sakote Ltd. (7 marks)
ii) Sakote Ltd paid for Goodwill amounting to GH¢10,000 in 2016 and intends to grant capital allowance on the value of the goodwill. Explain whether or not this arrangement is in accordance with the tax laws. (3 marks)
(Total: 10 marks)

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  • 5 Marks

AT – May 2017 – L3 – Q4b – Business income – Corporate income tax

Explain the VAT implications on the sale of an asset after failing to claim VAT on its importation.

b) Bossman Ltd acquired assets for GH¢10,000 from outside Ghana but failed to claim Value Added Tax (VAT) on imports of the assets in accordance with the Value Added Tax provisions and later sold the assets for GH¢12,000.

Required:
What is the tax implication of the transaction (if any) in the light of the provisions of the VAT Act 2013 (Act 870)?
(5 marks)

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  • 5 Marks

AT – May 2017 – L3 – Q4a – Business income – Corporate income tax

Provide tax advice on the sale of a vehicle, considering previous denial of input VAT claims, and explain the implications of the transaction.

a) Eddie Enterprise Ltd imported a vehicle for GH¢30,000 and was denied the claim of input tax (VAT) on the imports in 2014 on the vehicle by the Ghana Revenue Authority. In 2017, it intends to sell the vehicle for an amount of GH¢26,000.

Required:

The Company seeks your views as a seasoned Tax Expert to advise on the possible tax implication of the above transaction.
(5 marks)

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  • 12 Marks

AT – Nov 2023 – L3 – Q2b – Tax planning

Assess the tax implications of the setup, location, and planned interventions for the establishment of Gigani Ltd.

Some investors have invited you for comments on a business they intend to establish in four years’ time. Your comments are critical to the investors in making a choice on the establishment of one of the two entities, that is:

  • Manufacturing company or
  • Free zone company.

The investors intend to name the entity Gigani Ltd and establish it in Ghana. The following relates to the projected business of Gigani Ltd:

  1. The shareholders plan to establish Gigani Ltd in either Accra/Tema, Ashanti Regional capital, or Kasoa in the Central Region. It is anticipated that irrespective of the location, Gigani Ltd would generate the same amount of profit in year 1 and grow by 5% each year, all things being equal.

Its first year’s financial performance is projected as follows:

Location Profit (GH¢)
Accra/Tema 10,000,000
Ashanti Regional Capital 10,000,000
Kasoa, Central Region 10,000,000
  1. Additional interventions on what the investors intend to do in the future when Gigani Ltd is established are as follows:
  • Establish the business with four resident shareholders.
  • Start with share capital of GH¢2 million from the contribution of the shareholders.
  • Raise a debt from two main sources: GH¢10 million from a financial institution in Ghana and GH¢20 million from shareholders with interest at 4% above the market rate.
  • Transfer an amount of GH¢2 million from retained earnings to share capital to increase the worth of the shareholders after the second year.
  • Recruit fresh graduates each year from the University of Ghana and Massachusetts Institute of Technology in Boston, USA for the next 5 years until it meets its staff requirement yet to be decided.

Required:
You are required to assess the tax implications of the: i) Set-up.
ii) Location.
iii) Interventions to be introduced.
(12 marks)

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  • 4 Marks

AT – Nov 2019 – L3 – Q4b – International taxation

Advise on the tax implications of a distribution from a non-resident trust to resident beneficiaries in Ghana.

Askona is run as a Trust for Maame Kukua, a Ghanaian based in the USA. Askona is based in the USA and represents a lot of people in trust arrangements. Under the arrangement, Maame Kukua who is currently living in the USA has acquired a transporter vehicle for Askona to use it for the benefit of her two children -Yaaya Mensah and Nana Yaw Mensah who are both resident in Ghana.

In January 2019, Askona made a distribution to Yaaya Mensah and Nana Yaw Mensah in Ghana via Western Union Money Transfer. Maame Kukua has asked you, a young Tax Expert in Ghana to advise on the taxability or otherwise of the above transaction in Ghana.

Required: Advise on whether a distribution by a non-resident trust such as Askona is taxable and how?

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  • 3 Marks

AT – Nov 2019 – L3 – Q1c – International taxation | Tax administration in Ghana

Explain the tax implications of "Trading in Ghana" versus "Trading with Ghana."

What is the tax implication of the concepts “Trading in Ghana” and “Trading with Ghana” in tax administration arrangement?

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  • 14 Marks

MA – Nov 2018 – L2 – Q1a – Discounted Cash Flow

Assess the financial desirability of producing designer ceramic tiles by calculating the net present value in real terms.

Mawuena Ltd, a manufacturer of building materials, has recently suffered falling demand due to economic recession, and thus has unutilised capacity. Management has identified an opportunity to produce designer ceramic tiles for the home improvement market. It has already paid GH¢1.5 million for development expenditure, market research, and feasibility studies.

A new machine, with a useful life of four years, could be bought at GH¢6.5 million, payable immediately. The scrap value of the machine is expected to be 5% of the cost, recoverable a year after the end of the project.

The research and development division has prepared the following demand forecast:

Year 1 2 3 4
Demand (units) 110,000 130,000 150,000 145,000

The selling price is GH¢50 per box (at today’s price). Estimated operating costs, largely based on experience, are as follows:

Cost per box of tiles (at today’s price) GH¢
Materials cost 12.00
Direct labour 5.00
Variable overhead 2.50
Fixed overhead (allocated) 3.50
Distribution (Variable) 5.50

In addition to the initial cost of machinery, investment in working capital of GH¢0.2 million will be required in year two. Mawuena Ltd pays tax one year in arrears at an annual rate of 30% on returns from the project. Mawuena Ltd shareholders require a nominal return of 14% per annum after tax, which includes allowance for generally expected inflation of 5.55% per annum. (Ignore Capital Allowance).

Required:
Assess the financial desirability of this venture in real terms, computing the net present value offered by the project. (14 marks)

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  • 6 Marks

MA – May 2017 – L2 – Q1d – Transfer pricing

Describe three methods of transfer pricing and discuss their limitations.

Transfer pricing is the method used to sell a product from one subsidiary to another within a company. It impacts the purchasing behavior of the subsidiaries and may have income tax implications for the company as a whole.

Required:

Describe any THREE methods of transfer pricing and discuss their limitations.

(6 marks)

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