QUESTION ONE

a) A young man aged 28 years old and also a graduate from the University of Ghana has
approached you to advise on the tax implication of an entrepreneur establishing a
manufacturing business in Ghana for persons in their category.

Required:
Explain how this young graduate would benefit from tax with this proposed business
arrangement. (6 marks)

b) Two vehicles were sold by ExcelVehicles Ltd to two different buyers at the following
prices:
First buyer bought it at the equivalent of US$65,000 and the second at US$70,000. This
arrangement, the Tax Authority finds difficult to accept and plans to confront
ExcelVehicles on the matter.

The Commissioner-General has invited you as an ICAG Finalist to advise him on the
factors to consider before approaching ExcelVehicles Ltd on the matter as the
Commissioner-General suspects related party issues.

Required:
Write to the Commissioner-General on the issues to consider before approaching the
Vehicle dealer on the matter. (8 marks)

c) Abumo Ltd is a company engaged in commercial activities (tiles). It intends establishing a

hotel business in Accra, to be 100% fully owned by Abumo Ltd with its own stated capital.

Required:
i) What is the tax implication of the establishment of the hotel to Abumo Ltd. (5 marks)

ii) What is the possible tax outcome if the hotel is registered with Ghana Tourism Authority
under section 25 to 27 of the Tourism Act 2011 (Act 817)? (1 mark)

(Total: 20 marks)

QUESTION TWO

‘When unrelated parties deal with each other, independent market forces shape the
commercial pricing of goods and services transacted between them. However, in
transactions involving persons in a controlled or related relationship, the lack of
independence in their commercial and financial relations can potentially lead to the setting
of prices that deviate from independent commercial prices.

Consequently, this results in the distortion of the allocation of profits between related
entities, as well as in their tax liabilities. Where the persons in a controlled relationship are
located in different tax jurisdictions, the potential distortion in profits and tax liabilities of
each related entity assumes a greater concern, as the difference in the taxation level in the
different tax jurisdictions may lead to one or more such entities not paying the fair share of
tax.’

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 Required:
You have been called upon, as a Tax Expert, by a group of students to address the following
concerns, using the above statement as your guide:
a) What is ‘controlled relationship’ and which persons could be in a controlled relationship?
(4 marks)
b) What is the ‘arm’s length principle’ in relations to persons in controlled relationship?
(2 marks)
c) Comparability is central to the application of the arm's length principle. Explain the concept
of comparability and identify the factors likely to determine comparability. (6 marks)

d) NAM 2 Co. Limited is resident in Ghana and manufactures plastic cups which it sells at a
price of GH¢12.00 per cup to a subsidiary in Nigeria but at a price of GH¢14.00 to an
independent person also in Nigeria that carries out the same function as the subsidiary.
Assuming all other factors of comparability hold, what will Ghana Revenue Authority do
with the above transaction? Explain your answer. (2 marks)

e) Why would the issue of transfer pricing be of interest to Ghana? (6 marks)

(Total: 20 marks)

QUESTION THREE

a) In the paper “Addressing tax evasion and tax avoidance In Developing Countries,” by The
International Tax Compact, defines tax avoidance as ‘’an activity that takes place within
the legal context of the tax system, that is, individuals or firms take advantage of the tax
code and exploit ‘loopholes’ by engaging in activities that are legal but run counter to the
purpose of the tax law’’

Required:
With the above definition in mind, address the following issues:
i) Explain briefly, THREE (3) differences between tax avoidance and tax evasion.
(6 marks)
ii) Explain FOUR (4) examples of anti-tax avoidance activities firms and individuals are
likely to engage in. (4 marks)
(Total: 20 marks)

b) Stella Akorfa retired from Stonebridge (UK) Limited having served the company for 20
years meritoriously. She relocated to Abuakwa in Kumasi, Ghana where she commenced
business as a Security Consultant to honourable politicians. She rented out her house in
the UK for a yearly rent of £10,000. She also maintained a healthy balance in her account
with Gold Bank in London.
Her income for 2018 accounting year is as summarised below:
Consultancy Income (net of all taxes) GH¢70,000.
Dividend received from Success Company (Ghana) Ltd, a resident company at gross
amount GH¢10,000.
Rent paid into her London bank account £9,000. Withholding tax amounting to £1,000 had
been deducted.
Her London bank credited her account with net of £4,500 bank interest. UK tax rate on
interest is 10%.

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 Additional information:
The exchange rate is GH¢6 for £1.
Stella Akorfa does not contribute to social security in Ghana.

Required:
Compute her tax liability as an individual for the relevant year of assessment while granting
her relief for double taxation under the Ghana/UK Double Taxation Agreement using the
credit method. Use 2018 graduated tax rates. (10 marks)

QUESTION FOUR

a) The following financial data relates to 2018 year of assessment of XXY Ltd, a mining
company.
GH¢
Profit 100,000

The above was arrived at after the following items were adjusted:
(i) An amortization of GH¢10,000. It was realized from scrutiny of the records that the
Company incurred a cost as goodwill amounting to GH¢100,000 in 2018 year of
assessment.
(ii) Loss recorded in 2012 amounted to GH¢140,000
(iii)Royalty of GH¢25,000 paid to Ghana Government in 2018 year of assessment in respect
of its activities. From the records, an amount of GH¢5,000,000 was the total revenue from
the sale of the mineral for the year 2018.
(iv) Corporate tax of GH¢160,000 being payment for first and second quarters of 2018 year of
assessment.
(v) An amount of GH¢89,000 was paid to Yeyee Ltd that holds 25% of the voting rights of
XXY Ltd as gross dividend.
(vi) A capital asset acquired to help in the production of the resource amounted to
GH¢2,000,000 in 2018 year of assessment.
(vii) Depreciation was GH¢720,000

Note: Additional information below:

Written down value of depreciable assets carried down effective 2017 year of assessment
stood at GH¢30,000,000. Only one year capital allowance has been granted by GRA from
its depreciable assets.

A depreciable asset costing GH¢400,000 at the time it was acquired was sold in 2018 year
of assessment and realized GH¢390,000.00. Its basis period is from January to December
each year.

Required:
Compute the taxes payable and what is the tax implication of goodwill acquisition as
indicated above. (10 marks)

b) Natural resources to some extent define the fiscal opportunities countries enjoy from the
ownership of the resources. In Ghana, among other benefits, Government stands to benefit
from Carried interest from mineral operation.

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 Required:
What is the commitment of Ghana Government from holding Carried Interest and
Additional Participating Interest in the petroleum operations? (4 marks)

c) Kokofu Ltd is licenced by the Petroleum Commission to go into the upstream petroleum
operation in 2011. It commenced operations in earnest after the acquisition of a licence.

In 2015 year of assessment, it started commercial production of Oil. As a reward for the
steadfastness of the shareholders and to give a strong signal of management efficiency, in
2018 it declared and paid dividend to its shareholders.

Kakraka Ltd acquired a total of 30% shares in Kokofu Ltd. The rest of the 14 shareholders
hold maximum of 5% shares each. Both Kokofu Ltd and Kakraka Ltd are resident
companies.
The management of Kokofu Ltd has invited you to advise on the tax implication on the
above transactions.

Required:
Provide a position paper on the above for decision making by the Management of Kokofu
Ltd.
(6 marks)

(Total: 20 marks)

QUESTION FIVE

a) You have been appointed as the tax consultant of Backward Never Ghana Limited. The
Chairman and the Chief Executive Officer (CEO) of the company invited you to a crucial
meeting in the company’s office to shed more light on some of the issues that were brought
to their attention in relation to taxation and tax audit.

Required:
Specifically, the Chairman and the CEO would like to know the following:
i) What activities the company cannot or will not be permitted to do unless the company
quotes a Taxpayer Identification Number (TIN) or provides Tax Clearance Certificate.
(8 marks)
ii) What requirements should the company satisfy before the Commissioner-General issues
Tax Clearance Certificate? (2 marks)

b) Explain FOUR (4) examples of activities that are likely to be classified as tax evasion and
not tax avoidance. (4 marks)
c) Discuss THREE (3) limitations to effective tax planning. (6 marks)

(Total: 20 marks)

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SUGGESTED SOLUTION

QUESTION ONE

a) The income of a young entrepreneur from the business of manufacturing, information and
communications technology, agro processing, energy production, waste processing,
tourism and creative arts, horticulture and medicinal plants shall be exempt from tax for a
period of five years.

Tax benefits
The young man being 28 years and wanting to establish a manufacturing business shall
benefit from the provision of five years tax exemption which is specific to a young
entrepreneur in any business as stated above.

Concessionary Rates
Additionally, the concessionary rate after the holiday period shall be as follows:
NO. LOCATION TAX RATE
1. Accra and Tema 15%
2. Other regional capital outside 12.5%
the three regions
3. Outside other regional 10%
capitals
4. The three Northern Regions 5%

Carry over of loss

The young entrepreneur may carry forward an unrelieved loss for a period of five basis
periods
(6 marks)
b)
COMMISSIONE-GENERAL
GHANA REVENUE AUTHORITY
ACCRA

Sir,
ISSUE TO CONSIDER ON PRICE DIFFERENTIALS RESPECT OF VEHICLES
SOLD BY EXCEVICLES
INTRODUCTION
Following the discussion we had, I submit below issues you should consider before taking
the decisions on the price differentials.

Contractual Terms
Information concerning the contractual terms of potentially comparable uncontrolled
transactions are limited or available. The contract should be considered between the two
vehicles to determine the rationale for the price changes.
Characteristics of the good (Vehicle):
The nature of the vehicles must be the same for comparability analysis to be done. Different
features may explain the reasons for the differential in pricing. The vehicles features should
be looked at to determine the reason for the differences in price.

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 Function, Assets and Risks (FAR Analysis)
The functions performed in the production of the vehicle. Additionally, the assets used in
the production of the vehicles and the risk (financial risks, input cost fluctuations etc)
assumed by the taxpayer in this case ExcelVehicles.

Economic Circumstances:
The arm’s length prices might vary across different markets, even for transactions that
involve the same property or the same services. Different economic circumstances may
create price differentials and it should be looked at before any conclusion is drawn.

Marketing Strategies:
Tax administrators must examine business strategies in determining comparability for
transfer pricing purposes. A taxpayer seeking to penetrate a market or to increase its market
share might temporarily charge a price for the product that is lower than the price charged
for otherwise comparable products in the same market. The strategies adopted should be
looked at to establish any variation

Conclusion
In conclusion, Commissioner-General should take into account the above in order to form
your decision on the matter.

Thank you.

Yours faithfully,

Bossu Bossu
(8 marks)
c)
i) The establishment of a hotel business by Abumo ltd is one of businesses that enjoys from
tax incentives in the tax laws.

The hotel business shall be subject to tax at the rate of 22% on the hotel income makes
while its commercial activities shall be subject to tax at the rate of 25%. Obviously, the
hotel has tax rate rebate which is a huge tax incentive.

Additionally, the hotel business shall carry its loss from the hotel for three (3) years which
shall be deducted in the order in which they occur. (5 marks)
ii) If the hotel is registered with Ghana Tourism Authority in accordance with section 25 to
27 of the Tourism Act, 2011 (Act 817), it shall within the category of a priority areas and
consequently, can carry over its loss for five (5) years. (1 mark)

(Total: 20 marks)

QUESTION TWO

a) Controlled relationship here means a relationship between one person and another person
by the terms of which, the relationship is able to influence the transfer price set in a
transaction.
(2 marks)
The following persons could be in a controlled relationship according the LI 2188:

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 Persons who are associates
 Persons who are relatives
 Persons who are in a trust relationship
 Persons who are partners in a partnership business
 Holding companies and their subsidiaries
 A member or relative of persons in a closed corporation

(4 points @ 0.5 marks each = 2 marks)

b) Arm's length principle is the principle that the conditions of a controlled transaction
should not differ from the conditions that would have applied between independent persons
in comparable transactions carried out under comparable circumstances.

The arm's length principle is the internationally endorsed standard for transfer pricing
between related parties. When related parties adhere to this principle, it reflects
comparability to the pricing that independent commercial entities in similar situations
would transact and therefore, there will be no distortion in the profits and tax liabilities.
(2 marks to be allocated)

c) Comparability is central to the application of the arm's length principle. A transaction

between related parties is termed a “controlled transaction” whereas a transaction between
unrelated parties is termed an “uncontrolled transaction”. When assessing whether the
terms of a controlled transaction meet the arm's length principle it is necessary to compare
those terms of the transaction with the terms of a comparable uncontrolled transaction(s).
The critical question is whether the uncontrolled transaction(s) which is sought to be
compared against the controlled transaction is indeed comparable.

To be comparable means that none of the differences (if any) between the situation being
compared could materially affect the condition being examined in the method (e.g. price or
margin), or that adjustments can be made to eliminate the effect of any such differences. If
suitable adjustments cannot be made then the transactions cannot be considered
comparable.
(2 marks)
The assessment of comparability can be affected by the: (Factors to determine
comparability)
 Characteristics of goods, property and services transferred. Differences in the specific
characteristics of goods, property or services can often explain the differences in their open
market value. Comparisons of these features may be useful in determining the
comparability of controlled and uncontrolled transactions or activities
 Relative importance of functions performed. The compensation for the transfer of property
or services between two independent persons will usually reflect the functions that each
person performs
 The terms and conditions of the relevant transaction;
 The assets used
 The relative risk assumed by the persons in a controlled relationship and any independent
party where the independent party is considered as a possible comparable
 The economic and market circumstances in which the transactions take place; and
 The business strategies pursued by the related parties or affiliates in relation to the
transactions.

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 (4 points @ 1.5 marks each = 6 marks)

d) Assuming all other factors of comparability such as contractual terms are the same an
amount of GH¢2.00 per cup sold should be added to Company A's assessable income.
(2 marks)

e) The issue of transfer pricing would be of interest to Ghana based on the following
reasons.

 Adequate adjustment for transfer pricing is a potential source of revenue for Government.
 Measures to counter transfer pricing are a protection of the revenue base from the possible
manipulation of the Multi National Enterprises (MNE’s) to shift profits from Ghana
operations elsewhere.
 Artificial transactions can result into the transfer of profit from one member of the MNE to
another within the country to take advantage of the incentives put in place by the
Government for economic development.
 Transfer pricing can encourage fraudulent tax schemes to avoid or evade tax liability.

(4 points @ 1.5 marks each = 6 marks to be allocated)

(Total: 20 marks)

QUESTION THREE

a) i.The following points provides a summary of the distinction between avoidance and
evasion:
 Legal status
Tax avoidance is legal but tax evasion is illegal. There are court cases that support the idea
of tax avoidance but court cases on evasion show illegality
 Careful planning. Careful planning can lead to tax avoidance. There is no amount of tax
planning can lead to tax evasion
 Punishments. There is no punishment for tax avoidance schemes. But there are stiff
punishment for tax evasion
(6 marks to be allocated)

ii.Some Examples of Tax Avoidance Strategies

Despite the recognized legality of tax avoidance, governments of several countries have
made serious efforts against the use of these loopholes in the laws. These efforts aimed to
reduce or eliminate the under-tax payments are done by anti-avoidance instruments.

Examples of tax avoidance schemes in Ghana include:

 Taking legitimate tax deductions to minimize business expenses and thus lower your
business tax bill.
 Setting up a tax deferral plan such as plan to delay taxes until a later date.
 Taking tax credits for spending money for legitimate purposes, like taking a credit for hiring
fresh graduates for the business.
 Thin capitalisation
 Income Splitting

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 Dividend stripping
 Accumulating profits without distribution
(Any 4 points for 4 marks)

b)
GH¢
Consultancy Income 37,000/0.925 40,000
Dividend Income- this has final withholding tax 0
Foreign rent £10,000 6 60,000
Bank Interest £4,500 6 27,000
127,000

Taxation in Ghana:
Taxable Income 127,000
First 3,456 0.00
123,544
Next 1,200 x 5% 60.00
122,344
Next 1,680 x 10% 168.00
120,664
Next 36,000 x 17.5% 6,300.00
84,664 x 25% 21,166.00
27,694.00
Less Refiefs:
Rent tax paid £2,000 6 12,000
Bank interest tax paid 2,700
Consultancy income tax (40,000- 37,000) 3,000 17,700.00

9,994.00

(10 marks to be allocated evenly using ticks)

QUESTION FOUR

a)
XXY Ltd
Computation of Taxes payable
Y/A 2018
Basis Period January 1-December 31, 2018
GH¢ GH¢
Profit as per records 100,000
Add back non-allowable deduction:
Amortization 10,000
Loss from 2012 140,000
Dividend 89,000
Capital Asset 2,000,000
Corporate Tax 160,000

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 Depreciation 720,000
3,119,000
Adjusted Profit 3,219,000
Capital Allowance (7,402,500 +400,000) 7,802,500
Tax loss 4,583,500
Dividend withholding tax:
Dividend Tax: 89,000 @ 8% 7,120

Goodwill implication:
Goodwill is no longer granted capital allowance hence there is no tax implication.

Workings:
XXY Ltd
Computation of capital allowance
GH¢
Y/A 2018
BP Jan 1-Dec 31, 2018
Written Down Value B/f 30,000,000
Less Proceeds from Disposal 390,000
29,610,000
Capital Allowance (29,610,000/4) 7,402,500
WDV C/d 22,207,500

W2.
XXY Ltd
Computation of Capital Allowance
Y/A 2018
BP January 1-December 31, 2018 GH¢
Cost 2,000,000
Capital Allowance 400,000
Written Down Value c/d 1,600,000

(10 marks evenly spread using ticks)

b) Carried Interest
Ghana Government may hold a minimum of 15% carried interest in any petroleum upstream
company that operates in Ghana. This entitles Ghana Government a percentage of 15% in
production after royalty is paid to Government. GNPC holds the 15% percentage on behalf
of Ghana Government.
The commitment of Ghana is only in respect of production cost only. (2 marks)

Additional Participating Interest

c)
 Any investment in shares of a company entitles the shareholders to a dividend which would
be subject to dividend withholding taxes at the rate of 8%.

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 Under section 59(3) of Act 2015 Act 896, a resident company that holds voting power of
another resident company, when dividend is declared, the paying company should not
withhold tax and the recipient company should not also pay tax on the income. Dividend
under that arrangement is exempt from tax.
 In the case of a petroleum upstream company, the payment of dividend under such
arrangement is taxable.
(3 points for 3 marks)
 Conclusion
Given that Kakraka ltd holds 30% shares in Kokofu ltd, Kokofu ltd is required under
section 71 of Act 2015 Act 896 to withhold tax on the dividend declared at the rate of 8%.
The other shareholders that hold 5% shares in the Kokofu ltd will suffer withholding taxes
accordingly at the rate of 8%.
(3 points for 3 marks)

(Total: 20 marks)

QUESTION FIVE

a)
i) A taxpayer will not be permitted to do any of the following unless that person quotes the
Taxpayer Identification Number issued in respect of that person:
 To clear any goods from any port or factory,
 To register any title to land, interest in land or any document affecting land,
 To obtain any Tax Clearance Certificate from the Ghana Revenue Authority,
 To obtain a certificate to commence business or a business permit issued by the Registrar-
General or a Local authority (i.e. a district assembly in Ghana)
 To register a co-operative.
 To receive payment from the Controller and Accountant- General or a Local Government
Authority in respect of a contract for the supply of any goods or provision of any services.
 To receive a payment subject to withholding under the Income Tax Act, 2015, (Act 896)
 To file a case with the Courts.
 Conduct any official business with the following institutions and persons:
 The Ghana Revenue Authority
 The Controller and Accountant General’s Department;
 The Registrar General’s Department;
 The Registrar of Co-operatives;
 The Land Title Registry;
 The Immigration Service
 The Passport Office
 The Driver and Vehicle Licensing Authority
 The Courts;
 Ministries, Departments and Agencies;
 Metropolitan, Municipal and District Assemblies;
 Unit committees;
 Government, Sub-divisions of Government and Public Institutions not listed above;
 Persons required to withhold tax under the Income Tax Act, 2015 (Act 896);
 Banks, Insurance Companies and other Financial Institutions;
 Factories;

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 (Any 8 points for 8 marks)

i) The Commissioner-General shall issue a Tax Clearance Certificate where the

Commissioner-General is satisfied that the applicant:
 Has been issued with a Taxpayer Identification Number and the number is specified in the
application;
 Has no outstanding tax, returns or other obligations under any tax law; and
 Has satisfied any other condition that the Commissioner- General may determine.
(2 points for 2 marks)

b) Some of the common ways by which people commit tax evasion are as follows:

 Keeping two sets of books to record business transactions. One records the actual business
and the other contains fraudulent record
 Doing an extra job for cash and not declaring the income
 Engaging in barter trade
 Non-disclosure of major sources of income
 Submitting false statements and returns to the GRA to reduce tax
 Making false entries in any books of account or other documents relating to the income
which is subject to tax.
(Any 4 points for 4 marks)
c) There are a variety of factors that limit effective tax planning. These factors can be
Legislative, Judicial or Uncertainty in character.

 Legislative Constraints
This refers to circumstance that limit effective tax planning as a result of restrictions
imposed by certain provisions contained in the Tax Laws. An important assumption
underlying business and investment decision is that parties to the transaction will act in
their own self-interests. This arm’s length transaction assumption is fundamental to a
market economy and ensures that the economic results of transactions negotiated between
independent, self-interested parties will be respected by the Tax Authorities. Where related-
party transactions take place, legislative restrictions exist to prevent the achievement of tax
advantages that are not consistent with arm’s-length transactions. The Income Tax Act,
specifically lists three legislative restrictions or anti-avoidance rules. The provisions relate
to Income Splitting, Transfer Pricing and Thin Capitalization. These are specifically
mentioned legal restrictions in the Tax Laws

 Judicial constraints
There are three judicial doctrines that give tax authorities powers to rewrite the tax
consequences of transactions to reflect their economic realities. The business purpose
doctrine, which originated in USA in the case of Gregory v. Helvering, 293 US 465 (1935),
ensures that tax planning experts follow not only the letter of the law but also its spirit. This

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 doctrine disregards the results of transactions held to have no commercial purpose other
than tax avoidance.

The second doctrine is termed substance over form. This doctrine seeks to permit the tax
authorities to look through the legal form of a transaction to determine its true commercial
substance and subject the parties involved to tax in accordance with that substance. For
instance, a rental payment which in reality turns out to have a political agenda will be
ignored in form as a deductible expense.

Finally, the step transaction doctrine permits tax authorities to collapse a series of
intermediate transactions in a single transaction to determine the resulting tax
consequences. This doctrine is applied when it became clear that the parties involved would
not have undertaken the initial transaction without believing that the entire series would
take place.

 Uncertainty Constraints
Tax planning involves the projection of future cash inflows and outflows. These projections
are based on different assumptions that involved the use of market data, trend analysis and
estimates based on the advice of consultants. It is therefore pertinent that tax experts realize
or recognize the uncertainty of these assumptions. When the assumptions used in a tax
planning decision are wrong the cash flows that will be realized from a particular
transaction may differ from their expectations. This is because where future cash flows are
uncertain, the risk associated with the transaction might call for the use of either a higher
or a lower discount rate for calculating the present value of such cash flows.

(3 points well explained @ 2 marks each = 6 marks)

(Total: 20 marks)

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