The shareholders of Japan Rocks, a computer chip manufacturing company based in Japan, are planning acquiring 60% of the shares in Konadu Yiadom Ltd in Ghana. The return on income for Konadu Yiadom Ltd for the year ended 31 December 2020 showed a loss of GH¢3,600,000 and the financial cost of GH¢900,000.
As a tax expert, the parties are requesting an opinion on the tax implications of the proposed transactions for Konadu Yiadom Ltd and its current shareholders.
Required:
Advise Japan Rocks and its shareholders on the income tax implications of the acquisition of shares by Japan Rocks and the treatment of financial cost. (10 marks)
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Advice Konadu Yiadom Limited and its shareholders on:
- The income tax implications of the acquisition of shares by Japan Rocks.
- The acquisitions of sixty percent shares of Japan Rocks by Konadu Yiadom Limited will amount to change ownership of Japan Rocks.
- Sections 38(l)(f) and section 62 of Act 896 provide that where the underlying ownership of an entity changes by more than fifty percent at any time within three years, the assets and liabilities of the 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 fifty percent change in ownership of Japan Rocks, the assets and liabilities of Japan Rocks will be deemed to have realised immediately before the change.
- Section 62(2) of Act 896 provides that where the underlying ownership of Japan Rocks changes by more than fifty percent, Japan Rocks cannot:
o deduct financial costs carried forward under section 16(3) that were incurred by the entity before the change
o deduct a loss that was incurred by the entity before the change;
o claim a deduction after the change, in a case where the entity has included an amount in calculating income under those provisions before the change; or
o carry back a loss that was incurred after the change to a year assessment before the change. - Thus, the loss of GH¢3,600,000 of Japan Rocks cannot be carried forward, and the financial cost of GH¢900,000 cannot be deducted or carried forward.
- If the underlying ownership changes by more than fifty percent during a year of assessment of Japan Rocks, the period after the change shall be treated as separate years of assessment under section 62(3) of Act 896.