May 2021 Q2 a&b
a) There has been a merger among three companies. Ann Ltd, Bab Ltd and Cee Ltd. The merger was geared towards creating a monopoly in the market.
After careful revaluation of the assets and liabilities of the companies, the following is the outlook.
Gain from revaluation:
GH¢
Ann Ltd 4,200,000
Bab Ltd 5,000,000
Cee Ltd 5,200,000
The following is the outlook of the new company after the merger:
Profit GH¢5,000,000
Required:
As an Intern of IKERN and Associates, write a memo to your partner on the company’s tax exposure after the merger. (7 marks)
View Solution
Memo
To: Partner
From: Tax Intern
Date: 16 February 2021
Subject: Tax Exposure after the merger
Introduce
Following our discussion on the above subject matter, I furnish as follows for your consideration.
Issues
The gains on the realisation of an asset accruing to or derived by a company arising out of a merger, amalgamation or reorganisation of a company are exempt from tax when is a continuity of at least fifty percent of the underlying ownership in the asset.
Tax implication
The merger of the three and gains arising from the mergers shall be pitted against the underlying ownership in the new entity. Any entity that is less than 50%, the gain stands to be taxed at the corporate rate that the entity is exposed to.
GH¢
Ann ltd 4,200,000
Bab ltd 5,000,000
Cee ltd 5,200,000
From the above gains, the company in the post-merger, if the underlying ownership in the post-merger is less than 50%, shall be subject to tax at the marginal tax rate of 25%. The reverse is exempt from tax.
The profit being made is a testimony of the positive of the merger and, therefore, subject to tax at the marginal tax rate.
Conclusion
I hope the above would help you in your further action on the matter.
Thank you.
Yours faithfully
Handsome Padii.
b) Tanko Ltd has been into tree cropping for some time now. The last four years has been a boom for the business as its fruits are bought before they are harvested on the farmland.
Tanko Ltd intends to transfer the entity to Agoo Ltd as a going concern.
Required:
Explain the tax implication of the transfer of Tanko Ltd to Agoo Ltd. (5 marks)
View Solution
When there is a change in underlying ownership, the following will arise:
- The assets and liabilities are deemed realised
- The period before the change and period after the change shall be treated as separate years of assessment.
- The entity that changes ownership shall not deduct the financial cost from derivatives.
- Loss incurred before the change of ownership is not allowable
- Bad debts cannot be claimed
- Carry back of loss cannot be benefitted by the entity
- Shall be subject to tax on the gains made