Equity:                                                              GH¢
Stated capital                                                1,000,000
Retained Earnings                                       (2,000,000)
Equity                                                           (1,000,000)
Debt                                                               2,400,000
Safe Harbour Rule :    Debt Equity Ratio
.                                              3 : 1
.                              (3,000,000) : (1000,000)

From the above, and by implication, the entity is not required to borrow and if it must the interest is not allowable.
Interest on loan                        GH¢150,000
Foreign Exchange loss            GH¢ 20,000
The interest on the loan is not an allowable deduction and therefore shall be added back to income for tax purposes. The equity being negative implies that for any loan from a related party, the interest shall not be an allowable negative. The foreign exchange loss shall not be allowable as the same reason adduced under the interest.

Given that the equity is negative, the interest shall be disallowed for tax purposes, so should the foreign exchange loss.
The interest should suffer a withholding tax at the rate of 8% that is (8% X GH¢150,000) = GH¢12,000

It means that the company has issued shares, and consequently, a stamp duty of 0.5% shall be applied on the additional capital of GH¢200,000 introduced. (0.5% X GH¢200,000) = GH¢1,000. This is tax to be paid to GRA via Registrar General’s Department.

Loan Secured:                                  USD 1,500,000
Interest on the loan                              GH¢300,000
Foreign Exchange loss                        GH¢105,000
Exchange Rate GH¢5.73 to USD 1

Equity:
Share Capital                            GH¢ 150,000
Retained Earnings                    GH¢ 300,000
Total Equity                              GH¢ 450,000

Safe Harbour Rule is Debt: Equity Ratio 3: 1 respectively
Translation of loan into Ghanaian Cedis
USD 1,500,000 x 5.73 =GH¢8,595,000

Allowable debt = 3 times equity
3* 450,000= 1,350,000

Tax implication

• Interest of 8% shall be imposed on 300,000 (8% *300,000) = GH¢ 24,000
• Interest allowable is (300,000-252,879.58) = GH¢ 47120.42
• Foreign Exchange allowable (105,000-88,507.85)= GH¢ 16,492.15
  (6 marks evenly spread using ticks)

WORKINGS: 
W1: 

Debt Outstanding @ 1/1/2018    = $5,000,000
Translation of loan into Cedis = ($1 x $5,000,000)/GH¢5.20
.                                                = GH¢26,000,000

Threshold Ratio =  Debt : Equity
.                           =      3 : 1
3 times equity = 3 x 1,435,000
.                       = 4,305,000

Computation of allowable Interest:
If 26,000,000 = 90,124
Therefore 4,305,000 = ?
=(4,305,000 x90,124)/26,000,000
=GH¢14,922.45

W2:

W3:
Foreign Exchange Loss:
Total foreign Exchange = 147,000
If 26,000,000 = 147,000
Therefore 4,305,000 = ?
Allowable Foreign Exchange = 4,305,000 x (147,000/26,000,000)
.                                               =24,339.81

.                                                                            GH¢
Total Foreign Exchange                                   147,000.00
Foreign Exchange Allowable                           24,339.81
Foreign Exchange unallowable                     122,660.19                                    (7 marks evenly spread using ticks)

                                                  MEMO
TO:                  Tax Manager
FROM:            Tax Intern
DATE:             7th July 2019
SUBJECT:       Tax Implication on Thin Capitalization Rules
INTRODUCTION
Following your request for me to provide the tax implication on the thin capitalization, I furnish as follows:
ISSUES
Kelkadadi ltd is a subsidiary of Danlerigu and any loan that is granted shall be subject to Thin capitalization rule which rules say that the debt secured should not be more than 3 times the equity of the entity.
In this particular situation, the debt exceeds the three times. Consequently, the interest paid or payable that exceeds the 3: 1 ratio shall be added to income and taxed and also the foreign exchange loss paid or payable.
Additionally, the total interest paid or payable attracts a withholding tax at the rate of 8%.

From W2 as attached, total interest of GH¢ 90,124.00 shall attract interest at 8% which is (90,124.00 * 8%) = GH¢7,209.92
Interest of GH¢75,201.55 shall be disallowed, meaning it should not be an allowable deduction out of GH¢90,124 with GH¢14,922.45 allowable. (2 marks)

Summary of Foreign Exchange Loss

From W3 as per the schedule attached, the total foreign exchange loss of GH¢147,000 only GH¢24,339.81 shall be allowable with GH¢122,660.19 not allowable for tax purpose.             (2 marks)
CONCLUSION
In conclusion, the attached schedule will aid your comprehension of the issues as stated above.
Thank you
Yours faithfully,                                                        (1 mark for structure of Memo)