Corporate mergers and acquisitions usually take the form of purchase of the equity stake in a company, purchase of a business or trade as a going concern and purchase of strategic business assets of a company. Such acquisitions may cover the entire or part of the equity shares of the company. Whilst the decision to acquire businesses may be driven by a number of factors including financial objectives, there are significant and, sometimes, hidden tax consequences that every prospective buyer must be aware of and these tax consequences depend on the percentage of the ownership interest in the assets or equity acquired.
In this article, we explore the various significant and sometimes hidden Ghana tax implications of mergers and acquisitions transactions which result in a change in ownership of the targeted companies.
Until the entry into force of the Income Tax Act, 2015 (Act 896) as amended (“ITA”) in January 2016, the tax statutes of Ghana only imposed income and/or capital gains tax on gains arising from direct realisation or sale of membership interest or business assets of entities in Ghana. However, as of January 2016, any gains or income arising from both direct and indirect sale of interest in a resident entity can potentially be subject to tax unless exempt. The general trigger for such a tax is a change in underlying ownership as contemplated in section 62 of the ITA.
According to section 62 of the ITA, the tax resulting from change in underlying ownership arises where an entity’s underlying ownership changes by more than 50% at any time within a 3-year period. Underlying ownership is explained in section 133 of the ITA to mean membership interests owned in an entity or asset, either directly or indirectly through one or more interposed entities, by individuals or entities in which no other person has membership interest. In simple terms, the underlying owner of an entity is the ultimate and final shareholder, wherever resident.
This means that the tax resulting from change in underlying ownership is not only triggered by a change in direct ownership of an entity but also by an indirect change in underlying ownership of the entity as a result of a change in ownership in an interposed entity (entity between ultimate owner and the Ghanaian entity) in its ownership chain.
This rule is not different from what pertains in most foreign tax jurisdictions. The Ghana Revenue Authority’s practice notes on the change in ownership also provides more clarity on the tax treatment of section 62 and related provisions. While the change in underlying ownership rules in section 62 of the ITA generally apply to all entities registered and doing business in Ghana, additional rules exist for entities operating in the petroleum and mining sectors of Ghana.
Whereas, per section 69 and 83 of the ITA, entities with petroleum and mineral rights in Ghana trigger change in ownership tax where their respective underlying ownership changes by at least 5%, businesses operating outside this sectors are only exposed to the tax impact when there is more than 50% change in the underlying ownership of the entity.
In most tax jurisdictions including Ghana, the most common tax consequence of a change in an underlying ownership of an entity is the imposition of capital gains tax on any gains realised from the disposal of shares or assets subject to applicable tax exemption rules. In this section, we will highlight the other “hidden” tax implications that are triggered by a change in ownership under the ITA.
Deemed realisation of assets and liabilities
Where there is a change of more than 50% in the underlying ownership of an entity in Ghana, the law deems such a change as resulting in the deemed realisation of all the assets and liabilities of the entity. In simple terms, realisation of assets and liabilities means parting with ownership of assets or liabilities including by way of a sale, exchange, transfer, among others. Ordinarily, when a person sells or disposes of assets and/or liabilities in fact and makes a gain, the gain is taxed unless exempt.
However, because the provision of the law deems all assets and liabilities as realised once there is more than 50% change in underlying ownership of the entity, the deemed realisation covers both direct and indirect sale of membership interest. Once there is realisation of assets and liabilities, the tax law requires the market values of those assets and liabilities to be used as consideration received, and the tax costs plus other allowable costs to be deducted in arriving at the gain or loss from that deemed realisation. Where the result of your calculation yields a gain that can potentially be taxed.
Hence, there is unseen or hidden tax impact on an indirect change in ownership due to the disposal of interest in an interposed entity or the ultimate owner. The result is that the assets and liabilities of the Ghanaian entity whose underlying ownership has changed are deemed realised, and gains are required to be included in the determination of the chargeable income and this may be taxed at the corporate income tax rate of the Ghanaian entity.
Further, the entity is deemed to have reacquired the realised assets and liabilities at their market value at the time of the realisation.
Limitation on the carry-over of losses
One of the often missed and hidden tax implications triggered by a change in ownership is the restriction placed upon such a Ghanaian entity from carrying forward its unrelieved or unutilised tax losses. Under the provisions of the ITA, all businesses, excluding those in priority sectors, can carry forward losses they incurred in prior tax periods to subsequent tax years for a period of 3 years. Companies in priority sectors such as petroleum, manufacturing, mining sectors etc can carry forward tax losses for 5 years. However, companies with unutilized tax losses before a change in ownership are not allowed to carry them over to the period after the change.
Limitation on the deduction of financial costs
Ordinarily, section 16 of the ITA limits deduction of financial costs incurred other than interest when determining a person’s income from investment or business. Financial cost, in this context, generally refers to losses incurred by a person with respect to financial instruments such as foreign exchange losses among others. The ITA allows for a financial cost which could not be deducted due to the limitation in section 16 of the ITA to be carried forward for a period of 5 years. Because of the rules on change in ownership in section 62 of the ITA, these unutilized financial costs cannot be carried forward into periods after the change and are forfeited or lost.
Deemed realisation of assets and liabilities
For the purposes of calculating income on an accrual basis, where a person recognizes revenue or income and the amount later constitutes a debt claim which is written off as bad debts, the amount of bad debt can be deducted, subject to meeting certain conditions. This deduction is, however, not available for bad debts incurred which have been included in the calculation of income under the provisions of the ITA before the change in ownership. As such, the deduction is lost as a result of the restriction imposed by the change in ownership rules.
The hidden tax implications of triggering a change in ownership such as deemed realisation of assets and liabilities and restrictions on the deduction of losses, financial costs and bad debts are usually overlooked in corporate acquisition transactions. However, these hidden tax implications have proven to be showstoppers in most corporate acquisitions due to their resultant implications on the financial projections of most corporate acquisition transactions. As such, there is a need for shareholders and taxpayers to be mindful of these tax implications and properly provide for them in potential corporate acquisition transactions.
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Kingsley Owusu-Ewli is a Partner in PwC Ghana and the Transfer Pricing, International Tax and M&A Tax Services leader in Ghana. He is a regular speaker on tax matters and a facilitator at the PwC Business School in Ghana.