In its July 2024 report on Advanced Taxation (Paper 3.3), the Chief Examiner wrote on Question One(b): “Unfortunately, most candidates did not use the comparability factors to answer the questions. Those who did, could not provide the nexus between the comparability factors and the answers, making them lose marks.” This article shows what a linked answer looks like, so you can reproduce it under exam pressure.
The Question in Brief
Zanku Ltd, a financing company in the Chamez Ltd group, borrows at Base Rate + 2% (consistent with an AA rating), on-lends to lower-rated group members at a fixed 13% when the commercial rate is 15% to 20%, charges or requests a 4% guarantee fee, and hedges with the parent. Advise the board on arm’s length compliance. 10 marks.
The Factors the Marking Scheme Expects
(1) Contractual terms and form of the loans. (2) Functions, assets, risks, and financial capacity of borrower and lender, including credit rating. (3) Loan characteristics: tenor, amount, currency, guarantee. (4) Economic circumstances of the market. (5) Business strategies, including independent borrowing options and whether an independent lender would require a guarantee. The scheme names Comparable Uncontrolled Price (CUP) as the method where comparable independent loans and guarantee payments exist.
Listing Versus Linking
A weak answer: “Transfer pricing requires arm’s length pricing. Factors include contractual terms, functions and risks, and economic circumstances. The CUP method should be used.” Every sentence is true. None of it uses the question.
A stronger answer: “Functions and risks: Zanku raises the funds and takes the credit risk of on-lending to borrowers rated far below the group. An independent lender would be paid for that risk, so the 13% rate must be tested against the 15% to 20% commercial range. Conclusion: the rate and the 4% guarantee fee should each be benchmarked using CUP, and the hedging arrangement with the parent should be priced as an independent counterparty would price it.”
Part (a) Reminder
Resale price: resale price less the resale margin (scheme example: GH¢2.0m x (1 − 40%) = GH¢1.2m). Cost-plus: cost plus a mark-up (scheme example: GH¢200 with a 10% mark-up shows GH¢20, so the price is GH¢220). The examiner noted many candidates could not give the cost-plus example.
Other Lines from the Report Worth Printing
Candidates showed strength in acquisition of companies, permanent establishment and transfer pricing basics. Weaknesses named: no headings on computation questions, and individuals taxed at corporate rates (employees and self-employed persons use the individual rates). The Recommendations section: “The reading of the Tax Acts and Regulations are of serious concern. Most candidates give wrong context to the tax provisions.”
EXAM TIP: Use three steps for every factor you name: the factor, the fact from the question, the conclusion for the price. The examiner penalised lists. Add headings and GH¢ signs to every computation.
Conclusion
The marks sat between the factor and the answer. Close that gap on every transfer pricing question.
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