Paying dues: A look at the tax code

FORMS OF BUSINESS ORGANISATION: The main forms of business organisation in Ghana in approximate order of importance are: private and public limited liability companies; branches of foreign firms; partnerships; sole traders; companies limited by guarantee; and unlimited liability firms. They are: Limited Liability Companies: A limited liability company is a firm having the liability of its members limited to any unpaid amount on the shares held by them. Ghana Companies Code 1963 (Act 179) allows sole shareholding in a company in Ghana. Companies in Ghana must have at least two directors of which one should be resident in Ghana at all times A company may be private or public. A private company limits the total number of its members and debenture holders to 50. A private company is prohibited from making any invitation to the public to acquire any shares or debentures of the group.

Furthermore, the transfer of shares in a private company is restricted. Any company with more than 50 shareholders is a public company and is permitted to make invitations to the public to acquire its shares or debentures. A public company may choose to be listed on the Ghana Stock Exchange (GSE), where its shares may be publicly traded. External Companies: This describes a company incorporated outside of Ghana but that has an established place of business in the country. It is likened to a branch operation. External companies appoint their local manager by means of power of attorney and would require $100, 000 converted into Ghanaian currency (the cedi) to register with Ghana Investment Promotion Centre (GIPC). Partnerships: A partnership is the association of two or more individuals conducting business together with the aim of making a profit. Sole Proprietorships (Business Name): A business name registered by an individual without a partner with whom to co-conduct business. The sole proprietors’ personal property is unlimited in this case. Companies Limited by Guarantee: A company limited by guarantee is a company wherein the liability of its members is limited to the amount that the individual members undertake to contribute to the assets of the group should it be wound up. A company limited by guarantee may not be registered with shares and may not create or issue shares. Such companies are not incorporated with the object of carrying on business to make profits. Unlimited Companies: An unlimited company is one with no limits on the liability of its members.

CURRENCY & EXCHANGE CONTROLS: It is important to note that the Ghanaian cedi (GHS) was re-based with effect from July 1, 2007 such that GHS10,000 in the old currency was converted to one cedi (GHS1) in the new currency.

The legal tax code places no restrictions on the repatriation of profits, dividends, interest, management and technical service fees, royalties and capital. Businesses are allowed to open foreign currency bank accounts in either foreign currency or foreign exchange. There are a number of restrictions on the use of these accounts for transaction purposes. Foreign currency can be sold to authorised dealers, such as foreign exchange bureaux. Any foreign employee may repatriate part of his or her net earnings through any approved commercial bank. The domestic tax revenue division of the Ghana Revenue Authority (GRA), as well as the Registrar of Companies, accept financial statements in the major currencies when prior approval is granted.

TAXATION LEGAL FRAMEWORK: Taxation in Ghana is unitary and principally governed by the following:

• Internal Revenue Act, 2000 (Act 592) amended;

• Internal Revenue Regulations, 2001 L.I. 1675 as amended;

• Petroleum Income Tax Law, 1987, P.N.D.C L 188;

• Stamp Duty Act 2005 (Act 689);

• Value-Added Tax Act, 1998 (Act 546) amended;

• Value-Added Tax Regulations, 1998 amended;

• Customs, Excise and Preventive Service ( Management) Law, 1993 (Provisional National Defence Council Law 330) amended;

• Communications Service Tax Act 2008 (Act 754);

• National Health Insurance Act 2003 (Act 650);

• The Free Zone Act, 1995 (Act 504).

CLASSES OF TAXPAYERS: Taxpayers can be classified into companies, individuals, body of persons or estates. For direct taxes, companies are taxed separately from their shareholders. Ghana has not enacted group tax provisions. Each company in a group is treated as a separate entity for tax purposes. Groups of companies cannot file consolidated tax returns.

The government of Ghana tax year runs from January to December. Individuals, by tax law, are assessed to tax with reference to the government year. Companies may choose any accounting year-end other than the January to December year-end.

TAXATION OF RESIDENT ENTITIES: Tax rates and incentives vary accordingly. The standard corporate tax rate is currently 25%, but a variety of tax and non-tax incentives are offered to investors regardless of their country of origin. Tax incentives range from a 0% tax rate to reduced corporate tax rates to tax exemptions. See table below illustrating the general corporate tax rates and tax incentives.

A resident company for tax purposes is a one that is incorporated under the laws of Ghana or has the management and control of its business exercised in Ghana at any time during the year of assessment.

Resident companies are effectively liable for corporate income tax on profits arising on a worldwide basis. Income derived from, brought into, and received in Ghana is taxable. Non-resident companies are taxed on Ghana source income.

PAYMENT OF CORPORATE TAX (CIT): CIT is payable by equal instalment on a quarterly basis. The amount payable may be based on self or provisionally assessed. The payment is on or before the last working day of the quarter of the company’s financial year-end.

CHARGEABLE INCOME: Ordinarily, a firm’s chargeable income is based on its operating net profits in its annual financial statements, as adjusted by any differences between accounting requirements and tax laws. Such adjustments include non-deductible or disallowable expenses, capital allowances, exempt income and special reliefs allowed under the tax law.

DIVIDEND INCOME: Dividends received are not normally taxable income. Instead, they are subject to a final withholding tax (see below). However, foreign dividends brought into or received in Ghana are included in taxable income. A credit for any foreign tax is allowed if a double tax treaty so provides.

CAPITAL GAINS: Capital gains are not generally included in taxable income. Instead, they are subject to a separate capital gains tax (CGT, see below).

EXCHANGE DIFFERENCES: Foreign exchange gains are taxable only when realised. Foreign exchange losses are allowed as a deduction against profits for tax purposes when realised. Foreign exchange loss of a capital nature is capitalised, and a capital allowance is granted thereon.

In both cases, transactions giving rise to the realised exchange gain or loss should be between residents and non-residents. In addition, the GRA should be informed of foreign currency holdings.

DEDUCTIONS: A number of expenses are deductible when they are wholly, exclusively and necessarily incurred in the generation of the income to which they are being charged.

DEPRECIATION: Depreciation that is calculated for accounting purposes is not tax deductible. Instead, capital allowances are granted, which are then calculated on the total acquisition cost of an asset and are based on a pooling system. The value of the pool is used as the base for determining the capital allowance. Rates falling between 10% and 40% are normally applied. Pool 3 is a special pool attracting capital allowance at 80% of the cost base of assets added to the pool during the basis period, and 50% of the balance of the pool. This pool also qualifies for an investment allowance, calculated as 5% of the cost of assets added to the pool during the preceding basis period and added to the pool before the capital allowance is computed.

INTEREST: Interest expense is deductible if it is incurred wholly, exclusively and necessarily in the generation of income. Thin capitalisation restriction is described below; thin capitalisation does not apply to financial institutions.

START-UP COSTS: Expenses incurred by a company before commencement is generally not tax deductible. However, capital allowances are permitted for capital expenditure incurred before trade commences. They are deductible from the first day on which the asset is used in the business.

THIN CAPITALISATION: A foreign-controlled resident entity that is not a financial institution is defined as thinly capitalised when the ratio of foreign-controlled interest-bearing debt to foreign-controlled equity (share capital, relevant share of accumulated profits and any revaluation reserves) stands at less than 2:1. Interest and exchange losses are then restricted proportionately.

TAX TREATMENT OF LOSSES: Losses can be carried forward for five years following the year in which they were incurred. This applies to mining, farming, agro-processing, tourism, information and communications technology and manufacturing companies that manufacture mainly for export. Other businesses are not allowed to carry forward their losses.

TAXES & PENALTIES: Penalties, confiscations and stamp duty are generally not considered or allowed as deductible expenses.

TAXATION OF NON-RESIDENT ENTITIES: Permanent establishments belonging to non-resident persons in Ghana are taxable only on income accrued in or derived from Ghana. All profits from business or investment undertaken by a non-resident in Ghana will be considered as derived from Ghana and will, therefore, be subject to tax. Permanent establishments of non-resident companies are generally taxable at the same rates and in accordance with the same rules as resident companies.

CIT ASSESSMENTS & PAYMENTS: Within four months after the end of its financial year (basis), a company must submit its statement of income together with its tax return. Any balance of tax outstanding based on the taxpayer’s estimates made in the return is payable at that time.

Late filing penalties are defined in the act in terms of “penalty units”, which are currently set at GHS2 ($1.19), per tardy day. A late return attracts a one penalty unit fine per day.

Any late payments of taxes due are subject to a 10% penalty for the first three months and a 20% cumulative penalty thereafter. These rates are further increased by 10% in the case that the tax required to be paid is a withholding tax.

MINING BUSINESSES: Other significant amendments to the legal tax code include the Internal Revenue Amendment Act 2012, Act 839, which came into effect on March 5, 2012. This act in part affects mining businesses in Ghana and relates to areas of capital allowance rate and “ring fencing”.

Before the amendment, mining companies could deduct as tax allowable expenses incurred in one mining area from revenue derived from another mining area. The amendment has effectively abolished this practice. However, it is not clear from the amendment if such expenses could be capitalised for capital allowance or deferred as development cost for future capital allowance should there be a proven reserve. Mining companies’ income tax rate increased from 25% to 35% (see table on income tax rates).

Another amendment in 2012 related to mining businesses is in the area of capital allowance. Prior to the amendment, mining companies’ annual capital allowance was computed as follows: 80% of cost base of assets added to the pool during the basis period, and 50% of the balance of the pool, if any. An investment allowance was also added to the pool. This is 5% of the cost of assets acquired within the preceding year. Beginning on March 5, 2012 mining companies must depreciate the class 3 pool by 20% on cost. Definitions for Class 3 depreciable assets, however, remain unchanged.

TAX TREATMENT OF INDIVIDUALS: Resident individuals are generally taxable on his or her Ghanaian source income and income brought into or received in Ghana. Non-resident individuals are taxable only on income derived from or accrued in Ghana. If a nonresident individual carries on any trade, business, profession, or vocation partly in Ghana and partly elsewhere, then all such earnings will be deemed to have been derived from Ghana.

An individual will be classified as a resident if he or she spends at least 183 days in the country during any 12-month period. Tax residence begins with the expatriate’s initial arrival and ends with the day of final departure. A citizen of Ghana is always deemed a tax resident in Ghana, unless he or she has a permanent residence outside the country throughout the entire calendar year. A non-resident person is an individual, subject to the above, who is resident outside Ghana or who is in Ghana solely for a temporary purpose and does not have the intention of establishing a residence in Ghana.

TREATMENT OF FAMILIES: A husband and wife are treated as separate taxpayers in Ghana.

PERSONAL INCOME TAX RATE: Individuals are taxed at a progressive tax rate, as shown in the table below. These rates apply to residents. The rate of tax for non-resident individuals is 15% of the gross payment.

TAXABLE INCOME: An individual’s taxable income for the year of assessment is his or her gross personal income, less personal allowances and reliefs. Certain income is exempt, and this includes inheritances under a will, pensions, social security pay and interest earned from a bank.

EMPLOYMENT INCOME: Taxable employment income includes salaries and wages, bonuses, overtime and a range of various benefits and allowances. Remuneration earned by resident individuals for work undertaken abroad is normally taxable when brought into Ghana. Similarly, income that is attributable to employment in Ghana is taxable in the country, regardless of how and where paid.

DEDUCTIONS & RELIEFS: A resident may deduct various personal allowances and reliefs from gross income when calculating his or her annual chargeable income. The applicable reliefs include: interest on borrowing to construct or to buy a residential premises, set at GHS100 ($59.29) for a married taxpayer supporting a spouse, an unmarried taxpayer supporting at least two children, or an employed or self-employed taxpayer over the age of 60; a child’s education relief set at GHS100 ($59.29) for the education of a child (maximum three children); and an additional relief of GHS50 ($29.66) granted to taxpayers supporting an elderly relative (maximum of two such relatives). An individual undergoing training is granted relief of GHS200 ($118.58). Social security contributions and life insurance premiums are also deductible, but subject to limits.

PERSONAL INCOME ASSESSMENTS & PAYMENTS: undefined The tax year is the calendar year. For employment income, the employer is responsible for withholding the employee’s tax and paying it over to the tax authorities on or before 15th day of the following month. Individuals must file an annual tax return and pay the tax or balance of tax owed on other income.

The instalment system described above for corporate taxpayers also applies to unincorporated firms, including self-employed persons, traders and professionals in private practice. They are issued provisional assessments by the commissioner at the beginning of each tax year. Like companies, these individuals have the right to object to the assessments, but they must provide support for their objections. Advance tax payments are made quarterly.

Penalties apply as described above for corporate taxpayers, with the difference being a reduction in penalty for late filing fine by half a penalty unit. WITHHOLDING TAX RATES UNDER DOUBLE TAX TREATIES & GENERAL WITHHOLDING TAX: Ghana maintains operational tax treaties with the following countries: Belgium, France, Germany, Italy, the Netherlands, South Africa, the UK and Switzerland. These bilateral treaties may reduce the withholding tax rates applied to non-residents.

OTHER TAXES: There are a number of other taxes in Ghana, to which various businesses and individuals are accountable. These include: Capital Gains Tax: CGT is payable at 15% on the capital gains accruing to or derived by a taxpayer from the disposition of taxable assets. Both corporate entities and individuals are subject to the CGT, although certain exemptions exist for those gains that are transfers within families.

Taxable assets are defined as business assets (including goodwill), entire businesses, permanent and temporary buildings, land (except agricultural land), stock rights, share interests, and any other assets that are declared by law as taxable as capital gained.

CGT is computed by deducting from the amount realised the taxpayer’s cost in acquiring the asset and the various expenses, including the cost of improvements, cost incidental to the sale and depreciation. Gains are taxable even if the amount realised is paid in kind rather than in cash. However, gains of GHS50 ($29.66) or less are not taxable.

Capital gains on securities of companies listed on the GSE would still not to be considered as chargeable assets for CGT for the next five years. It effectively means that sale of listed securities, including government bonds on GSE, are not subject to CGT at the rate of 15%. Securities of companies listed on the GSE will become chargeable assets in year 2014.

Capital gains on mergers, amalgamation, reorganisations are exempt from CGT provided there is some (25%) continuity of underlying ownership. Transfer of chargeable assets between spouses as part of divorce settlement is exempt from CGT. Capital gains of venture capital finance companies are exempt for five years from the commencement date.

Under a rollover provision, a gain is not taxable if the proceeds of the disposal of the asset are used to acquire an asset of the same nature within one year following the date of disposal and provided that the new asset is not disposed of within the following five years. In certain cases, the one-year period may be extended at the commissioner’s discretion.

Within 30 days following the disposition of a chargeable asset, a taxpayer must provide the commissioner with a description of the asset, its location, its sale price, the full name and address of the new owner, the taxpayer’s original acquisition cost and any other relevant information. The commissioner will serve the taxpayer with a notice of assessment, which must be paid within 30 days. Gift Tax: Gift tax is levied on specified assets received as gifts. The tax is borne by the recipient. Assets subject to the tax include land, buildings, securities, cash and goods, and chattels. Exempt gifts include gifts not exceeding GHS50 ($29.66) in value, inheritances, gifts received by a person from his/her spouse, child, parent, aunt, nephew, or niece, gifts to religious bodies, and gifts for charitable or education purposes.

Gift tax is levied on the value of the gift. If the value is less than GHS50 ($29.66) tax is still payable if the aggregate value of gifts received by the recipient in one year of assessment exceeds GHS50 ($29.66). The rate of tax is 15%. Value-Added Tax & National Insurance Levy: Value-added tax (VAT) and the National Health Insurance Levy (NHIL) are imposed on the supplies of goods or services made in Ghana and on the importation of goods or services into Ghana. The tax base for local supplies is the invoice value, whereas the tax base for imports is the duty inclusive cost insurance and fright value. The standard VAT rate is 12.5% and the NHIL rate is 2.5%. Exports have a VAT/NHIL at 0%.

Persons whose business turnover is below GHS90,000 ($53,361) but over GHS10,000 ($5929) over a 12-month period or proportionate thereof are able to be registered as a tax person. Such a person is to charge VAT at 3% and will not qualify for input VAT. VAT-registered suppliers must submit returns and pay any tax due over to the tax authorities on or before the last working day of the following month.

Cash refunds are available for excess VAT paid. An application for refund by the taxpayer and field verification by GRA are essential in this.

Certain supplies, such as the export of taxable goods and services and locally produced agricultural machinery and implements, are zero-rated. Other supplies, including: insurance; banking; the transfer of a business as a going concern to another taxable person; agricultural inputs, livestock and products in a raw or preserved state; machinery for use in agriculture, fisheries, horticulture and animal care; oil and gas products; land and buildings; and many basic necessities, such as domestic water and electricity supply, salt and mosquito nets, essential drugs and medical services are exempt from VAT. Social Security Contributions: Employers contribute 13% of the worker’s basic salary to the social security and national insurance trust, whilst employees contribute 5.5% of the same basic value. Both levies are deductible expenses. Miscellaneous Taxes: Other taxes levied include: stamp duties (0.5% on the issue of shares; also chargeable on the transfer of land/real estate and other property and the registration of certain legal documents); registration fees; municipal rates on the occupation of real property; Customs and excise duties; airport departures; special taxes on beer and cigarettes; a tax on casino revenues; and various taxes on petroleum products. Mineral royalties are between 3% and 6% of the revenues earned. There is a 6% communication services tax on all communications related transactions. There is no wealth tax in Ghana.