Ghana tax legislation updated to reflect new realities

New income tax legislation known as the Income Tax Act, 2015 (Act 896) went into effect on January 1, 2016. The tax law covers operations in all industries, including petroleum, minerals and mining, and financial services, among others. The new income tax law also seeks to widen the country’s tax base and consolidate the various income tax laws to facilitate the application and use of this legislation. A number of significant changes have been introduced under Act 896 which are targeted at curbing tax base erosion and reviewing the country’s tax concession regime. These changes will impact a wide range of business sectors, as well as affect individual taxpayers.

Letter Of The Law

Some of the key introductions to the new income tax legislation include capital allowance deductions and tax concessions, among other things. They are listed below:

• Deductions for capital allowances granted for depreciable assets employed by a business, which are restricted to the year to which they relate, and any unutilised capital allowances in a particular year cannot be deferred to subsequent operating periods for deduction;

• Extension of any losses carry forward provisions to cover all business sectors, and businesses in priority sectors may deduct unrelieved operating losses from previous years for up to five years, while all other business sectors may carry forward unrelieved operating losses for up to three years. Priority sector businesses include companies in agriculture, mining, petroleum, energy and power, manufacturing (for export), agro-processing, tourism and ICT;

• Thin capitalisation restrictions have been increased from a debt-to-equity ratio of 2:1 to 3:1, with this increase expected to provide more room for deduction of inter-company debt interest and any losses due to foreign exchange;

• Clear ring-fencing rules that provide for petroleum companies have been introduced and stipulate that each separate petroleum operation shall be taxed as an independent business, and petroleum firms are now required to maintain separate accounts and submit separate tax returns for each petroleum operation; and

• Businesses operating under tax concessions in Ghana will pay corporate tax at the minimum rate of 1% under Act 896, rather than enjoying the full tax holiday, as was the case under the old law, and this includes businesses engaged in agro-processing, cocoa by-product manufacturers, rural banks, waste-processing businesses and providers of low-cost residential premises, all of which will be required to pay the tax during their concession periods.

Legal Framework For Taxation

The tax administration in Ghana is unitary and administered by the Ghana Revenue Authority (GRA) through its domestic tax revenue and Customs divisions. The Revenue Administration Act (Act 915) was passed and took effect on January 1, 2017. The act consolidates and regulates all tax administration provisions, including tax collection, filing requirements and penalties.

The Value-Added Tax (VAT) Act of 2013 (Act 870) provides for the imposition of VAT on all taxable supply of goods and services within Ghana or imported into the country. Other recent tax-related legislation includes the following:

• Transfer Pricing Regulation, 2012 (LI 2188);

• The Free Zone Act, 1995 (Act 504);

• Customs Act, 2015 (Act 891);

• Communications Service Tax Act, 2008 (Act 754); and

• National Health Insurance Act, 2003 (Act 650).

Currency & Exchange Controls

The monetary unit in Ghana is the cedi. There are no restrictions on the repatriation of profits, dividends, interest, management and technical service fees, royalties and capital through authorised banks, provided that such transfers are supported with the required documentation and that there is evidence that the appropriate taxes have been paid in the full amount. Foreign employees may repatriate part of their net earnings through any approved commercial bank.

The Bank of Ghana (BoG) allows up to $50,000 to be transferred abroad without initial documentation. Foreign currency earnings may be retained in bank accounts in Ghana and foreign currency can be sold to authorised dealers. The domestic tax revenue division of the GRA and the Registrar of Companies both accept financial statements in the major currencies with prior approval.

Classes Of Taxpayers

Taxpayers are classified as companies, individuals, partnerships and trusts. Companies are taxed separately from their shareholders. Ghana does not have group tax provisions. Each enterprise in a group is treated as a separate entity for tax purposes. Groups of firms are not allowed to file consolidated tax returns. The tax year in Ghana runs from January to December. Individuals and partnerships are assessed for tax with reference to the calendar year, while companies are allowed to choose their accounting year as their tax year (tax basis period) in cases where the years are different.

Taxation Of Corporate Bodies

A company is a tax resident in Ghana if it is incorporated under the laws of Ghana or has its management and the control of its business exercised within Ghana at any given time during the year. Resident companies are effectively liable for corporate income tax on their worldwide profits.

Non-resident companies, on the other hand, are only taxed on income sourced in Ghana, unless the company has a permanent establishment in Ghana, in which case the worldwide income of the permanent establishment is taxable.

Tax Rate & Incentives

The standard corporate tax rate is 25% on profits. Mining and petroleum exploration companies are subject to a tax rate of 35% and hotels 22%. Various tax and non-tax incentives are offered to investors in accordance with the industry they are in and the location of their business. The incentives are mainly in the form of reduced corporate tax rates on certain types of income. Companies operating in sectors such as agro-processing, rural banking and waste processing are subject to a reduced corporate income tax rate of 1% during the period of their temporary concession.

Chargeable Income

Ordinarily, an enterprise’s chargeable income is based on the operating net profits reported in its annual financial statements, as adjusted by any differences between accounting requirements and tax laws. Such adjustments include the following:

• Non-deductible or disallowable expenses;

• Capital allowances; and

• Exempt income.

Deductions Allowed

All expenses wholly, exclusively and necessary to the production of business income are tax deductible, except where specifically disallowed. Deductible expenses are:

• Repair and maintenance expenses;

• Any costs incurred for employees and staff;

• Interest;

• Royalties;

• Rent; and

• All other costs incurred for the purposes of producing the income of the entity. Deductions for repairs and improvement expenses in respect to a particular business asset are restricted to 5% of the tax written-down value of the asset pool at the end of the year. Any additional repairs and improvements that cannot be deducted are capitalised and can be deducted through the capital allowance provision.

Capital Allowance

Capital allowances are granted, in lieu of depreciation, for each year of assessment in respect to depreciable assets owned by a company and used in carrying on business. A depreciable asset is an asset used in operating a business, provided that the asset is likely to lose value because of wear and tear, obsolescence or the passing of time; however, this does not include goodwill, and any interest in land or entity or trading stock. Depreciable assets are placed in classes and depreciated as follows:

• Class 1, 2 and 3 assets are placed into separate pools for each class of asset, and capital allowance is granted for each pool via the reducing balance method; and

• Class 4 and 5 assets are granted capital allowance and depreciated on a straight-line basis. The rate of capital allowance ranges from a maximum of 40% on reducing balance and on a straight-line basis, depending upon the class of assets. The capital allowance granted for a year should be deducted in that year and cannot be deferred for deduction to subsequent periods.

Returns & Payment Of Taxes

Company returns, together with financial statements, are to be submitted to the GRA within four months after the end of the company’s financial year. Any balance of tax outstanding, based on the estimates made in the taxpayer’s return, is payable at that time.

Companies are also required to make a quarterly tax payment based on their estimated chargeable income. Late filing incurs a penalty of GHS500 ($126), as well as an additional GHS10 ($2.58) for each day the return remains outstanding. Based on the Revenue Administration Act, 2016 (Act 915), this is effective from January 1, 2017. Late payment of taxes due is subject to an interest, which is calculated as 125% of the BoG’s rediscount rate compounded monthly.

Non-Resident Entities

Permanent establishments of non-resident persons in Ghana are taxable in the same manner as resident companies. The worldwide profits from business or investments that are attributable to the permanent establishment are subject to tax in Ghana.

Treatment Of Individuals

Resident individuals are taxable on their worldwide sourced income. Non-resident individuals are taxable only on income derived from or accrued in Ghana. An individual will be classified as a resident for tax purposes if he or she spends a period of at least 183 days in any 12-month period in Ghana. Tax residence only begins on the date of an expatriate’s initial arrival and ends on the date of his or her final departure. A citizen of Ghana is always deemed to be a tax resident in Ghana, unless they have a permanent home outside the country throughout the calendar year.

A non-resident is an individual, subject to the above, who is ordinarily resident outside of Ghana or who is in Ghana for a temporary purpose only and does not have the intention of establishing a permanent residence in the country.

Personal Income

Taxable income from employment includes: salaries and wages, bonuses, overtime and any kind of benefits. For the purpose of personal income tax, individuals are subject to a progressive rate in the range of 5-25% after the first GHS216 ($55.73) of monthly income (see table). The tax rate for non-resident individuals is set at a flat 20% rate on gross income.

An individual’s taxable income for a year of assessment is his or her gross income, less reliefs. Certain categories of income are exempt, including inheritances under a will, pensions and any social security contributions.

Personal Reliefs

Reliefs may be granted to resident individuals on their gross income, and options for relief include:

• GHS200 ($51.60) for a married taxpayer who is supporting a spouse, or for an unmarried taxpayer supporting at least two children;

• GHS200 ($51.60) on income from employment or business to individuals older than 60 years;

• GHS200 ($51.60) for child education per child (up to a maximum of three children);

• GHS100 ($25.80) in additional relief for taxpayers supporting an elderly relative (up to a maximum of two relatives); and

• GHS400 ($103) for an individual who is undergoing training. Furthermore, in the case of a disabled individual, a further relief is granted on 25% of that individual’s assessable income from any business or employment. This is subject to limits, and social security contributions and mortgage interest on residential premises are also tax deductible.

Personal Payments

An employer is responsible for withholding employee income tax at the time of payment of salary or other emoluments. The tax withheld is payable to the tax authorities on or before the 15th day of the following month. The employer is also required to submit an employer’s annual tax deduction schedule of tax withheld from each employee to the GRA within four months after the end of the year. Individuals must also file an annual tax return and pay the tax or balance of tax owed on any other income by the end of four months after the year end.

The instalment system applied to corporate taxpayers also applies to unincorporated businesses, including self-employed persons, traders and professionals in private practice. These groups are issued provisional assessments by the commissioner at the beginning of each tax year. Similar to companies, these individuals have the right to object to the assessments, but they must offer evidence. Advance tax payments are made quarterly. Resident entities are required to withhold tax at various rates when making payments to resident and non-resident persons. Included below is a detailed summary of withholding tax rates.

Branch Profit Tax

The repatriated profits of a non-resident’s permanent establishment are treated the same as a dividend payment and are subject to an 8% withholding tax. A person who has earned repatriated profits must pay the tax on the gross amount of the earned repatriated profit to the GRA within 30 days after the year ends.

Double Taxation Treaties

Ghana currently has operational double taxation treaties with Belgium, France, Germany, Italy, the Netherlands, South Africa, the UK, Switzerland and Denmark. These treaties may reduce the withholding tax rates on payments to non-residents (see table). The terms of a double taxation treaty will prevail over all provisions of the local income tax law. However, where the rates of taxes set out in the relevant treaty are higher than those of the laws of Ghana, the lower rates are to be used.

Capital Gains

Under the new income tax law, gains made by a company from the realisation of capital or investment assets are to be included in the business or investment income of the company, and are subject to tax at the applicable corporate income tax rate. Individuals may elect to be taxed on gains from the realisation of an investment asset at the rate of 15%.

VAT & NHIL

VAT and the National Health Insurance Levy (NHIL) are imposed on the supply of goods and services made in Ghana and on the import of goods and 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 freight value.

The standard VAT rate is 15% and the NHIL rate is 2.5%. Businesses making a turnover in excess of GHS200,000 ($51,600) over a 12-month period or proportionately are required to register for VAT. VAT-registered suppliers must submit returns and pay any tax due to the tax authorities on or before the last working day of the subsequent month.

Vat On Real Estate

Effective as of April 15, 2015, the VAT Act of 2013 has been amended in order to introduce a VAT flat mechanism for estate developers. The taxable supply of an immovable property by an estate developer is now subject to VAT at a flat rate of 5% on the total value of the supply. Under the flat rate scheme real estate developers do not qualify to recover the input tax from the sale of an immovable property.

Deductible Input Vat & Refunds

A taxable person may deduct the following from the output tax due for the period: tax on goods and services purchased in Ghana, or goods imported by the taxable person and used wholly, exclusively and necessarily in the making of taxable supplies and the taxable person is in possession of a VAT invoice or relevant Customs entries indicating that VAT has been paid. Where the deductible input tax exceeds the output tax due in respect of the accounting period, the excess amount can be credited to the taxable person. Businesses that export more than 25% of their total supplies may apply for a refund of excess input tax credit attributable to the exports that remain outstanding for a continuous period of three months or more.

Exempted Goods & Services

Export of goods and services are zero-rated VAT supplies. The following supplies are exempt from VAT:

• Agricultural inputs, livestock and agricultural products in a raw or preserved state;

• Machinery for use in agriculture, fisheries, horticulture and animal care;

• Oil and gas products;

• Many basic necessities, such as domestic electricity and water supply, salt and mosquito nets;

• Education services; and

• Medical supplies and medical services.

Miscellaneous Taxes

Taxes are also levied for the following: the issue of new shares (0.5%); transfer of land or real estate and other property and the registration of certain legal documents at varying rates; registration; the occupation of real property; Customs and excise duties; airport departures; beer and cigarettes; casino revenues; and various petroleum products. Mining companies pay mineral royalties at a flat rate of 5% of total revenue from the minerals obtained. There is also a 6% communication services tax on all communications-related transactions.

Income Splitting

Where a person attempts to split income with another person, the commissioner of the GRA may adjust the chargeable income of both persons or re-characterise the source and type of any income, loss, amount or payment to prevent a reduction in tax payable as a result of the splitting of income.

A person is treated as having attempted to split income where that person transfers an asset, directly or indirectly, to an associate, and where the transferor retains the legal or implicit right to benefits from the asset and one of the reasons for the transfer is to lower the level of tax payable by the transferor or an associated person.

Transfer Pricing

Ghana also has transfer pricing regulations legislation that provides guidance on the determination of an arm’s length price and setting out transfer pricing documentation requirements. The regulations require taxpayers to demonstrate that all related-party transactions are carried out at arm’s length. Thus, transactions among related parties are required to be consistent with those that would have been entered by independent or unrelated entities under similar circumstances. Taxpayers are also required to submit annual transfer pricing returns, together with the tax returns for their company.

Thin Capitalisation

There are also thin capitalisation provisions that impose restrictions on the tax deductibility of interest and foreign exchange losses arising from related-party loans. The rules restrict the deductibility of interest and forex losses on a foreign parent’s (and related party’s) debt to a debt-to-equity ratio of 3:1.

General Anti-Avoidance Rule

For the purposes of determining the tax liability of a person under Act 896, the tax commissioner may re-characterise or disregard an arrangement or part of an arrangement that is entered into or carried out as part of a tax avoidance scheme. Tax avoidance schemes are defined as any arrangements which are fictitious, do not have any substantial economic effect or have a form which does not reflect the nature of its actual or intended substance.