A new look at income taxation in Ghana

Ghana’s parliament has enacted new income tax legislation with an effective date of September 1, 2015. The new legislation, the Income Tax Act, 2015 (Act 896), replaces the Internal Revenue Act, 2000 (Act 592) as the primary legislation on income tax in Ghana. The act also covers taxation of operations in industries such as petroleum, minerals and mining, and financial services.

The new income tax law seeks to widen the tax base and consolidate the various income tax laws to facilitate the application and use of these laws. A number of significant changes have been introduced under the new income tax act targeted at curbing tax base erosion and reviewing the country’s tax concession regime. These changes will impact a wide range of business sectors and will also affect individual taxpayers.

Some of the key introductions to the new income tax act are highlighted as follows:

•  Interest paid to individuals by resident financial institutions and on bonds issued by the government of Ghana, which were previously exempt from tax, will now attract tax, to be withheld at the source, and taxed at a rate of 1%.
•  Deductions for capital allowances granted for depreciable assets employed in business are restricted to the year to which they relate. An unutilised capital allowance in a particular year cannot therefore be deferred to subsequent operating periods for deduction.
•  Extension of the loss or carry forward provisions now cover all business sectors. Businesses may deduct unrelieved operating losses from previous years for five years in the case of operators in “specified priority” sectors and for three years for all other sectors. The law has however not yet defined the “priority” sectors. Amendments or guidelines will be required to identify the companies that fall within this category.
•  Thin capitalisation restrictions have been increased from a 2:1 to 3:1 debt-to-equity ratio. This increase is expected to provide more room for deduction of inter-company debt interest and foreign exchange losses.
•  Clear ring-fencing rules provided for petroleum companies will be introduced such that each separate petroleum operation shall be taxed as an independent business. Petroleum companies are therefore now required to maintain separate accounts and submit separate tax returns for each petroleum operation.
•  Businesses operating under tax concessions in Ghana will pay corporate tax at the minimal rate of 1% under the new law, rather than enjoying full tax holidays as was the case under the old law. The businesses include those engaged in agro-processing, cocoa by-product businesses, rural banks, waste processing businesses and providers of low-cost residential premises which will pay the tax during their concession periods.

Legal Framework For Taxation

Tax administration in Ghana is unitary and administered by the Ghana Revenue Authority (GRA) through its domestic tax revenue and Customs divisions. Ghana’s parliament is currently considering a Revenue Administration Bill that seeks to pool all the common administrative provisions in the tax laws.

The Value-Added Tax Act of 2013 (Act 870) provides for the imposition of value-added tax (VAT) on all of the taxable supply of goods and services made in Ghana or imported into the country. Other enactments include:

• Transfer Pricing Regulation, 2012 (LI 2188);
• The Free Zone Act, 1995 (Act 504);
• Customs Act, 2015 (Act 896);
• Communications Service Tax Act 2008 (Act 754), as amended; and
• National Health Insurance Act, 2003 (Act 650).

Currency & Exchange Controls

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

The Bank of Ghana 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 company in a group is treated as a separate entity for tax purposes. Groups of companies 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 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 profit. Mining and petroleum exploration companies pay tax at 35% and hotels at 22%. Various tax and non-tax incentives are offered to investors according to the industry and/or the location of the 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 pay reduced corporate income tax at 1% during the period of their temporary concession.

Chargeable Income

Ordinarily, a company’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 non-deductible or disallowable expenses, capital allowances and exempt income.

Deductions Allowed

All expenses wholly, exclusively and necessarily in the production of business income are tax deductible except where specifically disallowed. Deductible expenses include interest, royalties, rent, repair and maintenance expenses, employee and staff costs and all other costs incurred for the purposes of producing the income of the entity. Deductions for repairs and improvement expenses in respect of a particular business asset is restricted to 5% of the tax written down value of the asset pool at the end of the year. Any excess repair and improvement not allowed to be deducted is capitalised and deducted through the capital allowance.

Capital Allowance

Capital allowances are granted, in lieu of depreciation, for each year of assessment in respect of 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, but does not include goodwill, any interest in land or entity or trading stock.

Depreciable assets are placed in classes and depreciated as follows – assets under classes 1, 2 and 3 are placed into separate pools for each class of asset, and capital allowance is granted for each pool on a reducing balance method. Capital allowance is granted for each class 4 and 5 asset and is 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.

Filing Of Returns And Payments Of Taxes

undefined 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 the current year’s income based on a provisional assessment made by the GRA or by the company itself, in any cases where the commissioner general of the GRA has granted that company permission.

Late filing incurs a penalty of GHS4 ($1.11) for each day the return remains outstanding.

Late payment of taxes due is subject to a 10% penalty for the first three months of non-payment, and a 20% cumulative penalty thereafter. These rates are increased by an additional 10% when the tax due is tax withheld from another taxpayer.

Taxation Of 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.

Tax 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 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 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.

Employment Income

Taxable income from employment includes salaries and wages, bonuses, overtime and any kind of benefits.

Personal Income Tax Rates

Individuals are taxed at progressive tax rate ranging from 5% to 25% after the first GHS1 ($0.28) of income (see table). The rate of tax for non-resident individuals is set at a flat rate of 20% of gross income.

Taxable 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 social security contributions. PERSONAL RELIEFS TO RESIDENT INDIVIDUALS: Reliefs are granted to resident individuals on their gross income in determining their annual chargeable income. The reliefs include: GHS200 ($55.50) for a married taxpayer supporting a spouse or an unmarried taxpayer supporting at least two children; GHS200 ($55.50) on income from employment or business to an aged (at least 60 years) individual; child education relief of GHS200 ($55.50) per child (up to a maximum of three children); and an additional relief of GHS100 ($27.75) for taxpayers supporting an elderly relative (up to a maximum of two such relatives).

An individual undergoing training is granted relief of GHS400 ($111.00), and 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. Subject to reasonable limits, social security contributions and mortgage interest on residential premises are also deductible from taxable income.

Personal Assessments & Payments

An employer is responsible for withholding employee income tax at the time of payment of a salary or other emoluments. The tax withheld is payable to the tax authorities on or before the 15th day of the following month. Individuals must file an annual tax return and pay the tax or balance of tax owed on any other income.

The installment 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. Like companies, these individuals have the right to object to the assessments, but they must offer evidence. Advance tax payments are made quarterly.

Withholding Taxes

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 applicable withholding tax rates.

Branch Profit Tax

The repatriated profits of a permanent establishment of a non-resident is treated in the same way as a dividend payment and is subject to an 8% withholding tax. A person who has earned repatriated profits shall pay the tax on the gross amount of the earned repatriated profit to the GRA within 30 days after the basis period of that person.

Double Taxation Treaties

Ghana currently has operational double taxation treaties with Belgium, France, Germany, Italy, the Netherlands, the Republic of South Africa, the UK and Switzerland. These treaties may reduce the withholding tax rates on payments to non-residents (see table).

The terms of a double tax treaty will prevail over all provisions of the local income tax law. However, where the rates of taxes set out in a 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 to the business or investment income of the company and 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 importation 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 GHS120, 000 ($33,300) 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 on April 15, 2015, the VAT Act 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. Estate developers under the flat rate scheme 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 the VAT 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; and many basic necessities, such as domestic electricity and water supply, salt and mosquito nets, education services, medical supplies and medical services.

Miscellaneous Taxes

Other taxes levied include: stamp duties (0.5%) on the issue of new shares; also chargeable on the transfer of land or real estate and other property and the registration of certain legal documents at varying rates; registration fees; municipal rates on the occupation of real property; Customs and excise duties; tax on airport departures; special taxes on beer and cigarettes; tax on casino revenues; and various taxes on petroleum products.

Taxes on mineral royalties are between 3% and 6% of revenues earned.

There is 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 has a transfer pricing regulations act 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.

Thin Capitalisation

There are 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 foreign exchange losses on a foreign parent (and related party) 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 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 arrangements which are fictitious or do not have any substantial economic effect, or have a form which does not reflect the nature of its actual or intended substance.