Tax proposals reflect Ghana's changing economic conditions

Over the past year a major policy direction of the government has been enhancing domestic tax revenue mobilisation while promoting business growth. Accordingly, the 2018 budget statement and economic policy highlighted a number of tax policy proposals, which are focused mainly on promoting tax revenue generation and incentivising businesses in targeted sectors. The following are the key tax policy proposals expected to be implemented in the FY 2018 and beyond:

• Introduction of tax amnesty in 2018: The government intends to introduce a tax amnesty scheme for a limited period in 2018. The amnesty will allow defaulting taxpayers to regularise their tax status without paying penalties and interest for late payment or non-submission of returns.

• Introduction of tax holiday for young Ghanaian entrepreneurs: The government intends to support young Ghanaian business owners who are aged 35 and below by granting a tax holiday for their businesses in the early years of operation.

• Introduction of corporate tax relief for private universities: Privately owned universities are to be given relief from corporate income tax if they direct profits towards reinvestment in their facilities. The government aims to contribute to the long-term development of tertiary education in Ghana and ultimately the country’s human capital base.

• Extension of the National Fiscal Stabilisation Levy (NFSL) and the Special Import Levy (SIL) to FY 2019: The imposition of the NFSL and SIL will be extended to the end of 2019. The NFSL is a 5% levy on profit before tax on specific businesses, such as financial institutions and telecommunications companies, while the SIL is a 2% import levy on most imports into the country. These levies were planned to expire at the end of 2017 but will be extended for two more years.

• Introduction of a 7% withholding value-added tax (VAT) on taxable supplies: The government has proposed a 7% withholding VAT on payments by designated entities and government agencies for taxable supplies. The aim is to improve compliance in the VAT accounting and collection processes.

• Revision of personal income tax bands: Personal income tax bands will be reviewed to peg the tax-free income threshold to the minimum wage. The current tax-free income threshold is GHS2592 ($621) per annum or GHS216 ($52) per month. This is expected to be increased to approximately GHS3136 ($751) per annum or GHS261 ($62) per month using the agreed 2018 daily minimum wage of GHS9.68 ($2.32). The review will lead to an increase in the personal income tax bands across the graduated income tax schedule and thereby marginally increase the net income in the hands of individuals.

• Deployment of fiscal electronic devices: The Ghana Revenue Authority (GRA) is expected to deploy the use of fiscal electronic devices (FEDs) for VAT validation purposes in 2018. FEDs will be required to be used by all VAT-registered businesses, including service providers, to enable the GRA to monitor VAT declarations in real time.

• Review of investment legislation: The government has also hinted at plans to undertake a comprehensive review of the investment environment and legislation in 2018, and in particular, a comprehensive review of the Ghana Investment Promotion Centre Act. Ghana’s transfer pricing regulations, which regulate pricing of transactions among related parties, are also expected to be updated to reflect current international best practices during 2018.

Note

The above are policy proposals the government is expected to implement in FY 2018 and beyond. Most of the proposals would require amendments to existing laws and/or introduction of new laws before they become fully operational.

Legal Framework For Taxation

Tax administration in Ghana is unitary and administered by the 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 provisions on tax collection, filing requirements and penalties or interest.

The primary legislation for income tax in Ghana is the Income Tax Act, 2015 (Act 896). The act regulates taxation of operations in all industries, including petroleum, minerals and mining, and financial services, among others.

The VAT Act, 2013 (Act 870) also provides for the imposition of VAT on all taxable supply of goods and services within Ghana or imported into the country. Other tax-related legislations include the following:

• Transfer Pricing Regulation, 2012 (LI 2188);

• The Free Zone Act, 1995 (Act 504);

• Customs Act, 2015 (Act 891);

• Excise Duty Act, 2014 (Act 878);

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

• SIL Act, 2013 (Act 861);

• NFSL Act, 2013 (Act 862); and

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

Currency & Exchange Controls

There are generally 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 their net earnings through any approved commercial bank.

The Bank of Ghana (BoG) also 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 therefore 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).

Taxation Of Corporate Bodies

A company is 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 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. However, mining and petroleum exploration companies are subject to a tax rate of 35%, and hotels are subject to tax at 22%.

Various tax and non-tax incentives are offered to investors in accordance with the industry in which they operate 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 include:

• 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, 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 minimum of 10% to a maximum of 40% depending on the class of assets. The capital allowance granted for a year should be fully deducted in that year and cannot be deferred for deduction to subsequent periods.

Returns & Payment Of Taxes

Company returns, together with audited financial statements, are to be submitted to the GRA within four months after the end of the company’s financial year.

Companies are also required to make a quarterly tax payment based on an estimate of the current year’s income, or on a provisional assessment made by the GRA. Late return filing incurs a penalty of GHS500 ($119.70), as well as an additional GHS10 ($2.39) for each day the return remains outstanding. Late payment of taxes due attracts interest at a rate of 125% of the BoG’s rediscount rate, compounded monthly.

Carry Forward Of Losses

Companies are able to carry forward operating tax losses for deduction in subsequent years. The deduction is allowed for unutilised tax losses from previous financial years for a period of five years in the case of companies in priority sectors, and for three years for all other sectors in the order in which they accrue (i.e., on a first-in, first-out basis). Companies that fall under the priority sectors are those operating in mineral and mining operations, petroleum operations, energy or power generation, farming, agro-processing, tourism and ICT businesses.

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.

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.

Treatment Of Individuals

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

A non-resident is an individual, subject to the above, who is ordinarily a 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 ($51.71) of monthly income (see table). The tax rate for non-resident individuals is set at a flat 20% on gross income.

An individual’s taxable income for a year of assessment is their gross income, less reliefs. Certain categories of income are exempt, including compensation for personal injury, redundancy pay, pensions and social security contributions subject to certain conditions.

Personal Reliefs

Reliefs may be granted to resident individuals on their gross income. The following reliefs are available:

• GHS200 ($47.88) for a married taxpayer who is supporting a spouse, or for an unmarried taxpayer supporting at least two children;

• GHS200 ($47.88) on income from employment or business to individuals older than 60 years;

• GHS200 ($47.88) for child education per child (up to a maximum of three children);

• GHS100 ($23.94) in additional relief for taxpayers supporting an elderly relative (up to a maximum of two relatives); and

• GHS400 ($95.76) 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. Social security contributions and mortgage interest on residential premises are also tax deductible.

Personal Income Tax 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 within four months of the year’s 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.

These individuals have the right to object to the assessments, but they must offer evidence. Advance tax payments are made quarterly.

Withholding Tax Payments

Resident entities are required to withhold tax at various rates when making payments to resident and non-resident persons. For a detailed summary of withholding tax rates, see the table on the following page.

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 tax 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.

In March 2017 Ghana signed a double taxation treaty with Mauritius. This treaty is currently awaiting parliamentary ratification before it will become effective.

Capital Gains

Under the new income tax law, gains made by a company from the realisation of capital or investment assets are 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 either their marginal tax rate or a flat 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.

Businesses making a turnover in excess of GHS200,000 ($47,900) either 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.

The standard VAT rate is 15%, and the NHIL rate is 2.5%, applicable to VAT-registered suppliers who are not covered under the VAT Flat Rate Scheme (VFRS).

VFRS: Effective July 1, 2017, the VAT Act was amended to introduce VFRS as an alternate means for VAT collection. Under VFRS, wholesalers and retailers of goods, including sellers of imported goods, are required to charge VAT at a flat rate of 3% instead of the standard rate of 17.5%. Suppliers under the flat rate scheme do not qualify for input tax deduction; hence, they are required to pay the full amount of VAT collected to the GRA.

Deductible Input Vat & Refunds

Taxable persons (other than those under VFRS) 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, excess amounts 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;

• Medical supplies and medical services;

• Immovable property;

• Domestic transportation including air transport; and

• Financial services.

Miscellaneous Taxes

Taxes are also levied for the following: the issue of new shares (0.5%); transfer of land, real estate and other property; the occupation of real property; the registration of certain legal documents at varying rates; 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 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 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 the debt of a foreign parent (and related party) 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.