Ghana tightens and broadens its tax laws
THE Ghanaian deputy minister of finance, Mona Quartey, last month launched a new Income Tax Act, 2015 (Act 896) which seeks to facilitate and encourage compliance by taxpayers. The new act, which repeals the Internal Revenue Act 2000 (Act 592), came into effect on January 1.
According to Ms Quartey, the 2000 act was complex and not user-friendly and needed to be replaced by a law based on international best practice.
George Blankson, the Ghana Revenue Authority commissionergeneral, says the purpose of the new act is to broaden the tax base by removing the narrow and distorted tax base of the 2000 act, rationalise, streamline and restrict tax concessions and address the erosion of the tax base.
This year’s budget affirms the government’s commitment to lower its fiscal deficit to 5.3% of gross domestic product (GDP) and indicates that Ghana will seek higher taxes through improvements to tax administration rather than increasing the tax burden. The new act is expected to boost revenues by 0.3% of GDP.
Since mid-2013 the government has been making incremental tax increases. In July 2013, the 5% fiscal stabilisation levy on companies’ profits was reintroduced for 18 months and has now been extended until next year. In December 2014, 5% value added tax (VAT) was imposed on the real estate sector.
A 17.5% tax on petroleum products and fee-based financial services in the banking sector was also introduced.
The new act introduces significant amendments, including the introduction of a worldwide basis of taxation for residents which replaces the source-based tax system in terms of which residents were only subject to tax on income accruing in, derived from, brought into or received in Ghana.
Gains realised on the disposal of assets or liabilities are to be included in business or investment income and taxed at the applicable income tax rate as capital gains tax is no longer a separate tax. Similarly, gift tax is no longer a separate tax and gifts received in respect of employment, business and investment are to be included in calculating taxable income.
Capital allowances are reduced from six to five asset classes with allowances for assets in classes 1, 2 or 3 to be computed based on the reducing balance method and for assets in classes 4 and 5 in accordance with the straight-line method. Capital allowances not utilised in the year they were granted are no longer allowed to be carried forward and are to be written off.
Under the 2000 act, only persons engaged in farming, manufacturing for export, mining, agro-processing, tourism and information and communication technology could carry forward tax losses for five years. In terms of the new act, taxpayers in specified priority sectors are allowed to carry forward losses for five years and taxpayers in all other sectors may carry forward losses for three years. Capital losses incurred due to the realisation of a capital asset or liability of a business are tax deductible, provided certain requirements are met.
For thin capitalisation purposes, the debt-to-equity ratio has been increased to 3:1 from 2:1 to facilitate debt financing of investments in the country.
The corporate income tax rate for persons in the hotel industry has been increased from 20% to 22% and businesses operating under tax concessions in Ghana will pay corporate tax at the minimal rate of 1%, rather than enjoying full tax holidays, as was the case under the 2000 act. These 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.
In terms of the 2000 act, interest paid to individuals by resident financial institutions was exempt income. The new act introduces a 1% withholding tax on interest paid to individuals and increases the withholding tax rate on payments for the supply of services to a resident from 5% to 15%, whereas the rate on payments for the supply of goods to a resident is reduced from 5% to 3%. The threshold for withholding tax on the supply of goods, works and services has been increased from 500 Ghanaian cedis to 2,000. Under the new act, lottery winnings are to attract a 5% withholding tax.
The ministry of finance issued a press release on January 7 indicating that it has taken note of the concerns of taxpayers and the general public regarding certain provisions of the act, especially those relating to withholding taxes.
In respect of the 15% withholding tax on services, the new act allows the commissioner-general to grant exemptions from withholding tax to compliant taxpayers and the finance minister has directed the Ghana Revenue Authority to implement these provisions. Proposals have also been submitted to Parliament to review the withholding tax rate on services (and potentially reduce it to 7.5%) and to reverse the introduction of the 1% withholding tax on interest paid to individuals.
The commissioner-general noted that sensitisation programmes would be embarked upon to ensure the public understood the new act.
Higher taxes sought through administration improvements rather than raising the tax burden
Celia Becker is an Africa regulatory and business intelligence executive at ENSafrica.