Double taxation and Double taxation treaties

DOUBLE TAXATION AND DOUBLE TAXATION TREATIES (DTTs)

DOUBLE TAXATION
Double taxation is a tax principle referring to income taxes paid twice on the same
source of income. i.e., Taxing the same source of income once in the home country
of the taxpayer and again in the host country. It can occur when income is taxed at
both the corporate level and personal level, also it can occur in international and
domestic trade and investment. (Double taxation also refers to the same income
being taxed by two different countries).

FORMS OF DOUBLE TAXATION

 Economic double taxation.

 Juridical double taxation.

ECONOMIC DOUBLE TAXATION

It refers to the taxation of two different taxpayers with respect to the same income or
capital. For example, Income earned by a corporation and to its shareholders when
distributed as dividend.

JURIDICAL DOUBLE TAXATION

It refers to circumstance where a taxpayer is subjected to tax on the same income
or capital in more than one jurisdiction.

CAUSES OF JURIDICAL DOUBLE TAXATION

 Divergent tax laws
 Different resident's rules by countries
 Absence of tax treaties
 Cross-border transactions
 Transfer pricing disputes.

EFFECTS OF DOUBLE TAXATION

 It results in multiplicity of tax on a taxpayer.
 Increase tax burden on taxpayer.
 Decline foreign investment.
 It hampers free flow of capital.
 Increase tax evasion.

DOUBLE TAXATION RELIEF

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Double taxation and Double taxation treaties

This normally applied where the country of residences acts to prevent or reduce the
extent to which its residents are taxed more than once. There many different
systems in use for achieving this end. Mechanism for the relief for double taxation
are often set out in double tax treaties.

METHOD OF DOUBLE TAXATION RELIEF

There are three main methods by which countries may give relief for double
taxation.
 Deduction method
 Exemption method
 Credit method

1. DEDUCTION METHOD
Under the deduction method, foreign taxes are treated as an expense. The country
of residence taxes the foreign income but allows a deduction for any foreign tax
paid.

2. EXEMPTION METHOD
Under this method, the country of residence does not tax the foreign income of its
tax residents. It may be “full exemption” or “exemption with progression”. The
exemption may be conditional on the levy of tax by the source state under the
treaty.

ADVANTAGES OF THE EXEMPTION METHOD

 It is capital-import neural i.e., it treats all taxpayers in the source country on the
same tax basis.
 It recognizes fully the tax treaty benefits granted by the source country.
 It is the least complex administratively.
 It avoids dealing with two tax authorities.
 It eliminates actual and potential double taxation.

DISADVANTAGES OF THE EXEMPTION METHOD

 It reduces the tax revenues due to the state of residence.
 The source state may deny certain allowances or deduction.
 The loses of the permanent establishment may be disallowed by the resident
country.
 It requires detailed financial statements if exemption is given in progression.
 It encourages the use of low-tax countries or tax heaven as source or residence
state.

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Double taxation and Double taxation treaties

3. THE CREDIT METHOD

Under this method, the income earned from the overseas country is taxed in the
country of residence.
The foreign tax paid is then deducted from the tax on the income charged by the
country of residence. Thus, the country of residence gives credit for the foreign tax
suffered. The tax credits could be based on:
 Ordinary or partial credit (i.e., limited to the amount of tax due on equivalent
income, as income as computed under the domestic tax rules)
 ii. Indirect credit for the underlying tax levied in the source state on dividend
income.
 iii. Tax sparing or matching credit for the tax not levied (i.e. spared by the source
country) due to incentives or allowance. Tax sparing is a tax concession to
ensure that the foreign tax incentives granted to attract foreign investment
capital for particular activities are not recaptured by the residence state.

ADVANTANGES THE CREDIT METHOD

 Its capital-export neutral, i.e., it treats all taxpayers in the residence country on
the same tax basis.
 It allows the deduction of foreign losses of permanent establishment in the
home country.
 It discourages the transfer of assets or income to low-tax countries or tax
havens.
 It is easy to apply since the tax authority giving the tax credit computes the
amount under its own laws and does not have to consider the foreign tax
system.

DISADVANTANGES THE CREDIT METHOD

 The taxpayer always pays the greater of foreign and domestic taxes.
 It could lead to excess foreign tax credits that may not be useable.
 It eliminates the tax relief and incentives given in the source country unless the
resident country spares the tax.
 It makes the export of capital less attractive.
 It is complicated and can be time-consuming.

DOUBLE TAX TREATIES (DDTs) / DOUBLE TAX AGREEMENTS (DTAs)

Double tax treaty is an official agreement between two countries on the
administration of taxation when domestic legislation of the two countries apply
simultaneously to a particular issue or taxpayer.

PURPOSE OF DOUBLE TAX TREATIES

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Double taxation and Double taxation treaties

 Provide a means of settling, upon a uniform basis, the most common problem
which arise in the of international juridical taxation.
 Prevent evasion of tax, by making provision for exchange of information
between tax authorities and for assistance in collection of tax debts owed to the
treaty partner.
 Protect taxpayers against double taxation, direct or indirect, to a greater extent
than the protection offered under domestic law.
 Prevent tax from discouraging the free flow of international trade and
investment and the transfer of technology.
 Prevent discrimination between taxpayers.
 Provide a measure of fiscal and legal certainty in international operations. An
individual or enterprise considering investing in a foreign state can obtain an
indication of the way in which the investment, be it financial, manufacturing,
sales or otherwise, will be subject to that in that State.

DOUBLE TAX TREATIES (DTTs)

Ghana has DTTs with the following countries for the relief from double taxation on income
arising in Ghana:
Technical/
Country Dividend 1 Dividend 2 Interest Royalties Management
% % % % service fee %
Germany 5 15 10 8 8
Denmark 5 15 8 8 8
France 7.5 15 10 10 10
Belgium 5 15 10 10 10
Italy 5 15 10 10 10
Mauritius 7 7 7 8 10
Netherlands 5 10 8 8 8
Singapore 7 7 7 7 10
5 15 10 (5% for non-
South Africa resident bank) 10 10
United Kingdom 7.5 15 12.5 12.5 10
Switzerland 5 15 10 8 8
Czech Republic 6 6 10 8 8
Morocco 5 10 10 10 10
Norway 7 15 7 10 12
Ireland 7 7 7 8 10
Malta 6 6 7 8 12
Qatar 5 10 10 10 10

 Dividends 1, where the recipient holds at least 10% or 25% of shares.

 Dividends 2, in any other case.
 The Government of Ghana has signed DTTs with Qatar and the United Arab
Emirates (UAE) but not yet in force.

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Double taxation and Double taxation treaties

TREATY AND NON-TREATY WITHHOLDING TAX RATES

In the absence of any treaty with the Government of Ghana, the provisions of the
income tax law apply for the treatment of all tax matters. Thus, tax rates applicable
on various incomes apply. Where there is a treaty with the Government of Ghana,
the terms of the treaty prevail over all provisions of the 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 used.

Withholding tax under domestic tax laws

Income Rate
Resident person;
Interest (excluding individuals and resident financial institutions) 8
Interest to individuals (excluding interest paid by resident financial 1
institutions)
Dividend 8
Rent on residential properties 8
Rent on non-residential properties 15
Fees to resident individuals as invigilators, examiners and 10
part-time teachers or lecturers, and endorsement fees to individuals
Fees or allowances to directors, managers, board members and 20
trustees who are resident individuals
Commission to insurance, sales, canvassing and lotto agents who are 10
individuals
Supply of goods exceeding GH¢2,000 per annum 3
Supply of works exceeding GH¢2,000 per annum 5
Supply of services by an entity exceeding GH¢2,000 per annum 7.5
Supply of general services by an individual 7.5
Payments to petroleum subcontractors 7.5
Payments for unprocessed precious minerals 1.5
Royalty 15
Natural resource payments 15
Non-resident persons:
Dividends 8
Rent 15
Royalty 15
Natural resource payments 15
Management and technical service fees 20
Goods, works or services 20

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Double taxation and Double taxation treaties

Repatriated branch after tax profits 8

Interest income (excluding individuals) 8
General insurance premiums 5
Income from telecommunication and transportation business 15
Payments to petroleum subcontractors 15

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