TAXATION AND FISCAL POLICY

BACT 403
First Semester
2022/2023 Academic year
Presented By
Baba Seidu Rester Togormey
Timothy Azaa Ayamga
 LECTURE THREE

TAX PLANNING
 Outline
o Learning Objectives
o Introduction
o Tax Evasion
o Modes of tax evasion
o Promoting tax compliance (Discouraging tax evasion)
o Tax avoidance
o Tax planning
o Maxims or variables of tax planning
o Constraints or limitations of tax planning
o Anti-avoidance rules
o Transfer Pricing ( Arm’s length transaction )
 Learning Objectives
By the end of this lesson, students should be able to:
differentiate between tax evasion and tax avoidance
understand the concept of tax planning
explain the variables/maxims of tax planning
discuss the constraints and limitations of tax
planning.
discuss transfer pricing and its effect on the economy.
 Introduction

Resistance to tax is of two (2) main forms:

Tax • Illegal
Evasion

Tax • Legal
Avoidance (Limitations)
 Tax Evasion
• Plato alluded, “Where there is an income tax, the just man
will pay more and the unjust less on the same amount of
income”.

• Tax evasion is a deliberate act of concealing a person’s

economic activities or income, wholly or partly from
competent authorities ( Revenue Agencies).

• Therefore, the failure to pay legally due and payable taxes.

• It is an illegal act of failing to pay taxes which are owed to the

state. This is a crime punishable under the laws of Ghana.
 Modes of Tax Evasion
• Non-filling or submission of returns.
• Manipulation, falsification or modification of accounting records or
document.
• Providing false information to tax authorities.
• Claiming domestic expenses as business expenses
• Keeping two (2) or more sets of accounting records.
• Under reporting or omitting income.
• Misapplication of accounting principles or policies.
• Claiming false or overstated deductions ( expenses )
• Understating estimating taxes payable
• Misappropriation of assets.
• Recording fictitious transaction without economic substance
 Promoting Tax Compliance
(Discouraging tax evasion)
• Tax evasion can be curbed or minimized through the following
:
• Concise and clear tax legislations.
• Convenient procedures for filling and payment of taxes.
• Equity of the tax system ( fair assessment ).
• Granting of tax amnesty
• Granting of tax incentives, exemptions, rebates, concessions and holidays.
• Effective tax education and consciousness.
• Excellent customer service.
• Judicious and efficient use of tax revenue.
• Regular tax audit
• Implementation of harsh penalties for persons found culpable.
 Tax Avoidance
• Tax avoidance is the arrangement of a person’s affair in such a
manner to take advantage of provisions in the tax laws to
reduce the tax liability.

• Therefore, tax avoidance is legitimate and legal, provided

it does not breach any anti-avoidance provision.

• Act 896 defines tax avoidance to include “an arrangement,

the main purposes of which is to avoid or reduce tax
liability”.
 Tax Planning
• Tax planning is the process of achieving tax
avoidance.
• Therefore, tax planning is the process of arranging a
person’s affair in such a manner to take advantage of
provisions in the tax laws to reduce the tax liability.
• It involves forecasting and projecting into the future
based on current conditions coupled with tax
incentives, concessions, exemptions, rebates, reliefs
etc.
• Tax planning must be given a holistic approach.
 Maxims or Variables of Tax Planning
• The four variables underpinning tax planning
are represented below:

Activity

Entity Variables Location

Time
Location or Jurisdiction variable: mostly, there are corporate
tax differentials depending on location of companies. In Ghana,
tax rates differ in certain industries depending on the location.
In accordance with Act 896,companies located within the free
zone enclave are taxed differently and the chargeable income of
a company from a manufacturing business is taxed based on
location as in indicated below:
Manufacturing bus.
located in the regional • 75% of the rate of
capitals of the income tax applicable
country.
Manufacturing bus. • 50% of the rate of
located elsewhere in
the country income tax applicable
Activity or Character variable: the activity or operation of an entity
determines the applicable tax rates.

• In Ghana, the general tax rate is 25% but a company principally

engaged in hotel industry is taxed at 22% and the chargeable
income of a company from the export of a non-traditional goods
is taxed at 8%.

• The chargeable income derived by financial institution from loan

granted to farming enterprise or leasing company is taxed at 20%.

• Petroleum and mining business are taxed at 35%.

• There are different tax concessions or holidays for the various

industries.
Time variable: time value of money is the principle
underpinning this variable. The variable suggest that
payment of tax in the future is more cost effective and
prudent, because a cedi today is worth more than a cedi
tomorrow.

This can be achieved through acceleration of deductions

or deferral of income earning transactions.
Entity variable: the type of registration of a person’s activity
informs the appropriate tax rate because individuals and
companies are taxed at different rates and different tax
incentives are applicable.

• In Ghana, the chargeable income of individuals are taxed

using the graduated rate but companies are generally
taxed at 25%

• Individuals are entitled to reliefs but companies are not.

• Therefore, whether to register as a company or a self-

employed is very cardinal in tax planning.
Constraints or Limitations of Tax Planning

Uncertainty

Judicial

Legislative
 Uncertainty Constraint
• The projection and forecast of future cash
inflow and out flow may fail.
 Judicial Constraint
Over the years, the courts have utterly disregarded certain tax
avoidance schemes.

The courts are not confine to literal interpretation. There may,

indeed should be, considered the context and the scheme of the
relevant Act as a whole, and its purpose may indeed should be,
regarded.

- W.T. Ramsey v IRC

- Greenberg v IRC
- Johnson v Jewith
Legislative Constraint
Limitations imposed by the Tax Act-
Act 896 ( Anti-Avoidance Rule )

General Anti- Specific Anti –

Avoidance Rule Avoidance Rule
 General Anti- Avoidance Rule
For the purpose of determining liability to tax under
the Act, 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,
• Which is fictitious or does not have a substantial
economic effect, or
• The form of which does not reflect its substance
Specific Anti-Avoidance Rule
Change in
accounting
Date

Change in Taxation of
ownership shareholders

Arm’s length
transaction
( Transfer
Pricing)

Income Thin
Splitting Capitalization

Temporary
Concession
 Change in Accounting Date
.
A company or trust can not change its accounting date
without an approval by the Commissioner-General.
 Change in Ownership
. • Where the underlying ownership of an entity
changes by more that 50% at any time within a
period of three (3) years, the assets and liabilities
of that entity immediately before the change is
deemed to be realized.

• The entity shall not:

• Deduct finance cost carried forward
• Carried over losses
• Bad debt
 Taxation of Shareholders
. ( Undistributed Profit )
A company controlled by five (5) or less persons and
their associates that does not distribute to its
shareholders as dividends a reasonable part of its
income from all sources for a basis period within a
reasonable time after the end of the basis period, could
have the Commissioner-General treating part of their
income as dividends paid.
 Temporary Concession
• An unexpired concession granted under the
concession shall be treated as having been
transferred to a new owner of the business in
case of transfer of ownership of the business
and that concession shall not commence with
the new ownership.
 Income splitting
• where a person attempts to split income with
another person, the Commissioner-General has
discretion to adjust the chargeable income of both
persons to prevent a reduction in their tax position
as a result of splitting their income. A person is
treated as having attempted to split an income if:
• he transfers income, directly or indirectly, to an associate, or
• Transfers property, including money, directly or indirectly, to
an associate with the result that the associate receives or
enjoys the income from that property.
 Thin Capitalization
• Investments are normally financed through the capital assets of a company (equity) or
through borrowing (debt). In most cases investments are financed through a mix of
both debt and equity.

• The quantum of debt to equity ratio in investments have a number of implications for
tax purposes.

• In normal corporate transactions interest is paid on any debt incurred while a dividend
is a return paid to equity shareholders.

• In Ghana as in most other jurisdictions interest paid on a debt incurred for producing
an income is an allowable deduction, while dividend paid to a shareholder is a taxable
income.

• In addition, the company pays a corporate tax just as its individual shareholders pay
tax on their earnings as dividends.
• Therefore when you finance an investment
through equity you are exposed to many more
levels of taxes than if the investment were
financed through debt (such as a loan).
• In the latter case you are entitled to a deduction
of the interest paid from your income on the
loan.
• The major reason being that interest is an
allowable deduction, whereas dividends are not
deductible.
• Therefore most companies, to avoid tax, prefer
a higher debt to equity arrangement in business
financing. Several countries including Ghana
have developed thin capitalization rules as a
response to the bias in favour of debt compared
with equity. Under these rules, the deduction
for interest paid by a resident company is
denied to the extent that the company is
financed excessively by debt.
• In accordance with the Act, an Exempt-
Controlled Resident Entity (which is not a
financial institution), which has an Exempt debt-
to-exempt equity ratio in excess of 3:1, will not
be allowed a deduction for any interest paid or
any foreign exchange loss incurred by that
entity on the part of the debt or loss otherwise
deductible.
• An Exempt-Controlled Resident Entity is defined by the
Act to mean a Resident Entity in which an Exempt person
holds 50% or more of underlying ownership or control.
The Act further defines an exempt person to include:
• Non-Resident, and
• Resident person for whom interest paid to that exempt
person by an Exempt-Controlled Resident Entity (ECRE)
or for whom any foreign exchange gain realized with
respect to debt claim against a ECRE:
• is exempt income or
• Not included in ascertaining the exempt persons Annual
Income.
 Arm’s Length (Transfer Pricing )
• Arm’s length or transfer price is normally contrasted
with a market price, which is the price set in the
market place for transfer of goods and services
between unrelated persons.

• The price set by a taxpayer when selling to, or buying

from, or sharing resources with a related person (for
the purpose of Ghana tax law an associate).
Factors of Transfer Price Manipulation
• Tax rate differentials
• High custom duties
• Restriction or taxation of repatriated profit.
 Effects of Transfer Pricing Manipulation

• Lost of revenue to the state

• Distortion of GDP
• Distortion of balance of payment between the
countries.
 Methods of Transfer Pricing
Comparable Uncontrolled Price Method: used to determine the arm’s
length range by comparing the price charged for property or services
transferred in a controlled transaction to the price charged for property
or services transferred in a comparable uncontrolled transaction
Cost Plus Method: used to determine the arm’s length range by
comparing the mark up on those costs directly and indirectly incurred in
the supply of property or services in a controlled transaction with the
mark up of those costs directly and indirectly incurred in the supply of
property or services in a comparable uncontrolled transaction.
Resale Price Method: used to determine the arm’s length range by
comparing the resale margin that a purchaser of property in a
controlled transaction earns from the reselling that property in an
uncontrolled transaction with the resale margin that is earned in a
comparable uncontrolled purchase and resale transactions.
 Methods of Transfer Pricing
• Transactional Profit Split Method
• Transactional Net Margin Method
 Elements of Comparability Analysis

• Product characteristics
• Raw material used
• Functions performed
• Managerial Competence
• Risk Assumed
 Interpretation of Tax Statute
The approaches represent judicial attitudes towards tax
avoidance over the years:
• Traditional Approach- Literal/ strict interpretation
– Rusell v Scott, pattington v A/G, Cape Brandy Syndicate v
IRC,Ayshire Pullman v IRC , IRC V Duke of Westminster

• Modern Approach-Purposive interpretation

– W.T Ramsey v CIR
• Doctrine of form and substance
 Investment Incentives
There various incentives provided for in the tax laws
to attract investors to certain sectors of the
economy. This are in the form of tax holidays,
temporary concessions, location incentives etc.
 TEMPORARY CONCESSIONS
1. Farming
i) Tree Crop - 10 years from first harvest
ii) Cattle -10 years from commencement
iii) Livestock, fish and Cash Crop - 5 years
2. Agro-Processing Business -5 years
3. Companies producing cocoa by-products from cocoa
waste – 5 years
4. Waste processing companies - 7 years
5. Rural Banks -10 years
 TEMPORARY CONCESSIONS
6. Real Estates -5 years (Should be done in collaboration
with Ministry of Works and Housing to provide affordable
housing.
7. Gains from the realisation of securities traded on the
Ghana Stock Exchange up to December 31st, 2021.”
Free Zones - 10 years
9. Approved Unit Trust Scheme and Mutual Fund-10 years
10. Venture Capital Financing Companies-10 years
11. The income from cocoa of a cocoa farmer- Indefinite
 TAX RATES
General Corporate Tax Rate 25%
Hotel Industry 22%
Income from non-traditional Export 8%
Financial Institutions
- Income derived from Loans granted to a farming enterprise 20%
- Income derived from Loans granted to a leasing company 20%
• Manufacturing Companies
Located in Other Regional Capitals of Ghana 18.75%
Located elsewhere in Ghana 12.5%
• Free Zone Enterprise/Developers (after 10 years tax holiday) 15%
• Petroleum Income Tax 35%
• Mineral Income Tax 35%
• Agro Processing Companies /Farming/ Cocoa by products
- Accra and Tema (after 5 years) 20%
- Other Regional Capitals outside the Northern Savannah Ecological Zone 15%
• Outside Other Regional Capitals of Ghana 10%
• The Northern Savannah Ecological Zone 5%
 CARRY FORWARD OF LOSSES-PRIORITY SECTORS

For the purposes of ascertaining the income of a person for a

basis period from the following businesses.
(a) Minerals and mining operations;
(b) Petroleum operations;
(c) Energy and power business;
(d) Manufacturing business;
(e) Farming business;
(f) Agro processing business;
(g) Tourism business; and
(h) Information and communication technology business.
 Employment of Graduates

In calculating a company's income from

conducting a business for a year of
assessment, the company is entitled to an
additional deduction as provided in
subparagraph (2) for salary and wages
paid during the year to fresh graduates
from a recognised Ghanaian tertiary
institution.
Employment of Graduates
 Young entrepreneur
(1) The income of a young entrepreneur from the business of
manufacturing, information and communications technology,
agro-processing, energy production, waste processing, tourism
and creative arts, horticulture and medicinal plants shall be
exempt from tax for a period of five years.
(2) The tax rate applicable for the five-year period after the
initial concession period shall be as shown in the next slide:
(3) The person may carry forward an unrelieved loss for a
period of five basis periods.
(4) For the purpose of this paragraph, “young entrepreneur”
means an entrepreneur who is not more than thirty-five years
old.”
Tax Rates for Young Entrepreneur