TAX PLANNING

“YOU MUST PAY TAXES. BUT THERE’S NO LAW THAT SAYS YOU GOTTA LEAVE A TIP” – Morgan Stanley

Tipping on a service may be good but, definitely not in the case of paying taxes hence the need for tax planning. To appreciate tax planning, one must understand the impact of tax on their profits.

Impact of Tax on Profits

Government is essentially a de facto shareholder in your business and shares in your profits through taxes. Unlike the actual shareholders, whether or not a company distributes dividends, as long as there is profit, Government will take its share of it. Profit in this case does not refer to profit from financial accounting but rather, tax accounting. Therefore, while you may be making losses according to financial accounting, you may be making profits in tax accounting and guess what, government will get its share of that.

The portion of your profit that goes to the Government will depend on how well you manage your business affairs, including how well you comply with the tax laws. For example, without proper compliance not only is the GRA taking 25% (effective tax rate could be more) of your profit there is the additional interests and penalties for failure to comply with the tax law. A business or transaction which is not properly structured could also lead to paying more taxes which could raise your effective tax rate to about 40% or more depending on the circumstances of each case. (Effective Tax Rate is the percentage of your income you pay in taxes.)

This is even in the case of only corporate income tax. You can imagine how much of your income goes to Government if you consider the buffet of direct and indirect taxes which may hit your income, sometimes depending on the industry you find yourself or the nature of your business. To list a few, Communication Service Tax, National Fiscal Stabilization Levy, Financial Sector Recovery Levy, Special Import Levy, Special Petroleum Tax, Stamp Duty, Excise Duty, Energy Sector Levies, Branch Profit Tax, Value Added Tax, National Health Insurance Levy, Covid-19 Health Recovery Levy, Ghana Education Trust Fund Levy, etc.

Tax Planning

Tax planning does not only save you from unwillingly leaving a tip on your tax, it helps you arrange your affairs in such a way that you pay as little tax as possible and directly or indirectly improves your business operation. This is achieved by

i. taking advantage of the loopholes in the law i.e. tax saving opportunities not directly provided by the law; and

ii. taking advantage of opportunities provided by the law.

Taking Advantage of Loopholes

This option of tax planning entails creating one’s own tax advantages through loopholes in the tax laws to realize tax efficiency. It may vary from business restructuring either locally or internationally to transactional restructuring for a more beneficial tax impact on business transactions. You may seek advice from your lawyers and consultants for tax planning measures in this regard.

It is worth stating that the tax community led by the OECD and the UN is constantly making efforts to prevent profit shifting and base erosion. The result of this is general and specific anti-avoidance rules in domestic legislations and international treaties.

Some specific anti-avoidance rules are provided in Act 896 under section 31 on the Arm’s Length Standard, section 32 on Income Splitting, and section 33 on Thin Capitalisation. A general anti-avoidance rule is provided in section 34 of Act 896 as follows:

“For purposes of determining a tax liability, the Commissioner-General may re-characterise or disregard an arrangement that is entered into or carried out as part of a tax avoidance scheme

(a) which is fictitious or does not have a substantial economic effect; or

(b) whose form does not reflect its substance.”

“Tax Avoidance” is defined to include an arrangement, the main purpose of which is to avoid or reduce tax liability.

In view of the above, one must be cautious in creating their own tax planning measures which are outside the confines of the law by ensuring that the arrangement has substantial economic effect and the transaction is actually what it is in substance and not just in form.

Opportunities provided by the law

A few examples of tax planning opportunities provided by the law are stated below.

Tax Concessions: Tax concessions are provided under the Sixth Schedule to the Income Tax Act, 2015 (Act 896). Knowledge of your eligibility for tax concessions would be useful in preventing overpayment of tax. An example is a young entrepreneur in manufacturing who unknowingly pays tax at 25% during the concession period when he should pay tax at 1%. Taking advantage of tax concessions would help reduce your taxes.

Different tax rates: While the general corporate tax rate is 25%, Act 896 provides reduced tax rates for some incomes. For example, the chargeable income of a financial institution from loans granted to a farming enterprise for use by that enterprise in the production of income is taxed at 20%. The chargeable income of a financial institution from a loan granted to a leasing company for the use by that company for the funding or acquisition of assets for lease is also taxed at 20%. This would require segregating income related to such loans from income of other loans to benefit from the reduced rate and consequently reduce your effective tax rate. Knowing the nature of your business or the character of your income within the provisions of the law would enable you take advantage of reduced tax rates.

Location Incentives: Similar to the above, Act 896 provides tax rebates for manufacturing business which are located in places other than Accra or Tema. Manufacturing businesses located in regional capitals of the country pay tax of 18.75% while those located elsewhere in the country pay tax of 12.5%.

Deductible Expenses: This entails knowing expenses which are deductible under the tax law (including any limitations thereon) and arranging transactions in a way that expenses qualify to be deducted. An example is taking advantage of capital allowance deductions. Another example which is usually overlooked is ensuring that donations or corporate social responsibility activities meet the requirements of deductible donations under section 100 of Act 896.

Tax Reliefs: Deduction of expenses is not available to income from employment but fortunately section 51 of Act 896 allows resident individuals to deduct some personal reliefs provided under the Fifth Schedule to Act 896. Among the reliefs provided under the Fifth Schedule to the Act is the mortgage relief which allows individuals to deduct mortgage interest from their income.

Tax Refunds: Tax refund under section 66 of the Revenue Administration Act, 2016 (Act 915) provides the opportunity to apply for a refund of any taxes paid in excess of a person’s tax liability. For industries where there is usually huge excess payment of tax, it would be useful to apply for tax refunds to improve liquidity.

Withholding Tax Exemption: The law provides an opportunity to apply for exemption from withholding tax under section 116(5)(c) of Act 896. Applying to be exempt from withholding tax, where one meets the requirements, could save your business some liquidity challenges.

Other Tax Exemptions: For VAT purposes knowing your business is exempt so that you do not have to charge the tax would positively impact the pricing of your goods or service and also reduce your compliance responsibility.

NB: Notwithstanding the definition of a tax avoidance arrangement under section 34 of Act 896 as provided above, section 99(5) of Act 915 states that an arrangement is a tax avoidance arrangement only if it involves a misuse or abuse of a tax law provision having regard to the purpose of the provision and the wider purposes of the law in which the provision is situated.

Accordingly, one must be careful in how the opportunities provided by the law are used because an abuse or misuse of same could be deemed a tax avoidance arrangement. A typical example of abuse or misuse would be liquidating a company after enjoying a concessionary period and starting another company of the same character just to repeatedly benefit from the concessionary period.

Either option of tax planning you choose, it is important to emphasize that the first step to tax planning is tax compliance. Effectively complying with the tax laws would save you from unnecessary tax liabilities in the form of penalties for failure to comply with some provisions of the law such as, maintaining records, filing of returns, paying tax on the due date, among others.

Tax evasion is definitely not an option. Apart from being a criminal offence, tax evasion defeats the goal of tax planning because the consequence of tax evasion, upon being caught, is paying way more than merely leaving a tip on your tax.

Contact: ismail@al-ibrah.com