BEPS for Beginners-Part 1
Ever since the 1990’s, a large number of African countries have focused on attracting Foreign Direct Investment (FDI), as a means to drive the growth and development of their economies. In theory, FDI should lead to job creation, increased foreign exchange, and expansion of the economy with increased government revenue through the payment of taxes. Economic history has shown that this is not always the case or at least, results are not always in line expectations; however the pursuance of FDI remains important in the economic policies of most developing countries, Ghana included.
FDI goes hand in hand with international trade and today, cross- border transactions have become very common and are fuelled by the wealth of information available to people all over the world through the internet and social media. Unfortunately, this speedy growth in globalisation has not been matched by an equal evolution of tax rules to accommodate the changing economic landscape. This mismatch has resulted in weaknesses in various country tax systems often leading to double taxation or non-taxation of income.
Some Governments, international pressure groups and aid agencies, have raised concerns regarding what they consider to be “illicit financial flows” and “aggressive tax planning arrangements”, specifically in relation to multinational organisations. Estimates from these organisations, suggest that developing countries such as Ghana, are losing millions of US Dollars each year in tax revenues and effectively having their revenue base eroded.
The G20 in 2013, tasked the Organisation for Economic Cooperation and Development (OECD)-an organisation consisting of 34 developed countries, to address these weaknesses and gaps in the global tax system which were resulting in what they called “Base Erosion and Profit Shifting (BEPS)”. The term BEPS is used to describe strategies which take advantage of tax loopholes in order to have a zero taxable profit or to divert income to low tax jurisdictions.
The OECD is currently in the process of finalising a BEPS action plan centred on improving the interaction of taxes in different countries and ensuring that profits are aligned with economic activity and taxed appropriately. A key area of focus of the BEPS Project is the use of tax holding structures and payment for intangible assets. Effectively, the BEPS Project, if successfully implemented, will significantly change the world’s international tax arena and impact the way countries do business.
Although some of the BEPS action plan’s proposals are not currently legally binding, they can influence tax rules and actions of member and non-member states. For example, Ghana’s Transfer Pricing (TP) rules are largely based on the OECD’s principles. Also, Ghana’s Double Tax Treaties (currently nine in total) are based on the OECD’s model for double tax treaties.
Ghana has also signed on to the Multilateral Convention on Mutual Administrative Assistance (Convention), the second African country to do so after South Africa. This Convention was jointly developed by the Council of Europe and the OECD, the aim of which is to help governments fight cross-border tax evasion and ensure compliance with national tax laws. In signing this Convention, Seth Terkper (then the Deputy Minister of Finance), noted that “Ghana appreciates the present cordial relationship with the OECD and will adopt the exchange of information mechanism to reduce tax evasion and avoidance …raise more tax revenue to fund development projects.”
In May this year, Ghana signed on to the Multilateral Competent Authority Agreement (MCAA) with the OECD. Under the MCAA, Ghana has set out to implement an automatic exchange of financial account information in tax matters; beginning in September 2018.The automatic exchange of information is to take place on an annual basis.
As such, developments occurring in the OECD such as BEPS and the development of tax policy and practice in Ghana should not be looked at in isolation. Proposals and discussions occurring in the OECD do have the potential to affect taxpayers and tax administration in Ghana.
Ghana’s Internal Revenue Act, 2000 (Act 592) already contains provisions which will combat Base Erosion and Profit Shifting. These provisions include:
1. General Anti-Avoidance Provision. This empowers the Commissioner-General (C-G) to adjust income to prevent a reduction in tax payable as a result of splitting income. A person would be seen to have ‘’split-income’’ through transfer of income, property or money to an associate or related entity with the sole aim of lowering tax payable in Ghana.
2. Thin capitalisation provision; to limit the deduction of interest and foreign exchange on loans from shareholders and related entities. The thin capitalisation rule sets a debt to equity ratio of 2:1 and any interest payment or foreign exchange loss in excess of the 2:1 ratio will not be allowed as a tax deduction in Ghana.
3. Value Added Tax Act, 2013 (Act 870). Value of a supply between related persons provided at no consideration or at less than the open market value, will be valued at open market value for VAT purposes. Where the open market value cannot be determined, the C-G is empowered to determine the value considering all circumstances surrounding the transaction or the valuation of a similar supply.
4. Transfer Pricing- A general provision exists in Act 592. This empowers the C-G to distribute, apportion or allocate inclusions of income, deductions or credits in transactions between associated or related entities to reflect tax payable as if transaction has been conducted at arm’s length. A transaction is considered to be at arm’s length if the terms of the transactions do not differ from the terms of a comparable transaction between independent parties.
In the next edition, we will take a look at the impact of BEPS on the new Income Tax Act.