BEPS for beginners -Part 2
As discussed in the previous edition, due to the current worldwide developments including the OECD’s move to curb tax base erosion and profit shifting (BEPS), tax policy is changing significantly. In Ghana for example, a Transfer Pricing legislation was passed in 2012 which aimed to ensure that the tax base of income generated in Ghana is ‘’protected’’ from ‘’erosion or profit shifting’’ and subjected to tax in Ghana as appropriate.
What other changes should multinational taxpayers expect from these global changes?
The OECD are concerned by competition between countries to attract FDI’s based on low tax rates and tax incentives. These tax incentives are viewed as eroding the tax base of countries and their ability to develop from internally generated funds. The OECD through proposals from the BEPS project is looking to limit these tax incentives. Already, countries like Ghana have taken action. The 2015 Budget Statement contains proposals to streamline these tax incentives and change the way they are granted. Granting of withholding tax exemptions has also been temporarily suspended which although did not necessarily eliminate the payment of tax, did provide some cash flow benefits to taxpayers.
Transactions taking place over the internet both locally and cross border are becoming a target for tax authorities globally. This is due to the exponential growth in these types of transactions and also to the fact that some of these online businesses are not registered for and do not pay taxes. In Ghana the new VAT Law, Act 870 has provisions to address this challenge and subject online cross-border transactions to VAT in Ghana. Under the current VAT legislation, an unregistered non-Ghana resident may be required to register and charge VAT on their services used in Ghana, if their supplies exceed the VAT threshold and they provide services other than through a VAT registered person. Services here include website supply, web-hosting, distance teaching, music and games and the making available of databases.
What is not clear is how this provision will be practically enforced whether it applies to businesses, individuals or both.
Treaty Abuse Objective
Other actions taken by the GRA which conform to the BEPS action plan is the signing of a Memorandum of Understanding (MOU) between Ghana and The Netherlands (an OECD member) in March 2015. This MOU was signed to help carry out the provisions contained in the Convention signed between Ghana and the OECD. Additionally both Ghana and The Netherlands are reviewing their Double Tax Agreement “to include anti-abuse clauses to make it difficult for multinationals to avoid taxes.’’
It also remains to be seen whether existing DTT’s and those under discussion will be amended. Time will tell, however in the meantime, taxpayers especially those engaged in cross border transaction, should take note and prepare accordingly.
Transparency and disclosure
Country-by-country (CbC) reporting is also a key BEPS proposal. This is expected to increase compliance costs for multinationals as they will be required to report on revenues, earnings before income tax, and income taxes paid per each country they operate in. This means that investments will have to be made in systems and resources in order to compile accurate data from all jurisdictions of operations. CbC reporting is a proposal which is coming directly from OECD and will affect multinationals based in OECD countries with operations in Ghana. CbC also comes with an automatic exchange of information requirement and this is intended to assist local tax authorities with tax audits of multinationals. On the other hand, CbC should help multinational taxpayers demonstrate what taxes they pay worldwide to various tax jurisdictions where they have operations.
Income Tax Bill, 2015
The memorandum to the soon to be passed Income Tax Bill (replacing Income Tax Act, Act 592), states “….As globalisation makes it increasingly difficult to tax mobile factors, the very subjects of tax base erosion are those that will increasingly be relied upon to increase tax revenue”. As such the proposed Tax Bill intends to reduce or remove the tax exemptions and incentives which are contained in the current tax law. Whereas the current tax law exempts from tax or provides a tax holiday for example:
1. Dividends of a venture capital financing company, or interest paid to a person who has invested in a venture capital financing company, and
2. Interest, dividend or other income of an approved unit trust or mutual fund.
3. Income for some industries such as farming business, agro-processing, waste processing and rural banking.
The proposals in the new Tax Bill excludes the above-mentioned exemptions or tax holidays.
Measures in the Tax Bill to limit the tax base from “erosion” include:
Limitation on tax deductible financial costs (aside interest);
Increase in continuity of underlying ownership percentage from twenty-five percent to fifty percent; being the capital gains tax emption threshold for a merger or amalgamation.
Taxation (albeit at a nominal rate) for farming business, agro-processing, business of cocoa farming, waste processing and rural banking which in the current tax law are tax exempt for a number of years.
While the impact of some of the BEPS project may not be immediate, some developments as can be seen from above (OECD Agreements and new proposals in Ghana’s tax law) are already impacting taxpayers in Ghana. Other areas which are expected to see changes are the double tax treaties (for amending existing treaties and yet to be signed tax treaties). Taxpayers also have to include reputational risk in their total risk assessments, as CbC reporting could mean that their revenues and operations can now be matched to the level of tax payment on a global basis.