An overview of tax treaties
Today's business environment is one characterised by globalisation, regional trade blocs, integration and trade liberalisation. It is now commonplace to find businesses and individuals operating across borders – for example:
A US registered business operating an assembly plant in China and running distribution outlets in Ghana;
A Cuban medical practitioner with a permanent home in Cuba but providing medical services in Liberia or elsewhere.
Truly, the world has become one large marketplace!
But what about taxes? Could cross-border trade lead to potential double taxation?
Double taxation occurs because every country has its own laws which determine the taxation of income, capital and consumption. Some countries tax on the basis of income sources, whilst others tax based on tax residency and in the case of the United States, citizenship. Very often, individuals and businesses undertaking cross-border trade end up paying taxes in both their home country and in the foreign country where they carry on trade or business. Given the differences in tax laws of these countries, it is worth noting that income earned in most foreign countries is taxed simply because the income is derived from that country. In the same vein, a home country will claim taxing rights over the same income because it was earned by a person resident in that country.
In a bid to minimise or eliminate double taxation, international organisations and governments have, over the years, adopted double tax treaties. Countries enter into double tax treaties principally to eliminate the impact of double taxation on income arising from international trade or cross-border transactions. Tax treaties eliminate double taxation by granting taxing rights to only one country or permitting the income recipient to offset foreign taxes paid against home country tax payable. Further, double tax treaties are used to foster bilateral trade and investment between two or more countries by either reducing the tax rates applicable to income earned by residents of the contracting parties, or granting taxing rights to the source country. Other tax objectives of double tax treaties include removal of barriers to cross-border trade and investments; prevention of tax evasion and/or illegal tax avoidance by way of taxpayer information exchange or tax collection enforcement actions; affording certainty in tax treatment of transactions; and a forum for resolution of disputes in tax related matters.
Tax treaties globally derive their legal status from Article 26 of the Vienna Convention on the Law of Treaties which provides that every treaty in force is binding upon the parties to it and must be performed by them in good faith.
Legal basis for tax treaties in Ghana
Section 75 of the 1992 Constitution of Ghana provides the legal basis for tax treaties in Ghana. The President of the Republic is responsible for the execution of treaties and conventions. The convention so executed is subject to ratification by the Parliament of Ghana by way of a resolution. Once ratified by Parliament, the Government of Ghana notifies the other Contracting State of the completion of the procedures required by the laws of Ghana for the entering into force of the treaty.
The other Contracting party is also required to notify Ghana, through her Diplomatic Mission post in that country, of the completion of procedures required for the coming into force of the treaty. Once these procedures are completed, the treaty would ordinarily come into force or become law on 1 January of the year following the year of ratification and notification.
All tax treaties signed by Ghana remain in force until terminated by either Contracting State. Each Contracting State desiring to terminate a tax treaty, shall communicate its intent to terminate to the other Contracting Party through the Diplomatic Mission by giving at least six months’ notice before the end of any calendar year. In practice, this is usually done after the treaty has been in force for at least five years. In the event that a treaty is terminated, the treaty ceases to have effect in the respective fiscal year immediately following the one in which the notice of termination was given and the relevant domestic laws of the countries becomes applicable again to taxation of income.
To date, Ghana has not terminated any of its tax treaties.
Current tax treaties in Ghana
The ratification of the Ghana-Denmark Treaty brings the total number of countries that Ghana has signed double tax treaties with to nine. The other treaty states are the United Kingdom, Belgium, Italy, South Africa, Switzerland, Netherlands, France and Germany.
Bilateral relationship between
Ghana and Denmark
The partnership between Ghana and Denmark dates back to independence. In 1961, the Danish Embassy was opened in Accra but was reportedly closed in 1983 due to unfavourable political developments in Ghana. In 1989, Ghana became a Danish Development Assistance (DANIDA) programme country and the Danish embassy was re-opened in Ghana in 1991.
Between 1990 and 2006, Danish support to Ghana totalled almost DKK 4 billion (approximately USD 750 million) and included 43 major projects, 6 sector programmes, 28 private sector projects, 18 large NGO projects, three framework NGO programmes, and technical assistance. In 2013, imports into Denmark and exports to Ghana totalled DKK 323.9 and DKK 193.5 million respectively. At present, while there is no significant foreign direct investment from Denmark, it is reported that trade between the two countries is fast growing. It therefore comes as no surprise that the Governments of both countries signed the double tax treaty to serve as a tool for promoting and deepening their bilateral relationship in the areas of institutional support, sustainable human development, sustainable economic growth and good governance. This cooperation will in no doubt further promote increases in trade and investment relations in the coming years.