Ghana’s new Income Tax Act (No. 896 of 2015) will come into force on January 1, 2016. It is intended to improve tax compliance and administration and broaden the country’s income tax base by rationalizing tax breaks. A number of significant changes have been introduced under the Income Tax Act targeted at curbing tax base erosion and reviewing the country’s tax concession regime. These changes will impact a wide range of business sectors and will also affect individual taxpayers.
Rules are also established with regard to the calculation of income tax, such as the methods to be used for tax accounting. The Act also sets rules for the calculation of gains and losses and in relation to tax residence and permanent establishments. The Act includes a general anti-avoidance rule, rules on income splitting and transfer pricing rules.
Highlights of new law:
- Interest paid to individuals by resident financial institutions and on bonds issued by the government of Ghana, which were previously exempt from tax, will now attract tax, to be withheld at the source at a rate of 1%.
- Deductions for capital allowances granted for depreciable assets employed in business are restricted to the year to which they relate. An unutilized capital allowance in a particular year cannot therefore be deferred to subsequent operating periods for deduction.
- Extension of the loss or carry forward provisions now covers all business sectors. Businesses may deduct unrelieved operating losses from previous years for five years in the case of operators in “specified priority” sectors and for three years for all other sectors. The law has however not yet defined the “priority” sectors. Amendments or guidelines will be required to identify the companies that fall within this category.
- Thin capitalization restrictions have been amended. They now apply to restrict the tax deduction for interest where there is a 3:1 debt-to-equity ratio (previously a 2:1 ratio). This change is expected to provide more room for deduction of inter-company debt interest and foreign exchange losses.
- Clear ring-fencing rules will be provided for petroleum companies such that each separate petroleum operation shall be taxed as an independent business. Petroleum companies are therefore now required to maintain separate accounts and submit separate tax returns for each petroleum operation.
- Income attributable to a Ghanaian permanent establishment (PE) of a nonresident person, irrespective of the source of the income, is now required to be included in the assessable income of the PE in Ghana of the nonresident person.
- Businesses operating under tax concessions in Ghana will pay corporate tax at the minimal rate of 1% under the new law, rather than enjoying full tax holidays as was the case under the old law. The businesses include those engaged in agro-processing, cocoa by-product businesses, rural banks, waste processing businesses and providers of low-cost residential premises which will pay the tax during their concession periods.
- Gift tax and capital gains tax have been abolished. Gains derived from the realization of capital assets and liabilities of a business, as well as gifts received by a person in respect of the business are required to be included in business income. Gains derived from the realization of investment assets such as shares or securities in a company, an amount derived as consideration for accepting a restriction on the capacity to conduct the investment, winnings from the lottery and a gift received by a person in respect of an investment are to be included in investment income.
