Richmond Ofori-Boafo’s thoughts … COVID-19 and Beyond: an analysis of tax planning strategies and reliefs for businesses

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In my previous article, I sought to educate and draw the attention of resident individuals in Ghana to the various already existing personal reliefs that are enshrined in the Income Tax Act (2015) Act 896 (as amended), which since 01 January 2020 have significantly increased the amount of reliefs that eligible resident individuals in Ghana can take advantage of and claim from the Ghana Revenue Authority (GRA) following laid down procedures, so as to improve the personal finances of such individuals – especially in view of the COVID-19 pandemic.

As impacts of the pandemic linger on and continue to affect the revenues of government, amidst the various social interventions which have been announced by government, businesses may not in the short-term see a reduction in tax rates or have a freeze on the taxes payable to the GRA.

Objectives

I have followed various discussions in the media recently, in which most private businessmen and women requested the Bank of Ghana (BOG) to reduce the policy rate for lending in Ghana. However, during its 94th Monetary Policy Committee meeting, the policy rate was maintained at 14.5% as current economic indicators and conditions did not support a reduction.

In its quest to support these businesses financially during these unusual times in Ghana and the world at large, the government of Ghana on May 19th 2020 launched a GH¢1b stimulus package to support Micro, Small and Medium Enterprises (MSMEs) which have been negatively affected by the COVID-19 pandemic.

In addition to the above measures being put in place by government to sustain these businesses, this article seeks to draw the attention of and educate existing and potential businesses on already existing reliefs, concessions and provisions in the Income Tax Act 2015 (Act 896) (as amended), which are intended to reduce the chargeable or taxable incomes and hence tax payable by resident businesses in Ghana – so as to improve the cash flows of these businesses before, during and after the COVID-19 pandemic.

Businesses must be able to legally restructure or arrange their affairs so that the tax attached to their incomes under the Income Tax Act of Ghana is less than it could be, so as to increase their tax savings and cash flows significantly.

This article should also be able to serve as a guide to prospective investors and businessmen who intend to take future decisions on doing business in Ghana.

Analysis of relevant provisions in The Income Tax Act 2015 (Act 896) (as amended)

According to Section 2(1) of The Income Tax Act 2015 (Act 896) of Ghana, a business’s Chargeable or Taxable Income for a year is the total Assessable income of that business less the total amounts of allowable deductions under the Act.

From the above provision, it is clear that before taxes are applied on a business’s income, some deductions that the law allows the business may be set off against the business’s income; and thereafter, if a portion of the Income remains, then taxes are levied on that portion; otherwise, no taxes are payable.

Also, even when taxes are due and payable, various tax rates (between 0-35%) are applicable to businesses due to their nature, activity, location and the time period.

Allowable Deductions or expenses

For existing businesses, Part IV of the Income Tax Act 2015 (Act 896) allows certain approved deductions to be made out of the income of that business before taxes are levied on the residual income (if any). As per the Act, for a business expense to be allowed as a deduction from the income of that business, it must satisfy the following conditions:

(1) It must be wholly, exclusively and necessarily incurred in the generation of the Business’s Income.

    • An expense is wholly incurred for business if the full amount of the expense is incurred purposely for business. If the expense is for both private and business purposes, the private portion of the expense shall be disallowed.
    • An expense is exclusively incurred for business if it is incurred directly and in furtherance of the object of the business.
    • An expense is necessarily incurred if it can be proven that the expense was crucial, critical, inevitable and needed to be made in order to generate the business’s income.

(2) It must be revenue in nature and should not be a capital expenditure. An expense is revenue in nature if the benefit to be derived therefrom by the business will not exceed 12 months.

The following business expenses are specifically allowed by the Act to be deducted from business Income before taxes are applied:

  • Interest expense incurred by non-financial institutions (only up to 3:1 of debt to equity ratio) (S10,33)
  • Repair and Improvement (up to 5% of the written-down value of the asset pool at the end of the year) (S12)
  • Research & Development expenses, whether capital in nature or not (S13)
  • Financial cost subject to certain limitations (S16)
  • Donation toward a worthwhile cause (including: Sports development or promotion, rural or urban development; a scholarship scheme for an academic, technical, professional or any other course of study; a charitable organisation) (S100)
  • COVID-19 related donations and contributions aimed at fighting the pandemic
  • Any other business expense that meets the two conditions above (for example Wages & Salaries of staff, marketing & publicity, stationery, security, T&T, staff training etc.)

Recommendation

Businesses must be circumspect in incurring expenses which will qualify to be deducted from business Income so as to reduce the chargeable or taxable income upon which taxes will be computed.

Capital Allowance (S14)

Capital Allowance is an additional allowable deduction that the Act grants to businesses upon the satisfaction of certain conditions. Businesses can claim Capital Allowance as an allowable business deduction in place of accounting depreciation (which is a disallowable business expense) to further reduce the chargeable or taxable business income before taxes are applied. Capital Allowance is granted primarily for the acquisition and use of business assets.

The following conditions must be satisfied for a claim of Capital Allowance to be made;

  • It is granted in respect of depreciable assets owned and used by a business during a year of assessment in the production of the income of that business
  • A qualifying capital expenditure must be incurred in acquisition of the asset
  • A claim should be made for the allowance
  • The allowance is claimed per asset according to the number of days the business has been in existence in a year.
  • Capital Allowance granted in a particular year of assessment shall be utilised in that year and shall not be carried forward.

Capital Allowance shall be calculated in accordance with provisions specified in the Third Schedule of the Income Tax Act 2015 (Act 896). Depreciable assets are grouped into classes, and an applicable rate is to be applied on their values to determine the allowance to be granted.

Below are the classes of assets and respective capital allowance rates applicable:

Class Depreciable Assets Rate
1 Computers and data-handling equipment together with peripheral devices 40% on reducing balance basis
2 Automobiles, buses, minibuses, goods vehicles, construction and earth-moving equipment, heavy general purpose or specialised trucks, trailers and trailer-mounted containers, plant and machinery used in manufacturing. 30% on reducing balance basis
3 Railroad cars, locomotives, aircraft, water transportation equipment, equipment and machinery, office furniture, fixtures and equipment, any other depreciable asset not included in any class 20% on reducing balance basis
4 Buildings, structures and similar works of permanent nature 10% on straight line basis
5 Intangible assets e.g. Copyright, patent etc. 1% divided by the useful life of the asset in the pool

For the purpose of the above schedule, the cost of a road vehicle other than a commercial vehicle is limited to GH¢75,000. A ‘commercial vehicle’ means a road vehicle designed to carry a load of more than half a tonne or more than 13 passengers; or a vehicle used in transportation or a vehicle rental business.

Recommendation:

Businesses that employ any of the above-listed depreciable assets should calculate and claim the allowance (granted that applicable conditions are met) to reduce the business’s taxable income, which will tend to reduce the taxes payable by the business.

Carry-over of losses from Business (S17)

Businesses that have unrelieved losses shall carry-over such losses as follows;

  • For 5 years (if priority sector business). For purposes of the Act, priority sector businesses include businesses which are into ICT, Tourism, Farming, Agro processing, Manufacturing, Energy, Power, petroleum, mineral and mining operations.
  • For 3 years (if non-priority sector business – Any other business outside the above)

These losses must be offset against any future assessed profits in the order the losses were incurred before future taxes will be determined.

Locational Incentive (First Schedule)

The Chargeable Income of a manufacturing business located outside Accra and Tema is taxed at the concessionary rates indicated below:

Location Rate of income tax
(a) Manufacturing business located in the regional capitals of Ghana except Accra and Tema 75% of the rate of tax applicable i.e. 25%
(b) Manufacturing business located elsewhere in the country 50% of the rate of tax applicable i.e. 25%

Employment of graduates [Sixth Schedule]

A company that employs fresh graduates from a recognised Ghanaian tertiary institution is entitled to an additional allowable deduction for salaries and wages paid during the year as follows:

No. Percentage of fresh graduates in work force Additional deduction
1 Up to 1% 10% of salary and wages
2 Above 1% but not more than 5% 30% of salary and wages
3 Above 5% 50% of salary and wages

For purposes of the above, a fresh graduate means a person who has graduated from a tertiary institution for the first time, whether or not the person was previously employed

Young Entrepreneurs

The Income of a young entrepreneur from business of manufacturing, ICT, agro-processing, energy production, waste-processing, tourism and creative arts, horticulture and medicinal plants is exempt from tax for 5 years. The following tax rates after the initial 5-year tax holiday are applicable:

Location Tax rate
Accra and Tema 15%
Other regional capitals outside the three Northern regions 12.50%
Outside other regional capitals 10%
The three Northern regions 5%

Additionally, such young entrepreneurs can carry forward losses for 5 years. For purposes of the Income Tax Act, a young entrepreneur is an entrepreneur who is not more than 35 years.

Public Universities

Private universities that plough back 100% of profit after tax are exempted from taxes.

Charitable Organisations

The Incomes of religious and charity institutions of public nature, registered sporting clubs, a body of persons formed to promote social or sporting activities, clubs and trade associations are exempt from paying taxes permanently.

Concessionary Business tax rates

Unless otherwise provided for in the Income Tax Act, the rate of tax applicable to a general business in Ghana is 25%. However, the first schedule of The Act provide for reduced tax rates for certain businesses in Ghana is as follows;

  • Hotel business – 22%
  • Business of export of non-traditional goods – 8%
  • Business of Lending to a farming enterprise – 20%
  • Business of lending to a leasing company – 20%
  • Free zones enterprises – 15% (after tax holidays)

Tax Holidays for selected Businesses

As per the Sixth Schedule of the Income Act 2015, the following businesses enjoy a tax-free period (1%); and it is only after the concessionary period that incomes are subject to tax.

(1) Agriculture business

    • Tree Crop Farming – 10 years from the year of first harvest
    • Cash crop and Livestock farming (other than cattle or fish farming) – 5 years from the year of commencement of business.
    • Cattle rearing – 10 years from the year the business commences
    • Cocoa farming – Permanently exempt from paying taxes

(2) Agro processing business conducted in Ghana – 5 years

(3) Cocoa by-products business – 5 years

(4) Free zones enterprises – 10 years

(5) Rural Banking – 10 years

(6) Waste processing – 7 years

(7) Low-cost housing business – 5 years from year in which operations commences.

Personal reliefs for Sole Proprietorship and Partnership businesses

It must be noted that apart from all the above reliefs and concessions eligible businesses can enjoy, resident sole proprietors and partners in business also qualify to claim additional personal reliefs they are eligible for, in accordance with S51 of the Act.

Conclusion

One major way of achieving survival for businesses is being able to take advantage of existing tax laws by arranging their affairs in such a way as to achieve significant tax savings so as to improve the finances of businesses during and even after the COVID-19 pandemic.

>>>The writer is a Chartered Accountant, Tax Analyst, Corporate Financial Manager, Lecturer, and Author. He has 11 years of practical and relevant industry experience in Management Accounting, Financial Reporting, Banking & Finance, Taxation, Credit Analysis & Control, Risk Management and currently in Property Financial Management.

He can be contacted on +233(0) 509094905, email: [email protected]

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