Tracing the history of Transfer Pricing (TP) has not been a small task with some writers tracing it way back to 1918/19 just at the end of The First World War. It was the first time when the different nations in the world collaborated to form “League of Nations” in order to maintain peace, security, and take decisions in the matter of International Affairs. First time in the 1920s, the members of League of Nations recognized that the interaction of domestic tax systems can lead to double taxation or double non-taxation of incomes which can affect global prosperity and trade.
In Europe, the United Kingdom introduced the Arm’s Length Principle not only in Europe but in India too by virtue of section 43 of erstwhile tax law i.e., Income-tax Act, 1922. In the 1930s, the tax systems in US catered for TP adjustments and other nations also had their local legislations which sort to counteract the effect of TP on their tax base. Later on, the Organisation for Economic Co-operation and Development (OECD) was formed after the end of the second World War for the reconstruction of the European Economy in 1948 which has taken the concern of International Taxation as priority and published guidelines on Transfer Pricing namely “Transfer Pricing and Multinational Enterprises” in 1979. This was the first time when the International Communities promised to amend their existing tax laws for the introduction of TP in their respective tax laws.
Consequent tax abuse by Multinational Enterprises (MNEs) during the spread of globalisation in the 1990s where MNEs sort to take advantage of tax benefits in other jurisdictions by shifting cost and income to favourable jurisdictions to take tax advantage by reducing their ultimate tax liabilities. According to OECD, about 60% of the global trade takes place within the MNEs and as per IMF, tax avoidance through profit shifting is estimated to be around $400 billion for OECD countries and $200 billion for lower-income countries. The rise in global trade within MNEs and consequent tax abuse by them has increased the significance of Transfer Pricing in International Taxation.
The US led the development of detailed, comprehensive transfer pricing guidelines with a White Paper in 1988 and proposals in 1990–1992, which ultimately became regulations in 1994. But the first proper regulations were published in 1995, when the OECD published its first transfer pricing principles. The guidelines have now been adopted by a majority of the OECD member countries and other smaller nations use them as a starting point to their specific regulatory framework. While the OECD and UN guidelines have been accepted in principle in many parts of the world, their enforcement is not always easy. Countries with smaller and less developed economies are finding it hard to enforce some of the regulations.
The organizations are therefore continuously trying to improve the guidelines with introduction of revised editions, the most current OECD revised guidelines on TP were issued in January 2022.
Transfer Pricing in Ghana
Ghana introduced transfer pricing legislations into its tax regime in 2001 through the Internal Revenue Act, 2000 (ACT 592) by adopting the Arm’s Length Principle(ALP) which is Globally Accepted Standard by OECD and UN for determining acceptable transfer price, but the legislation faced several practical challenges ranging from lack of local expertise for determining instances of transfer pricing, obtaining relevant transfer pricing information, and the permitted use of stability agreements signed between Government of Ghana and foreign investors rather exacerbated the problem.
Under Act 592, avoidance schemes like Income Splitting, Transfer Pricing and Thin Capitalisation were legislated against in sections 69, 70, and 71 respectively. The Commissioner General (CG) of Ghana Revenue Authority was given vast powers to determine instances of avoidance schemes and to deal with them as appropriate.
Section 70 of Act 592 stipulates that in a transaction between persons who are associates, the CG may distribute, apportion, or allocate inclusions in income, deductions, credits, or personal reliefs between those persons as is necessary to reflect the chargeable income or tax payable which would have arisen for these persons if the transaction had been conducted at arm’s length.
Where, in the case of an associated resident entity of a non-resident person, the CG is satisfied that some adjustment is warranted under subsection (1) of section 69, or in the case of a Permanent Establishment (PE) of a non-resident person in Ghana, the CG is not satisfied with a return of income of that person made under section 72, the CG may adjust the income of the PE or entity for a basis period so that it reflects an amount calculated by reference to the total consolidated income of the non-resident person and all associates of that non-resident person, other than individuals but irrespective of residence; by taking into account the proportion which the turnover of the PE or entity bears to the total consolidated turnover of the non-resident person and those associates; and by taking into account any other relevant considerations in determining the proportion of the total consolidated income which should be attributed to the PE or entity. In making an adjustment under subsections (1) or (2), the CG may recharacterise the source of income and the nature of any payment or loss as revenue, capital, or otherwise.
Naturally, GRA would like to minimise lost of tax revenue and therefore would want to scrutinise transactions between related entities or associates. Section 70(1) gives specified reasonable powers to the CG to reclassify business transactions generally to restore perceived lost revenue for tax purposes. Such powers indeed could encourage tax controversy and instigate tax litigation instead of moving the tax function forward. The CG will usually do an audit of a business entity to establish the veracity of accounting information submitted to the tax office, reallocate costs, or re-establish the level of head office involvement in the local entity’s operations generally, for tax purposes. The objective for the audit may not necessarily be the determination of TP issues only, but also to ascertain the level of tax compliance, the depth of taxpayer tax literacy and to ascertain whether additional taxes need be paid, or overpaid taxes should be refunded.
With no legislative instruments or guidelines on how to practically operationalise and implement Sections 69,70, and 71 of Act 592, there were disagreements and controversies between and among taxpayers, tax practitioners, and tax administrators concerning the interpretation and application of the Act. After about eleven years of tax controversies on these anti-avoidance provisions in Act 592, the first TP regulations (Transfer Pricing Regulations 2012, L.I. 2188), was passed and came into force on 31st July 2012 to give guidance on the implementation of the anti-avoidance provisions in the Act.
The Transfer Pricing Unit (TPU) at GRA, was established in 2013 under the Transfer Pricing Regulations, 2012 (L.I. 2188), to be a specialised office domiciled at the Large Taxpayer Office (LTO) of the GRA and is largely accountable for setting the prices of goods, services, funds, etc. sold or transferred between parties in a controlled relationship (related parties).
The transfer price set between related parties is sometimes manipulated leading to mispricing of goods or services transferred or sold between the associated parties, and thus may reduce or increase the taxable profit of the associated parties. This practice is commonly described as transfer pricing abuse, transfer mispricing or base erosion and profit shifting.
The TPU was charged with the responsibility of assisting Government to formulate policies to curb transfer pricing abuse and base erosion; undertaking taxpayer education on transfer pricing laws and requirements; conducting audits into the tax affairs of taxpayers who have had arrangements with persons in a controlled relationship; implementing the provisions of the Transfer Pricing Regulations, 2012 (L.I. 2188) and related laws. The practice of transfer mispricing is proscribed by Ghana tax laws.
After fifteen years of the implementation of Act 592 coupled with the rapid changes in the tax landscape, there was the need to revise the income tax laws of Ghana, this led to the promulgation of The Income Tax Act 2015, (Act 896). Act 896 repealed Act 592 but just like 592, there were anti-avoidance provisions on Arm’s length standard and arrangements between associates, Income splitting, Thin capitalisation, and General anti-avoidance rule in sections 31,32,33, and 34 respectively of Act 896 to counteract any arrangement which is carried out as part of an avoidance scheme. Some untrammelled powers were bequeathed to the CG to enable him to effectively counteract any avoidance scheme in the sections listed above.
In 2016, the Revenue Administration Act, 2016 (Act 915) was also promulgated to consolidate tax administration in Ghana. Section 99 of Act 915 also gave powers to the CG as follows, where the CG is of the opinion that a person might otherwise secure a tax benefit under a tax avoidance arrangement, the CG may adjust the tax liability of that person in a way that the CG considers appropriate to counteract the tax benefit.
Since the provisions of Act 896 specifically mentioned certain transactions in sections 31,32,33,and 34 as an anti-avoidance measure, coupled with some limitations in L.I. 2188 to wholistically cover other possible avoidance schemes, with creative accounting and tax planning, one can still arrange an avoidance scheme in such a way to take it out of scope of the anti-avoidance provisions in both the Act and the Regulation.
Due to the short comings of the existing laws in Ghana to effectively check tax avoidance schemes and the changes in international tax world by OECD and other international bodies to check the practice of Base Erosion and Profit Shifting (BEPS), Ghana sort to revise its TP regulations to align with the action points devised by OECD to counteract BEPS to make our legislative landscape more acceptable to MNEs, investors, and other tax jurisdictions.
To achieve this, on 10th August 2020, Ghana passed a new Transfer Pricing Regulations 2020, (L.I. 2412) which entered into force on 2nd November 2020. This current legislation to a large extent aligns with the action points in the BEPS project under the auspices of OECD.
Conclusion
Although the adoption of TP in Ghana started late as compared to Europe and America, Ghana has gradually positioned itself to align with best global practices in TP administration. The legal landscape on TP in Ghana is adequate as compares with its peers and global best practice and the technical expertise required by staff of GRA to implement these laws has been tremendously improved with a lot of tax practitioners specialising in TP and TP related matters.
This series of articles is my contribution to tax literacy in Ghana as a professional tax practitioner in the discharge of my duties as a GHANAIAN CITIZEN who seeks the success of Ghana. The next edition will be on the Arm’s Length Principle (ALP).
The author is a Chartered Tax Practitioner- a Member of ICAG and a Member of the Chartered Institute of Taxation Ghana).
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