By Ibrahim ASARE
In accordance with Article 179 (8) of the 1992 Constitution and as stated in section 28 of the Public Financial Management Act (PFMA), 2016 (Act 921), the Minister for Finance shall, not later than the 31st of July of each financial year, prepare and submit to Parliament a mid-year fiscal policy review. The mid-year fiscal policy review shall include the following information: a brief overview of recent macroeconomic developments of Government; an update of macroeconomic forecasts undertaken by Government; an analysis of the total revenue, expenditure and financing performance for a period up to the first six months of the financial year; a presentation of a revised budget outlook for the unexpired term of the financial year, and the implication of the revised budget outlook for the Medium-Term Fiscal and Expenditure Framework if necessary; and where necessary plans for submitting a proposed supplementary budget for approval by Parliament; and an overview of the implementation of the annual budget and of the budgets of covered entities.
This requirement affords the minister the opportunity to introduce or amend existing tax laws and fiscal policies which requires review for effective implementation. As a tax practitioner, I deemed it fit to pen out some provisions in our tax laws which I believe require some sort of amendments for effective tax administration.
This article is to raise some observations made in our tax laws which in my opinion will require some form of amendment to ensure effective tax administration without posing arduous and laborious compliance burden on some taxpayers which has the propensity of affecting the businesses of some taxpayers.
Brief history on taxation of foreign exchange gains and losses
The erstwhile Internal Revenue Act, 2000 (Act 592) as amended, and its accompanied regulation, the Internal Revenue Regulations, 2001 (L.I. 1675) provided that only realised exchange losses and gains were to be considered in tax computations.
It explained further that “a foreign currency exchange gain or loss is realised when the liability under a contract in foreign currency is discharged or when the right to receive a foreign currency under a contract is satisfied by actual receipt.”
Although this rule seems simple, it was difficult to follow because taxpayers were required to track every unrealised exchange difference encountered in previous years to ascertain when the liability is discharged or when asset is realised, and actual benefit is received.
The promulgation of the Income Tax Act 2015, (Act 896) which repealed Act 592 also had rules on tax accounting for financial cost which includes financial losses and gains.
The combined reading of sections 16, 25, 131, and 133 of Act 896 as amended gave the effect that, financial gains and losses are to be ascertained in accordance with Generally Accepted Accounting Principles (GAAP) with a restriction on the quantum of financial loss deduction which can be taken in any year of assessment with guidance on how long any unrelieved losses can be carried forward.
Frankly speaking, these current rules were working perfectly for both taxpayers, tax practitioners, and tax administrators until the passage of the Income Tax (Amendment) Act, 2023 (Act 1094). Section 4 of Act 1094 amended section 25 of Act 896 by the addition of sub-sections 4 to 7 to section 25.
Section 25(6) and (7) sort to reintroduce some of the rules which existed under Act 592 by disallowing unrealised foreign exchange losses as a legitimate deduction and permanently disallowing a deduction of exchange loss arising from transactions between resident persons.
These new additional rules to be applied in addition to the existing rules is quite problematic with some institutions being severely affected by the effect of section 25(6) and (7). One can understand that these new additional rules were probably introduced due to the poor performance of the Ghanaian cedi in 2022 to help stern the depreciation of the cedi without recourse to its unintended effect on taxpayers.
Area of focus for my analysis
My analysis on some tax provisions which should see amendment will be centred on section 25 of the Income Tax Act, 2015 (Act 896) as amended with emphasis on sub-sections 6 and 7 as outlined below:
25(6) An unrealised foreign exchange loss shall not be allowed as a deduction.
25(7) A foreign exchange loss arising from a transaction between two resident persons shall not be allowed as a deduction.
Unrealised foreign exchange gains and losses
In summary, foreign exchange gains or losses occurs when a person holds assets or liabilities in foreign currencies and there are exchange rate movements between the underlying currency and the functional currency.
Depending on the direction of the exchange rate movement, a foreign exchange gains or losses will be created on those assets or liabilities. Such exchange gains or losses created could be either realised or unrealised.
The gains or losses are realised when the underlying assets or liabilities have been settled or redeemed before end of the reporting period. Unrealized gains or losses are the gains or losses on foreign currency denominated transactions that have not been settled or realised as at the reporting date. This would mean that the underlying payment of the liability has not been made or received, or the underlying assets have not been realised prior to the close of the accounting period.
Section 25(6) of Act 896 as amended.
This section states that an unrealised foreign exchange loss shall not be allowed as a deduction. Although rules on the tax treatment of unrealised exchange losses and gains are issued hand in hand because the income and cost arise on the same principles, so it was bamboozling to see that sub-section 6 made no mention of any new rules on the treatment of unrealised foreign exchange gains.
One may opined that taxpayers can still rely on section 25(1-5) to exclude unrealised gains from their income for assessment but I beg to differ that, such grounds will NOT hold with reasons that, section 8(3) of Act 896 provides that “a specific deduction rule shall take precedence where more than one deduction rule applies” and section 25(1-5) are general rules on accounting for foreign currency and financial instrument with sub-section 6 of section 25 being a specific rule on the treatment of unrealised foreign exchange loss with no mention of unrealised foreign exchange gain.
So, since nothing was mentioned about the treatment of unrealised foreign exchange gains, then one cannot exclude it from its income for tax purposes.
Even though in principle, Ghana Revenue Authority (GRA) may agree and by extension interprets section 25(6) as both unrealised foreign exchange gains should be excluded from the income of the taxpayer in the same way that the unrealised foreign exchange losses are also to be disallowed as a deduction. What is missing now is an amendment of section 25(6) to affirm such a fair interpretation.
Section 25(7)- Disallowance of foreign exchange loss arising from transactions between two resident persons.
On hindsight, this policy intervention is laudable as being part of measures policy makers came up with to deal with the depreciation of the cedi against other foreign currencies in the country especially in 2022 when the cedi depreciation had gone haywire. But the unintended consequence of the policy on operations of other legitimate businesses who deals in foreign currencies a lot with resident persons were not factored in the drafting of the amendment. The problem of complying with this provision includes:
- The definition of resident as used in the provision. Is it english definition of resident or tax definition as outlined in section 101 of Act 896 as amended? Using the former definition will be easy to apply but using the later will leave more questions to be answered. As a taxman, I believe the later definition as outlined in section 101 of Act 896 should apply since we are interpreting an income tax law.
- Is the determination of the residency status supposed to be made at the time the transaction is being entered into or at the time the loss deduction has been sort? We must remember that residency of a person is determined per year of assessment and not a one-off determination. One can be non-resident in 2023 year of assessment and be resident in 2024 year of assessment and vice versa.
- How are institutions like Banks and other financial institutions who transact with their huge customer base on transactions like loans, deposits, and other financial instruments involving foreign currency exchange comply with this law? This compliance requirement is too burdensome for such taxpayers and should have been EXEMPTED from this law.
Conclusion
From the discussions espoused above, I conclude that the introduction of section 25(6) of Act 896 as amended in 2023 was needless since it has created more confusion and even seeks to stifle taxpayers more by denying them deduction of unrealised foreign exchange losses, tax their unrealised foreign exchange gains whilst section 16 of Act 896 still limit the amount of deduction of financial cost they can take in a year of assessment. Although section 25(7) is to prevent persons residing in Ghana from transacting among themselves in foreign currencies as means of controlling the rapid depreciation of the Ghanaian cedi, for which this policy may achieve some success, by not exempting some businesses like Banks and some other financial institutions whose business is to transact with resident persons in foreign currencies is erroneous which ought to be remediated.
Recommendations
Based on my assessment of the issues raised above, I recommend among the following for consideration:
- The Finance Ministry and GRA must consider amending section 25 of Act 896 as amended, by deleting sub-section 6 and maintain the status-quo that existed before the passage of Act 1094 in 2023 or amend subsection 6 by including the exclusion of unrealised foreign exchange gains from the income of taxpayers.
- The Finance Ministry and GRA must consider amending section 25 of Act 896 as amended, by reviewing sub-section 7 to EXEMPT Banks, and other relevant financial institutions from section 25(7) of Act 896 as amended.
- Institutions like Ghana Association of Banks (GAB), Ghana Association of Forex Bureaux (GAFORB), should petition the Minister for Finance for exemption from section 25(7) of Act 896 as amended in this 2024 mid-year budget review.
- Other tax practitioners should add their voice to the discourse to drive home our expectation of the necessary tax amendments we anticipate in the 2024 mid-year budget review.
I know that, this and other tax matters will be part of the discussions at the oncoming 12th Annual International Tax Conference of the Chartered Institute of Taxation Ghana, slated for 21st to 23rd August 2024 at the College of Physicians and Surgeons in Accra. I am excited to be part of the gathering of Chartered Tax Practitioners in Ghana and the world to discuss issues which hinders on effective, efficient, and productive tax administration in Ghana.
You are all invited to join the conference. See you there!
This article is my personal and professional opinion as a Tax Practitioner in the discharge of my duties as a GHANAIAN CITIZEN who seeks the success of Ghana, and it is not a representation of the opinion of any institution especially those mentioned in my article. That notwithstanding, I am available to liaise with any institution which requires my insight to advance a cogent petition to policy makers on tax matters affecting them for consideration.
The author is a Chartered Tax Practitioner- a Member of ICAG and a Member of the Chartered Institute of Taxation Ghana).
[email protected]; [email protected]; @ib_asare; 0244 423 960
