With being over eight years into the Ghanaian Transfer Pricing (TP) regime, it came as no surprise that Ghana has issued revised TP regulations to clarify provisions in the previous regulations, fill any gaps, and ensure that it has incorporated significant relevant developments in the international tax space.
Specifically, like many developing countries, Ghana has adopted some of the recommendations from the Organisation for Economic Cooperation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) action plans. Particularly, Ghana has adopted BEPS’ Actions 8, 9, 10 and 13 in the Transfer Pricing Regulations, 2020 (L.I.2412) (Revised TP Regulations or the Regulations) which replaced the Transfer Pricing Regulations, 2012 (L.I.2188) (2012 TP Regulations). The Revised TP Regulations, which have an effective date of 2 November 2020, are more comprehensive and include safe harbour provisions and specific guidelines with respect to certain transactions.
This article highlights the significant changes in provisions of the Revised TP regulations and their implications for taxpayers.
The Significant Changes Introduced in the Revised TP Regulations
Some of the changes introduced by the Revised TP Regulations include:
- Application of the Regulations
Unlike the 2012 TP Regulations whose application included transactions between persons in an employment relationship, the revised TP Regulations aimed to simplify application of the Regulations to arrangements between persons in a controlled relationship under the enabling Act or under any other tax law. Two or more persons are said to be in a controlled relationship when the relationship is between an individual and that individual’s relative, partners in the same partnership, an entity and a person who controls the entity or benefits from 50% or more voting rights, income or capital; or a settlor or trustee and beneficiary or an agent and that agent’s principal. Persons are also in a controlled relationship when the relationship is between an entity and a person that controls that entity; or an entity and a person having a 50% stake, individually or jointly.
This change is critical in aligning the revised TP Regulations with the OECD TP Guidelines and TP Regulations of other jurisdictions.
- Risk Assumed
The Revised TP Regulations also emphasised the importance of risk in determining the reasonability of a controlled transaction from an arm’s-length perspective. It places emphasis on who bears the economically significant risks; particularly who bears the financial risk, performs the relevant risk controls and mitigation functions, and who has the financial capacity to assume the risks. When the entity that assumes the risk under an arrangement does not control the risks or have financial capacity to assume a risk, the Commissioner-General (CG) may make an adjustment to reflect the actual risks assumed by the entity. This is an alignment of the revised TP Regulations with the revised sections on risk in Chapter 1 of the OECD TP Guidelines.
This implies that where a Ghanaian entity assumes significant risks, including the financial risks, and bears the costs in control and management of risks but is earning a low return for the functions performed under a controlled arrangement, the CG may reallocate more profits to the Ghanaian entity during an audit. Therefore, it is imperative that taxpayers in preparing their TP documentation properly analyse where value is created and who bears risks in every transaction.
- Service Transactions
The Revised TP Regulations stipulate that service transactions may be considered to be consistent with the arm’s-length principle when it passes the benefit test. However, the Regulations expanded the types of services that would not be considered to be at arm’s-length to include duplicative services – unless the duplication is to achieve a business objective or undertaken to reduce the risk of the person taking a wrong business decision; and services that provide incidental benefits to the taxpayer merely on account of the entity being a member of a group.
For example, when legal services are provided by an offshore related party to its Ghanaian related party which already has a strong legal department, the cost arising from providing these services by the offshore related party may be deemed to be duplicative and thereby disallowed. Likewise, when a parent company undergoes a Corporate Social Responsibility (CSR) activity in relation to the COVID-19 pandemic that results in improved perception of the Group, the parent company may not be allowed to pass the CSR costs to its Ghanaian subsidiary when the Ghana Revenue Authority (GRA) views the benefit to the Ghanaian subsidiary as merely incidental.
- Intangible Property (IP)
The Revised TP Regulations introduced additional requirements when determining the arm’s-length conditions for controlled arrangement involving IP. Prior to revision to the TP Regulations, for an IP transaction the focus used to be on identifying the legal owner of the IP – typically the licencor, and the licencee. Next, will be to determine the reasonableness of the royalty rate stated in the licence agreement from an arm’s-length perspective.
However, in line with OECD recommendations, the Revised TP Regulations requires that factors such as which entities perform the Development, Enhancement, Maintenance, Protection and Exploitation (DEMPE) functions be considered for intangible transactions. The delineation of functions will aid in determining the arm’s-length remuneration to be earned by the licencor of the intangible. Therefore, in preparing the contemporaneous TP documentation, it is important that taxpayers include this analysis for IP transactions to support the reasonability of royalty rates from an arm’s-length perspective.
- Cost Contribution Arrangements (CCA)
CCA are contractual arrangements entered into to allow participants share contributions and risks relating to the development or acquisition of intangible or tangible assets or provision of services. Under a CCA, it is expected that the participants’ cost contributions will be based on their respective anticipated benefits. Multi-National Enterprises (MNEs) often enter into such arrangement to save costs and improve efficiency with respect to the development of an asset or provision of services.
The Revised TP Regulations aim to reduce the ambiguity in determining the reasonability from an arm’s-length perspective of such arrangements. It provides that the following should be taken into account when demonstrating the reasonability of CCAs from an arm’s-length perspective:
- the contractual arrangement between each party;
- the assets contributed by each participant;
- the risks assumed by each participant;
- the management and control of those risks; and
- the financial capacity to assume the risk.
- Financial Transactions
The Revised TP Regulations provide guidance on determining the appropriate arm’s-length interest rate or fees for financial transactions. It stipulates that factors such as the nature or purpose of the loan, the credit profile of the borrower, and economic conditions in the geographical location of both the borrower and lender should be considered in determining arm’s-length interest rates or fees. Further, the Regulations empower the CG to determine appropriate interest or loan fees in situations where an entity provides a loan for which:
- interest or loan fees are not charged on the loan;
- interest is not charged on related party trade payables which remain unpaid for 12 months; or
- interest or loan fees charged is not consistent with the arm’s-length standard.
This implies that Ghanaian entities will no longer be able to provide interest-free loans to its related parties, and interest will need to be charged on intercompany payables that last longer than 12 months.
- Business Restructuring
The Revised TP Regulations provide guidance on factors to be considered in determining whether a business restructuring arrangement is in line with the arm’s-length principle. The introduction of Regulation 10 is to ensure that the amount received for the transfer of functions, rights, interests, assets and risks between persons in a controlled relationship is at par with the amount an independent person in comparable circumstances would pay for the transfer of those functions.
For example, this guidance will be relevant for a subsidiary of an MNE group that used to manufacture and distribute products locally, bore the market risk and earned the profits/loss associated with these activities – but restructured to transfer the manufacturing function and market risks to a foreign related party, such that it is now entitled to some guaranteed routine marginal return commensurate to its limited risk distribution function.
- Documentation Requirement
The Revised TP Regulations incorporate the three-tiered approach to TP documentation as recommended in the BEPS Action 13, which seeks to enhance tax transparency. The Regulations require taxpayers to prepare and file the following reports contemporaneously:
- The Master File: The master file is expected to contain high-level information of the group. This information includes the group’s organisational structure; description of the group’s business activities (such as products, services, supply chain etc.); the group’s TP policies on transactions such as intangibles, financial activities within the group; and the financial and tax positions of the group.
- The Local File: The local file focuses on information relating to the Ghanaian entity. It contains information such as organisational structure, controlled arrangements entered into with the Ghanaian entity, and financial activities of the local entity.
Unlike the 2012 TP Regulations, which only required taxpayers to prepare TP documentation and submit the documents within the timeframe requested by the Ghana Revenue Authority (GRA), the revised TP Regulations require companies to file electronic copies of their local and master files within 4 months after end of the tax year. This is a highly significant development, meaning that taxpayers impacted by this compliance requirement have to ensure they work assiduously to complete the preparation of annual TP documentation and file them timely.
- Country-by- Country (CbC) Report: The Revised TP Regulations also includes CbC reporting obligation for MNE Groups which meet the stated threshold. It stipulates that an Ultimate Parent Company (UPC) of an MNE group that is resident in Ghana, for tax purposes, will be required to prepare and submit a CbC Report (CbCR) when the annual Consolidated Group Revenue (CGR) is two billion and nine hundred million Ghana cedis (GH¢2.9billion) or above in the fiscal year immediately preceding the Reporting Fiscal Year. The CbCR should be filed twelve months after the reporting fiscal year.
Similarly, a constituent entity of an MNE group (with a CGR that meets the threshold) that is tax resident in Ghana will be required to notify the GRA of the entity within the Group that will file the report on behalf of the Group. The notification should be filed at the end of the reporting fiscal year.
The filing of CbCR by MNE groups that meet the threshold, irrespective of the jurisdiction of the UPC, means that tax administrations of the jurisdictions where the MNE group has presence will get access to financial and personnel information about the group that will aid with risk assessment of taxpayers by the tax administrators. This unprecedented level of transparency means that taxpayers need to be proactive in preparing robust TP documentation reports in order to help mitigate their risks of assessment for additional tax liabilities should the tax administrators select them for TP audits.
The Revised TP Regulations also require Ghanaian entities to prepare and file annual TP returns four months after the financial year-end.
The above compliance requirements imply that the affected taxpayers’ compliance burden have increased, as companies will need to prepare and submit contemporaneous documentation alongside the TP returns, as well as possibly submit CbC reports. Further, the GRA will have an unprecedented amount of information to carry out risk assessment of companies. It is expected that with this level of information, there may also be an increase in the amount of TP audits to be conducted.
- Safe Harbour Rules
The Revised TP Regulations include the following safe harbour provisions which will reduce the compliance burden borne by taxpayers and provide certainty with respect to certain transactions:
- Minimum Threshold: The Revised TP Regulations introduce a simplified approach that exempts taxpayers with controlled arrangements which do not exceed the Ghana cedi equivalent of two hundred thousand United States Dollars (US$200,000) from preparing TP documentation. To determine if an arrangement qualifies for this exemption, the CG may aggregate two or more arrangements to satisfy that the arrangement was not designed for tax avoidance. It is important to note that the Regulations do not exempt taxpayers from conducting their transactions in accordance with the arm’s-length principle. Hence, the GRA can still make adjustments to transactions that are below the threshold but are inconsistent with the arm’s-length principle.
- Low Value-Adding Intra-Group Services: Taxpayers who enter into controlled arrangements with respect to the provision of low value-adding intra-group services may be exempted from preparing TP documentation, and the amount charged may be considered to be at arm’s-length under the following conditions:
- the cost plus method is applied to the arrangement;
- the cost of providing the services is allocated among members of the group using an appropriate allocation method, and;
- the mark-up applied on the cost does not exceed three percent.
- Technology Transfer Agreement (TTA): Connected person who enter into Technology Transfer Agreements (TTA) may elect to be exempted from documentation requirements, provided the rates of their agreements are in line with the below:
- The TTA is registered with the Ghana Investment Promotion Centre (GIPC) and;
- The amount charged for transactions including royalties, know-how and management or technical fees does not exceed two percent (2%) of net profit[1].
For IP transactions whose arm’s-length remuneration is usually based on a percentage of revenue, taxpayers who opt for this safe harbour may bear the risk of double taxation, as the tax authority in the jurisdiction of the licencor may disagree with the pricing. However, taxpayers who opt out of the safe harbour will need to prepare a robust analysis to justify the price charged on such transactions.
- Penalties and Interest
Unlike its counterpart in Nigeria, which has seen significant increase in compliance as a result of including TP specific administrative penalties in its Regulations, the GRA didn’t include TP specific penalties in the Revised TP Regulations. The penalties stipulated within the Regulations are with reference to those included in the Revenue Administration Act, 2016. We are yet to see if the penalties will aid in driving the much-needed increase in compliance by taxpayers.
Conclusion
The Revised TP Regulations incorporated some recommendations of the OECD Guidelines, which brings Ghana to par with its international counterparts. The Regulations are also aimed at encouraging compliance and providing clarity on the appropriate treatment of related party transactions.
However, the additional documentation and filing requirements may increase the compliance burden on taxpayers. Further, with the increased level of transparency, it is expected that there will be an increase in the number of TP audits and queries by the GRA. The GRA has also indicated that practice notes will be issued to further explain the provisions of the revised TP Regulations.
Thus, taxpayers should be proactive in ensuring compliance with all aspects of the Regulations. This will involve developing robust TP documentation reports to support their related party transactions, and proactively preparing an audit file with documents supporting their transactions. In addition, taxpayers may need to also review their current arrangements with connected persons to ascertain their compliance with provisions of the Regulations.
Writers
Eric Mensah is a Partner at Sam Okudzeto & Associates, and Dr. Josh Bamfo is the Head-Transfer Pricing Unit, Andersen Tax, Nigeria.
[1] Net profit means earnings after interest, tax, depreciation and amortisation but excluding the charge for the technology transfer.
