When I did my highlights on the 2023 tax Acts, I was struck by the provision of section one of the Income Tax (Amendment) Act, 2023 (Act 1094) which I believe requires further attention. This article is to analyse the possible reasons for the introduction of a minimum chargeable income and to weigh the pros and cons of such a policy on tax administration, taxpayer apprehension, the overall possible adverse effects of such a policy on the economy, and the way forward.
- Imposition of income tax
The authority to impose tax can be traced to article 174 of the 1992 Constitution of the Republic of Ghana as (1) no taxation shall be imposed otherwise than by or under the authority of an Act of Parliament. (2) Where an Act, enacted in accordance with clause one of this article, confers power on any person or authority to waive or vary a tax imposed by that Act, the exercise of the power of waiver or variation, in favour of any person or authority, shall be subject to the prior approval of Parliament by resolution. (3) Parliament may by resolution, supported by the votes of not less than two-thirds of all members of Parliament, exempt the exercise of any power from the provisions of clause (2) of this article.
Through this authority to impose tax, several tax laws have been promulgated by Parliament and duly assented to by Presidents into law. Such an act, which is of importance to this discussion, is the Income Tax Act, 2015 (Act 896). This is the main act which governs how income is to be assessed and taxed in Ghana.
- Income Tax Act, 2015 (Act 896)
For the purpose of this article, I will limit myself to Part I (Imposition of Income Tax) and Division I of Part II (Income Tax Base- Chargeable Income).
Imposition of income tax
Section 1(1) Act 896 states that tax is payable for each year of assessment by (a) a person who has chargeable income for the year; and (b) a person who receives a final withholding payment during the year. (2) The amount of income tax payable by a person for a year of assessment is the total of the amounts payable under sub-section 1. (3) Subject to sub-section 5, the income tax payable by a person under sub-section (1)(a) is calculated by (a) applying the relevant rates of income tax set out in the First Schedule to the chargeable income of that person; and (b) deducting a foreign tax credit allowed to the person for the year.
(4) The income tax payable by a person under sub-section (1)(b) is calculated by applying the relevant rate set out in the First Schedule to each final withholding payment. (5) Income tax payable by an individual with respect to assessable income from a business may be subject to the modified taxation rules set out in the Second Schedule.
Chargeable income
Section 2(1) of Act 896 states that the chargeable income of a person for a year of assessment is the total of the assessable income of that person for the year from each employment, business or investment less the total amount of deduction allowed that person under this Act.
The phrase “less the total amount of deduction allowed that person under this Act” means that some deductions from the assessable income is allowed under the Act before arriving at the chargeable income which the tax is calculated on. In some instances where taxpayers are aware of all the benefits allowed them as deductions under the Act and choose to take full advantage of those benefits though effective tax planning, it mostly leads to either no chargeable income (Tax losses) or lower chargeable incomes which affects their associated tax revenues.
Although there are several anti-avoidance provisions in Act 896 and other Acts to counteract such unwarranted tax planning mechanisms, the challenge cannot be eliminated in absolute terms.
- Minimum chargeable income
Some other extra measures which are used by policy-makers and tax administrators include the imposition of a minimum tax or a minimum chargeable income. This measure has been employed in several tax laws in Ghana and other jurisdictions.
A minimum chargeable income tax or minimum corporate income tax is a tax policy where a minimum amount of tax is imposed on companies or individuals, regardless of their actual profits or income. The aim of this policy is to ensure that all companies or individuals pay a fair share of tax and prevent them from avoiding taxes through over exploitations of loopholes or deductions in the tax laws.
Section 59(8) of Act 896 states that where the Commissioner-General (CG) is satisfied that a company controlled by not more than five persons and their associates does not distribute to its shareholders as dividends, a reasonable part of the income of the company from all sources for a basis period within a reasonable time after the end of the basis period, the CG may, by notice in writing treat as dividend that part of the income of that company which the CG determines to be dividend paid to its shareholders during that period or any other period. This is a classical example of imposing some minimum tax to ensure that fair taxes are paid by shareholders of close companies. This provision is an example, but not in likeness to section 1 of the Income Tax (Amendment) Act, 2023 (Act 1094).
Several countries have implemented a minimum corporate income tax or a similar policy. Some notable matured tax jurisdictions like United States, Canada, India, Brazil and some other African countries, like Uganda, Kenya, Tanzania have all implemented minimum tax policies in one way or the other.
The Organisation for Economic Co-operation and Development (OECD) has been leading discussions on the introduction of a global minimum corporate tax rate. This is in response of incidence of shifting profits from one jurisdiction to another jurisdiction which has favourable tax rules.
The Pillar Two Model Rules (also referred to as the “Anti Global Base Erosion” or “GloBE” Rules), being led by the G7, seeks to address the challenges of ensuring that some appropriate amounts of taxes are paid by multinationals to jurisdictions they operate. The Pillar Two Model Rules are designed to ensure large multinational enterprises (MNEs) pay a minimum level of tax on the income arising in each jurisdiction where they operate. Pillar Two sets out global minimum tax rules designed to ensure that large multinational businesses pay a minimum effective rate of tax of 15 percent on profits in all countries.
- Merits
The introduction of a minimum corporate income tax or a similar policy can have several outcomes. One outcome is an increase in tax revenue for the government, which can be used to fund public services and infrastructure.
Another outcome is a reduction in tax avoidance and evasion by companies, as they will be required to pay a minimum amount of tax regardless of their actual profits.
This is because some businesses may use deductions and credits to reduce their tax liabilities to zero, even if they are not making a profit.
- Demerits
The outcomes of minimum tax or chargeable income policies in African countries have been mixed. While these policies have been successful in generating additional tax revenue for the government, there have been concerns about their impact on small businesses and low-income earners. It is important for policy-makers to carefully consider the potential impacts of these policies before implementing them, and to ensure that they are designed in a way that is fair and equitable for all taxpayers.
Yes, there have been instances where the minimum tax or chargeable income policy has been imposed on loss-making businesses.
However, there have been concerns about the impact of minimum tax or chargeable income policies on loss-making businesses. Some critics argue that these policies can be particularly burdensome for small businesses and start-ups, which may be struggling to generate profits and may not have the cash flow to pay the minimum tax.
However, there are also potential drawbacks to this policy. Some critics argue that it can discourage investment and innovation, particularly for small businesses and start-ups. They argue that these companies may struggle to pay the minimum tax, which could stifle their growth and development. Additionally, there are concerns that a minimum corporate income tax may not be effective in reducing tax avoidance and evasion as companies may still find ways to avoid paying the minimum tax.
This amendment has the potential of affecting genuine businesses which are struggling to survive; and the application of the rule may accelerate the collapse of such businesses.
- Conclusion
In conclusion, several countries have implemented a minimum corporate income tax or a similar policy to ensure that all companies pay their fair share of taxes. The introduction of this policy can have both positive and negative outcomes and therefore, it is important for policy-makers to carefully consider the potential impacts before implementing such a policy.
On one hand, implementing a minimum tax or chargeable income policy could potentially help Ghana increase its tax revenue and improve its fiscal position, which could in turn provide greater stability and predictability for investors. A stable and predictable fiscal environment is often cited as an important factor in attracting foreign investment.
On the other hand, there are potential downsides to implementing a minimum tax or chargeable income policy, particularly if it is perceived as overly burdensome or punitive for small businesses and start-ups. These types of businesses are often important drivers of innovation and job creation; and excessive taxation could potentially stifle their growth and discourage investment.
In considering whether to implement a minimum tax or chargeable income policy, policy-makers in Ghana would need to carefully balance these potential benefits and risks, taking into account the country’s broader economic goals and priorities. It may also be helpful to consult with stakeholders in the business community and to carefully assess the potential impacts of any proposed policy changes on different segments of the economy.
- Recommendations
I recommend the following for possible consideration:
- The same old words are what I can rehash, that policy-makers and implementers are to enforce the existing tax laws to the latter by identifying defaulters and bringing them into the tax net for them to pay their part instead of introducing new tax measures on the same old people who have voted to do the right thing by registering and paying taxes.
- From the resistance faced on the passage of these bills, I think it’s high time policy-makers understood that engagements and wide consultations to build consensus are key in the success of formulation and implementation of policies.
This article is the first of two to be published by me to kick-start the debate on the implementation of section 1 of the Income Tax (Amendment) Act, 2023 (Act 1094) from a professional tax practitioner’s lens in the discharge of my duties as a Ghanaian citizen who seeks the success of Ghana.
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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