By: Enoch AKUFFU-DJOBI (CA, ACIB)
Corporate governance (CG) and tax compliance (TC) are closely intertwined, especially in an emerging economy like Ghana, where effective governance can significantly influence a company’s ability to meet its tax obligations.
As tax revenues form a crucial part of Ghana’s financial backbone, ensuring businesses remain compliant with tax regulations is critical to economic development. Corporate governance provides the structure within which this compliance is fostered, making it an essential element in Ghana’s economic landscape.
What is the issue?
Tax compliance has recently become one of the most pressing issues for governments around the world, particularly in emerging markets like Ghana. This is based on the fact that taxpayers (including businesses) are literally not happy with accurate tax reporting for a variety of reasons, including tax system complexity, ignorance of taxes, corruption, and a general lack of trust in public institutions. Meanwhile, tax revenues provide funding for critical sectors such as healthcare, infrastructure, law enforcement, and education.
In Ghana, as in many other developing economies, tax evasion and avoidance have posed serious challenges, undermining the country’s revenue mobilization efforts and, as a result, increasing Ghana’s public debt through government borrowings. As of July 2024, Ghana’s public debt stands at GH₵761.1 billion (around USD 51.1 billion), which reflects a significant increase driven by factors such as currency depreciation and budget financing.
However, one major contributor to Ghana’s rising debt is its fiscal deficit, where expenditures exceed revenue. Tax evasion exacerbates this problem by reducing potential government income.
To address these challenges, the writer believes that corporate governance structures has emerged as a critical strategy for improving tax compliance among organizations (corporate tax) in order to promote growth and sustainable development in our motherland. We need to understand that enhanced tax enforcement through CG can help close this gap and lower the need for deficit financing through debt.
What is tax compliance?
Tax compliance in Ghana refers to the process by which individuals, businesses, and other entities adhere to the tax laws and regulations established by the Ghana Revenue Authority (GRA). This involves the accurate calculation, reporting, and timely payment of taxes as mandated by the country’s tax laws. Ghana has various types of taxes, including income tax, value-added tax (VAT), corporate tax, property tax, and customs duties, among others.
In 2023, corporate tax revenue in Ghana made significant contributions to the overall tax revenue. For example, banks contributed GHS 3.95 billion, a 54.8% increase from the previous year, while mining companies contributed GHS 6.14 billion, marking a 39.6% rise from 2022. This robust performance in corporate tax collection has been attributed to compliance measures and growth in key sectors, showing the importance of corporate tax in Ghana’s overall tax revenue framework. In this regard, what is the link between CG and TC?
The link between corporate governance and tax compliance
Corporate governance is crucial for tax compliance in Ghana because it establishes a framework of accountability, transparency, and ethical decision-making within companies. This framework helps ensure that businesses meet their legal obligations, including the timely and accurate payment of taxes.
The Ghana Revenue Authority (GRA) has been actively advocating for reforms in corporate governance structures to ensure that companies, especially large multinational corporations and local conglomerates, contribute their fair share of taxes. This effort aligns with the global call for greater transparency and accountability in business operations.
Challenges in strengthening tax compliance through corporate governance
While there is a growing recognition of the role corporate governance plays in tax compliance, several challenges remain, which deserves mentioning:
Weak enforcement of SEC corporate governance codes
Despite the existence of corporate governance codes in Ghana, enforcement remains weak. Some companies continue to operate without adhering to best governance practices, increasing the risk of tax evasion.
Complex tax laws and regulations:
The complexity of Ghana’s tax laws also poses a challenge for companies. The lack of clarity in some tax regulations (e.g. Income Tax Act, 2015, Act (896)) can lead to unintentional non-compliance. To address this, the GRA must simplify tax laws and provide more guidance to businesses on how to comply.
Informal sector dominance
A significant portion of Ghana’s economy is informal, which makes it difficult to enforce corporate governance and tax compliance. Strengthening corporate governance in the informal sector will require innovative approaches and incentives for businesses to formalize their operations.
Practical Perspectives – The Role of Corporate Governance in Tax Compliance in Ghana
From a practical perspective, the role of corporate governance in tax compliance in Ghana can be seen through three critical lenses: transparency, accountability, and ethical decision-making.
Transparency and financial reporting
A core principle of corporate governance is the accurate and timely reporting of financial information. In Ghana, companies with good governance structures are required to adhere to proper financial reporting standards.
For instance, companies listed on the Ghana Stock Exchange must prepare their financial statements in a manner that aligns with international financial reporting standards (IFRS) and submit audited financial statements that accurately reflect their earnings, expenses, and tax liabilities.
In my experience working as a chartered accountant for a mid-sized firm(s), I’ve observed that companies with strong governance frameworks tend to have more transparent accounting systems.
They are less likely to underreport income or inflate expenses to evade taxes. By ensuring that financial statements are prepared in compliance with international standards, and that audits are carried out by independent auditors, these companies demonstrate a commitment to transparency, which, in turn, fosters greater tax compliance.
On the other hand, companies lacking proper governance often fall into the trap of poor record-keeping or financial misreporting. This not only puts them at risk of non-compliance but also exposes them to severe penalties from the Ghana Revenue Authority (GRA).
Accountability of leadership
The accountability of directors and management plays a significant role in tax compliance. Under a governance framework, boards of directors are responsible for ensuring that a company adheres to legal obligations, including tax regulations. Strong corporate governance encourages boards to set up internal controls and risk management systems that monitor compliance, ensuring that taxes are paid accurately and on time.
For example, I once worked with a manufacturing company where the board actively engaged in overseeing tax matters. They appointed a tax committee made up of financial experts to ensure all tax obligations were met without delay.
The committee regularly reviewed the company’s tax position, ensuring the business complied with tax laws while taking advantage of available incentives. This structure not only helped the company avoid tax penalties but also enhanced its reputation with the GRA, which can sometimes translate to smoother audits and fewer disputes.
Without strong governance, however, companies are at risk of leadership making poor decisions regarding tax compliance. A lack of accountability can lead to deliberate tax evasion, unethical accounting practices, or negligence in filing tax returns, all of which can damage a company’s credibility and lead to costly penalties.
Ethical corporate culture
Corporate governance is essential in building an ethical corporate culture, where integrity in business operations is prioritized. An ethically grounded company ensures that tax compliance is not seen as a burden but as a duty. In Ghana, where the informal sector remains large and tax evasion is a significant challenge, companies with a governance structure that promotes ethical decision-making must set themselves apart.
I’ve seen how companies with a strong ethical culture perform better in terms of tax compliance. One example is a financial institution(bank) where the management established a whistleblower policy.
This policy empowered employees to report unethical behaviors, such as attempts to falsify tax information or avoid tax payments. The presence of this policy not only deterred non-compliance but also fostered an environment where ethical business practices were valued.
Conclusion – The way forward
In Ghana, corporate governance is crucial in shaping tax compliance behavior within companies. Firms with robust governance structures tend to be more transparent in their financial dealings, ensure leadership is accountable, and foster an ethical business culture that promotes compliance with tax laws. For Ghana to continue developing economically and improve its tax revenue collection, it is vital that businesses adopt and maintain strong governance practices.
In a country where tax evasion remains a challenge, the adoption of good corporate governance principles is not just a matter of regulatory compliance but a key factor in the long-term sustainability of businesses.
It is therefore essential that companies in Ghana embrace these principles to improve tax compliance, contribute to the nation’s development, and build a more transparent business environment. By doing so, companies can avoid the costly repercussions of non-compliance and contribute to a more sustainable and accountable economy.
Enoch is a Chartered Accountant / Certified Banker with a deep passion for accounting, banking, and governance. His expertise spans both education and practice reflecting a commitment to research and knowledge sharing. He can be reached via [email protected])
