Executive Summary

The Commissioner-General (CG) of Ghana Revenue Authority (GRA) CG of the GRA, the officer responsible for the administration of the tax laws, has issued Practice Notes (PNs) on:

1. Obtaining double taxation relief under the Income Tax Act, 2015, Act 896 (as amended) (ITA)
2. Determining minimum chargeable income under the Income Tax (Amendment) Act, 2023, Act 1094

This Alert highlights the key matters set forth in the PNs.

Practice Note on obtaining double taxation relief under the Income Tax Act, 2015, Act 896 (as amended)

The PN explains the various benefits available to taxpayers, the procedures required to benefit from the concessions and the documentation required to support any claims for exemptions, relief and use of reduced taxes.

Persons entitled to Double Taxation Agreement (DTA) benefits in Ghana

As per the PN, a taxpayer who seeks to benefit from any DTA between Ghana and a contracting state must:

1. Be a resident of Ghana
2. Be a resident of the treaty partner
3. Be a resident of both Ghana and the treaty partner
4. Be a beneficial owner of the income
5. Meet any Limitation of Benefits (LOB) or Entitlement to Benefits provisions provided in the treaty, where applicable

The PN further states that a person who is resident a country other than in Ghana or its contracting states cannot benefit from the treaties entered into with Ghana.

Additional conditions for deriving treaty benefits

In addition to the conditions outlined above, the PN provides that the following conditions must be present to enable a person take advantage of the concessions or relief provided in the DTAs:

1. The taxpayer is liable for tax in the treaty country of which that taxpayer is a resident.
2. The income in question is not exempt from tax in Ghana.
3. The tax in question is covered by the DTA.
4. The benefit is not specifically excluded under the DTA.
5. The benefit is claimed within the time stipulated by the treaty or domestic laws.

Denial of treaty benefits

According to the PN, a taxpayer may be denied DTA benefits if, either:

1. Based on facts and circumstances, the taxpayer engaged in treaty shopping (i.e., obtained the tax residency solely for the purpose of accessing the DTA)
2. It is discovered after careful review of the case that one of the principal purposes of the arrangement or a transaction or business is to take advantage of the treaty or abuse its provisions

Available treaty benefits

The PN provides the following benefits and reliefs available under the DTAs between Ghana and other countries:

1. Relief from double taxation in the form of tax credits or deductions of foreign tax paid from tax payable in Ghana by a Ghanaian resident to eliminate double taxation
2. DTA withholding tax rates for passive income or fees for technical service derived from Ghana by residents of a treaty partner
3. DTA tax rates applicable to foreign airlines or shipping companies or exemption of their income from tax
4. Access to Mutual Agreement Procedure (MAP) for dispute resolution
5. Nondiscrimination in taxation matters

Relief from double taxation

As per the PN, residents of Ghana who pay foreign tax on income from countries that have executed DTAs with Ghana are eligible for tax credits under the treaty provisions on the Elimination of Double Taxation and as further enshrined in sections 112 and 122(4) of the ITA. These credits can be used to offset similar taxes owed in Ghana. However, according to section 112(2)(b) of the ITA, the credit available is limited to the average income tax payable on that income in Ghana. This means that the taxpayer can claim credit only up to Ghana's average tax rate on that income. If the foreign tax rate exceeds Ghana's, partial relief is granted; a lower foreign tax rate entitles the taxpayer to full relief.

Under section 112(3) of the ITA, taxpayers can use foreign tax credits to offset taxes payable or claim a deduction for foreign taxes paid. A claim for deduction is available only if the taxpayer opts to relinquish the foreign tax credit. This election can only be made through the submission of an application to the CG or by accompanying the tax return with a disclosure memo.

A taxpayer will be granted a foreign tax credit upon submitting to the CG a tax credit certificate, an official receipt, or a functional equivalent of a tax credit certificate issued by the tax department of a foreign country.

Treaty Withholding Tax (WHT) rate on passive income and technical service fee

Some DTAs between Ghana and other countries provide lower withholding tax rates on certain passive income and technical service fees. These lower rates apply when payments are made to nonresidents, excluding payments that are connected to the permanent establishment (PE) of the nonresident person in Ghana. Conversely, Ghanaian residents can benefit from the reduced withholding tax rates under the DTAs when they receive payments from other treaty countries, as long as the payments originate from sources within those countries.

The PN defines a "beneficial owner" as person who receives an item of income for the person's use and enjoyment and assumes the risk and control of the item of income received. It further states that the beneficial owner must be a resident of the other treaty partner, even if the income was not paid to that person. Additionally, the income must not relate to a PE of the beneficiary in the paying country.

Income from immovable property

Regarding the article on income from immovable property, the PN states that treaty WHT rates will not apply to rental income derived from the source country in relation to direct use, letting, or use in any other form of immovable property, such as land, building, plantation and forestry, including royalties from the exploitation of mineral deposits and other natural resources.

Royalties

The PN states that some treaties include income from the lease of equipment as part of the definition of royalties. Where this applies, the DTA rate applicable to royalties will also apply to the income from the lease of equipment.

Treaty rate of Ghanaian tax for nonresidents operating in international traffic

Although the general rule in tax treaties is to give the exclusive or sole taxing right to the resident or home country of the airline or shipping company, in most of the DTAs between Ghana and other countries, the Article on "International Traffic" or "International Transport" moderates the provision of Section 7(f) of Act 896 as follows:

Where there is reciprocity in international traffic between Ghana and the home country of the foreign airline or shipping company, i.e., where any Ghanaian airline or shipping company also operates to the home country of the foreign airline or shipping company in the year of assessment, then the business income of the foreign airline or shipping company will be absolutely exempted from tax in Ghana in that year of assessment. In such a case, each country will tax its own airline or shipping company.

Access to dispute resolution through MAP

In cases where a taxpayer disagrees with either the Ghanaian tax authority or that of the treaty partner regarding the interpretation or application of a tax treaty provision on their income taxation, the DTA gives the taxpayer access to a simple dispute resolution mechanism through the MAP. The CG is required to engage with the Competent Authority (CA) of the other treaty country to resolve disputes arising from the interpretation or application of the tax treaty provisions. This aims to reach a mutual agreement and steer clear of taxation that is not in accordance with the treaty terms.

Nondiscrimination of Ghana citizens on taxation matters

According to the PN, where a Ghanaian has suffered discrimination in tax matters in any of the countries that has tax treaty with Ghana, the Ghanaian may apply to the GRA (or the CA of the treaty partner if provided under the treaty) for redress through the MAP.

Procedures for claiming treaty benefits in Ghana

A taxpayer may apply for tax treaty benefits upon meeting all the eligibility criteria. The procedures involved include:

a) Completing a certificate of residence

The certificate of residence comes in two forms — one for Ghanaian residents, and the other for nonresidents.

The certificate of residence for Ghanaian residents must be completed by a resident of Ghana who is seeking to claim a tax treaty benefit in a foreign country that has a DTA with Ghana. The certificate must be endorsed by the CG before it is submitted to the tax authority of the country where the claim is to be made.

The certificate of residence for nonresidents, on the other hand, must be completed by a nonresident who is seeking to claim a tax treaty benefit from Ghana. The certificate is to be duly endorsed by the tax authority of the country of residence of the nonresident taxpayer.

b) Submitting a formal application to the GRA

The completed certificate of residence with the official seal or stamp of the relevant revenue authority must be attached to a formal application addressed to the CG and submitted by a taxpayer or an individual duly appointed by the taxpayer to act on his behalf.

Nonresidents claiming relief or treaty WHT must provide, in addition to a formal application addressed to the CG, evidence (e.g., copy of contract with a Ghanaian resident in the case of royalties and fees for technical service, evidence of shareholding in the case of dividend or loan agreement in the case of interest) to support the income on which the treaty rate is being sought.

c) Submitting a claim for treaty benefit

Once the GRA approves the claim of treaty benefit in the case of a WHT DTA rate, the taxpayer must submit to the WHT collecting agent (e.g., Government ministries, departments, agencies and parastatals, companies, statutory bodies, institutions and other WHT collecting agents of the GRA etc.), a copy of the CG's approval letter to reflect the rate in the WHT deduction.

Implications

Taxpayers seeking DTA benefits must meet specific criteria, including residency requirements and evidence of beneficial ownership, and adhere to the Limitation of Benefits (LOB) provisions. Noncompliance with or abuse of treaty provisions can lead to denial of benefits.

Residents of Ghana can claim tax credits for foreign taxes paid, subject to certain limitations. They can also opt for a deduction for foreign taxes paid, subject to the approval by the CG.

Taxpayers need to take proactive steps to obtain the necessary documentation from their vendors and timely apply to the CG for confirmation of DTA benefits. This will ensure that the correct withholding tax rates are applied to their vendors.

A taxpayer also must obtain a certificate of residence and submit a formal application to the GRA. Nonresidents claiming relief or treaty WHT must provide supporting evidence along with their application.

Practice Note on the application of minimum chargeable income under the Income Tax Act, 2015, Act 896 as amended by Act 1094

The key matters provided in the PN are highlighted below.

Application of the PN

The Income Tax (Amendment) Act, 2023 (Act 1094) imposes a tax on a person who has been in business or investment for more than the previous five years and continues to declare losses from its operations. Such a person is required to pay tax on a minimum chargeable income of 5% on the turnover from the sixth year until the person declares a tax profit.

Exclusion from the Minimum Chargeable Income

The minimum chargeable income is not applicable to a person within the first five years of commencement of operations or persons engaged in farming.

Determining the Minimum Chargeable Income

The chargeable income of a person shall be determined as the assessable income of that person referred to in section 3 of the ITA less deductions allowed that person under the ITA.

1. If a person is obliged to file a tax return by self-assessment, the minimum chargeable income must be calculated on the turnover filed by that person.
2. If a person fails to file a tax return as required by law, the minimum chargeable income shall be determined using the CG's best judgment, taking into account information reasonably accessible to the CG.
3. If the CG adjusts a person's assessment (i.e., loss) based on additional information, the minimum chargeable income will be subsequently determined on the adjusted turnover.

Treatment of tax paid under Minimum Chargeable Income

According to the PN, tax paid under the minimum chargeable income cannot be regarded as a tax credit to be carried forward to a future period or used to offset any income tax liability in another year of assessment.

Carrying losses forward

Where a person is allowed to carry forward losses under section 17 of the ITA, the minimum chargeable income will nonetheless apply — regardless of the right to carry forward the losses. That person will be allowed to carry forward the unrelieved losses to subsequent periods pursuant to section 17 of the ITA.

Illustrations

Paragraph 5 of the PN provides some illustrative examples based on various fact patterns.

Definition of terms

The PN defines the following terms:

• A taxpayer's loss from a business or investment for a year of assessment is calculated as the excess of amount deducted in calculating the income of that person from the investment or business over amounts included in calculating that income. Loss referred to in the PN means tax loss.
• Unrelieved loss means the amount of a loss that has not been deducted in calculating the income of the person under the ITA.
• Minimum Chargeable Income means 5% of a person's turnover for a year of assessment where that person has been declaring losses for the previous five years of assessment.
• The previous five years means any consecutive five years of assessment preceding the current year of assessment.
• Turnover means the total income or revenue from business or investment before any expenses and operating costs are deducted.

Implications

Taxpayers who have been claiming tax losses for continuous periods must factor in the impact of the minimum chargeable income when budgeting and planning for taxes, as they will be required to pay the taxes despite incurring losses. However, paying the tax, based on the minimum chargeable income will not hinder a taxpayer's ability to carry forward unrelieved losses within the provisions of the ITA.