The New Tax Reforms: How much tax are you paying?
Tax reforms are usually undertaken by governments to ensure that any ambiguities in previous tax legislations are cleared, loopholes are plucked to remove any unintended tax avoidance, and the provisions are made simpler for easy implementation etc. Act 896 seeks to achieve these and more. The Act also seeks to consolidate all direct tax legislations which hitherto existed separately such as Minerals and Mining Act, Petroleum Income tax and all previous amendments to Act 592 have also been taken care of.
CHANGES IN ACT 896
Capital Gains Tax and Gift Tax which previously stood separately as Chapters 11 and 111 respectively in Internal Revenue Act 2000, Act 592 and taxed at 15% have now been subsumed under employment, business and investment income and taxed at graduated rate of employment and at corporate rate for companies without the previous threshold of Ghc50.00. Additionally, there is no distinction between a gift to a family member and a non-family member. For example, a gift to be added to assessable income and taxed at graduated rate for individuals and at corporate rate for companies. Gains in asset disposal under 896 for companies is added to be assessable income for tax purposes while for individuals he can opt to be taxed at 15% or add to assessable income for gradual tax. (Section 45 of 896)
INDIVIDUAL INCOME TAX
The individual income tax free tax band has also been increased from Ghc 1,584.00 to Ghc 2,592.00 per annum. What this means is that if an individual earned up to Ghc 1,584 per annum under Act 592 they were free from paying tax. Under 896 the tax-free limit has risen to Ghc 2,594. Therefore the individual tax payer under 896 takes home an enhanced income.
In Act 592 Ghana the income of a person was taxed based on the source of the income and residential status. For example, for a resident, the income must be derived in Ghana, accrued in Ghana or brought into the country to qualify to be taxed and for a non-resident; the income must be derived or accrued in Ghana. Therefore, the source of the income must be in Ghana. In Act 896 however, the income of the resident person worldwide is taxable and for non-resident, the source must be from Ghana.
Section 3(2) states.
“The assessable income of a person for a year of assessment from employment, business or investment is
a) In the case of a resident person, the income of that person from each employment, or business or investment for the year, whether or not the source from which the income is derived has ceased and
b) (i) In the case of a non-resident person, from employment, business, or investment for the year, to the extent to which that income has a source in this country;
(ii) Where the person has a Ghanaian permanent establishment income for the year that is connected with the permanent establishment, irrespective of its source.
Section 111 (1) of the Act also adds that:
“The income of a resident person derived from foreign source is taxable.” These buttress the worldwide income of a resident person being subject to tax.
RING FENCING IN TAXATION OF NATURAL RESOURCES
DEFINITION of ‘Ring Fence’
A protection-based transfer of assets from one destination to another, usually through the use of offshore accounting. A ring fence is meant to protect the assets from inclusion in an investor’s calculable net worth or to lower tax consequences.
Moves to ring fence an asset are often called “ring fence trades”.
BREAKING DOWN ‘Ring Fence’
There are many legal options available in many countries to ring fence assets, although many have caps that are set at a percentage of one’s net worth. The main motivation for moving assets (or capital) into a ring fence is to free it from undue restrictions, tax burdens or other country-specific laws. Property or assets held outside a nation’s jurisdiction cannot have claims brought on them, so they become “untouchable” by the investor’s home country.
Act 896 has introduced ring fencing into mineral mining sector in addition to that which was already in existence in the petroleum sector. By this provision the income of mineral, mining and petroleum sectors will be taxed on project basis but not income of the whole entity level. For example, if a company has more than one mine, each mine will be taxed on income derived from that particular mine as if it is a separate entity and not income from the general operation of the company.
OTHER AMENDMENTS: WITHHOLDING TAX OBLIGATIONS
DEFINITION of ‘Withholding Tax’
1. Income tax withheld from employees’ wages and paid directly to the government by the employer.
2. A tax levied on income (interest and dividends) from securities owned by a non-resident.
BREAKING DOWN ‘Withholding Tax’
1. The amount withheld is a credit against the income taxes the employee must pay during the year.
2. Tax is deducted not only from dividends, but from other income paid to non-residents of a country.
This is a statutory obligation on all business entities operating within the country unless the entity is specifically exempt by the Commissioner General.
PAYMENT FOR SUPPLY OF GOODS, SERVICES AND CONTRACTS
A resident person is required to withhold tax at the appropriate rate where that person pays a service fee with the source being in Ghana to resident individual as follows except where the person is exempt:
i. As fee or allowance to a resident director, manager, trustee, or board member of a company at the rate of 20%
ii. Endorsement fee, Commission to a sales agent, part-time teacher and examinations invigilator, all at the rate of 10%
iii. A service fee or insurance premium with a source in Ghana, 5%
A resident person, other than an individual making payment to another resident person shall withhold tax at the rates as specified below;
a) The supply of goods or services 3%
b) The supply of any works, 5%
c) The supply of services 15%
A resident person making payment to a non-resident person shall withhold tax as follows;
a) Management and technical service fees 20%
b) Supply of goods or works 20%
c) The supply of any service, 20% where the contract gives rise to income from the country.
Credit: Ghana Talks Business interview with Mr. Lance Adoguba, Tax Consulatnt- WTS Tax Advisors