“Three things are certain, competition, death and TAXES” – Unknown
The review and introduction of new taxes at the beginning of the year brought heightened apprehension among Ghanaian taxpayers. High cost of borrowing, rising energy/utilities cost, sluggish local currency (at the time) against major trading currencies, high inflationary pressures among others made analysts questioned the rationale for government to take this unpopular stance on taxation. Some were taken off completely (1% interest on earnings**) but majority passed for implementation and enforcement.
To probe further on the need to understand the basics and how to get the best policies in taxation going forward, Ghana Talks Business’ Paa Swanzy-Essuman had an interview with Tax Consultant, Lawyer and Part-Time Lecturer at the School of Law, University of Ghana, as well as the Ghana School of Law, Mr. Abdallah Ali-Nakyea to get his perspectives on this timeless debate on taxation. Aside lecturing and consulting on taxation, Mr. Ali-Nakyea is also the managing partner of the law firm Ali-Nakyea & Associates (Tax Attorneys, Solicitors and Consultants). In this interview Mr. Ali-Nakyea throws an insightful light on the principle of ring fencing used in taxation and push for more training for the tax authorities’ human resource who would be handling the collection of revenue and also put in place the appropriate legislation for the country to derive much from its natural resources. He argues that there needs to be transparency in the handling of the debt stock owed the BDCs and also the recent hue and cry about taxing pensions is much ado about nothing since it is illegal to take such move.
Paa Swanzy-Essuman= GTB
Abdallah Ali-Nakyea= Ali-Nakyea
GTB: How should the country position itself to gain much from specialized sectors (petroleum and mining) following the revision of aspects of petroleum agreements?
ALI-NAKYEA: I think that the first step has been taken, which is the review of the tax laws on the taxation of the petroleum and mining sectors. Because if you look at the taxation of the specialized sectors, mining had the Minerals and Mining Act of 2006 and petroleum was still subject to tax under the Petroleum Income Tax Law, PNDC Law 188 of 1987. So the first step has been taken which was the passage of the new Income Tax Act, 2015 (Act 896). And then the chapters that provided for the specialized sectors saw a lot of review and updating of the provisions in the law to meet the current standards. But a lot still needs to be done, and that has to do with the education and training of the officers of the Ghana Revenue Authority who will have an oversight of the sources of revenue for government. Because if you are not versatile in all the nuances of the sector, you may not appreciate how costs are accumulated and these costs will go to reduce incomes and once revenues reduce then tax inflows will also reduce. So the bottom line is the capacity-building of the revenue officers because they will be monitoring the revenue flows and they will be the custodians of the state to collect the taxes due the state. So they should be abreast with the changes in the system as far as those specialized sectors are concerned.
GTB: Ring fencing tends to benefit mainly multinationals and big corporations is that always the case? How can small business owners take advantage?
ALI-NAKYEA: When we talk about ring fencing, I do not think it is a benefit to multinationals alone, they seem to rather wish not to have it. It is rather the opposite, reason being that, if you talk about ring fencing which is commonly applied in the natural resource sector, petroleum and mining- what it means is this, when you come into mining for example, you apply for and you are given a concession where you explore for the minerals and produce. You can be given a concession at say Point A, you start doing your exploration, and suppose you do not find any mineral, if you get another concession at say Point B, and you start exploring and find a mineral then you are in a position to produce. There is the tendency for the entity to move all the cost incurred in Point A, for which there was no mineral find, to Point B and wipe off the profits coming from the operations in Point B. Meanwhile the costs incurred in Point A should not have been shifted to wipe of profits from Point B, because they are sunk costs. If you allow that, that is the shifting or transferring of costs from one mineral operation to the other, what is going to happen is that as and when the new concession is granted and costs come out without a mineral find, these costs will be moved to knock of profits from another concession which is profitable.At the end of the day you may get nothing if the costs from the first concession end up wiping of the profits of the second concession. So the principle of ring fencing is that, if you are given a concession, or in the oil sector a block to explore and drill oil, any cost you incur, say on Project A remains there with Project A and not transferrable to any other project. If you are given a block (Project A), and you drill and get a dry well, that is you do not find oil, if you go for another block (Project B) and you find oil, you cannot move the cost from Project A to come and knock off the profits from Project B. It is thus not a beneficial concept, but rather businesses will have a higher cost because they will lose in terms of having so many projects-supposing they have five wells and four are dry, they cannot move the costs from the four wells to come and knock off the profits from the fifth block although these blocks belong to the same entity. All costs must remain with their respective and specific projects. You will find out that in the new Income Tax Act, 2015 (Act 896) that is what has been maintained, it is thus not new in the sense that in the mining companies they were already in that format. For example you have ABC Mining Ltd but it has a mine in Town B, Town C- so you see we have Goldfields Tarkwa, Goldfields Damang, they are separate entities for tax purposes but they all belong to Goldfields. That is the essence of ring fencing. They are done that way because suppose we have Goldfields, which operates, say Damang Mines and finds no minerals. They go to Tarkwa Mines and there are minerals and, without a provision for ring fencing,they could use the costs of Damang Mines to knock off profits from Tarkwa Mines because you are the same company, Goldfields. That is what ring fencing tries to stop so there will be a fair sharing because the state as the owner of the resource must have a fair share from the investor, who should as be getting enough to cover his/her/its costs and also make profit. It is thus a win-win situation.
GTB: Ring fencing; has it got any advantages or positive implications to our tax system
ALI-NAKYEA: It is going to lead to us getting more revenue if the monitoring is done so that companies do not move costs from one project to another. This is so because if you have three concessions, and two are not producing and one is producing, the tendency to move the costs of the two to knock off the income of the third one to reduce profit or even to report a loss is there. If that happens the net loser is the government-no revenue. It all bothers on monitoring. Thus, yes ring fencing provisions has advantages and positive implications for our tax system.
GTB: the energy sector levies and its impact after 6 months, good or bad?
ALI-NAKYEA: The impact is so glaring. ECG has come to show that it is not entirely the meters but also the tariffs that have been imposed on the utilities, including electricity. And for me I thought that as a nation we all missed something fundamental, when the tariffs were imposed and the prices of petroleum products and other utilities went up, I remember clearly when they interviewed the Chairman as well as Ranking Member of Finance Committee of Parliament they were both clear that when their Committee asked what the impact will be after examining the figures from the finance ministry, the highest impact was going to be 5%, yet after it was approved and imposed it went as high as 27-30% in some instances. So the question I asked was what was stopping us from asking the committee or parliament to request the ministry to come back with the figures that will give the initial impact of the highest of 5% that they told the committee. It is just the due process to be followed. Parliament is the only body that can make laws; they are the only body that can impose taxes and duties under article 174(1) of the constitution. In article 174(2) they are the only body again that can waive or vary a tax, because any person or body given power to waive or vary a tax cannot do so without the prior approval of parliament. I see that the challenges facing businesses in Ghana do not have much to do with direct taxes, as direct taxes are on your income you have earned after taking off your expenses and government wants it share. The impact is not as worrisome as that on the utilities which are indirect taxes. Indirect taxes are on goods and services, if they go up, the cost of production goes up, prices go up, patronage goes down and businesses will shut down. So I think we as a nation should address the issues of indirect taxes on utilities and then businesses will have low cost of production and remain in business. In taxation and tax policy making we have what we call tax equivalences, which means you have to decide where you want to source your tax revenue; so if as a government you want say Ghc 400 million to fill gaps in your budget you look at indirect taxes to find out which tax handles can you touch to raise Ghc 400 million, what will be the impact on the economy? Then you come to the direct tax and ask yourself which tax handle if I touch will give me the same revenue of Ghc 400 million and less distortion of the market, then you go for that. So if it is a particular void in the budget that we need to block, we should also then be prepared that if the indirect taxes and tariffs are reduced we should be expecting some other place, or tax type to be touched. Countries that are able to make it without the increases in tax, of course look at the other sectors. The other alternative is for government to keep an eye on the extractive sector-the natural resources because Ghana has them all- gold, timber, oil, cocoa, diamond, bauxite, oil, etc., so if you put an eye there and you are able to tap the revenues that are legitimately due you, then of course you can bring down taxes because other sources are supporting the economy. But if export earnings are low or negligible, and also the natural resource sector is not getting you enough, what then is left for government? I am particular about the natural resource sector because unfortunately these days and times they are facing low commodity prices globally. It is not intentional that we are not getting enough from there but the question is, to the extent that things are high at those sectors we should anticipate illicit financial flows. If you take a look at the Africa Centre for Energy Policy (ACEP) Report in February 2015, we, as a country Ghana, lost $14.39 billion between 2002-2011-on average that comes to $1.44 billion a year. How much did we go for from International Monetary Fund? $ 1 billion for 3 years, on average $300+ million yearly, and we are losing more than that a year from illicit financial flows from extractive sector alone?
GTB: the energy sector levies and its impact after 6 months, good or bad and Calls by BDCs and consumers of petrol for the removal of 17.5%tax on petroleum products. What do you make of it?
ALI-NAKYEA: I think it is time there is transparency in this whole BDCs saga, because over the years we have been made to understand that prices cannot come down because we need to recover and pay for the cost and owings to BDCs. But I keep complaining that the key to compliance and resolution of all these challenges is transparency. Have we been told by the authorities in the dailies how much we owe the BDCs, how much have we paid and what is outstanding? Publish what we pay, transparency for me is key. But if we are not privy to how it is being handled and forever have to pay, then what are we contributing towards? For me, the other concern is the reading that I came across that the government would float bonds to raise money to pay the BDCs, then where from the levies? The levies I thought were there to raise money to pay for these debts, so if you want to go and float bonds, that is, a double source of revenue- that is another area where I will raise the tax equivalences issue. If issuance of bonds can pay them off then why the imposition of levies, and if the levies can pay them off, then why float bonds? The third concern is the tax point; at what point is the 17.5% levy being imposed. Because if you take the petroleum price build-up if you do not take care you will be imposing a tax on a tax, that is, what then leads to cascading effect of taxes. Its impact on the citizenry and the economy is well-known and we are all feeling it. The agitation, the rising costs and you can see where inflation figures are going through because all these feed into the consumer price index (CPI). It is time to review these levies, these are tax handles that come in once in a while to block a loophole in a budget but when it becomes permanent then that is a worry.