The Minister of Finance recently presented the 2017 national budget. As with most budget statements, there has been a lot of public debate after the Minister’s speech in Parliament. Thankfully, PricewaterhouseCoopers Ghana, one of the foremost thought leaders in the country has condensed and analysed the budget. You can follow this link to read the document. A concise version of the budget has also been provided by KPMG, another leading professional services firm. See it here.

This year’s budget saw a number of tax developments. Majority of these developments related to indirect taxes. Very few direct tax issues were touched on in the budget. In fact, in terms of expected amendments to the Income Tax Act, only one specific amendment is clear from the budget. This proposed amendment is the focus of this article.

The Minister stated that capital gains from disposal of securities listed on the Ghana Stock Exchange (“Exchange”) will be exempted from tax for 2 years. Stamp duty was also to be given the same treatment. This news is welcomed, not only in terms of policy but also for general tax administration. It is necessary to provide some historical context.

History of capital gains tax

The old income tax law introduced in 2001 was friendly to persons who invested in shares of companies listed on the Exchange. These investors were exempt from capital gains tax. The old law clearly indicated that securities on the Exchange were not to attract capital gains tax for the first fifteen years of the establishment of the Exchange. Since the Exchange was formally established in 1990, this holiday period expired in 2005. In 2006, the holiday was extended by 5 more years. When that also expired, an additional 5 year period was added making the total holiday period to be 25 years. This holiday was expected to end in 2015. Further, the chargeable income of companies listed on the exchange was taxed at reduced rate for the first 3 years at some point. All these were to make the exchange attractive for participation.

No more incentives

The policy direction changed with the new income tax law which took effect from 2016. Capital gains from disposal of shares listed on the Exchange are now taxable. Companies listed on the Exchange now have to pay tax at the general corporate tax rate. Basically, the incentives that existed previously were taken away. A problem however arose with the new policy when it came to taxing non-resident investors. By design, the new income tax law did not tax capital gains separately as the old law did. The new law required that all capital gains are to be added to the annual income of the investor and taxed together. This means disclosure of these gains to the Ghana Revenue Authority (“GRA”) can only occur when the investor was filing its annual return at the end of the basis period. For a resident person who is bound to file this return, it is expected that the return will contain details of any investment. The same cannot be said of a non-resident person either as an entity or an individual. For effective tax administration, non-resident persons are almost always made to pay final withholding taxes. All the taxes due the State are collected by withholding agents thereby eliminating the need for these non-resident persons to register and pay taxes, not to mention file tax returns. One can imagine the difficulty a non-resident person may have to go through simply because it provided management and technical service to a person who is an agent of the GRA had the obligation for accounting for the tax not been passed to the agent. The potential problem is that non-resident persons will either fail to trade with Ghanaians in order to avoid the tax obligations or simply escape after any trade.

Enforcement woes

It appears the new tax law did not really consider the enforcement arrangements when it decided to make non-resident investors pay tax on any capital gain they make on investment in shares listed on the Exchange. The first issue to deal with is whether a particular non-resident investor qualifies to be taxed. Although the law requires any capital gain to be included in the income of the person, there are some exceptions. As explained previously, only income sourced from Ghana by a non-resident person are taxable in Ghana. In identifying Ghanaian sourced income, the law created a collection of items it calls “domestic assets”. In relation to shares, the law says a person has a domestic asset if that person controls 25% or more of the voting rights of the resident company now or in the previous 5 years. In other words, a non-resident person doesn’t source income from Ghana if it does not make any gain on disposal of a domestic asset. The effect is that whenever an investor doesn’t have a domestic asset by virtue of its control of voting rights of the company, the State isn’t interested in whether it makes a gain in order to tax it.

It is not clear if this effect was the intention of the Government when it introduced the law. Resident persons are not allowed to go through this process to determine if they have domestic assets i.e. income source rules are irrelevant to them. So long as they make any gain on disposal of shares, taxes must accompany those gains. A potential situation could be that a non-resident  person owning 24% of shares in a company escaping taxes when the shares are sold and a resident person owning 1% of the shares taxed on any gain on disposal. The subtext of the law, as it stands now is that it is costly to be a resident person who invests in shares on the Exchange.

The next issue is how the Government intended to collect the tax. As pointed out above, non-resident persons who are subject to taxes in Ghana pay all their regular taxes using the withholding mechanism. An agent is made to be responsible for the taxes non-resident persons pay. The tax on any capital gain however is to be collected directly by the GRA. There is a presumption that when a non-resident person disposes of shares during the year and moves on, it will remember to come back to file a Ghanaian tax return 4 months after the end of its accounting year. This is extraordinary. It appears the only incentive to the non-resident person to file a tax return is the ability to carry tax losses from investment activities forward. No real incentive exists if gains are being made. It is worth mentioning that the new tax law provides a rate of 15% that may be applied to individuals who earn capital gains. Since the general tax rate of companies is neutral when it comes to residency, the non-resident is expected to pay 25% tax on the capital gain.

When the new holiday period of 2 years expires, the Government should give serious consideration as to the mode of collection of the tax. A withholding tax approach may be suitable. That will mean the broker/dealer will need to have the authority to determine the gain on any trade and account for any tax to the GRA.