The Income Tax (Amendment) Act, 2023 (Act 1094) (the Income Tax Amendment) was enacted on 31 March 2023 and became effective on 3 April 2023, following presidential assent and its publication in the gazette. The purpose of this update is to highlight and comment on the key changes the Income Tax Amendment introduces to Ghana’s income tax regime.
1. Imposition of withholding tax on the realisation of assets and liabilities
Prior to the enactment of the Income Tax Amendment, there was no withholding tax on the realisation (i.e. sale, transfer or other form of disposition) of assets and liabilities. Further, corporates and other non-natural persons were required to pay tax on the gains made from the sale of their assets when making payments in respect of their chargeable income for the year of assessment in which the realisation occurred (i.e. there was no separate capital gains tax regime for such entities). In the securities industry, gains made by non-resident persons from the realisation of bonds issued by the Government of Ghana were tax exempt, while gains made from the realisation of securities traded on the Ghana Stock Exchange (GSE) were tax exempt until 31 December 2021. The policy rationale behind these securities related tax exemptions was to encourage trading activity on the stock markets and it was expected that the Government would renew the exemption related to gains from the realisation of securities traded on the GSE for this purpose. However, without passing any legislation to renew the waiver in relation to securities traded on the GSE, the Government has now (through the enactment of the Income Tax Amendment) imposed a withholding tax of (in the case of residents) 3% and (in the case of non-residents) 10% on the consideration paid by a resident non-natural person in respect of the realisation of assets or liabilities (other than investment returns which are already subject to withholding tax under section 115 of the Income Tax Act, 2015 (Act 896) as amended) and where the payment has a source in Ghana. This means that unless the person selling or realising an asset or liability in Ghana is entitled to full tax exemption or any tax exemption specifically including withholding tax, the juristic person making the payment will be required to withhold tax at the specified rates and the consideration payable will be reduced by the amount which must be withheld and paid to the Ghana Revenue Authority in respect of tax. In the absence of any restriction on the kind of asset or liability this provision relates to, this change is bound to have serious consequences on all kinds of transactions, including transactions for the realisation of securities, other types of movable property and immovable property. The amount withheld is not a final tax and therefore will serve as a credit towards the tax liability of the person who realises the property for the relevant year of assessment. However, considerations regarding whether the seller actually makes a profit from the sale and the practicality of obtaining tax refunds from the Ghana Revenue Authority raises questions regarding the rectitude of imposing withholding tax on the sale of assets and liabilities.
2. Introduction of requirement to file a tax return on the realisation of assets and liabilities
In addition to the imposition of withholding tax on the realisation of assets and liabilities, the person realising the asset or liability is now required to submit a return to the Commissioner-General within 30 days of the realisation. The Commissioner-General is yet to specify the form of the return or provide any guidance on the information which will be required for the purpose of completing the return.
3. Imposition of income tax on persons declaring losses for 5 consecutive years of assessment
Generally, income tax is the tax payable on the chargeable income (from employment, business and/or investment) of a person for a year of assessment. In any year of assessment, the income of a person from a business is the gains and profits of that person from that business for the year or a part of the year. Prior to the enactment of the Income Tax Amendment, this formulation of the law meant that a business which did not make profit had no income tax obligation. The Income Tax Amendment changes this position by creating a minimum chargeable income of 5% of a business’ turnover (i.e. gross revenue) and authorising the tax authorities to require a person to compute and pay tax on this minimum chargeable income where the person has been declaring losses for the previous five years of assessment. This means that with the exception of persons engaged in farming and businesses which have not been in operation for more than 5 years (both of which are exempted from the scope of this provision) businesses which are making losses may be required to pay income tax.
4. Imposition of withholding tax on winnings from betting and other games of chance
Prior to the enactment of the Income Tax Amendment, a withholding tax of 8% applied to payments of lottery winnings which had a source in Ghana. “Lottery winnings” was not defined and was reasonably interpreted to apply to the winnings from lotto as regulated by the National Lottery Authority. Based on this interpretation, the withholding tax requirement did not apply to winnings from betting and other games, which are distinct from lotto and are regulated by the Gaming Commission. The Income Tax Amendment plugs this gap by replacing the withholding tax on “lottery winnings” with a tax on “winnings from lottery”, and then proceeds to define lottery for tax purposes as including betting, gaming and other games of chance. The rate of withholding tax has also been increased from 8% to 10% of gross winnings at the end of each game.
5. Taxation of companies involved in lottery operations
The Income Tax Amendment has completely overhauled the taxation regime for companies involved in lottery operations. Such entities will now be taxed at 20% of their gross gaming revenue, which is defined as the total amount staked or wagered less prizes or winnings paid or payable. This means that all other expenses of a company involved in lottery operations will not be deductible from the income of such entities for the purposes of determining their income tax liability. Further, the income from an entity’s lottery operations are to be charged separately from its other earnings, which will be determined by the general regime for determining an entity’s chargeable income for a year of assessment.
6. Increased income tax rate for persons entitled to concessions
The income tax rate for persons entitled to a concession under Schedule 6 of the Income Tax Act, 2015 (as amended) has been increased from 1% to 5%. The affected entities include companies which satisfy the eligibility criteria under the Venture Capital Trust Fund Act, 2004 (Act 680), companies involved in waste processing business and certified companies involved in the business of providing low-cost housing.
7. Increased elective tax rate in relation to gifts and gains for individuals
Prior to the enactment of the Income Tax Amendment, an individual could opt or elect to pay tax on a gift received (other than a gift received in respect of business or employment) or on the gains made from the realisation of an investment asset (less any loss from the realisation of an investment asset that has not been charged elsewhere) at a rate of 15% as a final tax. These rates have now been increased to 25%.
8. Changes to the treatment of unrelieved losses
Prior to the enactment of the Income Tax Amendment, a person could (in the ascertainment of a person’s income from business in a year of assessment) either deduct unrelieved losses for the previous 5 years or the previous 3 years of assessment, depending on whether the person fell under a specified priority sector (e.g. mining). Now, the losses regime has been unified such that all persons (irrespective of whether the person falls in a priority or non-priority sector) are entitled to deduct unrelieved losses from any of the previous 5 years of assessment.
9. Changes in treatment of foreign exchange losses
Following the enactment of the Income Tax Amendment, unrealised foreign exchange losses incurred by a person are not deductible when ascertaining the person’s income for a basis period from any business. Further, an unrealised foreign exchange loss and a foreign exchange loss arising from a transaction between two resident persons does not form part of an allowable deduction. Realised foreign exchange losses, other than those of a capital nature, are deductible if incurred by a person in the production of business income during the period related to a debt claim, debt obligation or foreign currency holding.
10. Changes to the threshold for determining control in relation to related parties
The Income Tax Amendment has changed the definition of controlled relationships by including the concept of an “associate” into the scope of controlled relationships and amending the definition of an associate to mean a person who participates directly or indirectly in the management or control of the entity or a person who is managed or controlled by the same persons who manage and control the entity. Control has also been varied from meaning a person who “controls the entity or may benefit from 50% or more of the voting power or rights to income or capital of the entity” to “holding directly or through one-or more interposed entities, 25% or more of the voting power or rights to income or capital of an entity”.
It is expected that the GRA will issue administrative guidelines and practice notes to provide further clarity on the implementation of these changes to taxpayers in due course.