Ghana’s trade policy and development agenda have over the years been dictated by the desire to attract Foreign Direct Investment (FDI) and to increase export earnings. Tax incentives have, therefore, been a major strategic tool to achieve these goals.
Unfortunately, the result is that trade taxes have declined and currently, Ghana has one of the lowest tax rates in the West Africa sub-region. While this might have boosted Ghana’s competitiveness, it has sometimes undermined the harmonisation of trade and investment regimes across the sub-region through initiatives such as the ECOWAS Common External Tariff (CET)
In a recent preliminary research conducted by Action Aid Ghana (AAG) on Tax Justice, it was realised that the contrary popular assertion that tax incentives attract FDI was not so but rather other factors including skill pool, availability and social infrastructure services such as good schools, good road networks, health facilities, and electricity accounted for significant consideration by the Multinational Companies for investment.
In estimating the value lost through tax incentives, largely as a result of inadequate official data sources, the study relied on alternative data sources such as national budget statement to arrive at overall tax losses. The study estimates that Ghana may be losing up to USS1.2 billion annually as a result of tax incentives. This is usually about half of the entire annual government of Ghana budget for education.
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The study estimates that Ghana lost about US$ 90 million between 2011 and 2012 in the mining sector alone as a result of stability agreement. In the Oil and the Gas sector, the estimate is about US$ 70 million in two years resulting from an ambiguous tax law, which could not be fully applied as a result of varied interpretation of the law.
It is pertinent to indicate at this juncture the various types of tax incentives often granted by the government to Multinational Companies which are becoming inimical to the economic growth of the country
Corporate tax rates incentives
At various stages in Ghana’s economic development, corporate tax cuts have been offered as a deliberate strategy ahead of other African countries in the competition for FDIs. Many businesses and organisations benefitted from these cuts during the country’s economic recovery programme from the 1980s through the structural adjustment programme of the 1990s into the new millennium.
The competition was founded on the conviction that FDI is the way to achieve rapid economic growth. Corporate income tax for instance, in the mining sector was cut down from as high as 45 per cent in 1986 to 25 per cent in 2011. At the same time, initial capital allowances were increased from 25 per cent in 1986 to 80 per cent in 2011, as well as long mining lists of exemptions and other expatriate employees tax incentives all in line with attempts to attract FDIs, thereby watering tax rates in the country. Several other tax incentives in the agriculture and the manufacturing sectors have all conspired to create a tax competition environment by reducing the effective tax rates.
Tax holidays defer the payment of corporate taxes. Here, companies are given time limits typically between five to 15 years from the start of their operations in Ghana where they are exempted from paying taxes. This, they claim, gives special dispensation to companies to recover investment costs before coming into tax payment position. The policy, apart from presumably helping the country stay in competition for FDIs, is aimed at incubating new companies into maturity. The extent of the holiday is dependent on what policy makers conceive as a reasonable period to fully nurture the company into maturity. Tax holidays in Ghana may also appear to be open ended as being witnessed in the cocoa sector. Typically, time bound tax holiday in Ghana ranges between five and 15 years except the cocoa sector where cocoa farmers have been tax exempted from income tax with no time limit to date.
Location invest is another type of incentive granted by the government of Ghana to multinational companies. Historically, investment in the Ghanaian economy seemed to have been over-centred in the main cities, thus Accra, Kumasi and Tema. The policy rational of business location incentives is, therefore, to encourage manufacturing and agro processing companies to locate beyond these three cities. It should be pointed out that this form of incentive does not yield the desire impact for which it was introduced. This is because tax incentives are not the sole determinants of FDIs or Multinational Companies. Many investors prefer cities such as Accra, Kumasi and Tamale because of the availability of the required skills set, proximity to port facilities, relatively better access to electricity, water and banking services.
One of the commonest schemes used is to shift profits from Ghana to other countries through the transfer of mispricing of goods and services. Transfer pricing as a management tool: Transfer pricing is an advanced management accounting tool used to determine the price at which a decentralised company transfers intermediate products or services from one sub-unit of the company to another. For example, when a company in Nigeria transfers goods or services to a related company in Ghana, the price charged by the Nigerian company is referred to as the “transfer price”. One of the main objectives for using transfer pricing is to determine the amount of profit or loss that is attributable to the activities of a decentralised sub-unit of a company.
The government has the responsibility of providing an enabling environment including security, infrastructure, and human capital to facilitate the smooth operations of these businesses. In addition, the government grants these businesses several years of tax holiday to enable them to overcome the restraints of business start-up, among other reasons. In return, Multinational Enterprises (MNEs) are also statutorily mandated to pay income tax to the government to enable it to mobilise revenue to provide state services which are critical for the smooth operations of their businesses. Unfortunately, most MNEs use various schemes apart from government tax incentives to aggressively avoid paying taxes.
What needs to be done
In fact, there is the urgent need for government to review the tax incentive packages to these Multinational Companies. It has been established that the popular assertion that tax incentives attract Multinational Companies was not so but other factors including skill pool, availability and social infrastructure services such as good schools, good road networks and health facilities, and electricity accounted for significant consideration by the Multinational Companies for investment.
Nobody can dispute the fact that if government reviews the tax systems granted to the Multinational Companies, there will be massive development in the areas of education, road infrastructure, health, agriculture, housing, among others. It will reduce the dependency syndrome of Ghana on donors and other partners. It is not in my purview to say that Multinational Companies should not be granted tax incentives, but it is just too much for the country to bear the consequences of the many tax incentives given to them.
Indeed, Multinational Companies need to bear in mind that the government is already providing an enabling environment including security, infrastructure, and human capital to facilitate the smooth operations of their businesses and they need to recognise this by also reciprocating the gesture. —GNA