Managing compliance obligations to reduce risk of tax penalties
Ghana’s tax laws not only require the payment of taxes, but also require certain compliance obligations on the part of taxpayers.
These obligations include, registering with the tax authorities regarding a particular tax, acting as a withholding agent, filing returns, making payments on time, and keeping proper records.
Noncompliance with these obligations can have financial consequences, and instances of noncompliance generally are identified during tax audit. Full compliance, however, has little to no financial burden on taxpayers; hence, the saying “the best tax planning measure is compliance.”
This article highlights how taxpayers may reduce risk and exposure through tax compliance, identify typical noncompliance areas in practice, and use certain measures to comply with the tax laws in order to prevent the imposition of penalties.
Tax audit liabilities
A standard comprehensive tax audit by the Ghana Revenue Authority (GRA) usually covers four main tax types: corporate income tax, withholding tax, employee taxes (PAYE system), and VAT.
Liabilities relating to withholding tax, employee taxes, and VAT normally constitute a significant proportion of total tax liability arising from most tax audits. These taxes generally are avoidable as they are third party taxes and not intended to be borne by the payor.
Under the Income Tax Act, 2015 (Act 896), residents are required to withhold taxes at specified rates on payments to residents and nonresidents.
The applicable withholding tax rate depends on the nature of the transaction and the tax residency status of the recipient, and the amount of tax withheld in a month must be remitted and withholding tax return must be filed within 15 days after end of the month.
Withholding tax liability in a tax audit normally results from one or more of the following:
• Failure to withhold tax: A resident that fails to withhold tax when making a payment will be required to pay the tax not withheld. This is usually a primary cause of withholding tax liability arising from tax audits.
• Applying the incorrect (lower) withholding tax rate: Tax audits may uncover situations where residents apply the wrong (lower) withholding tax rate when making a payment.
• Failure to remit withheld tax by the due date: Late remittance of withheld amounts may result in interest charges.
• Failure to file a withholding tax return by the due date: Failure to file withholding tax returns by the due date may result in a penalty of GHS 500, plus GHS 10 for each day the return remains outstanding.
Employers are required to withhold taxes from payments to employees for the exercise of their employment. Tax must be withheld on all gains and profits from the employment unless specifically exempted. The employer must remit the taxes withheld to the commissioner-general of the GRA, together with the PAYE return, within 15 days after the end of the month.
Liabilities arising from tax audits result from the failure to fully comply with the PAYE obligations. Below are some of the practical issues that may lead to PAYE liability:
• The omission of certain taxable amounts from the PAYE computation: Almost every benefit earned by employees, whether in kind or in cash, including gifts, is taxable.
However, reconciling the taxable staff cost in the audited financial statements to the total amount reported on monthly PAYE returns may show differences that suggest that not all taxable payments to employees were taxed under PAYE.
The unpaid taxes then become the financial responsibility of the employer when they are discovered during a tax audit.
• Use of incorrect tax rates: Employers may be applying incorrect tax rates to certain employee payments, such as bonus and overtime payments, payments to temporary and casual staff, and payments related to income earned by foreign nationals who are tax resident in Ghana.
• Late payment: Late remittance of withheld amounts may result in interest charges.
• Late filing: Failure to file tax returns by the due date may result in a penalty of GHS 500, plus GHS 10 for each day the return remains outstanding.
VAT is a consumption tax imposed on supply of goods and services made in Ghana, or imported into Ghana, other than supplies specifically exempt from VAT.
Under the Value Added Tax Act, 2013 (Act 870), persons that make supplies of goods and services (other than exempt supplies) and meet the registration threshold are required to register for VAT with the GRA.
Most VAT issues arising from a tax audit come from the following areas:
• VAT registered persons not charging VAT on taxable supplies: The reconciliation of revenue reported on the audited financial statements and revenue filed on submitted VAT returns is a common audit procedure adopted to test the accuracy and completeness of the revenue reported for VAT purposes. Any unexplained difference is treated as a deliberate understatement of revenue, which may result in an additional tax assessment on the taxpayer.
• Failure to remit the VAT charged and collected by the due date: Late payment of VAT may result in the imposition of late payment interest on the outstanding balance. VAT charged on an invoice must be remitted to the commissioner-general not later than the last working day of the month immediately following the month in which the supply was made.
Failure to file VAT returns by the due date may result in a penalty of GHS 500, plus GHS 10 for each day the return remains outstanding.
Managing tax compliance
Taxpayers should make a concerted effort to fully comply with the compliance provisions under the tax laws, taking into consideration regular tax health checks and proper recordkeeping.
Tax health checks
Given the sanctions associated with noncompliance, taxpayers should conduct regular tax health checks at periodic intervals to uncover any errors or omissions in a timely manner and, where necessary, settle any additional tax liability to prevent interest charges.
A tax health check not only helps quantify the potential tax exposure but also identifies tax risk areas that require extra attention from the taxpayer to minimize the probability of reoccurrence.
The Revenue Administration Act 2016 (Act 915) imposes an obligation on taxpayers to maintain necessary records and documentation in Ghana, and any failure to comply may result in penalties.
Beyond the tax law requirements, proper recordkeeping helps to provide evidence that may be required for defending a position during a tax audit. Proper recordkeeping includes maintaining:
• Invoices and receipts supporting sales and purchases, including VRPOs and Form 9.
• All necessary documents supporting sales reversals and associated payments.
• Accounting records with a detailed description of the nature of all transactions.
• Withholding tax exemption letters received from vendors and accurately tracked payments made to such vendors;
• Documentation and justification for adjustments passed by the statutory auditor during an audit of the financial statements.
Any increase in taxes payable (including associated penalties and interest) increases the cost of doing business and has a negative impact on a taxpayer’s cashflow. Company executives must ensure that measures are implemented to ensure tax compliance.
This requirement is even more important now, due to the challenges faced by taxpayers under the current economic landscape.
The writer is Senior Consultant, Business Tax, Tax & Regulatory Services, Deloitte Ghana