Preparing for the end of 2023: challenges in implementing the 2023 tax changes

The Ghana Revenue Authority (GRA) announced that the Income Tax (Amendment) Act, 2023 (Act 1094), which was gazetted on 3 April 2023, would be effective from 1 May 2023. The measures in Act 1094 were announced in the 2023 National Budget and were expected to be passed by Parliament to become effective from 1 January 2023. Another law, the Growth and Sustainability Levy Act, 2023 (Act 1095) was also gazetted on the same day.

Unfortunately, although Parliament’s Finance Committee had worked on the Bills before the Christmas recess, Parliament was unable to pass these Bills before 2022 ended. This meant the 2023 calendar year started without the new measures taking effect.

The Income Tax Act, 2015 (Act 896), as amended, allows companies to choose their accounting or financial years. The financial year of most companies in Ghana starts in January and ends in December. Some companies run a July-June financial year among other variations.

The Government’s financial year however, as provided by the Public Financial Management Act, 2016 (Act 921), starts from January and ends in December. This means new measures that are announced in the National Budget are almost always going to start from January.

The current problem is that some measures in Act 1094, which were intended to start from 1 January 2023 have been pushed to 1 May 2023. All companies must find ways of complying with the new laws.

Some of the new measures include new graduated tax rates for individuals, increment of 1% concessionary tax rate to 5%, non-deductibility of unrealised exchange losses, and imposition of Growth and Sustainability Levy (GSL). The GSL is an enhanced form of the National Fiscal Stabilisation Levy (NFSL), which operated on selected industries.

We will focus on the non-deductibility of unrealised exchange losses, the imposition of GSL and the introduction of a minimum chargeable income.

Change in deductibility rules for unrealised exchange losses

From 1 May 2023, companies are no longer allowed to deduct unrealised exchange losses. They must wait until the losses are realised. That is, these losses are only treated as incurred when the foreign debt is paid, or foreign revenue is received.

For most businesses, this new rule came after they had started their financial year. The problem is whether the taxpayer is expected to reverse only unrealised exchange losses suffered after 1 May 2023 or the taxpayer is supposed to reverse the total unrealised exchange loss at the end of the year.

It is worth mentioning that this provision, in and of itself, is problematic because it taxes unrealised exchange gains but does not permit deduction of the unrealised exchange losses. Ideally, once both unrealised gains and losses have not been earned or incurred, they should be treated similarly. This treatment is also necessary because the same item which gives rise to a gain today, may generate a loss tomorrow. We hope this law sees an amendment soon.

Generally, the exchange rate at year-end and the rate used to book the amount are the only relevant rates. This mean that taxpayers would ordinarily apply the new provision on the total balance of unrealised exchange losses at year-end. However, for the 2023 year of assessment, taxpayers may consider applying this provision to only unrealised exchange losses incurred after May 2023. That is, they should find the monthly losses up to April and apply the old rules to those amounts especially if the full-year application will negatively affect them.

On this same issue, the amendment also provided that any exchange loss from transactions between two resident persons is not deductible. This is consistent with the Bank of Ghana’s directive that discourages unauthorised pricing, receipting or making payments for goods and services in foreign currency in Ghana without authorisation.

What happens if the person has authorisation from Bank of Ghana? Assuming the business is authorised to invoice in and receive USD in Ghana, it is likely its customers will incur exchange losses. Does this amendment mean these customers cannot deduct the exchange losses, even though they have not broken any law?

Imposition of GSL

For the tax rate changes in the Income Tax Act, the law already provides a transitional mechanism. Act 896 provides that whenever the tax rate to be applied on income for the year changes during the year, the taxpayer is required to apply the two rates in a specific way.

Let’s take the change in rates for individuals, assuming the individual’s income is entirely from employment, the employer is required to determine the individual’s annual tax using the old rate. After that, the employer must determine the individual’s annual tax using the new rate.

So, we will have two annual taxes using both the old and new rates. The law then says the employer is required to do an apportionment. Firstly, the annual tax based on the old rates will be apportioned using the number of months the rate was in existence. Secondly, the same apportionment is done for the annual tax based on the new rates. So, the formula will be (4/12 * annual tax based on old rates) (8/12 * annual tax based on new rates).

The good thing is that Act 896 anticipates this problem and provides details on how to resolve it. However, there is no such transitional mechanism for the GSL.

The GSL, especially for companies that were not paying the NFSL and are not in the extractive industry, will be a fresh imposition of taxes. This category of persons must generally pay 2.5% of their profit before tax as GSL.

For a company whose financial year ends in December, what does that mean for it? Does the 2.5% apply to the entire profit for the year? Must it apportion the profit since between January and April this Levy was not in force? If it must apportion, does it simply exclude the profits for the first four months of 2023? Is it better to apportion based on the same guidance provided in Act 896?

These are all questions that Act 1095 fails to address. It is understandable that the Government, in submitting the Bill, did not address this problem since it expected the Levy to have commenced on 1 January 2023. When this date was missed, Parliament could have anticipated this problem and catered for it by providing a transitional mechanism.

Had the transitional mechanism even been provided, that would have assisted only businesses whose financial years aligned with the Government’s, i.e., January to December. Assuming the GSL had started in January 2023, what about companies whose financial years ended in June 2023? These companies would have done six months without knowledge of the Levy being introduced.

Currently, those companies whose financial years ended in June 2023 would have spent ten months in their year without the GSL being in force. How do they calculate the GSL? Do they do a simple apportionment of the profit based on the two months?

Determining the profit for GSL

As a start, a guiding post for anyone confronted with these issues is that the Constitution, 1992, frowns on retroactive legislation, especially if the legislation affects accrued rights of persons. This ordinarily means a law should not be passed at the end or in the middle of a person’s financial year to tax income earned before the law was made.

However, there are views that income and profit are variables that can only be determined at the end of the year and hence a change during the year should apply to the entire year. That is, if the tax is imposed during the year and the tax is supposed to apply to the profit for the year, then the tax should apply to the whole profit. The basis is that so long as the year has not ended, there should be no argument on retroactivity especially when at the time the tax was passed, the final profit was unknown.

At PwC, we believe based on the arguments, the scale tilts in favour of apportioning the profit for the year. The alternative will mean that even on the last day of the year, Parliament could pass a law to impose a new tax on profit for the entire year. This will be unfair to taxpayers and so the profit requires apportionment.

We also support the view that the profit should be apportioned based on the number of months the new tax existed in the year. When Parliament wanted to select a method of apportionment in Act 896, it preferred this method.

Fiscal stability relating to GSL

Another issue is the applicability of GSL on some specific companies that have special Agreements with the Government. These special Agreements contain stabilisation clauses. Some of these clauses provide that the Government guarantees that new tax laws or changes in existing laws will not affect the other parties to the Agreement. These Agreements are required to be approved by Parliament.

However, Section 2 of the GSL law provides language to suggest that the Government is unilaterally amending the special Agreements. It says, “The Levy imposed under section 1 applies to the specified companies and institutions despite any provision to the contrary in any agreement or enactment relating to a tax holiday or exemption from direct or indirect tax applicable to a company or institution”.

The simple meaning of this provision is that regardless of whatever Agreement a person has that says they are not liable to taxes in Ghana, the GSL will apply. Surely, Parliament was aware of the tax exemptions it approved before approving this provision in the GSL law. Can the Government insist on collecting the GSL from these companies with such Agreements? Can the companies resist and take action under the dispute clauses in these Agreements?

Risk for underestimating GSL?

The GSL is to be paid quarterly and based on estimated profits. What happens if the total payments made by a taxpayer is lower than the correct payment? Can the GRA legally apply provisions in other laws to impose interest for underestimating the Levies as is done for income tax?

Double taxation of GSL

The current nature of the GSL will lead to double taxation for a group of companies in Ghana. That is, if a resident parent company owns a subsidiary in Ghana, both the parent and the subsidiary may pay the GSL on the profits. There is no exemption for the subsidiary. The exemption is necessary because the same person will end up paying the GSL twice.

Lessons can be drawn from Act 896. For dividends, where a resident parent company owns at least 25% of the voting power of another resident company, dividends received by the parent company are exempt from income tax. Tax is only paid when the parent or holding company pays dividend to its shareholders. The same concept should apply to GSL. That is, with a group of companies with layers, GSL should be excluded from any dividend paid to the resident parent company.

	Subsidiary	Parent	Total tax
PBT	100.00	72.50
GSL	(2.50)	(1.81)	(4.31)
TAX	(25.00)	0.00	(25.00)
PAT	72.50	70.69
Dividend tax	0.00	(5.66)	(5.66)
Cheque	72.50	65.03	(34.97)

From the illustration in the table, the parent company does not pay any income tax on the dividend it receives but must pay GSL on the dividend. The 1.81 GSL needs to be excluded to avoid the same stream of income getting taxed multiple times in the hands of the same ultimate person.

Minimum chargeable income

Act 1094 also introduces a minimum chargeable income for a specific category of taxpayers. This minimum chargeable income applies to taxpayers who have recorded losses for the past five consecutive years. This is the main qualification criterion among other conditions.

If a person meets all the other conditions, the law provides that the person’s chargeable income should be calculated in a special way. 5% of the turnover is deemed as the chargeable income. The tax rate is then applied. However, the law does not make it automatic. It gives the GRA the discretion to apply this provision. That means, this provision can only apply if the GRA writes to a taxpayer or serves them with a notice of assessment.

The issue is what happens when a taxpayer meets all these conditions and has normal chargeable income for the year? Can the GRA legitimately calculate tax on both the normal chargeable income and the minimum chargeable income? It appears to us that the intention of the law is to apply only one at a time. The minimum chargeable income only applies if there is no normal chargeable income.

Also, what if a taxpayer has adjusted income and uses its unused tax losses to reduce the income to zero, does that also count as a loss year? That is in counting the five years, must there be an actual amount to be carried forward as tax loss first? Our view is that a loss means excess expenses over income. So even if prior year losses are used to reduce current year income to zero, there is no loss.

In summary, as we end December, businesses need to ensure they comply with the recent tax laws.

The Government’s major tax changes take effect from 1 January of the year. This sometimes affects companies whose financial years do not align with the Government’s. For 2023 especially, due to the delays in passing Acts 1094 and 1095, most companies must transition between two regimes.

The failure of clear Guidelines from the GRA has left taxpayers answering the same questions differently. In future, it is hoped that Parliament will provide clear provisions to guide everyone.

In the meantime, taxpayers are encouraged to consult their advisors or the GRA in navigating the rest of the year.

Want to know more?

Let’s talk. You can contact me by sending an email to Kingsley Owusu-Ewli ([email protected]) and copying in Laura T. Fiagome ([email protected]) or Odzangbateh Dake ([email protected]).

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