Question Tag: Double Taxation

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  • 5 Marks

TF – May 2018 – L3 – Q3c – Business income – Corporate income tax

Discuss five benefits of the Double Taxation Agreement between Ghana and Mauritius.

The Government of Ghana recently signed a Double Taxation Avoidance agreement (DTA) with the government of Mauritius at Port Louis, Mauritius.

Speaking at a joint press conference after the signing ceremony, Ghana’s Vice President, Alhaji Dr. Bawumia, said:
“We have seen the manifestation of the first fruits of this Joint Permanent Commission with the signing of the historic double taxation agreement between Ghana and Mauritius, …, and we believe this is just the beginning of our cooperation.”

Required:
Discuss FIVE benefits likely to result from the Double Taxation Agreement.
(5 marks)

The benefits of the Double Taxation Agreement (DTA) are as follows:

  • Encourages Trade and Investment: A DTA creates an environment of fiscal certainty, which encourages trade and investments between the contracting states.
  • Prevents Double Taxation: It ensures that businesses and individuals are not taxed twice on the same income, reducing the overall tax burden.
  • Administrative Cooperation: It provides mechanisms for cooperation between the tax authorities of both countries, improving tax enforcement and compliance.
  • Prevents Tax Evasion: The agreement facilitates the exchange of information between the two countries, helping to prevent tax evasion and avoidance.
  • Non-Discriminatory Treatment: It helps prevent discriminatory taxation of foreign nationals and enterprises, fostering equal treatment under tax laws.

(5 marks)

  • 10 Marks

AT – Aug 2022 – L3 – Q2a – International taxation

Discuss whether bilateral double taxation conventions are essential for resolving international tax problems.

Despite the growing number of contributions to bilateral double taxation, some tax analysts have questioned whether bilateral double taxation conventions relating to the taxation of income and capital are essential for the resolution of international tax problems.

Required:
Discuss the above statement.
(10 marks)

The interrogation is based on the idea that bilateral double taxation conventions may be dispensed with. In other words, such conventions are not necessary to resolve the international tax problems that normally fall within their purview. However, this premise assumes that it is possible to ascertain why such conventions exist and what they are intended to do.

Therefore, the following purposes of double taxation conventions are stated, expressly, to serve:

  • A major goal of bilateral tax treaties is to remove impediments to international trade and investment by reducing the threat of double taxation that can occur when both Contracting States impose tax on the same income. This goal is advanced in four distinct ways:
    1. A bilateral tax treaty generally increases the extent to which exporters residing in one Contracting State can engage in trading activity in the other Contracting State without attracting tax liability in that latter State.
    2. When a resident of a Contracting State does engage in a sufficient activity in the other Contracting State for that State to have the right to tax, the treaty establishes certain guidelines on how that income is to be taxed.
    3. A bilateral tax treaty provides a dispute resolution mechanism that the Contracting States may invoke to relieve double taxation in particular circumstances not dealt with explicitly under the treaty.
    4. Where income or gains remain taxable in both Contracting States, the State of residence of the taxpayer will relieve the double taxation by either allowing a credit for the tax paid in the other State or by exempting the income or gain from its own tax.
  • The scope of a bilateral tax treaty typically is not limited to commercial and business activities. Treaties may remove tax impediments to scientific, educational, cultural, artistic, and athletic interchanges. Additionally, they may address issues related to pension plans, Social Security benefits, and even stipends for scholars.
  • The fundamental principle is that treaties should apply to ensure that income is taxed once and only once, thus eliminating double taxation. In addition, most tax treaties also focus on preventing tax evasion and avoidance. The objective is to ensure that double non-taxation does not occur.
  • One ancillary objective is the elimination of discrimination against foreign nationals and non-residents. A treaty ensures that residents of one Contracting State who carry on business in the other State are treated the same as residents of that State.
  • Another ancillary objective is to facilitate administrative cooperation between the Contracting States. This includes exchange of information, assistance in tax collection, and dispute resolution.

Despite these benefits, there are challenges associated with double taxation treaties. Some of these include:

  • Immediate revenue costs.
  • Limitations on certain domestic tax laws.
  • Risk of treaty shopping and abuse.
  • Risk of double non-taxation.

There are alternatives to having double taxation treaties. These alternatives include:

  • The grant of unilateral relief where appropriate.
  • Multilateral tax conventions.
  • Dealing with taxation through multilateral trade and investment treaties.
  • Harmonisation of tax law.
  • Introduction of a universal model tax law.
  • 20 Marks

AT – May 2020 – L3 – Q1 – International taxation

Explanation of the concept of permanent establishment in Ghana and the differences between economic and juridical double taxation.

The spectrum of investment opportunities in Ghana has heightened and this has attracted some investors who intend to visit next month to assess the potential for investment. The Ministry of Finance has written to your Tax Consulting Firm to make a presentation on behalf of the Ministry to these Investors. The letter from the Ministry contains in part the following:

“International trade has given persons the ability to carry out separate aspects of their business operations in different countries. Even though it will be inconceivable to compel a person to pay taxes in every country where that person carries out business operations, the level of business activity carried on by a person in a particular country may expose that person to tax liabilities under the laws of that country. In Ghana, assessable income of a non-resident person includes income effectively connected with a Ghanaian permanent establishment of the person irrespective of the source of the income…”

Required: Prepare a report highlighting the following:

a) What constitutes a Ghanaian permanent establishment with reference to the Income Tax Act, 2015 (Act 896)?
(4 marks)

b) Explain the taxation rules on Ghanaian permanent establishment as enshrined in the Income Tax Act, 2015 (Act 896).
(10 marks)

c) There are economic double taxation and juridical double taxation. Explain these TWO (2) concepts of double taxation.
(6 marks)

Report

To: Tax Partner
From: Tax Intern
Date: July 7, 2020
Subject: Ghanaian Permanent Establishment

a) What Constitutes a Ghanaian Permanent Establishment:

Under the Income Tax Act, 2015 (Act 896), a Ghanaian permanent establishment could be any of the following:

  1. A place in Ghana where a non-resident person carries on business or that is at the disposal of the person for business purposes.
  2. A place in Ghana where a person is using or installing substantial equipment or machinery.
  3. A place in Ghana where a person is engaged in construction, assembly, or installation for at least 90 days, including supervisory activities.
  4. A place for providing services in Ghana.
  5. A place in Ghana where an agent performs functions on behalf of a non-resident person’s business, except for a general agent of independent status acting in the ordinary course of business.

(4 marks)

b) Taxation Rules on Ghanaian Permanent Establishment:

  1. Tax Treatment:
    A permanent establishment is treated as an independent entity and taxed accordingly in Ghana. Income attributable to the permanent establishment is subject to tax in the same manner as a resident company.
  2. Branch Profit Tax:
    A Ghanaian permanent establishment may be subject to branch profit tax at the applicable rate if the income is remitted abroad.
  3. Withholding Tax:
    The permanent establishment must withhold tax on payments made to non-residents and is entitled to claim tax credits on taxes withheld on its behalf.
  4. Tax on Transactions:
    Transactions between a non-resident owner and the Ghanaian permanent establishment must satisfy the arm’s length principle. Interest on loans or debts between the non-resident owner and the permanent establishment may be recognized for tax purposes if it reflects in both books of accounts.
  5. Asset and Liability Attribution:
    Assets used or employed in the activity of the permanent establishment are treated as its assets, and any liabilities arising from borrowing for the establishment’s activity are recognized as its liability.
  6. Control and Business Activity:
    The law considers any business activity carried out by the non-resident that is similar to the permanent establishment’s operations as conducted by the permanent establishment.

(10 marks)

c) Economic Double Taxation and Juridical Double Taxation:

  1. Economic Double Taxation:
    This occurs when the same income from an economic activity is taxed twice in the hands of different taxpayers. For example, the income of a corporation and the dividends distributed to shareholders may both be taxed, leading to economic double taxation.
  2. Juridical Double Taxation:
    Juridical double taxation occurs when a taxpayer is taxed on the same income by two or more countries due to conflicting tax laws. This is common when a resident of one country earns income from another country and both countries claim taxing rights over the income. For example, a resident of Ghana receiving foreign income may face double taxation unless there is a tax treaty in place to avoid this.
  • 8 Marks

AT – Nov 2020 – L3 – Q3b – International taxation

Tax computation for Andrew Soweah as an individual, granting relief under the Ghana/UK Double Taxation Agreement using the credit method.

Andrew Soweah recently relocated to Ghana to commence his business after retirement from TaskForce (UK) Ltd, a security company he served for over 20 years. The nature of the business was to provide private security to diplomats and the very affluent.

Before coming to Ghana, he rented out his apartment in the UK for a yearly rent of £18,000. He also maintained a healthy balance in his account with Diamond Bank in London.

His income for 2019 year of assessment is summarized as follows:

  • Business Income (net of all taxes): GH¢126,000.
  • Dividend received from Faithful Ltd, a resident company at gross amount was GH¢18,000.
  • Rent of £16,200 was paid into his account with Diamond Bank. Withholding tax amounting to £1,800 had been deducted.
  • Diamond Bank credited his account with net of £8,100 bank interest. UK tax rate on interest is 10%.

Additional Information:

  • Exchange rate is GH¢7.5 for £1.
  • Andrew Soweah does not contribute to social security in Ghana.

Required: Compute his tax liability as an individual for the relevant year of assessment while granting him relief for double taxation under the Ghana/UK Double Taxation Agreement using the credit method.


  • 10 Marks

AT – Nov 2020 – L3 – Q2a – Tax planning

A presentation on five objectives of international taxation treaties.

You are a partner in a Tax Consulting firm. Your firm has recently employed 5 new staff and they have to be trained on a number of issues.

Required:
Prepare a presentation on international taxation with emphasis on FIVE (5) objectives or goals of international taxation treaties.

A treaty is an international agreement concluded between states in written form and governed by international law, whether embodied in a single instrument or in two or more related instruments and whatever its particular designation.

International taxation is the taxation of transactions across borders. This places a burden on taxpayers involved in international transactions. Tax treaties are arrangements aimed at reducing the tax burden on taxpayers and crafting a common path between and among countries with tax treaties. An example of such treaties is the double taxation agreement.

Objectives of International Taxation Treaties:

  1. Allocation of tax rights:
    It allows for the allocation of tax between treaty partners, deciding which country has the right to tax certain income.
  2. Fiscal certainty:
    It creates fiscal certainty which encourages investment across countries within the treaty areas. By reducing tax-related disputes, businesses can operate more efficiently.
  3. Preventing tax evasion and avoidance:
    It is designed to eliminate international tax evasion and aggressive tax avoidance, promoting transparency between tax authorities.
  4. Reducing tax burden:
    It aims to reduce the tax burden on taxpayers by preventing double taxation, where income is taxed in two different countries.
  5. Strengthening international relations:
    It deepens international relations by encouraging cross-border investments and ensuring equitable tax practices among treaty countries.
  • 8 Marks

AT – Mar 2024 – L3 – Q1b – International taxation

Discussing the challenges posed by double taxation agreements and the methods of granting double taxation relief.

There is growing attention on the question of tax treaties signed by developing countries. The costs of tax treaties to developing countries have been highlighted in recent years by NGOs such as ActionAid and SOMO (Lewis, 2013). During 2014, an influential IMF paper warned that developing countries “would be well-advised to sign treaties only with considerable caution” (IMF, Spillovers on International Corporate Taxation, 2014) and the OECD, as part of its Base Erosion and Profit Shifting (BEPS) project, proposes to add text to the commentary of its model treaty to help countries decide “whether a treaty should be concluded with a State but also whether a State should seek to modify or replace an existing treaty or even, as a last resort, terminate a treaty” (OECD, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, 2014).

Required:

i) Examine the challenges double taxation agreements pose to Ghana.
(4 marks)

ii) Explain the methods of granting double taxation reliefs.
(4 marks)

i) Challenges of Double Taxation Agreements to Ghana include:

  1. No credible evidence that tax treaties significantly boost Foreign Direct Investment (FDI) activity.
  2. Treaty negotiations are complex and may not fully meet the political and economic interests of both countries.
  3. Double taxation agreements (DTAs) can erode the tax base by shifting taxing rights away from Ghana.
  4. DTAs can be exploited by foreign and local companies to minimize or avoid tax entirely, often by profit-shifting practices.
    (4 marks)

ii) Methods of granting double taxation reliefs include:

  1. Exemption method: The income is taxed in the source country and not taxed again in the second country.
  2. Deduction method: Residual income is taxed in the second country after being taxed in the original country.
  3. Credit method: Taxes paid in the source country are credited against taxes due in the second country, ensuring no double taxation occurs.
  • 8 Marks

AT – July 2023 – L3 – Q1b – International taxation

Calculating the tax payable for a resident company with cross-border income from Ghana and Nigeria.

Libir Ltd is a resident company incorporated in Ghana. Its trading partners have been customers and suppliers from Ghana and also from Nigeria. The company supplies animal feed.

Its operation for 2021 year of assessment is as follows:
Income from Ghana: GH¢10,000,000
Income from Nigeria: ₦1,000,000,000

Additional information:

  1. Allowable expense granted by the Ghana Revenue Authority is GH¢6,000,000.
  2. The allowable expense in 1 does not include capital allowance of GH¢1,200,000 which was legitimately claimable by the company.
  3. The tax paid in Nigeria amounted to ₦40,000,000. The withholding taxes paid in Ghana with evidence of tax credit certificates amounted to GH¢1,000,000.
  4. The taxpayer has written to the Commissioner-General to relinquish its right under the double taxation arrangement.
  5. Exchange rate is GH¢1 = ₦60.

Required:
Compute the tax payable.

Libir Ltd
Computation of tax payable for the Year of Assessment 2021

  • 3 Marks

AT – March 2023 – L3 – Q3f – International taxation

Discuss two harmful effects of double taxation on international trade and investment.

Evaluate TWO (2) harmful effects of double taxation. (3 marks)

Double taxation can have several harmful effects on international trade and investment. Two of the most significant effects are:

  1. Negative Impact on Cross-Border Investments:
    • Double taxation discourages foreign direct investment (FDI) as businesses and individuals are subjected to tax in both the country of source and the country of residence. This leads to reduced profits and makes cross-border investments less attractive, ultimately limiting the flow of capital and technology between countries.
  2. Inhibition of International Trade:
    • The imposition of double taxation creates tax barriers that hinder the free exchange of goods and services between countries. When businesses are taxed twice on the same income, it increases the cost of doing business internationally, reducing the competitiveness of companies engaged in international trade and slowing down economic growth.

In conclusion, double taxation reduces international investments and impedes the growth of cross-border trade, creating unfavorable conditions for global economic cooperation.

  • 4 Marks

AT – May 2016 – L3 – Q5b – International taxation

List the countries with which Ghana has double taxation agreements.

Mention the countries with which Ghana has double taxation agreements. (4 marks)

The countries that Ghana has double taxation agreements with are:

  1. France
  2. Belgium
  3. Italy
  4. South Africa
  5. Germany
  6. Switzerland
  7. Netherlands
  8. Denmark
  9. United Kingdom (Any 8 for 4 marks)
  • 2 Marks

AT – March 2023 – L3 – Q3e – International taxation

Assess the reasons for countries entering into tax treaties and their importance in reducing tax barriers.

Countries have enjoyed tax treaties while others have criticised the whole idea of tax treaty arrangements. Treaties may be bilateral or multilateral. Many countries weigh the benefits of treaties before they enter into them in order not to lose out.

Required:
Assess the rationale for tax treaties. (2 marks)

The rationale for countries entering into tax treaties includes the following:

  1. Avoidance of Double Taxation:
    • One of the primary purposes of tax treaties is to prevent double taxation. Without a treaty, income earned by individuals or businesses in one country may be subject to tax in both the country of residence and the source country. Tax treaties establish which country has the taxing rights and provide relief from double taxation, either through exemptions or tax credits.
  2. Promotion of International Trade and Investment:
    • Tax treaties facilitate cross-border trade and investment by providing certainty and reducing the tax barriers faced by investors. The treaties set clear guidelines on the allocation of taxing rights between countries and may reduce withholding taxes on dividends, interest, and royalties. This creates a more favorable environment for international business and economic cooperation.

In summary, tax treaties are designed to avoid double taxation and promote international trade and investment by providing clear tax rules and reducing tax barriers for cross-border activities.

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