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- 8 Marks
Question
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)
Answer
i) Challenges of Double Taxation Agreements to Ghana include:
- No credible evidence that tax treaties significantly boost Foreign Direct Investment (FDI) activity.
- Treaty negotiations are complex and may not fully meet the political and economic interests of both countries.
- Double taxation agreements (DTAs) can erode the tax base by shifting taxing rights away from Ghana.
- 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:
- Exemption method: The income is taxed in the source country and not taxed again in the second country.
- Deduction method: Residual income is taxed in the second country after being taxed in the original country.
- Credit method: Taxes paid in the source country are credited against taxes due in the second country, ensuring no double taxation occurs.
- Tags: Double Taxation, Tax Compliance, Tax Relief, Tax treaties
- Level: Level 3
- Topic: International taxation
- Series: MAR 2024
- Uploader: Joseph