Print Page   |   Report Abuse
News & Press: TaxTalk

Transfer Pricing - Ghana

04 March 2011   (0 Comments)
Posted by: Author: Yaw Asante-Boadi
Share |

Transfer Pricing – Ghana


Transfer pricing (TP) is one of the many vehicles multinational companies (MNC) use to manage the tax impact on incomes derived from different tax jurisdictions.Technological preferences, local market conditions and tax competition offer sustainable justification for transfer pricing. 

Ghana introduced transfer pricing legislations into its tax regime in 2001 but the legislation faces many practical challenges.Local expertise for determining instances of transfer pricing, obtaining relevant transfer pricing information and the permitted use of stability agreements signed between Government of Ghana and foreign investors have rather exacerbated the problem.   

Ghana’s Tax Act, Number 592, legislates income splitting, transfer pricing and thin capitalisation under the anti-avoidance provisions.It amply gives the Commissioner General (CG) of Ghana’s revenue authority vast powers to determine instances of anti-avoidance schemes and to deal with them as appropriate. 

Transfer pricing defined   

Transfer pricing generally is a pricing strategy usually adopted by one or more persons, who are related, and whose principal motivation is the shifting of profits and/or costs from one jurisdiction to another with a view to minimise the tax effect on overall profit.Obviously the motivation here is to increase overall profitability whilst minimising tax payable on incomes at specified locations.

It is  commonplace, therefore, to note that many MNCs located in Ghana return losses or marginal gains each year for many years running but do not contemplate folding up or liquidating in the foreseeable future.Identifying instances of cost movements between associates Transfer pricing.

Sec70 Act 592 stipulates that:                                                                                                                                       

1) In a transaction between persons who are associates, the CG may distribute, apportion or allocate inclusions in income, deductions, credits or personal reliefs between those persons as is necessary to reflect the chargeable income or tax which would have arisen for these persons if the transaction had been conducted at arm’s length.

Naturally, Ghana Revenue Authority (GRA) would like to minimise lost tax revenue and therefore would want to scrutinise transactions between related entities or associates. Sec 70(1) gives specified reasonable powers to the CG to reclassify business transactions generally to restore perceived lost revenue for tax purposes. Such powers indeed could encourage tax controversy and instigate tax litigation instead of moving the tax function forward.

The CG will usually do an audit of a business entity to establish the veracity of accounting information submitted to the tax office, reallocate costs, or reestablish the level of head office involvement in the local entity’s operations generally, for tax purposes.The objective for the audit may not necessarily be the determination of TP issues only, but also to ascertain the level of tax compliance, the depth of taxpayer tax literacy and to ascertain whether additional taxes need be paid or overpaid taxes should be refunded.

Commissioner General’s redress in the case where a transfer pricing has been identified For many taxing authorities particularly in Africa, there is great difficulty in policing transfer pricing because of the complexity of the structure and mode of operations of MNS. Because of the perceived difficulty, Ghana’s Tax Act grants the Commissioner General the power to trigger a TP controversy and deal effectively with corporate relationships that impact revenue. A controversy arises where an MNE’s tax planning strategy establishes pricing arrangements that minimise taxation in Ghana or shifts income between associates with the intention of evading the tax, avoiding the tax or minimising the tax. 

Section 70 of Act 592 further indicates that: 

2) Where

a. In the case of an associate resident entity of a non-resident person, the CG is satisfied that some adjustment is warranted under sec 70(1) above, or income has been split; or

b. In the case of a permanent establishment (PE) of a non-resident in Ghana, the CG is not satisfied with a return of income of that person made as required by the Act. the CG may adjust the income of the PE or entity for a basis period so that it reflects an amount calculated: 

c. by reference to the total consolidated income of the non-resident person and all associates of that non-resident person other than individuals but irrespective of residence;

d. by taking into account the proportion which the turnover of the PE or entity bears to the total consolidated turnover of the non-resident person and those associates; and

e. by taking into account any other relevant consideration in determining the proportion of the total consideration which should be attributed to the PE or entity The CG could cite this section to drag the taxpayer into litigation by assuming higher revenue levels to the disadvantage of the MN taxpayer. The onus of proof against a tax position adopted by the CG is on the taxpayer. 

Re-characterising the source of income

Sec. 70 further gives the CG powers to re-characterise the source of income for tax purposes. That is: 

3) In making an adjustment under subsection 1) or 2), the CG may re-characterise the source of income and the nature of payment or loss as revenue, capital or otherwise.

Section 70(3) deems it expedient for the CG to recharacterise the source of income because income derived in Ghana is taxable in Ghana – source-based taxation.To minimise shifting income from Ghana’s jurisdiction for tax purposes, the CG is empowered to re-characterise income and losses as appropriate to determine the source of the income for tax purposes. 

It further empowers the CG to re-characterise income derived by an associate of a non-resident entity as having been derived from Ghana or otherwise to protect revenue.

Income splitting

Act 592 has income splitting legislation to ensure effective taxation of incomes derived or accrued in Ghana. Section 69 of Act 592 indicates that:

1)Where a person attempts to split income with another person, the CG may adjust the chargeable income of both persons to prevent a reduction in tax payable as a result of the splitting of income.

2) A person is treated as having attempted to split income where 

a. that person transfers income, directly or indirectly, to an associate; or

b. that person transfers property, including money, directly or indirectly, to an associate with the result that the associate receives or enjoys the income from that property, and the reason or one of the reasons for the transfer is to lower the total tax payable upon the income of that person and the associate.

3) In determining whether a person is seeking to split income, the CG shall consider the value given by the associate for the transfer.

4) A transfer of income or property indirectly from one person to an associate of that person includes a transfer made through the interposition of one or more entities.

Sections 69 and 70 combine effectively to strengthen the CG beyond doubt to create controversy to the advantage of revenue. However, without clear mandate on effective transfer pricing positions, an unfair jurisdiction is created for litigation to thrive.

Thin capitalisation rules

Thinly capitalising a subsidiary is one of the business strategies that offers rapid exit of investment from  subsidiary jurisdictions to parent destinations. 

Inbound investors may prefer to convert equity funding to loan funding, for quicker repayment and early interest return than would normally not be the case under an equity investment. 

Whilst investors may expect an investment to return profits before dividend is declared, loans earn interest income more quickly whether profits are made or not. The permitted thin cap ratio in Ghana is 2:1, being the debt to equity injection by the parent and/or related persons excluding financial institutions. Interest payment and foreign exchange losses incurred in excess of the 2:1 ratio are not deductible for tax purposes.

Some companies have negotiated a more liberal ratio. Others are arguing for far more liberal ratios. Whilst the return risk factors for industrial sectors remains different, the revenue must be strongly positioned not to introduce unfair competition in allocating thin cap ratios.  

The arm’s length principle – OECD

Arm’s length principle recognises that independent entities would normally price their products at market when dealing with each other or trading with each other. In the case where related entities trade among themselves, pricing policy should at best conform to market.This may not be the case when related companies deal with others It is believed that prices governing trade between related MNEs may differ significantly from prices prevailing between unrelated parties in the same or similar trade under same or similar conditions. 

The CG is empowered, as discussed above, to set aside the ostensible TP and restore equitable pricing for tax purposes.The CG will gladly adhere to the arm’s length principle for a solution.OECD prescribes specified criteria for determining arms length pricing.These include the comparable uncontrolled price method (CUP), the resale price method and the cost plus method. 

The CUP method refers to the situation where a transaction should be deemed to be comparable or identical to similar ones between two independent persons.

The resale price method refers to a situation where a product transferred between two related entities is resold to an independent third party who uses the resale price as a basis for the TP.The cost plus method takes the input costs incurred in making the product or in providing the service and adds a mark-up to arrive at an arm’s length margin. 

Two other recommended methods prevail.These are the profit split method and the transaction net margin method. 

The profit split method expects that where many inter-related transactions make it difficult to assess specific prices, companies may determine the profits that arise from intra-group transactions and split them as two independent companies would if they were partners.

The transaction net margin method deals with a situation where prices are determined by transferring some profit indicator, such as net operating margin, observed in comparable but independent companies.    

The CG will have no worries to admit a litigating taxpayer who builds his defence using one of the prescribed OECD accepted methods since Ghana subscribes to the OECD model in local tax legislation for arbitration.     

Ghana’s TP provisions raise more questions than solutions. The controversy is that the TP provisions leave the CG to guess and challenge the taxpayer to give a counter position to the CG’s. 

The TP provisions do not recommend any specific penalties for guilty taxpayers but culprits could be punished under the general rules for noncompliance or short payment of the tax.A more specific penalty for unacceptable TP practices should rather be encouraged. 

New ways of doing things emerge daily on the market. Act 592 has been around for the past 10 years and the TP provisions have never been amended or strengthened to take into account new and emerging ways to confront new TP concepts. 

It is time therefore for Ghana’s Revenue Authority to rethink the anti-avoidance provisions in the tax act for growth, dexterity and relevance.In more advanced geographies, the need to provide enough documentation to support TP policy is a requirement. Will this strategy be good for Ghana as well?

It is important to develop a comprehensive approach to improving the administration of transfer pricing in Ghana since the challenge is a big one. The capacity of the revenue and the sophistication of the MNCs in the TP game are unequal.The need to improve the technical competence of tax administration generally; installing the structures for timely tax dispute resolution; improving the effectiveness of TP administration through legislation; selecting cases for quality audit; and TP examination procedures for local players with foreign connections cannot be over emphasised.

Source: By Yaw Asante-Boadi (TaxTALK)


Section 240A of the Tax Administration Act, 2011 (as amended) requires that all tax practitioners register with a recognized controlling body before 1 July 2013. It is a criminal offense to not register with both a recognized controlling body and SARS.


The Act requires that a minimum academic and practical requirments be set to register with a controlling body. Click here for the minimum requirements of SAIT.

Membership Management Software Powered by®  ::  Legal