Solution to double taxation Many years ago, when the very first tax treaties were concluded, countries such as the United Kingdom and the USA were mainly using these treaties as a tool for facilitating trade with other major trading partners and to also eliminate economic double taxation.
Double taxation occurs when the same taxpayer is taxed twice on the same income (or capital) by one or more tax authorities in one or more tax jurisdictions.
As the years passed, economic transactions or activities globally transcended territorial and geographical borders culminating in the emergence of several Multinational Enterprises (MNEs). This phenomenon led most countries to enter bilateral tax treaties described as Double Tax Agreements (DTAs) with the aim of reducing the incidence of double taxation and allocating taxing rights of incomes sourced from the treaty partner countries to the contracting countries or states.
Over the years, DTAs have served other purposes such as serving as a legal basis or a protocol for the exchange of information between tax authorities and anti-discrimination provisions. The presence and use of these treaties have also reduced the incidence of tax and fiscal evasion. Ghana, as a developing
economy has concluded several DTAs with different countries in Africa, Europe and Asia.
As of the time of writing, Ghana currently has thirteen (13) DTAs that are in force. These DTAs are with Germany, Belgium, France, the Netherlands, Italy, the United Kingdom, South Africa, Switzerland, Denmark, Czech Republic, Singapore, Morocco and Mauritius. While Ghana has signed DTAs with Ireland, Malta, Qatar, Norway and United Arab Emirates, these are yet to enter into force.
Approaches to granting tax reliefs Where double taxation is more likely to occur, DTAs are used as a mechanism for the reduction or where possible, elimination of the incidence of the double taxation. Traditionally, DTAs have employed two main approaches or methods in granting tax relief from double taxation, namely: the exemption method and the credit method.
As the name suggests, the ‘exemption method’ seeks to exempt foreign income from domestic taxation, whereas the ‘credit method’ seeks to grant tax credits domestically for foreign taxes incurred.
Typical of countries that have concluded DTAs with other states, Ghana’s DTAs mostly provide
for these two methods of double taxation relief.
The Ghana Revenue Authority (GRA) published a circular note document on “How to Obtain Tax Treaty Benefits in Ghana” which prescribed an additional three methods of double taxation relief. While the methods for tax relief are usually by way of a lump sum, the thrust of this article is mainly focused on understanding how the two main methods prescribed by most DTAs concluded by Ghana operate in the Ghanaian tax landscape.
The next paragraphs will provide some additional information on these.
The Exemption method First let’s talk about the ‘exemption’ method.
For illustrative purposes, let’s use Mr. A who is tax resident in Country R, a country which has
signed a DTA with Ghana. Mr. A earns income of US$ 500 from Country R and earns income of US$350 from Ghana. Therefore, from the perspective of Country R (which operates the ‘worldwide system of taxation’ like Ghana), Mr. A’s worldwide income subject to tax in that country is US$850, all other things being equal. As such, Country R would ordinarily have taxed Mr. A based on his worldwide income of US$850. Where the exemption method is in operation, Country R would not tax any income which ‘may be’ taxed in Ghana.
That is, Country R will only tax US$ 500, with Ghana taxing the income of US$350. The fundamental concept with this method of double taxation relief is that, with the exemption method, the DTA operates such that the taxing rights in most cases solely lie with the source country, with the country of residence allowing an exemption of foreign sourced income.
A source country is where the activity giving rise to the income or the person making the payment is situated while the country of residence is the country where the recipient of income is deemed to be
permanently based for purposes of taxation giving that country first right to taxing all income of such a person.
The Credit method
On the other hand, under the credit method, the country of residence gets a subsidiary or residual taxing right which is invoked or triggered when the country of source levies a lower tax than the country of residence.
This is so because in such a case, an additional tax needs to be paid on the worldwide income in Country R.
In much simpler terms, Country R includes the income earned in the country of source for computing total tax liability in Country R out of which credit is given for taxes already paid in Country of Source. For illustrative purposes, Mr. A, who is tax resident in Country R, has derived an income from Ghana of US$5,000 and has accordingly paid taxes of US$1,250 in Ghana (at 25%). In Mr. A’s resident country, the same income would have been assessed to tax at a tax rate of 30% (US$1,500).
Consequently, the foreign tax paid is credited against the Country R’s tax amount (US$1,500 – US$1,250). Mr. A must only pay US$250 in his country of residence – Country R. It is worth noting however that, the amount of foreign tax credits allowed would not exceed the amount of tax payable in Country R. That is, where Mr. A paid more than US$1,500 in Country of Source, Country R would only grant him a tax credit up to the US$1,500 amount, being the amount of tax payable under the tax rules of Country R.
In Part 2 we will focus on how to claim the treaty benefits and the limitations (if any) to claiming such benefits.