Transacting business with your related parties. Are you at risk? (Part 2)
In the first part of this article, we discussed related party arrangements and the requirement in Ghana to have them at arm’s length (i.e. reflecting arrangements between independent parties).
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We also discussed other requirements from a Ghanaian perspective including preparation of a transfer pricing (“TP”) documentation and submission of an annual TP return to the tax authorities. In the concluding part of the article, we will discuss transactions and persons affected and discuss potential risk triggers for TP adjustments.
Transactions in focus and persons liable
TP rules in Ghana cover any intercompany transaction involving an entity incorporated or registered in Ghana or a permanent establishment of a foreign entity in Ghana, including:
- Purchase, sale and lease of goods and tangible or intangible assets;
- Provision or receipt of services including management, technical, intragroup services, etc.;
- Rent, hire and similar charges; and
- Provision of finance and other financial arrangements (including loans and guarantees).
TP rules in Ghana also apply to dealings between a branch of a foreign entity in Ghana and its head office and/or other related branches or group entities.
Why is it important to ensure your intercompany transactions are at arm’s length?
Let us suppose Ghana Operating Company (“Opco”) is an entity resident in Ghana for tax purposes. Ghana Opco is subject to the standard rate of tax on its taxable income (i.e., 25 per cent) and pays management/technical service fees to a non-resident related party.
Per Ghana’s domestic tax laws, this payment would ordinarily be deductible for corporate income tax purposes. A higher amount of management and technical service fees will lead to a reduction in Ghana Opco’s taxable income (i.e., revenue less allowable expenses) that would be subject to tax at 25 per cent in Ghana.
On the other hand, as Ghana Opco is also required to withhold tax at the rate of 20 per cent (or at the rate of eight per cent the Netherlands-Ghana double tax treaty), there might be an incentive for the multinational to increase management/technical service fees to a certain level that would minimise the total tax payable in Ghana by all group entities as well as reducing the overall tax burden of the group as a whole.
Entities in a loss making position in Ghana may have an incentive to under-price management fees payable to their non-resident related parties in view to minimise the amount of tax payable in Ghana and by the group as a whole. The result is that transactions among group entities are often used to shift profit from one jurisdiction depending on what is beneficial to the group as a whole.
In order to ensure that taxpayers do not arbitrarily set the price in their arrangements with related parties and pay their fair share of taxes in Ghana, Act 896 allows the Commissioner-General of the GRA to adjust income or expenses of a taxpayer in Ghana to reflect arrangements between independent persons. In simple terms, The GRA can adjust upwards an amount received or receivable which has been priced below the arm’s length price and do the reverse for expenses.
In addition to the potential tax payable (e.g., additional corporate tax and/or withholding tax), the taxpayer would also be subject to interest and penalties for non-payment and late payment of tax derived from TP adjustments.
Hence it is important to set the transfer price (i.e., price between related parties) right as there may be adverse consequences impacting the corporate income tax and withholding tax liabilities of the Ghanaian entity in the event of a TP adjustment.
Are you at risk?
It is safe to say that any company in Ghana with related party arrangements is at risk of a TP adjustment.
Similarly, a branch would automatically fall within the scope of transfer pricing in its dealings with its head office on the basis that, for tax purposes, a branch is supposed to be assessed as if it was a separate entity from its head office. The same principle applies to permanent establishments.
To determine whether intercompany transactions are at arm’s length, the rule of thumb is to ask whether independent parties would have transacted under same terms and conditions.
Below are some TP risk triggers to look out for: Way forward
As we approach the end of the year for companies with December year ends (and generally companies with other year-ends) two questions come to mind: 1) Do you have any arrangement with a related party? 2) Are you totally compliant?
To answer the second question, it would be worth considering the following for historical and future compliance:
- Conduct a TP risk assessment to assess whether your entity may be exposed to any potential TP risks in Ghana;
- Check your filing status and file a TP return with the GRA on annual basis; and
- Ensure you have a TP documentation covering the pricing of your intercompany arrangements which could be used to defend your intercompany pricing.