Business News of 2014-04-17

Government must Review Tax Incentives to Multinational Companies

Ghana Trade policy and development agenda have over the years been dictated by the desire to attract Foreign Direct Investment (FDI) and to increase export earnings. Tax incentives have therefore been a major strategic tool to achieve these goals. Unfortunately the result is that trade taxes have declined and currently Ghana has one of the lowest tax rates in the West Africa sub region. Whilst this might have boosted Ghana’s competitiveness, it has sometimes undermined the harmonization of trade and investment regimes across the sub region through initiatives such as the ECOWAS Common External Tariff (CET) In a recent preliminary research conducted by Action Aid Ghana (AAG) on Tax Justice, it was realized that the contrary popular assertion that tax incentives attract FDI was not so but rather other factors including skill pool, availability and social infrastructure services such as good schools, good road networks, health facilities, and electricity accounted for significant consideration by the Multinational Companies for investment. In estimating the value lost through tax incentives, largely as result of inadequate official data sources, the study relied on alternative data sources such as national budget statement to arrive at overall tax loses. The study estimates that Ghana may be losing up to USS 1.2 billion annually as a result of tax incentives. This is usually about half of the entire annual government of Ghana budget for education. The study estimates that Ghana lost about US$ 90 million between 2011 and 2012 in the mining sector alone as a result of stability agreement. In the Oil and the Gas sector, the estimate is about US$ 70 million in two years resulting from an ambiguous tax law, which could not be fully applied as a result of varied interpretation of the law. It is pertinent to indicate at this juncture the various types of tax incentives often granted by government to Multinational Companies which are becoming inimical to the economic growth of the country CORPORATE TAX RATES INCENTIVES At various stages in Ghana’s economic development, corporate tax cuts have been offered as a deliberate strategy ahead of other African countries in the competition for FDIs. Many businesses and organizations benefitted from these cuts during the country’s economic recovery programme from the 1980s through the structural adjustment programme of the 1990s into the new millennium. The competition was founded on the conviction that FDI is the way to achieve rapid economic growth. Corporate income tax for instance, in the mining sector was cut down from as high as 45 per cent in 1986 to 25 per cent in 2011. At the sometime, initial capital allowances were increased from 25 per cent in 1986 to 80 per cent in 2011, as well as long mining lists of exemptions and other expatriate employees tax incentives all in line with attempts to attract FDIs thereby watering tax rates in the country. Several other tax incentives in the agriculture and the manufacturing sectors have all conspired to create a tax competition environment by reducing the effective tax rates. TAX HOLIDAYS Tax holidays defer the payment of cooperate taxes. Here, Companies are given time limits typically between 5 to 15 years from the start of their operations in Ghana where they are exempted from paying taxes. This they claim gives special dispensation to companies to recover investment costs before coming into tax payment position. The policy, apart from presumably helping the country stay in competition for FDIs , is aimed at incubating new companies into maturity. The extend of the holiday is dependent on what policy makers conceive as reasonable period to fully nature the company into maturity. Tax holidays in Ghana may also appear to be open ended as being witnessed in the cocoa sector. Typically, time bound tax holiday in Ghana ranges between 5-15 years except the cocoa sector where cocoa farmers have been tax exempted from income tax with no time limit to date LOCATION INCENTIVES Location invest is another type of incentive granted by the government of Ghana to multinational companies. Historically, investment in the Ghanaian economy seemed to have been over centred in the main cities, thus Accra, Kumasi and Tema. The Policy rational of business location incentives is therefore to encourage manufacturing and agro processing companies to locate beyond these three cities. It should be pointed out that this form of incentive does not yield the desire impact for which it was introduced. This is because tax incentives are not the sole determinants of FDIs or Multinational Companies. Many investors prefer cities like Accra, Kumasi and Tamale because of the availability of the required skills set, proximity to port facilities, relatively better access to electricity, water and banking services. TRANSFER PRICING One of the commonest schemes used is to shift profits from Ghana to other countries through transfer mispricing of goods and services. Transfer pricing as a management tool: Transfer pricing is an advanced management accounting tool used to determine the price at which a decentralized company transfers intermediate products or services from one sub-unit of the company to another. For example, when a company in Nigeria transfers goods or services to a related company in Ghana, the price charged by the Nigerian company is referred to as the “transfer price”. One of the main objectives for using transfer pricing is to determine the amount of profit or loss that is attributable to the activities of a decentralized sub-unit of a company. OTHER TAX INCENTIVES In fact there are many forms of tax incentives apart from those mentioned earlier. Others include capital allowance, carry forward losses and tax haven. Multinational companies are good at finding ways to avoid paying tax that are technically not illegal, and also in persuading governments to offer them tax deals as the price of their investment. A vast network of well-paid lawyers, accountants and executives support them in circumventing the tax systems that were created precisely in order to provide funding for government services and democratic structures Whilst the study appreciate government’s effort, especially in recent times to streamline the tax incentive system, it is very pertinent for Civil Society Organizations (CSOs) in Ghana to follow up these interventions and related promises made by government. The study particularly identifies as a major portion, the arbitrariness of the discretion in tax incentive administration in Ghana such as the use of permit at the ministerial levels without recourse to procedural steps set out in the statute books. In almost all cases .Parliamentary approval is required in the granting of tax incentives but evidence from AAG Preliminary report reveals that parliamentary approval is sometimes by passed resulting in excessive and unregulated granting of tax incentives. The study cites as for example the case of SINOPEC, the Chinese Firm undertaking the construction of the Ghana Western Corridor Gas Infrastructure Project which had been granted exemption from import duties, VAT, and Cooperate Income Tax by the Ghana Gas Company without prior Parliamentary approval. In response to public pressure, the Minister of Finance and Economic Planning is only now putting together the necessary documentation for parliamentary ratification which should not have been the case. It is very crucial to note that the role of taxation in development financing cannot be overemphasized. However the capacity of many developing countries to raise the needed tax revenue to finance their development can easily be constrained by over generous tax incentives regimes which benefits have not been critically evaluated.. Tax incentive is also known as tax expenditure because of their cost to government. The revenue a government foregoes through statutory or administrative provisions are so much. It allows, deductions, exclusions, exemptions from the tax payers’ taxable expenditure, income or investment, deferral of tax liability, and preferential tax rates among others. Tax incentive became a prominent feature of developing countries strategies for attracting FDIs in the period of the IMF and WB –inspired structural adjustments of the 1980s into the 1990’s and has been maintained to date without assessing their real negative or positive impact. The granting of huge task breaks to attract larger Corporations and the vast outflow of funds from developing countries to tax havens, continue to undermine the revenue mobilization of developing countries. The 2014 budget statement had further acknowledged that revenue loss from exemption grants in duties and taxes continue to undermine the overall tax revenue performance. It revealed that tax expenditures constitute a very significant proportion of the total tax revenue, estimating it at 13.1 per cent of total revenue and 2.1 per cent of GDP. The budget, however, failed to give details what progress government had made in reviewing the current incentive regime and what new measures had been taken or introduced to curb the abuses. Indeed, it is paradoxical that while developing countries are faced with daunting challenges of mobilizing adequate domestic resources for national development, great amount of potential revenues were given away yearly through the granting of huge tax breaks; an outrageous exemptions to attract FDIs. Many developing countries such as Ghana host many Multinational Enterprises (MNEs) to support their development agenda with the hope that these Enterprises would in turn honour their tax obligations and meet the expectations of all stakeholders. In contrast, many MNEs take advantage of the power in their size and the complexity of their structure to deny many developing nations tax revenues that could be used to advance their development agenda of fighting poverty and the injustices that cause it. The 2009 Christian Aid report “False Profits: robbing the poor to keep the rich tax-free” indicated that Ghana lost £74 million between 2005 and 2007 to multinationals of EU and US residence. Another report by Action Aid UK alleged that SABMiller, the majority shareholder of Accra Brewery Limited has established complex structures that enable the company to avoid paying taxes, estimated at GH¢2.2million per annum. The developing complexity of MNEs’ quest to maximize their shareholder value against meeting their tax obligations have assumed a phenomenal trend and have now become a major aspect of development discourse which Ghana must not ignore .In Ghana, many MNEs have registered to operate in various industries including, banking, breweries, textiles, oil and gas, and mining. The government has the responsibility of providing an enabling environment including security, infrastructure, and human capital to facilitate the smooth operations of these businesses. In addition, government grants these businesses several years of tax holiday to enable them to overcome the restraints of business start-up, among other reasons. In return, MNEs are also statutorily mandated to pay income tax to government to enable government mobilize revenue to provide state services which are critical for the smooth operations of their businesses. Unfortunately, most MNEs use various schemes apart from government tax incentives to aggressively avoid paying taxes. .WHAT NEEDS TO BE DONE In fact, there is the urgent need for government to review the tax incentive packages to these Multinational Companies. It has been established that the popular assertion that tax incentives attract Multinational Companies was not so but other factors including skill pool, availability and social infrastructure services such as good schools , good road nets works and health facilities, and electricity accounted for significant consideration by the Multinational Companies for investment. Nobody can dispute the fact that if Government reviews the tax systems granted to the Multinational Companies there would be massive development in the areas of education, road infrastructure, health, agriculture, housing among others. It would reduce the dependency syndrome of Ghana on donors and other partners. It is not in my purview to say that Multinational Companies should not be granted tax incentives, but it is just too much for the country to bear the consequences of the many tax incentive given to them. CONCLUSION Indeed Multinational Companies need to bear in mind that the government is already providing an enabling environment including security, infrastructure, and human capital to facilitate the smooth operations of their businesses and they need to recognize this by also reciprocating the gesture. CSOs must be on the neck of government to make this change a reality for the entire benefit of all Ghanaians including foreigners.