Tax planning for businesses: Why it must be a priority

INTRODUCTION

Tax constitutes by far the most secure, convenient, and reliable means by which governments around the world raise money to finance public expenditures. And for centuries, governments have relied on tax revenues to finance expenditure items such as the payment of public sector compensation, healthcare, security, roads, education, and the provision of social programs.

Unless exempted, a taxpayer bears the mandatory obligation to pay at specified times, taxes imposed by law – and these obligations are usually imposed on individuals and businesses.

To the taxpayer, the payment of tax is never a willing conduct for several reasons. Nonetheless, due to the mandatory nature of taxes and their associated civil and criminal sanctions, taxpayers such as businesses have no other option than to plan their tax obligations and religiously honor same to avoid the related sanctions.

Hence in this article, I will seek to discuss generally the tax regime in Ghana and offer some reasons why and considerations for tax planning as an imperative task for businesses in the bid to build a strong tax compliance culture and sustained operations without sanctions for defaults.

THE TAX REGIME IN GHANA

Tax obligations only result from legislation – therefore where no existing law imposes an obligation, no such obligation will be deemed imposed even where a person makes an abnormal profit from an activity or transaction. A good example is the non-payment of taxes on offertory collected by religious bodies because the law imposes no tax obligation on such collections.

The strict interpretation of tax obligations leaves no room for the subjective determination of what is fair, just, and equitable. Once tax laws are enacted, such laws must be implemented strictly in accordance with the tax rates/amounts, frequency, and taxable activity/taxpayer, among others mandated by the law.

In Ghana, several tax obligations either at the individual or business levels have been imposed by legislations enacted over time. These include income tax, corporate tax, withholding tax, capital gains tax, value-added tax, estate tax, property tax, etc.

Under these various tax obligations, although how much a person or a business is liable to pay is determined by the relevant law, same is also generally influenced by how much one earns, how one earned it, where one earned it from and how one has structured or organized his/her affairs or business to either increase or reduce one’s tax liability and its quantum.

It is in this regard that businesses, especially Startups and Small and Medium-sized Enterprises (SMEs) need to take tax planning seriously in order to influence their tax liabilities, avoid high tax incidences and the potential risk of default.

THE CONCEPT OF TAX PLANNING

Tax planning constitutes a deliberate set of strategies formulated by a business to understand its related tax obligations, the consequences of tax default, and build a compliance culture. Thus, tax planning is the means for businesses to know their tax obligations, plan to honor same as well as take advantage of the law to reduce their tax liabilities – which if done right may be legal.

It must be emphasized that the essence of tax planning is not to avoid the payment of taxes but to help businesses formulate strategies and effective tax management systems that help to improve the ability to take full advantage of opportunities provided by the law to reduce tax liabilities to the barest minimum.

It requires deploying relevant skills and knowledge to develop and deploy an effective and efficient tax management system by which a business is able to identify its tax obligations under the laws, make provision for the payments of these taxes at the right time, and also devise ways by which the business may be able to take advantage of the various incentives under the law to reduce liabilities.

Whether as an individual or business, tax planning has several advantages. One such benefit is the assurance and certainty a business can have about its tax liabilities, the ability to prudently manage finances including the payment of tax obligations on time thereby improving the business’s overall financial commitments for a given tax year.

In addition, consistent tax planning enables businesses to increase the rate of compliance with the tax laws, reduce the risk of tax default and thereby build credibility with the tax regulator and its agencies and institutions as a tax-compliant business. This enables other stakeholders to be more comfortable in doing business with such businesses as tax-compliant ones.

Ultimately, tax planning will enable businesses to organize their tax compliance strategies and systems in order to make smart choices that ensure that their tax obligations are satisfied while safeguarding their business operations. In the process, tax planning will make businesses more competitive and keep them ahead of their competitors by ensuring that their tax obligations satisfy the requirements of the tax regime, enabling support structure for their investments, and promoting their business activities in a manner that makes them effective and tax efficient.

SOME “MUST-DOs” AS PART OF TAX PLANNING

The attempt is not to prescribe a “one-size, fit all” must-do for businesses. However, the below considerations are important for developing a tax planning strategy for a business, and business owners and managers must consider these as part of their internal assessments, evaluations of historical tax obligations, existing business activities, and planned expansions among others.

1. Identify real and potential tax liabilities based on your business activity.

As a business operating within a specific industry, it is important to have a very good understanding of the relevant tax law regime within which your business operates. Often this may require the need to engage a professional tax advisor to offer professional advice on what your tax liabilities are, and the opportunities provided under the law by way of exemptions and other tax incentives that you may be able to take advantage of to reduce tax liabilities and thereby save some money.

The list of these obligations may be existing or potential because of pending tax law revisions or legislation of new ones as may be indicated by the government’s budget statements. These obligations cannot be assumed. Therefore, deliberate efforts must be made to assess the full scope of tax liability on businesses either by internal resources or professionals.

It is only when a business fully understands the nature and scope of tax liabilities on its operations that the business can plan to comply – one cannot plan for what he or she does not understand or knows.

2. Identify other existing tax liabilities

Aside from an industry specific taxation and corporate taxes that a business may be liable to, there are other taxes that may be chargeable including the Value Added Tax, National Health Insurance Tax, Covid 19 Recovery Levy, the Communication Service Tax, GET Fund, National Health Insurance Levy (NHIL), Tourism Levy and many others that may require the services of a professional to be able to identify.

These taxes are not exhaustive and keep changing from time to time due to the government’s appetite to generate more revenue through taxation. Hence, for businesses that are interested in formulating an effective and efficient tax planning strategy, it is absolutely necessary that the business fully understand and appreciate the full extent and scope of the tax liabilities beyond its specified industry. And this is better done with the advice of a professional tax advisor, who is familiar with the tax regime in Ghana and globally, for businesses that have operations outside of Ghana.

3. Identity tax reliefs, exemptions and incentives provided for by law

Tax laws do not only impose tax obligations – they sometimes provide exemptions and incentives for specified taxpayers. It is consistent with tax laws generally to provide reliefs, exemptions, and incentives for specified taxpayers and exclude them from imposed tax obligations. These reliefs, exemptions, and incentives are opportunities to reduce one’s tax liabilities or not pay related taxes at all.

Nonetheless, some of these opportunities may have qualification criteria and require an express grant of exclusion before a business can enjoy them. So, it is important for businesses to identify the various reliefs, exemptions, and incentives under the relevant tax laws to limit their liabilities.

Tax incentives may take several forms and may be in several legislations including the gamut of measures and exemptions under the law. A typical example is the Ghana Investment Promotion Centre Act, 2013 (Act 865) which provides for a number of tax incentives intended to promote investments in strategic and critical sectors of the Ghanaian economy. This may include a reduction in the corporate income tax for businesses, exemptions on the importation of critical machinery, on technology transfer, reduction in the tax rate and deferred payments, waiver of interest payments and penalties on tax defaulters among others.

These tax incentive measures are introduced from time to time by the revenue agencies and the government requiring some attention and continuous updates to fully enable their utilization.

4. Limit the risk and potential of tax defaults

An expected outcome of tax planning is to limit the risk – real or potential of tax defaults. However, the ability to achieve a higher compliance rate with tax obligations starts with tax planning and the type of strategies devised by a business to realize same.

One way to ensure a high compliance culture is to develop a dashboard or checklist of all identified tax obligations clearly stating their incidence, payment frequencies, applicable incentives, and opportunities to negotiate payment terms, etc.

By doing this and factoring same into a business’s tax planning, the risk of defaults may potentially be reduced, and compliance culture promoted.

5. Good bookkeeping and maintenance of proper books of account

Largely, tax liability disputes result from the lack of records or the absence of proper books of account to back taxable transactions. Effective bookkeeping and the maintenance of proper books of account in accordance with standard accounting methods and principles help significantly in settling tax liabilities disputes, especially where incorrect assessments are made by the regulator.

Therefore, in tax planning, businesses must endeavor to institute measures that ensure their bookkeeping and maintenance of books of accounts are enhanced, accurate, and updated frequently.

Such records become helpful in determining tax incidence and businesses must be intentional about ensuring advanced bookkeeping methods, especially with the use of technology to increase access, security, and efficiency.

Proper bookkeeping and accurate books of accounts must be prioritized in any tax planning initiative to ensure the determination of a business’s tax liabilities are based on verifiable, accurate, and actual transactions or activities of the business and eliminate assessments based on potential.

THE FAILURE TO PLAN

No legislative punishment exists for the failure to plan for one’s taxes. However, the certainty of tax obligations, once one engages in a taxable activity, implies that tax planning must be taken seriously.

As noted earlier, effective tax planning has numerous benefits to businesses. Planning your tax as a business brings some significant degree of business certainty to your business operation and increases the ability to comply with the tax obligation on time and in full.

On the other hand, failure to effectively plan one’s tax obligations comes with several risks. These include the risk of failure to file tax returns, which may be followed with prescribed sanctions under the relevant tax laws. Businesses who fail to plan their taxes, therefore, risk defaulting in the payment of their taxes, and even when they do pay, it may be done out of time and on the threat of regulatory sanctions.

Most tax legislations in Ghana prescribe punitive measures for defaults in honoring tax obligations in the form of tax offenses that attract pecuniary penalties or imprisonment, or both. The penalties for failing to maintain documents/records, for making false and misleading statements/declarations, and for failing to file tax returns with the tax authorities as provided for under the law and enforceable. Effective tax planning will therefore help avoid or reduce substantially the risk of default on tax obligations and avoidance of these punitive measures.

In the end, failure to undertake effective tax planning may prove more costly - than the businesses may be able to bear, especially given the uncertain and increasingly difficult business climate that businesses are having to deal with, particularly in recent times. It has become even more important, that businesses take full advantage of all the best practices available, including tax planning to help increase their business and operational functionality, reduce losses, increase the potential to save money, and become more compliant with the requirements of the law taking full advantage of tax-saving opportunities.

Tax planning helps to organize business affairs in such a manner that reduces tax obligations, ensures compliance, and saves money. And these benefits cannot be overemphasized.

CONCLUSION

Despite the unwelcome nature of tax conversations within the business ecosystem, taxes have been mandatory and unavoidable part of business operations – once you engage in a taxable activity, you must mandatorily pay the resulting tax obligations.

Nonetheless, tax planning and its related strategies help businesses to effectively organize their affairs to promote compliance culture while taking advantage of the various tax incentive measures to reduce their tax liabilities and incidence. Thus, businesses must pursue tax planning deliberately just as they have been developing their annual strategic plans for marketing, sales, human resources, and other critical business operational areas.