How have the courts in general and legislations in particular addressed tax avoidance?

Tue, 17 Nov 2020 Source: Michael Sumaila Nlasia

A tax avoidance transaction is one which would not be adopted if tax-saving elements are not present. The rules of interpreting tax laws go hand in hand with tax avoidance. In doing so, we are simply asking how the courts deal with attempts to avoid taxes by the interpretation of tax legislation. In general, the courts have adopted three approaches towards interpreting revenue laws for tax avoidance, and they are:

a) Traditional approach

b) Modern approach, and

c) Doctrine of form and substance

In particular, we have various provisions in the laws of Ghana which seek to curtail tax avoidance on the part of the taxpayers. The Income Tax Act, 2015, (Act 896), have split anti-tax avoidance laws into two categories. Subsequent article will explain further their meaning; for now, the categories are:

a) General anti-avoidance which essentially is the residual provision in Act 896, and

b) Specific anti-avoidance tax rules, which are provisions in Act 896 aimed at dealing with tax avoidance processes such as income splitting, thin capitalization, and transfer pricing.

The 1992 Constitution provides that the power to impose tax obligations is vested exclusively to the legislative arm of government. In 2011, it was decided by the Supreme Court that strict interpretation is the only applicable rule of interpretation of tax laws in Ghana. So this article seeks to assess the decision of the Supreme Court in view of tax avoidance.

What is tax avoidance?

According to Act 896, tax avoidance is an arrangement, the main purpose of which is to avoid or reduce tax liability. A tax avoidance arrangement is defined in the Revenue Administration, 2016 (Act 915) as an arrangement that has as the main purpose the provision of a tax benefit for a person; or an arrangement where the main benefit that might be expected to accrue from the arrangement is a tax benefit for a person. The shortest definition according to Srephen Potters’ book on gamesmanship is “the art of dodging tax without actually breaking the law.”

More significantly, tax avoidance must be distinguished from tax evasion. Avoidance is legal; evasion is illegal. Essentially, a person who deliberately adopts one of several possible ways because that one will save him the most tax must be distinguished from the man who adopts the same course for the purpose of evading tax when it is due.

The attitude of the courts to tax avoidance

Tax avoidance takes many forms. However, the comprehensive approach the courts have adopted is to interpret tax legislation for a taxpayer to comply.

a) Traditional Approach

First, in using the traditional approach, what the court is interested in is what the charging provision in the legislation which imposes the tax says. So where it is not in the letter of the law, there will arise no obligation to pay tax. More so, there is no room for intendment when it comes to the interpretation of tax legislation. The reason is simple, i.e., if you intend to take from someone, it must be very clear that parliament intended to take the money otherwise the person must keep his money. In short, the law has always been generous of the liberty and property of individuals. If there is any doubt in the legislation, it must inure to the benefit of keeping the property of the person. This is what constitutes the traditional approach, which is the strict literal interpretation of revenue laws.

b) Modern Approach

Second, in using the modern approach, the court will go beyond the strict literal rule to consider the context and intent of the framers of the tax law. In such a situation, the court looks at the tax law from a more fiscal policy standpoint to ask: what is the intention of the law? Or what did the framers seek to achieve? And not simply what was written. By so doing, the court is demonstrating an unwillingness to aid tax avoidance. But the court may end up allowing certain tax avoidance measure under the modern approach, but this will be after it has interpreted any ambiguous law or any rule in the law having regard to the intention of the lawmaker.

c) Doctrine of form and substance

Third, in using the doctrine of form and substance, the Commissioner-General (CG), exercising a quasi-judicial power, does not simply look at the transaction, the CG looks at the intention of the transaction. Thus, if you take a transaction, the CG will have to first understand what it means to the parties in the transaction. After that, the CG will apply the general rules of law. In a decided case, the court came out with three main rules the CG will need to observe to obviate tax avoidance:

1. The description attached to a transaction is not decisive of its true picture: So how the parties choose to call a transaction is neither here nor there. Sometimes the registered name of a business does not reflect the transactions undertaken. So there is the need to go into the transaction proper. The CG needs to carefully peruse the agreement to see whether or not the description is simply a matter of nomenclature or it actually satisfies such a description. Indeed, the doctrine of form and substance is clearly represented in Act 896 as the general anti-avoidance provision. It provides that the Commissioner-General may characterise or disregard an arrangement which is carried out in order to achieve tax avoidance, where form does not reflect its true substance.

2. Liabilities and rights created by fictitious transaction ought to be disregarded: Here, we are not just looking at how a transaction has been put out, but we are looking at the obligations of the parties. The CG is permitted when you read Act 896 to disregard these rights and liabilities where you are looking at a transaction which is fictitious, or a sham, once that transaction is entered into to avoid tax. Thus, this rule gives the CG power to do so.

3. The rights and liabilities arising out from the genuine transaction ought to be respected or upheld: However, the CG can look at the surrounding circumstances in determining the rights and liabilities of the parties in a transaction to decide on the tax obligations.

So, on the doctrine of form and substance, you need to look at each transaction, each right or liability that arises to see whether or not it is the genuine transaction or a fictitious transaction.


So these approaches have reflected in the approaches of the Ghanaian courts, although we do not have enough Ghanaian cases that address this. However, going by the decision held by the Supreme Court in 2011, the court is still sticking to the traditional approach as the only rule of interpretation of revenue legislations for tax avoidance. This is because the Supreme Court is bound by legislation.

The author is a research assistant at Center for Data Processing and Geo-Spatial Analysis (CEDPA), and a graduate of GIMPA Law Faculty.

Columnist: Michael Sumaila Nlasia