Cedi depreciation negatively impacts tax obligations of businesses

Introduction

As a tax and transfer pricing enthusiast, I am concerned about the impact of the depreciation of the cedi on tax and transfer pricing (TP) compliance.

This article examines the impact of the depreciation of the cedi on various tax types such as Value Added Tax (VAT), Customs taxes and duties, Withholding Tax and Corporate Tax.

From an international tax perspective, we also look at the broader impact of cedi depreciation pon transfer pricing and the application of arm’s length interest.

Value Added Tax (VAT)

Taxpayers who make an actual or estimated annual turnover of at least GH₵200,000 (GH₵ 50,000 per quarter) are required to register for VAT and charge VAT on the taxable supply of goods and services.

By recent amendments to VAT laws, retailers who make an annual turnover of at least GH₵500,000 are required to charge VAT at a standard rate of 12.5% instead of the previous 3%.

The depreciation of the Ghana cedis, translating into the high costs and prices of goods, will cause businesses to meet these thresholds quickly imposing huge compliance burdens.

Customs

The taxable base for the purposes of determining customs duties is generally the cost, insurance and freight (CIF) values plus any adjustments, where applicable, to be made by the customs. The depreciation of the cedi raises the taxable base and, consequently, the duties and applicable import taxes. This makes the cost of imported goods very high and even the benchmark value discounts offered is no longer a safety helmet.

Withholding tax

The threshold for withholding on a contract for the supply of goods and services remains GHs 2,000. With the high costs of goods and services triggered by the fast depreciation of the Ghana cedis, the withholding tax threshhold is now insignificant.

Businesses will have worse cashflow position.

Corporate tax: Thin Cap and Financial cost limitation

Where related party debt is more than three times equity, interest and foreign exchange losses on the portion of debt which exceeds the 3:1 ratio is disallowed for corporate tax purposes.

The fast depreciation of the Ghana cedis will lead to revaluation of debt to higher values in the books of entities.

This is likely to trigger the application of thin-cap rules assuming equity remains relatively the same.

Also, businesses that import are going to record huge foreign exchange losses.

Foreign exchange losses on normal trade transaction will be limited through what we call in tax “limit on deduction of financial costs”

Although businesses are not responsible for the currency depreciation, they are to suffer by paying corporate tax on the portions of interest and foreign exchange losses disallowed for tax purposes.

Transfer Pricing rules

Debt is a cheaper source of finance and a mechanism by which many MNEs finance their operations in other jurisdictions.

Assuming that a multinational advancing loan to its subsidiary in Ghana decides to charge an arm’s length interest, the repayment obligation to the subsidiary will be quite onerous as a result of the depreciation of the Ghana cedis.

The current situation, therefore, has adverse impact on investment and debt-financing.

If arm’s length interests prevail, profits will be shifted to other jurisdictions through higher interest costs and foreign exchange loss deductions.

Conclusion

It is often said that a small leak can sink a great ship. We have observed from the above analysis, the wider ramifications of the depreciation of the Ghana cedis including the compliance cost and burdens it is imposing on businesses.

Government must therefore strive to stabilize the domestic currency in order to protect businesses from collapse.

By Peter Kelly Agbeehia