Ghana has signed double taxation agreements (DTAs) with more than 10 countries. In February it added Ireland to the list of countries it has DTAs with. While DTAs have some tax benefits for companies and citizens living and working between two countries, or investing in the economies of one partner country, when poorly crafted, DTAs can put developing countries at a disadvantage.
“Developing countries…would be well advised to sign treaties only with considerable caution,” the IMF tax policy staff advised in 2014.
A Christian Aid report issued in September 2019 on the eve of a UN General Assembly meeting on finance and development for poor nations raised the red flag that not only will the agreement between Ghana and Ireland, reduce tax revenues in Ghana, it would also enable profit shifting and tax avoidance.
Ghana is said to be the poorest of all the countries that have signed DTAs with Ireland and it is also a recipient of Irish aid.
Citing the Organisation for Economic Co-operation and Development (OECD) data, Christian Aid said that more than one in twenty Ghanaian children still die before their fifth birthday, and despite major improvements, almost four million Ghanaian children still live below the poverty line.
“Ghana’s tax revenues also remain vulnerable: Ghana only collects around 16 per cent of its GDP in tax revenues, compared to 25-30 per cent for most European economies,” it added.
Christian Aid quoting a letter from the Department of Foreign Affairs and Trade (DFAT) of Ireland, that it obtained using the Freedom of Information Act, said DFAT raised a red flag over the agreement back in 2012.
“This model generally favours residence-based rather than source-based taxation, meaning that the effect of many DTAs is that capital flows from developing to developed nations,” the department said in a report in 2012 as the treaty with Ghana was being processed.
This means that rather than being taxed in a country where goods and services are consumed, a company’s activities are taxed in the country where it has an operating base. In many cases, that would be Ireland for companies such as Apple, where this country is the home base for sales in African countries.
“Countries with these treaties can also be used to channel money between jurisdictions to minimise tax payable, particularly if withholding taxes are minimised to encourage investment – a practice which would clearly not be encouraged in relation to developing nations,” the letter from DFAT noted.
According to Christian Aid, the agreement lacks “the minimum level of protection against treaty abuse” which OECD member states have agreed is necessary to effectively address Base Erosion and Profit Shifting (BEPS).
While the Irish government claims it is committed to signing tax agreements that address the BEPS, its actions in relation to the Ghana agreement is contrary to this position.
The agreement, which is yet to be approved by the Ghana Parliament, sets the withholding tax on royalty payments to Ireland to be lowered from the domestic rate of 15 per cent to 8 per cent.
The tax on technical service fees have been reduced from 20 per cent to 10 per cent under this agreement.
Christian Aid believes that, it was Ireland that made the move for the agreement and thinks it shouldn’t have as the country’s own findings have established it would be unfavourable to Ghana.
“Intentionally targeting a developing country to sign a tax treaty flies in the face of findings of the government’s own analysis, the advice of the Department of Foreign Affairs and Trade and even the IMF who recommend developing countries not to sign double tax agreements with rich countries,” says Sorley McCaughey, Christian Aid Ireland’s Head of Policy and Advocacy.
The organization points out the facts that the agreement halves Ghana’s taxing rights over income paid from Ghana to Ireland as royalties and technical services fees. Adding that it, as a result, reduces Ghana’s key defence against profit-shifting via such payments, for which Ireland remains Europe’s leading channel. This greatly increases Ghana’s exposure to the risk of this kind of profit-shifting, it says.
Ghana is already losing money from illicit financial flows – and tax avoidance among others are known to be contributing factors.
A study by the Global Financial Integrity (GFI) shows that Ghana lost a total of $27.2 billion to illicit financial flows from trade misinvoicing in 2014.
Dr. Joseph Spanjers, an economist with GFI said, according to this study, Ghana’s illicit outflows and inflows averaged 9.3 per cent of GDP over 2005-2014.
The study says the combined value of illicit outflows and inflows within the period under review was $184.1 billion.
It is ironic, as Christian Aid points out that the government of Ireland is going ahead with the agreement, which is yet to be put before the country’s legislature which it clearly says is contrary to its own findings and analysis.
From all indications, Ghana is less likely to benefit from this agreement.
By Emmanuel K. Dogbevi
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