ABSTRACT
Corporate law firms fall within the Micro, Small, and Medium Enterprises in Ghana. Tax laws apply to all corporate firms as it is to other businesses. As people with knowledge of the law and its practice, it is incumbent to appreciate and take advantage of provisions that give room for firms to plan their tax activities in a way that they pay less taxes. The current global economic crises and Ghana’s own peculiar economic challenges shut Ghana from the International Capital market and as such, the government would have to improve on its revenue mobilization from taxes in order to meet public expenditure needs.
Corporate law firms like other businesses will face the brunt of increased tax rates in a time of economic uncertainty, hence, the need for corporate firms to apply tax avoidance schemes provided in law to reduce their tax liability and preserve cash. Various sections of the Income Tax Act 2015, Act 896, as amended throw light on some provisions that can help corporate firms reduce their tax liability.
Compliance is at the base of effective tax planning for corporate firms and cannot be overlooked. Firms should take special interest in recent court judgments in relation to tax issues to identify opportunities therein. Extensive consultation with professionals is also required as the ability to interpret the tax laws and their application to particular circumstances.
Consequently, some level of fiscal discipline is achieved through effective tax planning.
INTRODUCTION & BACKGROUND: THE LEGAL PROFESSION
The legal profession in Ghana traces its origins to the British legal system which was transplanted to Ghana during colonization. Since the first Ghanaian lawyer was called to the British Bar in 1887, the legal profession has grown and developed into a cadre of lawyers who act in various professional capacities. Dawuni, 2021.
The legal profession remains one of the most revered and envied professions in Ghana [and globally]. This is evident in the systems put in place by the General Legal Council to train lawyers. There are 960 chambers and legal departments, duly licensed to practice law for the 2022 Legal Year, as of 23rd June 2022. Despite the many positive strides the legal profession has chalked in helping improve justice administration in the country, it has not been one without its own peculiar challenges of an industry perceived to have a low tax compliance character.
GHANA’S ECONOMIC OUTLOOK
The pinch of the current global economic crises following the Covid 19 Pandemic and the Russian invasion of Ukraine is felt in every business sphere in Ghana [including law firms].
As at September 2022, the Ghana Cedi had depreciated by 37.5 percent, 24.1 percent, and 27.5 percent against the US dollar, the pound, and Euro, respectively (BoG, Monetary Policy Committee October Report). Inflation at the end of December 2022 stood at 54.1% according to the Ghana Statistical Service. The cost of living has become high and firm survival is keen for many business owners in a trying economy like Ghana’s. The government’s quest for an IMF bailout is a testament of the economic hardship. Matters have taken another turn, following the announcement by the government through the Ministry of Finance on 5th December 2022 inviting eligible bond holders to exchange their existing bonds for new bonds maturing from 2027 to 2028 in an exchange consideration ratio. The move to exchange bonds includes individual holders of eligible government notes and bonds, E.S.L.A. PLC bonds, and Daakye Trust PLC bonds. Treasury Bills are however exempted from the Debt Exchange Program. Ghana cannot now access the international capital market for at least three (3) years and would have to be innovative in raising enough tax revenue to meet its appropriation needs.
Law firms like other businesses are equally facing the brunt of the harsh economic conditions. As lawyers will [always] find “caveats” to provisions in laws and regulations to argue out their cases for their clients, digging through the tax laws and engaging in effective tax planning for the firm’s business [and for the individual lawyer] remains one of the options available to ensure fiscal discipline for business survival.
TAX PLANNING
Tax planning is traditionally viewed as being in the interest of shareholders since its aim is to cut down costs and increase the after-tax profit (Abdul Wahab & Holland, 2012). In Commissioner v. Newman, Judge Learned Hand remarked: “Over and over again courts have said that there is nothing sinister in so arranging one’s affairs so as to keep taxes as low as possible. Everybody does so, rich or poor, and all do right, for nobody owes any public duty to pay more than the law demands: taxes are enforced exactions, not voluntary contributions. To demand more in the name of morals is mere cant.”
Tax Planning is therefore at the core of a business operation and cannot be overlooked. Zhu et al., 2019, however, opine that corporate tax planning increases value in the form of positive net benefits (short-term cash savings) but up to a maximum point beyond which the benefits derived from these activities become lesser than the costs involved and thus lead to a fall in value.
The government needs enough revenue to be able to meet all the needs of the citizenry and as such, the Ghana Revenue Authority seeks to ramp up efforts to generate more tax from all persons (individuals and entities). While businesses need to support GRA’s revenue mobilization efforts, a business should do all it legally can to protect its income from taxes and to remain fiscally disciplined [Cash is King]. This can be achieved by efficient tax planning.
It is worth noting that the service sector of the Ghanaian economy does not enjoy many tax incentives and benefits compared to other sectors like the agricultural and manufacturing sectors. That notwithstanding, firms can effectively follow the steps outlined below to ensure they reduce their tax liability legally and in accordance with the tax laws and regulations.
PRACTICES OFTEN OVERLOOKED IN TAX PLANNING RECORD KEEPING
Most businesses, especially within the Micro, Small, and Medium Enterprises (MSMEs) bracket do not keep proper business records. Many law firms in Ghana fall within this bracket as well. Every business regardless of size needs to develop and practice the skill of keeping records. Records serve as evidence of the income and expenses of the business. It would be absolutely dire for any business to wait till the end of the year or even worse, during a tax audit to now try and pull records to support business transactions. When records are kept on a regular basis, it is difficult to misplace receipts or forget that expenses were incurred. These legitimate business expenses can be deducted from income before tax is charged.
Another practice often overlooked is good financial reporting systems. Many firms and businesses within the MSME space do not invest in having good financial reporting systems. With the fast evolution of information systems, inculcating good financial reporting systems in a firm’s business helps it to gain a competitive edge over its rivals. Furthermore, an investment in having a good financial system will result in producing a financial statement free from error and present a true and fair view of the firm’s financial performance and financial position. Also, treating every income under the appropriate income heading [business, investment, or rent income] has different tax implications, thus a wrong treatment can result in paying higher than reasonable taxes. The absence of a good financial reporting system from the foregoing could lead to wrong classification or misrepresentation of the chart of accounts, consequently resulting in a higher tax liability.
Example; Repairs & Maintenance account Section (12)(2)(a) of Income Tax Act 2015, Act 896 as amended; Loss from business & Investment, Section 17(1)(a)(b); Board Meeting Allowances among others.
PROVISIONS IN LAW TO TAKE ADVANTAGE OF
Firms having taken appropriate steps to ensure proper record keeping and a good financial reporting system, are encouraged to apply provisions in the law that allow the firm to arrange its business in a way [legally] to reduce its tax liability.
1. Section 17(1)(b) of Income Tax Act 2015, Act 896, as amended – Loss from Business & Investment
(1) “A person who is ascertaining the income of that person or of another person from a business for a year of assessment shall deduct;
(b) an unrelieved loss of the person in all other sectors for any of the previous three years of assessment from the business.” Firms [and businesses] that make losses are minded to deduct all unrelieved losses in the subsequent years when they make profits. Unrelieved losses can be carried forward for three years. This will help reduce the tax burden on the firm and help maintain good liquidity as payment of taxes draws cash out of the business.
2. Paragraph 8 of the Sixth Schedule - Income Tax Act 2015, Act 896 as amended; “In calculating the income of a company from conducting a business for a year of assessment, the company is entitled to an additional deduction as provided in subparagraph (2) for salary and wages paid during the year to a fresh graduate from a recognised Ghanaian tertiary institution.” “For the purpose of this paragraph ‘fresh graduate’ means a person who has graduated from a tertiary institution for the first time, whether or not that person was previously employed”.
Additional Deduction
Up to 1% of the workforce 10% of wages & Salaries
Above 1% but not more than 5% 30% of wages & Salaries
Above 5% 50% of wages & Salaries
This provision is one not explored by many companies, big and small. It is an incentive in law aimed at enticing the private sector to employ fresh graduates to reduce the graduate unemployment rate in the country. Consider the Scenario:
• Two law firms XYZ & Associates and ABC & Company both in Accra employ 3 “fresh graduates” in the 2021 year of assessment.
• Both have a workforce of 20 staff, hence fresh graduates form 15% of the workforce.
• Both Pay the graduates a gross salary of GHS 3,000.00 per month.
• Translates to an annual salary of GHS 108,000 for the three “fresh graduates”
• Further assumption; all other factors apply equally to both firms.
Assuming ABC & Company takes advantage of this provision, they will be entitled to an additional deduction of GHS 54,000.00 as graduate employment deduction. XYZ & Associates on the other hand will have no extra deduction.
The above scenario puts into context the tax benefits and savings firms and other businesses can make by taking advantage of Paragraph 8 of Sixth Schedule - Income Tax Act 2015, Act 896 as amended.
Other Provisions to help in Tax Planning;
i. Section 12 of Act 896 - Repairs and Maintenance.
ii. Section 17(4) of Act 896 - Deducting business loss from investment income.
iii. Section 100 of Act 896 - Contributions and donations to a worthwhile cause.
CONCLUSION
Proper tax planning makes it easier to build your personal finances. Corporate firms are to note that desperate times call for desperate measures. Strategies that can help from the tax perspective for firms and businesses include but are not limited to;
1. Complying with the tax laws to tax evasion
2. Avoiding interest and penalty payments to Revenue Authority.
3. Filing all returns on or before due dates.
4. Calculating and paying the correct amount of tax.
5. Applying tax planning schemes.
6. Keeping abreast with the knowledge of the tax laws/legislations in order to identify opportunities therein.
REFERENCES
• Commissioner of Internal Revenue v. Newman, 159 F.2d 848 (2d Cir. 1947)
• Income Tax Act 2015, Act 896, as amended.
• Revenue Administration Act 2016, Act 915, as amended.
• Law of Taxation in Ghana (5th Edition)
• Advanced Taxation; Emile Woolf International (ICAG)
• Kwasi Nyantakyi Owiredu Vs. Commissioner-General Ghana Revenue Authority
• J. Jarpa Dawuni (2022) The legal profession in Ghana: from indigenization to globalization, International Journal of the Legal Profession, 29:1, 75-101
• Shaipah Abdul Wahab and Kevin Holland 2012. Tax Planning, Corporate Governance, and Equity Value. The British Accounting Review, vol 44, issue 2. Pages 111-124
• Bank of Ghana Monetary Policy Committee September Report
• Ghana Statistical Service; Inflation Report December 2022
