TRANSFER PRICING IN GHANA: ISSUES, RISKS AND CHALLENGES

BY
WILLIAM KOFI OWUSU DEMITIA
OCTOBER 2019
Transfer Pricing Abuse in Ghana

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 In November 2010, Actionaid published a
research document titled “Calling Time: Why
SABMiller Should Stop Dodging Taxes in
Africa”.
 The publication focused on the tax dodging
strategies employed by SABMiller plc to
minimize the tax obligations of its subsidiary
Accra Brewery Limited and strip income out of
Ghana from 2007 to 2010.
 The publication highlighted four tax-dodging
strategies employed by SABMiller to minimize
its tax obligations in Ghana.
Transfer Pricing Abuse in Ghana

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 The Going Dutch strategy deals with the
payment of royalties by Accra Brewery Limited
to International BV, a Dutch-based subsidiary
of SABMiller, for use of trademarks for most of
the brands produced by Accra Brewery Limited.
In the four-year period, Accra Brewery paid
royalties of GHS 2.69 million ($1.97 million) to
SABMiller
 The Swiss Role strategy involved the payment
of management fees to other companies within
the SABMiller group.
Transfer Pricing Abuse in Ghana

The publication indicates that in the year 2010,

Bevman Services AG, a subsidiary of SABMiller
based in Zug, Switzerland received GHS 2.18
million ($1.38 million) from Accra Brewery
Limited as management fees
This figure represented 4.6 percent of Accra
Brewery Limited’s turnover for that year. After
paying a whooping GHS 2.18 million ($1.38
million) as management fees to Bevman
Services AG, Accra Brewery declared a loss for
the year 2010
Transfer Pricing Abuse in Ghana

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 The Trip to Maurituis involved the purchase of
raw materials by Accra Brewery from Mubex -
a subsidiary of SABMiller located in Mauritius.
 Accra Brewery purchased 50 percent of all its
raw materials from Mubex in 2009 and 2010.
Either by coincidence or by design, the
inception of the arrangement between Mubex
and Accra Brewery saw a sharp fall in Accra
Brewery’s gross profits. Actionaid estimates that
this tax dodging strategy costs the Government
of Ghana about GHS 1.6 million ($995,542) in
tax revenue every year.
Transfer Pricing Abuse in Ghana

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 The fourth strategy employed by SABMiller is
described as Thinning on Top. The strategy
involves the use of interest payments for a loan
granted by Mubex to Accra Brewery to strip
income out of Ghana
 The publication indicates that sometime in 2009,
Mubex granted a loan of GHS 19.9million ($12.63
million) to Accra Brewery Limited. The debt
obligation generated annual interest payments of
GHS 1.04 million ($661,218) wiping out GHS
177,000 ($112,927) of taxes every year
Transfer Pricing Abuse in Ghana

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 The then Minister of Finance in Clause 85 of his
presentation of the 2012 Budget Statement to the
Ghanaian Parliament stated inter alia “it is estimated
that developing countries lose about US$160 billion
every year through transfer pricing fraud. Recent
studies in the mining sector showed that Ghana loses
about US$36 million a year through transfer pricing.”
 This statement highlights the pervasive nature of
transfer pricing fraud and these revelations provided
the catalyst needed to jumpstart the consultative
process, which culminated in the Ghanaian transfer
pricing regulations.
Relevance of Transfer Pricing in Ghana

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 The 21st century has seen a lot of foreign direct
investment (FDI) in African countries including
Ghana. Africa is rich in resources and income
generated by MNEs in the extractive, retail and
services industries are usually sourced in Africa.
 The desire of MNEs to repatriate returns on their
investment provides an incentive for transfer
pricing manipulations within the group.
 Although transfer pricing is mainly associated with
cross-broader transactions, the existence of industry
concessions and location savings in the domestic
laws of Ghana gives room for domestic transfer
Relevance of Transfer Pricing in Ghana

The Sixth Schedule to the Income Tax Act, 2015

(Act 896) contains industry concessions that
enable taxpayers in these industries to enjoy
specific tax holidays. The First Schedule to Act
896 also provides tax incentives for manufacturing
enterprises located outside the cities of Accra and
Tema.
Section 22 and 28 of the Free Zones Act, 1995
(Act 504) also provide tax exemptions on imports
and tax holidays for Free Zones entities.
Relevance of Transfer Pricing in Ghana

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By manipulating the transactional prices between
members in the same group, income can be
shifted from one company operating in an
industry without tax concessions to another
company enjoying tax incentives thereby eroding
the tax base. This may either give a temporary or
a permanent deferral of tax on that income.
Intragroup financing arrangements also create
high interest rates on loans and since interest
payments are deductible for tax purposes, it
reduces the chargeable income of the company in
Ghana thereby reducing its corporate income tax.
Relevance of Transfer Pricing in Ghana

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Also since the withholding tax rate on interest
payment to a non-resident entity is 8% and and the
corporate income tax for companies is 25%, (but 35%
for mining and petroleum) there is a tax incentive to
strip income through interest because for every Ghana
Cedi of corporate income that the group can re-
characterizes as interest payment, it makes savings on
taxes.
Similarly, the use of intragroup services including
management and technical services and intragroup
supply of raw materials to a subsidiary in Ghana
provide enormous opportunities for transfer pricing
manipulations with its attendant tax savings to
Relevance of Transfer Pricing in Ghana

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Management and Technical Services fees for non-
residents are subject to a final withholding tax of 20%
while the corporate income tax for companies is 25%,
(but 35% for mining and petroleum) and given the fact
that these payments are deductible for tax purposes, it
reduces the chargeable income of the company in
Ghana thereby reducing its corporate income tax.
In addition, the creation and use of intangibles such as
intellectual property rights by MNEs give rise to
royalty payments, which are deductible for tax
purposes and therefore provides an avenue for transfer
Relevance of Transfer Pricing in Ghana

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Royalty payments to non-residents are subject to

a final withholding tax of 15% while the
corporate income tax for companies is 25% (but
35% for mining and petroleum) .
Also, Ghana’s Double Taxation Agreements
(DTA) either reduce withholding tax rates on
passive incomes or in some cases allocate the
income to the residence of the owner which
denies Ghana the ability to tax the income.
Relevance of Transfer Pricing in Ghana

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 Reduced withholding rates on passive incomes

such as royalties, interests, technical and
management services in tax treaties and the
harmful tax competition (race to the bottom)
adopted by most African countries including
Ghana to attract FDI also encourage transfer
pricing
Transfer Pricing Regulations, 2012 (LI2188)

15 Arm’s Length Standard

 Regulation 2(1) of L.I. 2188 provides that for any

transaction entered into by persons in a
controlled relationship , the profit and loss
arising out of such transaction should be
computed using arm’s length standard.
 A transaction is conducted at arm’s length if the
terms of the transaction do not differ from the
terms of a comparable transaction between
independent persons
Transfer Pricing Regulations, 2012 (LI2188)

Choice of appropriate transfer pricing method

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Persons who engage in a transaction with related

persons must compute the price of the goods to be
sold or the service to be rendered based on any of the
following methods:
(a) the comparable uncontrolled price method;
(b) the resale price method;
(c) the cost-plus method;
(d) the transactional profit split method; and
(e) the transactional net margin method.
 A taxpayer has the option of using an unspecified
method if that taxpayer obtains the permission of the
Transfer Pricing Regulations, 2012 (LI2188)

17 Services between persons in a controlled relation

 A service charge between persons in a controlled

relationship to be consistent with the arm's length
principle, if:
(a) the charge is for a service that is actually
rendered,
(b) the service provides economic or commercial
value to the recipient of the service, and
(c) an independent person in a comparable
circumstance will pay that charge for the service.
Transfer Pricing Regulations, 2012 (LI2188)

18 Transactions involving intangible property

 In determining the arm's length conditions
between persons who are in a controlled
relationship, GRA takes into account:
(a) the perspective of both the transferor of the
property and the transferee, including the price a
comparable independent person will pay for the
transfer of that property, and
(b) the usefulness of that intangible property to the
business of the transferee.
Transfer Pricing Regulations, 2012 (LI2188)

19 Transactions involving intangible property

 In applying the comparability principle to a
transaction, the following special factors relevant to
the comparable transaction are taken into account:
(a) the benefit expected from the intangible property;
(b) any geographical limitation on the exercise of a right
to the intangible property;
(c) the character of the right transferred, whether
exclusive or non-exclusive; and
(d) whether the transferee has a right to participate in a
further development made by the transferor to the
intangible property.
Transfer Pricing Regulations, 2012 (LI2188)

20 Documentation & Audit

 Taxpayers who engage in controlled transactions in
any year are required to maintain contemporaneous
documentation covering these transactions
 The documentation must provide information on the
transfer pricing method selected by the taxpayer, any
assumption made in applying the method, any
adjustments made as a result of applying the method,
justification for use of the method, the comparables
chosen and the screening criteria used in selecting
the comparables and the comparability analysis made
Transfer Pricing Regulations, 2012 (LI2188)

21 Documentation & Audit

Information must also be provided on the
calculations and price adjustment factors used in
determining comparability; determination and use
of any arm’s length range and justification for the
determination and use of the arm’s length range.
The taxpayer must also provide information on
organizational structure of the MNE including the
location and ownership linkages amongst associated
persons;
Transfer Pricing Regulations, 2012 (LI2188)
Documentation & Audit

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 the nature of the business in which the transaction

took place, the property used and the extent of any
other commercial or financial relationship; as well as
details of the transactions including the terms of the
contracts or agreements.
The strategies and policies applied to ensure that the
transaction is at arm’s length; the principal business
activities of each person in the group including the
business relationships among the associated persons and
the consolidated financial statement of the group must
be provided in the documentation.
Transfer Pricing Regulations, 2012 (LI2188)

23 Documentation & Audit

 In addition, the documentation must include
information on the industry dynamics, market,
regulatory and economic conditions under which
the associated party operates as well as
information on the functions and risks assumed
by the associated party and the assets employed.
Transfer Pricing Challenges

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Transfer Pricing Documentation
The requirement of preparing documentation to
cover each transaction entered into between
related parties imposes a huge burden on taxpayers
and depending on the volume of these transactions
in a given year, the taxpayer is likely to incur huge
cost to build and maintain contemporaneous
documentation to support intra group transactional
prices.
Transfer Pricing Challenges

Materiality
25

 All transactions entered into with controlled

persons irrespective of their value, frequency or
nature must be conducted at arm’s length and
contemporaneous documentation provided to
justify the pricing structure.
 This requirement does not take into account the
cost of building and maintaining transfer
pricing documentation vis-a-vis the potential
revenue that may be derived as a result of this
obligation imposed on taxpayers .
Transfer Pricing Challenges

Inadequate Penalty Provision

26

 The regulations incorporate the penalties

imposed by the Revenue Administration, 2016
(Act 915) for offences relating to fraud, failure to
file returns and underpayment of tax. A tax due
as a result of a profit adjustment made by the
Commissioner-General under the transfer
pricing regulations is treated as an additional tax
under Act 915
The penalty provisions incorporated into the
transfer pricing regulations address both the
substantive and the procedural aspects of non-
Transfer Pricing Challenges

27 Inadequate Penalty Provision

 For example, if a company fails to furnish a transfer
pricing documentation within the time specified by
the Commissioner-General in a notice, the taxpayer
is liable to pay a penalty of five hundred currency
points and an additional ten currency points for
each day of default
 The major problem with the penalties imposed for
breach of transfer pricing regulations is that it is
insignificant to deter MNEs from flouting these
rules.
Transfer Pricing Challenges

28 The Comparables Conundrum

Finding comparable items and transactions to

enable a taxpayer carryout comparability analysis
and determine an arm’s length range poses a huge
challenge for taxpayers.
The situation is worsened when a taxpayer has to
find comparables for intangibles and other items
that are trade secrets. For example, what is the
comparable for KFC’s preparation formula for
chicken or the formula for coke?
Transfer Pricing Challenges

29The Comparables Conundrum

Having an internal comparable uncontrolled

price (CUP) helps reduce this tax compliance
burden but it is not always easy to have an
internal comparable uncontrolled price. This is
because some intragroup transactions or services
are provided solely to members within the same
group.
Transfer Pricing Challenges

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Lack of Comparability Database

 Again, since Ghana does not have a national

comparability database, the tasks of conducting a
comparability analysis becomes difficult. If a
taxpayer lacks an internal comparable uncontrolled
price and information on the transactional prices
from other competitors are not readily available, a
taxpayer has no option than to take a margin and
defend it.
Transfer Pricing Challenges
Risk of Transfer Pricing Adjustment
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When a transfer pricing audit results in a

reallocation of income from another country into
Ghana, there is a real likelihood that the MNE will
suffer double taxation on that income reallocated
to Ghana. Such transfer pricing adjustments are
usually settled through mutual agreement
procedures (MAP) between the competent
authorities of the two countries.
Transfer Pricing Challenges

 32 However, under the Practice Note on

Transfer Pricing Regulations issued by the
Commissioner-General, mutual agreement
procedures (MAP) for corresponding
adjustment in the other country can only be
activated if Ghana has a Double Taxation
Agreement (DTA) with the country.
Transfer Pricing Challenges

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Package Deals

The transfer pricing regulations do not provide

guidance on “package deals”. Package deals often
involve charging a single price for the transfer of
intangibles, the provision of technical and
management services as well as the leasing of
production facilities in a single transaction
Transfer Pricing Challenges

 34 These package deals provide enormous benefits

to MNEs since the tax rates for each of the items
differ significantly. It is arguable that the
Commissioner-General can employ the G.A.A.R.
provisions to defeat such an arrangement but failure
of the transfer pricing regulations to provide
detailed treatment for these complex but common
transactions is a source of concern.
Transfer Pricing Challenges

35 Cost Contributions
The transfer pricing regulations is also silent on the
tax treatment of cost contribution agreements. The
OECD defines cost contribution agreements as a
“framework agreed among business enterprises to
share the costs and risks of developing producing or
obtaining assets, services or rights and to determine
the nature and extent of the interests of each
participant in those assets, services or rights.”
Recommendations

36 Improve Penalty Provisions

Penalty provisions are designed to make non-
compliance costly than compliance. Therefore, if the
cost of non-compliance is negligible or insignificant to
the taxpayer, the penalty provisions lose their essence.
The current penalty provisions, which are borrowed
from the Revenue Administration Act, 2016 (Act 915)
are not attuned to address cross border transactions
which involve huge sums of money. The US enacted
exclusive penalty provisions for breach of its transfer
pricing provisions. There is a substantial valuation
misstatement penalty (20%) and the gross valuation
misstatement penalty (40%).
Recommendations

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Guidance on Cost Contributions
 The transfer pricing regulations do not
specifically address cost contribution
arrangements. Detailed regulations on cost
contribution arrangements should be provided in
the transfer pricing regulations.
Recommendations

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Guidance on Package Deals
Guidelines should be provided on “package deals”.
The OECD guidelines recommend that such
transactions should be evaluated using principles
on aggregation and segregation. This may involve
segregating the entire transaction into individual
elements to determine whether the individual
components conform to arm’s length principle or
in other instances evaluating the entire transaction
to determine whether it conforms to the arm’s
length principle.
Recommendations

39Develop Safe Harbours

 Safe harbour can be provided for transactions

recurring every year thereby reducing the need for
building documentation every year.
 Transactional values of the previous year will only
be adjusted to compensate for economic conditions
to enable us determine current year prices.
 In addition, Technology Transfer Regulations, 1992
(LI 1547) provide permissible margins for
technology transfers. These margins could be used
to develop safe harbour provisions thereby
eliminating the need for a full-scale comparability
Recommendations

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Create Low Value Intra Group Services

The OECD Transfer Pricing Guidelines defines low

value-adding intra-group services as:
 services performed by one member of an MNE
group on behalf of other group members which are
of a supportive nature;
 are not part of the core business of the MNE group;
do not require the use of unique and valuable
intangibles and do not lead to the creation of
unique and valuable intangibles; and
Recommendations

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 do not involve the assumption or control of

substantial or significant risk and do not give rise
to the creation of significant risk.
 The proposal is limited to services such
accounting and auditing, human resources
activities, information technology, internal and
external communications, legal services and
activities with regard to tax obligations.
 The mark-up on such services should range
between 2 – 5 %.
Recommendations

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Implement Risk Assessment Manual
The Risk assessment manual developed by the
Transfer Pricing Unit of the Ghana Revenue
Authority, which will be used for determining
whether the transfer pricing return submitted by
a taxpayer should be selected for transfer pricing
audit is a positive and commendable step.
There is a need for broad based consultations on
the content of the manual to enable taxpayers
know what they ought to do to comply.
Recommendations

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Develop a Comparability Database
 There is the need for concerted efforts to develop
a national comparability database to serve as a
guide to both tax administrators who will
undertake transfer pricing audits and taxpayers
who engage in related party transactions that
require the preparation of transfer pricing
documentation.
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Conclusion
 Although transfer pricing manipulations have
eroded Ghana’s tax base in times past, there is the
need for us to pursue strategies, which provide
relevant information to tax authorities while
reducing the burden of tax compliance on the
taxpayers.
 A balanced approach to solving the issues will
aid voluntary compliance by taxpayers and
reduce the need for enforcement by tax
authorities.
END OF PRESENTATION

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