18 Sep Transfer Pricing in Ghana (Part I) – Keeping it At Arm’s Length
The Transfer Pricing Issue
Transfer pricing has grown in prominence with the increase in the globalization of business and the operations of multinational companies in Ghana. Unlike the open market commercial transactions, where a typical buyer will choose the lowest price for goods and services, with the seller competing to achieve the highest price, in the transfer pricing context, both the buyer and the seller are likely to have the same aim: to maximize profits within the intra-group of companies they find themselves operating.
The Transfer Pricing Problem
Transfer pricing arises between related or connected persons in a transaction; a parent and its subsidiary company being a classic example. The common incentive with respect to connected party transactions is to minimize the overall tax paid by the group, thereby maximizing group profit. It is reported that transfer “mispricing” adopted by some intra-group companies has caused substantive loss of government revenue in Ghana and other developing countries. For example, Global Financial Integrity Report of 2014 indicated that the cost of fraudulent invoicing in Ghana amounted to approximately $ 14.4 billion in revenue, for the ten-year period preceding the Report. Such astronomical figures are not uncommon and has resulted in most African countries adopting transfer pricing rules.
The Rules of the Transfer Pricing Game
The relevant legislation regulating transfer pricing in Ghana is the Income Tax Act, 2015 (Act 896) and the Transfer Pricing Regulation 2012 (LI 2188). Pursuant to the Regulations, the Commissioner General is authorized to adjust, for tax purposes, the price paid for goods and services or supplied between related or connected persons, typically, when intra-group transactions are undertaken on a non-arm’s length basis. Related persons include members of a multinational group, cross border transactions and persons participating in the management, control or capital of the other person.
The Arm’s Length Provision
The arm’s length provision stipulates that the terms of the transaction must be between two connected or related parties. It requires such persons to “… quantify, characterize, apportion and allocate amounts to be included in or deducted from income to reflect arrangements that would have been made between independent persons”. To determine whether the transaction conducted between the related parties occurred in accordance with the arm’s length principle, the taxpayer is required, in any given transfer pricing transaction to compare the conditions in a controlled transaction with the conditions in a transaction with an independent person or entity to determine the arm’s length price.
Keeping it at Arm’s Length
The arm’s length principle will apply to provisions made within a transaction or series of transactions or dealings between any of the following:
- persons who are in a controlled relationship.
- a permanent establishment (a branch) and its head office
- a permanent establishment and other related branches of the permanent establishment;
- taxpayers in a controlled relationship; and
- taxpayers in an employment relationship
It is important to note that there are transfer pricing documentation requirements within Ghana law and if accurate record keeping is not adhered to by the taxpayer, penalties may apply.