Considerations for Extractive Sector as Ghana gets Tough on Transfer Pricing Audits

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Paa Kwesi Morrison

Paa Kwesi Morrison, ENSafrica, Accra

Paa Kwesi Morrison is a partner at ENSafrica in Accra

The recent budget in Ghana made significant tax proposals, including tax administration measures to enhance tax compliance. Taxpayers in the extractive sector have been specifically targeted by the government, making it essential for businesses to ensure compliance with transfer pricing rules and requirements.

The Government of Ghana presented the 2017 Budget Statement to Parliament on March 2, 2017. The budget made significant tax proposals, including tax administration measures to enhance tax compliance.

Notable among these measures is the strengthening of the Transfer Pricing Unit (“TPU”) of the Ghana Revenue Authority (“GRA”) to undertake rigorous audits of businesses in the extractive sector of Ghana. It has been suggested in the 2016 Country Report of the Africa Chapter of the Tax Justice Network that Ghana loses about $2 billion annually in revenue due to transfer pricing abuses.

Ghana has had arm's length pricing provisions in its tax legislation and, since 2012, has established detailed transfer pricing regulations by the passage of the Transfer Pricing Regulations, 2012 (L.I. 2188) (the “Transfer Pricing Regulations”), requiring persons engaged in related party transactions to maintain contemporaneous transfer pricing documentation on those transactions and to file annual transfer pricing returns. The new Income Tax Act, 2015 (Act 896) (the “Income Tax Act”) also provides for the ring-fencing of income from each petroleum and mineral operation by treating each operation as an independent business and requiring such operation to conform with transfer pricing principles.

However, tax audits on businesses operating in the extractive sector of Ghana did not usually cover transfer pricing aspects, due to the lack of capacity at the GRA to carry out effective transfer pricing audits. Although a Transfer Pricing Unit had been set up by the GRA, the unit required significant resource allocation and capacity building to enable it to effectively carry out its mandate.

What Do the Proposed Transfer Pricing Audits Mean?

The government's decision to focus on transfer pricing audits of businesses in the extractive sector means that all related party transactions in the extractive sector will come under scrutiny. The Revenue Administration Act, 2016 (Act 915) and the Income Tax Act empower the Commissioner-General of the GRA, for a reasonable cause, to have full and free access to premises, documents or assets of taxpayers. In practice, the GRA usually informs the taxpayer of a planned audit in order to give the taxpayer the opportunity to prepare for such audit to make it more effective. We expect the GRA to continue this practice with respect to transfer pricing audits.

What Should Businesses Do?

Businesses need to carefully structure their related party transactions and ensure compliance with transfer pricing rules, maintain appropriate documentation and file the required transfer pricing returns. Also, businesses that receive oral or written communication from the GRA regarding impending transfer pricing audits must take the notification seriously and prepare for such audits. Non-compliance with the requirement to maintain transfer pricing documentation or file a transfer pricing return can expose a taxpayer to the following penalties and interest:

  •  approximately $125 for failing to file a transfer pricing return and approximately $2.50 for each day the filing remains outstanding;
  •  75 percent of any tax payable for a deliberate failure to maintain transfer pricing documentation; and
  •  interest of 125 percent of the Bank of Ghana rediscount rate for any unpaid tax.

Taxpayers with related party transactions should ensure that they have suitably qualified personnel and seek tax or legal advice to ensure compliance and avoid penalties, as well as related inconvenience and embarrassment.

What Challenges Lie Ahead?

Government would have to consider and address the following challenges relating to transfer pricing audits:

  •  lack of thorough understanding by revenue officers of the businesses of taxpayers;
  •  insufficient knowledge of transfer pricing issues by revenue officers;
  •  corruption and other unprofessional conduct of revenue officers relating to the raising of tax audit queries and general collection of taxes; and
  •  undue delay in commencing and completing tax audit queries.

Taxpayers will be required to build the capacity of their finance, accounting and legal teams to ensure compliance with transfer pricing regulations.

What Practices Should Change Going Forward?
Detailed Transfer Pricing Documentation

Businesses must prepare detailed transfer pricing documentations of all transactions affected by the transfer pricing regulations. This would ensure that penalties that may arise from non-preparation of such documentations are either mitigated or eliminated.

Non-Cash Benefits must be Controled

Employee non-cash benefits that are made without taxation must be controlled. Failure to do so exposes the affected businesses to the potential for such untaxed employee benefits to be considered as a transfer pricing adjustment on which additional tax liability and penalties will be levied in accordance with the provisions of the transfer pricing regulations.

File Annual Returns

Taxpayers with related party transactions must recognise and comply with the obligation to file annual transfer pricing returns. Focus should be placed not only on filing the annual income tax returns but also on the transfer pricing returns for all related party transactions. Failing to file the returns exposes the business to penalties and imputation of interest on the tax due.

Tax and Legal Advice

Taxpayers should be encouraged to immediately inform or call on their tax and legal advisors once the GRA evinces the intention of commencing transfer pricing audits on their operations. This would ensure that their interests are protected throughout, from commencement to close of the audits.


With the expected growth of 33.6 percent in tax revenues over the 2016 provisional outturn, coupled with the abolishment of a significant number of certain taxes, government tax revenues for 2017 are largely expected to be financed by strict enforcement of, and compliance with, tax laws. It is therefore necessary that taxpayers in the extractive sector, which have been specifically targeted by the government, ensure compliance with transfer pricing rules and requirements.

Paa Kwesi Morrison is a partner at ENSafrica in Accra. He may be contacted at:

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