THE ROSES OF TRANSFER PRICING RULES IN GHANA- KEY HIGHLIGHTS FOR TAXPAYERS.

Introduction

The Transfer Pricing regulation provides a legal framework that gives legal effect and application of the arms-length rule provided in the Income Tax Act 2015 (Act 896). The new Transfer Pricing Regulation 2020, LI 2412, replaced the old Transfer Pricing Regulation 2012, LI 2188.

Key highlights

The following are the key highlights of the transfer pricing regulation in Ghana.

1.???? ?Generally, the Regulations in Ghana align with the OECD Transfer Pricing Guidelines for MNEs 2017 ( TPG ). The provisions in the new regulation significantly depart from the provisions contained in the old regulation LI 2188.

2.???? Regulation 2 of LI 2412 provides that a person who enters into an arrangement with another person with whom that person is in a controlled relationship shall compute the income or expenditure arising from that arrangement according to the arm's length standard. Regulation 2 of the LI is consistent with the definition of the arm's-length principle in Article 9 of the OECD Model Tax Convention on Income and Capital and also in Chapter I of the OECD TPG 2017.

3.???? The regulation 2 ?of the LI 2412 further ?provides as follows:

“A person who enters into an arrangement with another person with whom that person is in a controlled relationship shall compute the income or expenditure arising from that arrangement according to the arm's length standard.

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An arrangement between persons in a controlled relationship accords with the arm's length standard, if the terms of that arrangement do not differ from the terms of a comparable arrangement between independent persons”.

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4.???? In line with Chapter Three of the OECD TPG, regulation 3 of the LI 2412 requires taxpayers to perform comparability analysis to confirm that dealings in controlled transactions are consistent with the arm’s length requirements.

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5.???? Functional analysis is at the core of comparability analysis, a necessary requirement for performing comparability analysis under the rules in Ghana.? This requires an analysis of functions performed, assets used, and risks assumed in controlled transactions.

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6.???? The Regulation further emphasises the need for risk analysis in controlled transactions to ensure that transactions are consistent with arm’s length principles.? For example, regulation 3 of LI 2412 further emphasises as follows:

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“In determining whether two arrangements are comparable, the_ allocation of risk between the ·associated persons shall take into account how the economically significant risks are allocated in arrangements between those persons and which person ·(a) assumes the financial risk; · (b) performs the relevant risk control and risk mitigation functions, and (c) has the financial capacity to assume the risk. · Where the Commissioner-General is satisfied that the person who assumes the risks under an arrangement between persons in a controlled relationship does not (a) control the risk, or (b) have the financial capacity to assume the allocated risk, the Commissioner-General shall adjust the profits of the associated persons to reflect the actual risks assumed by the associated persons under the arrangement”.

7.???? The five Transfer Pricing methods contained in Chapter II of the OECD TPG have been adopted and included in the Regulation. Taxpayers can select one of these five methods and apply it consistently, provided it better fits the arrangement they enter within controlled transactions.

8.???? The Regulation further made provision for an Advanced Pricing Agreement in a situation where the taxpayer holds the view that the five traditional methods are not consistent with the actual transaction carried out in a controlled transaction.

9.???? Adopting a simplified elective approach for low-valued Intra-group?has now been captured by the regulation and is consistent with the requirement under the TPG. However, the Regulation gives safe harbour rules where certain payments, including management fees and technology transfer costs, are to be in line with the Ghana Investment Promotion Act. ?

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10.? The Regulation also considers controlled transactions, which are not core to the taxpayer's business and have a value not exceeding two hundred thousand, as low-valued intra-group services.

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11.? However, the cost allocation key for low-valued intra-group service contained in the Regulation is three per cent as compared to the five per cent in the TPG.

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12.? A significant aspect of the new Regulations is the implementation of the three-tiered approach for Transfer Pricing documentation, which includes the Local File, a Master File, and Country-by-Country documentation. Taxpayers are required to submit an electronic copy of the contemporaneous documentation to the Commissioner-General no later than four months after the end of each basis period. This documentation must provide details regarding the arrangements made by the taxpayer.

13.? Provisions relating to intangibles, cost contribution arrangements, and business restructuring are also similar to approaches in dealing with them ?as contained in the OECD TGP 2017.?

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14.? The Regulation specifies that a Transfer Pricing audit should be conducted on the documentation provided by the taxpayer. It allows the Commissioner-General to review the documentation filed by the taxpayer under sub-regulation (1) of regulation 12 to determine whether the most appropriate transfer pricing method has been applied to the arrangement. If the Commissioner-General is satisfied that the person who filed the return did not apply the most appropriate transfer pricing method to the arrangement, the Commissioner-General may apply the most appropriate transfer pricing method to the arrangement.

Conclusion

In Ghana, the transfer pricing rule exists to ensure that transactions between related parties are in line with transactions between unrelated parties. This helps to prevent tax distortions that may arise when related parties are involved in transactions. The aim is to ensure fairness and consistency in pricing for tax purposes.???????????????????????????????????????????????????

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WRITTEN BY:

FRED KWASHIE AWUTTEY, ESQ.-

Fred is a lawyer and a tax management advisor who specializes in international tax law.

He is a director of tax at EM Tax Advisors.

EM Tax Advisors is a team of chartered and international tax advisors that offers high-quality services to both local and multinational companies operating in diverse industries such as financial services, mining, petroleum, technology, entertainment, and education. The firm's specialisation in international taxation and transfer pricing gives it a competitive advantage in taxation.

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