Double Taxation Agreements able to reduce the tax barriers to FDI, report says
Double Taxation Agreements [DTAs] per a study by a group of scholars, is said to be able to reduce the tax barriers to Foreign direct investment (FDI).
Per the study, an increase in FDI activity can be expected following the enforcement of DTAs.
According to a report by the Ghana Integrity Initiative [GII] highlighting the dangers of DTAs, the role DTAs play in attracting FDI is of major importance to tax policy makers because DTAs invariably affect the revenue that the source State can derive from taxes and thus from a revenue generating perspective, a DTA will make economic sense if the revenue sacrificed under the DTA will be compensated for by the positive economic effects from an increase in FDI.
Foreign direct investment (FDI) is regarded as a major driver of growth in developing countries because it provides financial resources which are most often in short supply in the developing countries.
Given the appropriate host country policies, FDI often triggers technology spillovers, assists human capital formation, contributes to international trade integration, helps create a more competitive business environment and enhances enterprise development.
DTAs were developed to address the issue of double taxation of income. To prevent double taxation, DTAs essentially modify the domestic tax laws of the contracting parties by eliminating the factors that give rise to double taxation.
The modification is achieved by allocating the taxing rights between the two states so that income earned by a person who is entitled to benefits under the DTA is not taxed more than once.
Ghana urged to review double taxation agreements with 13 countries
Tax consultant and Senior Lecturer at the University of Ghana (UG), Dr Abdallah Ali-Nakyea, has called on the government to review tax treaties it has with thirteen (13) countries as the tax treaties are skewed in favour of Ghana’s tax treaty partners.
Dr Ali-Nakyea is of the view that there is the need to renegotiate the tax treaties so as to avoid double taxation on businesses in the country.
“Our tax laws have changed over the years from the Internal Revenue Act 2000 [Act 592], we now have the Income Tax Act 2015, [Act 896]. With the changes in the income tax and then changes in other international tax instruments like the Base Erosion and Profit Shifting and the pillars that come with it, are we able to take a second look at our existing double taxation agreement and see what revisions are needed because at the end of the day, we are trying to protect the tax base,” he said.
Supporting Dr Ali-Nakyea’s position is William Kofi Owusu Damitia, a lecturer at the University of Ghana’s School of Law, who also called on the government to adopt a universal model tax treaty to serve as a basis for negotiations.
“To ensure that Ghana benefits from these tax treaties as they are designed to do, there is the need for us to comprehensively review them. You do not review things in a vacuum, the only way we are able to review is if Ghana is able to come to a conclusion that this is the way Ghana wants to go. Ghana’s model tax treaty must be enhanced and developed so that they can be the basis for us to negotiate going forward,” he stated.
Ghana is said to have entered into double taxation agreements with thirteen countries across the world.
The fundamental assumption which informs the tax treaty is that there will be a corresponding flow of capital between the treaty partners such that the tax revenue sacrificed by each state will even out.
