Ghana loses millions in uncollected taxes

What is the relation between taxation and development? Is revenue collected equally from all residents? Why should foreign investors be given tax concessions?

These and other questions are raised by a new Tax Justice Ghana Report, produced together with ISODEC, focuses on the ways in which the tax system and revenue collection are the biggest missing piece in national poverty eradication programmes. Download the printer-friendly version here, and the widescreen version here. The reports are written by Wilson Prichard of the Institute of Development Studies at the University of Sussex, with Isaac Bentum of A, A & K
Consulting.

Revenue mobilisation is at the top of the government's agenda, with a budget deficit reaching 11% in 2008. There are areas where revenue collection could be improved, for instance, taxing property and rental income could raise an additional 1-2% of GDP in taxes, while also increasing the regulation in land tenure.

The income tax, along with other direct taxes, is a key area where improved collection is needed. Indeed the income tax should be renamed the “development tax”, as it has the greatest missing capacity, regulates private sector activities, and redistributes income.

Ghana’s investment policy relies heavily on tax holidays, while serious efforts to monitor and evaluate their benefits are lacking. Companies often receive a 10-year tax holiday when establishing in the Free Zones. The whole regime of Free Zones needs urgent review in Ghana, as for instance, it has been found that 72% of forestry turnover is subject to Free Zone status, making a revenue loss of 0.5% of GDP.

Extractive industries account for 4.6% of Ghana’s GDP, while contributing approximately 3.3% of government revenues. Using existing provisions, royalties could be charged at a higher rate (up to 6% provision in the current law), instead of the current lowest rate of 3% being used across the board. Income taxes could also be collected from expatriate workers.

The establishment of an International Financial Services Centre (IFSC) in Accra will make Ghana into a tax haven. If and when the second bill constituting the legal framework is passed, money from the region will start flowing in hampering efforts to fight corruption, tax collection and the drug trade in the region.

While there is much talk about future oil revenues bumping government revenues as early as in 2010, relying on oil to solve the revenue problem is not advisable. The recent oil price fluctuations demonstrate that you can’t rely on oil revenues for current spending. Instead, a broad-based and well-enforced tax system will tackle the budget short falls, and safeguard against abuses in all areas.

This report is the start of a whole series of country reports, which look into the tax justice issues from a national angle with a view to build tax advocacy work in all continents.