To appear in The Tax Journal, Chartered Institute of Taxation, GhanaVirtually all countries of the world, especially developing countries, give tax incentives to foreign firms and individuals in order to attract investment, generate employment, and boost economic growth. An example of these tax incentives is a Double Taxation Agreement (DTA) between countries.Double taxation is the imposition of taxes in two or more States on the same tax payer in respect of the same income or the imposition of multiple taxes on the same income by the State. A well-known but controversial example is the taxation of dividends paid out to shareholders when these dividends have already been taxed through a profit (corporate) tax (i.e., when profit is taxed dividends are not tax deductible). Therefore, it is argued that dividends are taxed twice.

Ghana has signed Double Taxation Agreements (DTAs) with, among others, France, UK, Belgium, Italy, Germany, South Africa, and Switzerland. DTAs save investors in the participating countries money because they are not liable to pay taxes in both countries. For instance, if an Italian firm or individual invests in Ghana and pays taxes in Italy on the income earned in Ghana, it is not liable to pay taxes on the same investment in Ghana. This is intended to avoid excessive taxation (double taxation) and thereby boost investment in Ghana. To the extent that firms and individuals in developed countries have a greater capacity to invest in Ghana relative to the capacity of Ghanaian firms and individuals to invest in these countries, DTAs with developed countries are arguably beneficial and indeed are win-win situations for both countries: Ghana gets no tax revenue but benefits from foreign direct investment and the developed country gets all the tax revenue.

But do Ghana’s DTAs, as currently structured, boost investment in Ghana? Or to put it differently, will abolishing DTAs discourage investment in Ghana? The answer, in my view, is NO. To explain why, I shall argue that there exists another bilateral taxation agreement that allows Ghana to tax the incomes earned by foreigners in Ghana but which gives these foreigners the same or better investment incentives as DTAs.

I begin by explaining a key difference between two concepts of the taxation of foreign income. I use the United States of America (USA) and Canada as examples. Taxation in Canada is based on “residency. Canadian citizens who are not “residents” of Canada do not pay taxes on their foreign income. Residency depends on a number of factors, including length of stay in Canada in a given year, ownership of property, maintenance of bank accounts, maintenance of a home, membership in organizations, etc. To avoid double taxation of foreign income, Canada taxes income earned abroad but allows a credit for tax paid to foreign governments. Suppose that my Canadian tax liability on income earned in Germany is $7000 and I paid $5000 in taxes to the German State. Then, as a resident of Canada, I get a tax credit of $5000 and so I will pay only $7000 – $5000 = $2000 to the Canadian Revenue Agency in respect of the income earned in Germany. The tax credit cannot exceed what the full Canadian tax on the foreign income would have been. Therefore, in the above example, the maximum tax credit is $7000. In contrast, taxation in the USA is based on citizenship. Therefore, US citizens, wherever they reside, are taxable on their global income with credits permitted for taxes paid to foreign governments.

By signing bilateral taxation agreements that combine tax credits and variants of the principles of citizenship and residency discussed above, Ghana can tax the incomes earned by foreigners in Ghana and still give these foreigners the same investment incentives as DTAs. Hereafter, I shall refer to these agreements as Tax Sharing Agreements (TSA). Under TSA, the participating countries must determine which country would be the primary taxing authority (PTA) and which country would be the secondary taxing authority (STA). The PTA is the first to tax the income earned. The STA gives the taxpayer a tax credit based on the tax paid to the PTA and then taxes the residual income. I propose that the residency requirement should first be applicable wherein the country (i.e., host country) in which the income is earned is the PTA and the country where the parent company is located or of which the investor is a citizen is the STA. Under this TSA, the host country (for my purposes, Ghana) will always earn some tax revenue while the other country is also likely to earn some revenue. In fact, given that our marginal tax rates on capital gains, labor income, wealth, corporate income, etc are lower than the corresponding rates in developed countries, the tax credit that a foreigner investor will earn if Ghana is the PTA will not exceed the full tax liability in the foreign country. Therefore, the foreign country will also earn some tax revenue.

But even more importantly, this proposed TSA will not affect the investment incentives of foreigners. Note that under Ghana’s DTAs, as currently structured, the foreign investor will still pay taxes in his country of origin. Nothing in the DTAs says that both countries will not tax the investor. If this were the case, then a TSA will discourage investment in Ghana relative to a DTA. But given that under the present DTAs, the country of origin will still tax the investor and that these countries have higher tax rates than Ghana, the proposed TSA -- which makes allowances for tax credits as explained above -- implies that the investor’s tax liability under a TSA cannot be more than his tax ability under a DTA. Therefore, relative to DTAs, the proposed TSA will not adversely affect the investment incentives of foreigners.

For a developing country that wants to reduce its dependence on foreign aid, boost tax revenues, promote investment and economic growth, TSAs clearly dominate DTAs. They should be embraced by Ghana and her development partners.

*The author, J. Atsu Amegashie,Teaches economics at the University of Guelph, Canada

J. Atsu Amegashie

Department of Economics

University of GuelphGuelph,

Ontario

Canada

N1G 2W1