In accordance with Article 179 (8) of the 1992 Constitution and as stated in Section 28 of the Public Financial Management Act (PFMA), 2016 (Act 921), the Minister for Finance shall, not later than the 31st of July of each financial year, prepare and submit to Parliament a mid-year fiscal policy review.

The mid-year fiscal policy review shall include the following information: a brief overview of recent macroeconomic developments by the Government; an update of macroeconomic forecasts undertaken by the Government; an analysis of the total revenue, expenditure, and financing performance for a period up to the first six months of the financial year; a presentation of a revised budget outlook for the unexpired term of the financial year, and the implication of the revised budget outlook for the Medium-Term Fiscal and Expenditure Framework if necessary; and, where necessary, plans for submitting a proposed supplementary budget for approval by Parliament; and an overview of the implementation of the annual budget and the budgets of covered entities.

This requirement affords the minister the opportunity to introduce or amend existing tax laws and fiscal policies, which require review for effective implementation. As a tax practitioner, I deemed it fit to pen out some provisions in our tax laws that I believe require some sort of amendment for effective tax administration.

This article is to raise some observations made in our tax laws that, in my opinion, will require some form of amendment to ensure effective tax administration without posing an arduous and laborious compliance burden on some taxpayers, which has the propensity of affecting the businesses of some taxpayers.

Brief history of taxation of foreign exchange gains and losses:

The erstwhile Internal Revenue Act, 2000 (Act 592) as amended, and its accompanied regulation, the Internal Revenue Regulations, 2001 (L.I. 1675), provided that only realised exchange losses and gains were to be considered in tax computations. It explained further that “a foreign currency exchange gain or loss is realised when the liability under a contract in foreign currency is discharged or when the right to receive a foreign currency under a contract is satisfied by the actual receipt.”

Although this rule seems simple, it was difficult to follow because taxpayers were required to track every unrealized exchange difference encountered in previous years to ascertain when the liability was discharged, an asset was realised, and an actual benefit was received.

The promulgation of the Income Tax Act 2015 (Act 896) that repealed Act 592 also had rules on tax accounting for financial costs, which include financial losses and gains. The combined reading of sections 16, 25, 131, and 133 of Act 896 as amended gave the effect that financial gains and losses are to be ascertained in accordance with Generally Accepted Accounting Principles (GAAP) with a restriction on the quantum of financial loss deduction, which can be taken in any year of assessment, with guidance on how long any unrelieved losses can be carried forward.

Frankly speaking, these current rules were working perfectly for taxpayers, tax practitioners, and tax administrators until the passage of the Income Tax (Amendment) Act, 2023 (Act 1094). Section 4 of Act 1094 amended Section 25 of Act 896 by adding sub-sections 4 to 7 to Section 25.

Sections 25(6) and (7) sort to reintroduce some of the rules which existed under Act 592 by disallowing unrealised foreign exchange losses as a legitimate deduction and permanently disallowing a deduction of exchange loss arising from
transactions between resident persons. These new additional rules to be applied in addition to the existing rules are quite problematic, with some institutions being severely affected by the effects of sections 25(6) and (7). One can understand that these new additional rules were probably introduced due to the poor performance of the Ghanaian cedi in 2022 to help stem the depreciation of the cedi without recourse to its unintended effect on taxpayers.

Area of focus for my analysis:

My analysis of some tax provisions that should see amendment will be centred on Section 25 of the Income Tax Act, 2015 (Act 896) as amended, with emphasis on Sub-sections 6 and 7 as outlined below:

25(6) An unrealised foreign exchange loss shall not be allowed as a deduction.
25(7) A foreign exchange loss arising from a transaction between two resident persons shall not be allowed as a deduction.

Unrealized foreign exchange gains and losses:

In summary, foreign exchange gains or losses occur when a person holds assets or liabilities in foreign currencies and there are exchange rate movements between the underlying currency and the functional currency. Depending on the direction of the exchange rate movement, foreign exchange gains or losses will be created on those assets or liabilities. Such exchange gains or losses created could be either realised or unrealized.

The gains or losses are realised when the underlying assets or liabilities have been settled or redeemed before the end of the reporting period. Unrealized gains or losses are the gains or losses on foreign currency-denominated transactions that have not been settled or realised as of the reporting date. This would mean that the underlying payment of the liability has not been made or received, or the underlying assets have not been realised prior to the close of the accounting period.

Section 25(6) of Act 896, as amended:

This section states that an unrealised foreign exchange loss shall not be allowed as a deduction. Although rules on the tax treatment of unrealized exchange losses and gains are issued hand in hand because income and cost arise on the same principles, it was bamboozling to see that sub-section 6 made no mention of any new rules on the treatment of unrealized foreign exchange gains. One may have opined that taxpayers can still rely on Section 25(1-5) to exclude unrealized gains from their income for assessment, but I beg to differ that such grounds will NOT hold for reasons that Section 8(3) of Act 896 provides that “a specific deduction rule shall take precedence where more than one deduction rule applies” and Section 25(1-5) are general rules on accounting for foreign currency and financial instruments, with Sub-section 6 of Section 25 being a specific rule on the treatment of unrealized foreign exchange loss with no mention of unrealized foreign exchange gain.

So, since nothing was mentioned about the treatment of unrealized foreign exchange gains, one cannot exclude them from its income for tax purposes.
Even though, in principle, the Ghana Revenue Authority (GRA) may agree and, by extension, interpret Section 25(6), both unrealized foreign exchange gains should be excluded from the income of the taxpayer in the same way that the unrealized foreign exchange losses are also to be disallowed as a deduction. What is missing now is an amendment to Section 25(6) to affirm such a fair interpretation.

Section 25(7): Disallowance of foreign exchange loss arising from transactions between two resident persons. On hindsight, this policy intervention is laudable as part of the measures policymakers came up with to deal with the depreciation of the cedi against other foreign currencies in the country, especially in 2022, when the cedi depreciation had gone haywire. But the unintended consequences of the policy on the operations of other legitimate businesses that deal a lot in foreign currencies with resident persons were not factored into the drafting of the amendment. The problem of complying with this
provision includes:

The definition of resident as used in the provision. Is it the English definition of resident or the tax definition as outlined in Section 101 of Act 896 as amended? Using the former definition will be easy to apply but using the latter will leave
more questions to be answered. As a taxman, I believe the later definition as outlined in Section 101 of Act 896 should apply since we are interpreting an income tax law.

Is the determination of the residency status supposed to be made at the time the transaction is being entered into or at the time the loss deduction has been made? We must remember that the residency of a person is determined per year
of assessment and not a one-off determination. One can be non-resident in the 2023 year of assessment and be resident in the 2024 year of assessment, and vice versa.

How do institutions like Banks and other financial institutions that transact with their huge customer base on transactions like loans, deposits, and other financial instruments involving foreign currency exchange comply with this?
law? This compliance requirement is too burdensome for such taxpayers and should have been excluded from this law.

Conclusion:

From the discussions espoused above, I conclude that the introduction of section 25(6) of Act 896 as amended in 2023 was needless since it has created more confusion and even seeks to stifle taxpayers more by denying them deduction of
unrealised foreign exchange losses, tax their unrealised foreign exchange gains, while Section 16 of Act 896 still limits the amount of deduction of financial cost they can take in a year of assessment. Although Section 25(7) is to prevent persons residing in Ghana from transacting among themselves in foreign currencies as a means of controlling the rapid depreciation of the Ghanaian cedi, for which this policy may achieve some success, not exempting some businesses like banks and some other financial institutions whose business is to transact with resident persons in foreign currencies is erroneous and ought to be remediated.

Recommendations:

Based on my assessment of the issues raised above, I recommend among the following for consideration:

The Finance Ministry and GRA must consider amending section 25 of Act 896 as amended by deleting Subsection 6 and maintaining the status-quo that existed before the passage of Act 1094 in 2023 or amending subsection 6 by including
the exclusion of unrealised foreign exchange gains from the income of taxpayers.

The Finance Ministry and GRA must consider amending Section 25 of Act 896 as amended by reviewing Sub-section 7 to exclude banks and other relevant financial institutions from Section 25(7) of Act 896 as amended.

Institutions like the Ghana Association of Banks (GAB) and the Ghana Association of Forex Bureaux (GAFORB) should petition the Minister for Finance for exemption from Section 25(7) of Act 896 as amended in this 2024 mid-year budget review.

Other tax practitioners should add their voice to the discourse to drive home our expectation of the necessary tax amendments we anticipate in the 2024 mid-year budget review.