Ghana: Tax treatment and the recognition of deferred tax on Expected Credit Losses

In certain situations, the domestic debt exchange program (DDEP) in Ghana has given rise to cases where banks are potentially exposed to accounting losses on government bonds, which can significantly affect their income statements. The losses, termed as "Expected Credit Losses" (ECLs), are required to be recognized in accordance with the generally accepted accounting standards as adopted by Ghana.

Background

The Government of Ghana launched the DDEP in December 2022, inviting taxpayers to exchange certain domestic notes and bonds for new bonds to be issued by the Government.

The ECL from the DDEP appears to be a provision charged to the income statement in order to bring the value of the bonds existing as of 31 December 2023 (old bonds) down to the present value of the expected cashflows of the replacement bonds (new bonds) that will be issued when the taxpayer enters into the DDEP. Apparently, over the duration of the new bonds, the provision will be gradually unwound into the Income Statement to bring the discounted value up to the original value.

The issues arising from this include:

i. Whether or not a deduction should be allowed for the losses

ii. Whether the losses have deferred tax implications

The law

The following citations to the law pertain to the Ghana Income Tax Act, 2015, Act 896 (as amended), referred to as the ITA.

Section 9(1) of the ITA requires that, for an expense to be deductible, it should be "wholly, exclusively, and necessarily incurred by the person in the production of the income from the investment or business during the year."

Section 21(1)(b) of the ITA provides that a person "incurs an expense or other amount when the expense or other amount is payable by the person."

Section 21(3) of the ITA provides that "an amount is treated as payable by the person when the events that determine liability have occurred and the amount of liability can be determined with reasonable accuracy, but not before economic performance occurs with respect to that amount."

Section 21(1)(a) of the ITA provides that "a person derives an amount when the amount is receivable by the person."

Section 21(2) provides that "an amount is receivable by a person when the person becomes entitled to receive it, even if the timing for discharge of the entitlement is postponed."

Section 25(1) of the ITA provides that "a person is required to include an amount or may deduct an amount in relation to a financial instrument in calculating income from a business or investment."

Section 25(2)(a) provides that "the time at which an amount is to be included or deducted … shall be in accordance with generally accepted accounting principles."

Section 25(3) provides that "[w]ithout limiting subsection (2), the generally accepted accounting principles apply even if the principles require the inclusion or deduction of an amount on a fair value accounting basis irrespective of

a. the other provisions of this Division

b. whether or not the amounts have been derived, incurred or realised; and

c. whether or not the amount is of a capital or revenue nature."

Section 16(1) of the ITA provides that ''the amount of financial cost other than interest deducted in calculating the income of a person from an investment or a business for a year of assessment shall not exceed the sum of

a. a financial gain derived by the person that is to be included in calculating the income of the person from the investment or business for the year of assessment; and

b. fifty percent of the chargeable income of the person for the year from the business or investment calculated without

i. including a financial gain derived by the person; or

ii. deducting a financial cost incurred by the person."

Regulation 14(2) of L.I. 2244 provides that ''a financial cost referred to in section 16 of the Act is a financial cost incurred by a person in the course of a business or an investment of that person."

Section 131(1)(a) of the ITA defines financial instrument to include, among others:

i. a debt claim or debt obligation;

ii. a derivative instrument;

iii. a foreign currency instrument; and

iv. any other instrument prescribed by Regulations or in the absence of Regulations, treated as a financial instrument by generally accepted accounting principles.

Section 131(2) provides that:

a. ''debt claim" means a right to receive a payment under a debt obligation;

b. "debt obligation" means an obligation to make a payment to another person that is denominated in money and is in the nature of accounts payable and the obligations arising under deposits, debentures, stocks, shares, treasury bills, promissory notes, bills of exchange and bonds"

Section 131(3) of the ITA provides that "a person

a. derives a financial gain when the person derives interest from a financial instrument; and

b. incurs a financial cost when the person incurs losses with respect to a financial instrument."

Applying the law to the facts

Deductibility of the ECL and tax implications of subsequent unwinding

Given that the ECL is a provision passed in relation to an accounting adjustment on a financial instrument, it qualifies as a deduction under ITA section 25 in determining the chargeable income for the period. It is not caught by the finance-cost restriction under section 16, as it does not meet the definition of an incurred expense. This is based on the definition of a finance cost as captured under section 131(3). Similarly, the subsequent unwinding of the provision will generally be considered as income under section 25 and taxed accordingly.

Flowing from the above, the ECL may be considered as a deductible expense for the 2022 year of assessment. For the 2023 year of assessment and subsequent years over which the ECL is unwound, the amount credited to the income statement would be taxed accordingly.

Notwithstanding the foregoing, the Commissioner General (CG), in his response to a request by the Ghana Association of Bankers on the matter in issue, stated his intention to permanently disallow any losses arising from the DDEP.

The CG's position appears to differ from the relevant provisions of the ITA. It may, however, be inferred from the CG's position that he may allow for a deduction of the amounts to be credited to the Income Statement as the provision is unwound, in determining the chargeable income in the subsequent years. For certainty, it will be helpful if the Association of Bankers requested the CG's clarification on this.

Deferred tax implications of the ECL and subsequent unwinding

Taxpayers may want to consider that, for tax purposes, given that there should be no variance between the tax and accounting treatments of the ECL, there likely would be no taxable temporary difference. That is to say, there might well be no deferred tax implications. Similarly, if there were no variance between the tax and accounting treatments of the unwinding of the ECL, there would be no taxable temporary difference and no deferred tax implications.

Further, it appears that the CG's position could lead to a taxable temporary difference and — by extension — deferred tax implications, as there will be differences between the CG's recognition of the expenses and that required by the accounting standards.

Conclusion

Flowing from the above, one could conclude that the ECL and income from the subsequent unwinding of the ECL should be respectively tax deductible and taxable. Additionally, there likely would not be any related deferred tax implications.

Banks that disagree with the CG's opinion on this issue will need to consider formally objecting to the CG's position and resorting to the dispute resolution mechanism provided under the law to resolve the issue.

For additional information with respect to this Alert, please contact the following:

Ernst & Young Chartered Accountants, Accra

• Isaac Sarpong

Ernst & Young Société d'Avocats, Pan African Tax — Transfer Pricing Desk, Paris

• Bruno Messerschmitt

Ernst & Young LLP (United Kingdom), Pan African Tax Desk, London

• Kwasi Owiredu

Ernst & Young LLP (United States), Pan African Tax Desk, New York

• Brigitte Keirby-Smith
  
  
• Dele A. Olagun-Samuel

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor

For a full listing of contacts and email addresses, please click on the Tax News Update: Global Edition (GTNU) version of this Alert.