Preventing Corporate Tax Base Erosion In Ghana: A Review Of Ghana’s Thin Capitalisation Rule As An Anti- Corporate Tax Base Erosion Tool

Generally, interest paid by a company on a loan used to finance the production of income or acquisition of a capital asset for the production of income is deductible when computing the chargeable income of the company, but a dividend, which the company pays to its equity shareholders, is not deductible when ascertaining the chargeable income of the company for tax purposes. To eliminate the tax advantage an entity would obtain if it employed a disproportionate amount of debt to finance its activities, the domestic tax laws of most countries usually contain a thin capitalisation rule, which sets a maximum debt-to-equity ratio for interest deductibility. Ghana’s thin capitalisation rule employs a fixed 3:1 debt-to-equity ratio benchmark to determine the maximum level of related party debt a resident entity, which is not a financial institution, should maintain to make the interest generated on the debt deductible for tax purposes. In this article, the author employs a doctrinal approach to discuss the meaning, scope and effect of Ghana’s thin capitalisation rule as an anti-corporate tax base erosion tool. This entails a discussion of the ascertainment of chargeable income, the scope of Ghana’s thin capitalisation rule, definition of critical elements, application of the thin capitalisation safe harbour and design issues with Ghana’s thin capitalisation rule. The discussions reveal that there are uncertainties and inadequacies in the design and application of the thin capitalisation rule. The author proposes that to improve the certainty and adequacy of Ghana’s thin capitalisation rule as an anti-corporate tax base erosion tool, the 3:1 fixed ratio of debt-to-equity benchmark should be replaced with a fixed ratio based on an entity’s EBITDA and an anti-conduit financing rule should be introduced to improve the efficacy of the thin capitalisation rule.