For a developing nation like Ghana, the reasons for broadening the tax net are well known vis-à-vis the role that tax plays and its ability to impact upon Governments ability to execute its socio-economic agenda for the Nation.
To make the point clearer, it can be reasonably argued that well over 90% of real estate transactions (in the private sector) e.g. rental of: private accommodation, office space, warehouses and parcels of land for agricultural uses are not captured by the IRS.
This represents a significant loss in (potential) revenue to the State and negatively impacts upon its ability to execute its development agenda for the country.
This document - prepared and devised by Premier Inter Pares Business Solutions, details how the property transactions that occur within the real estate sector can be effectively captured by the Internal Revenue Service (IRS).
Though we are certain that over the years the IRS has sought to properly administer this sector of the economy – they have to date, lacked the administrative infrastructure in which to properly monitor the commercial transactions that occur in the real estate industry.
This document provides a solution to creating this administrative infrastructure.
To illustrate the impact that effective tax administration in this sector would have on the economy, the following projection is given.
1. We estimate that a minimum of 2 million units of privately rented property are the subject of commercial transactions throughout the country.
2. If on average, it is conservatively estimated that each unit of accommodation attracts GHC1, 000,000.00 per month, then a total of GHC2 Tr. (TWO TRILLION CEDIS) of taxable revenue is exchanged in this sector each month.
3. With a tax element of 15%, per cent being applied, the IRS would accrue GHC300, 000,000,000 (THREE HUNDRED BILLION CEDIS) or approx. US$30million per month in tax revenue for the Government.
HOW TO CAPTURE THIS TAX REVENUE?
A. Parliament to introduce a legal instrument making it unlawful to either let property or rent property without registering the transaction via the acquisition of a property rental certificate.
B. Landlords are to obtain the property rental form from the Post Office or any bank possessing a universal banking license.
C. This document (issued in quadruplet form) is supplied with a bar-coded unique 13-digit reference number. A copy is issued to the following: (i) receiving bank, (ii)landlord, (iii)tenant and (iv) IRS
D. On concluding a tenancy agreement/contract, the landlord must complete the property rental form – providing their full personal details, the property details pertaining to the tenancy agreement, the tenure of rent and the amount of rent being received.
Attached to this completed document must be a copy of the rental agreement / tenancy agreement. The document and its contents are verified and co-signed by the tenant.
E. The landlord submits this completed document together with attachments to Ghana Commercial Bank or any licensed Universal Bank.
F. Following submission of this document a “property rental bank account” is opened in the name of the landlord. The secure 13-digit unique reference number is used as the Bank account number – providing easy cross-reference with the established central database that will administer this tax provision.
G. The landlord, by law is obliged to deposit all remittances pertaining to the rental of their property into this account.
H. Once a minimum of GHC3, 000,000 has been deposited the landlord is issued with a property certificate – which is to be displayed at the property site.
I. The landlord's bank account is credited with the deposit amount less 15% tax which is paid to government.
J. All subsequent rent remittances that are deposited will be taxed at source.
K. To dissuade tenants from colluding with landlords in presenting false information on the property forms, the law will allow for tenants to receive legal aid and legal representation vis-à-vis any property disputes that may occur.
Legal protection will therefore encourage tenants to only enter into tenancy agreements that are properly covered by the property rental certificate facility.
L. A proportion of the tax revenue raised will be allocated to provide for this facility.
M. Landlords who are inclined to provide false information must be informed of the punitive measures that exist for filing false information to the IRS.
Additionally all parties must be informed that the details presented in the property rental document are legal and binding.
A landlord who therefore presents a false (lower) rate of rental income for the purpose of tax avoidance will be legally bound by those terms. Tenants will be obliged to pay only the amount of rent detailed in the documents presented.
N. We conservatively estimate that Government will accrue in excess of US$360m each year from this tax sector.
O. A proportion of the tax revenue is to be allocated to employ youth tax administrators in all districts.
Their role will be to periodically check commercial and residential property sites to ascertain that properties are NOT being leased outside of the legal provisions of the law.
These tax administrators will also be responsible for checking that property certificates are properly displayed at the premises.
The presence of the 13-digit bar-code will also allow tax officers in the field to communicate with the central database in determining whether the monthly rental payments are being made accordingly.
Any inconsistencies can be duly investigated, with legal support being offered to either the landlord or tenant to ascertain why rent payments are not being made in to the property account.
P. It is the convention that most rent payments (in Ghana) are made in one, two, or three years advance. This will therefore accrue a significant amount of revenue to Government as the advance rental payment can be taxed at source.
Advantages to be accrued:
1. IRS will increase revenue by approx. US$360m to assist Government's National Development plans.
2. Create jobs for the youth via need to employ tax administration officers
3. The disciplining effect of this tax facility will help to cultivate national responsibility for paying taxes.
4. Provide a strong platform for property dispute resolution
5. Will assist National Security in determining who is living where – especially vis-à-vis non-Ghanaian residents.
6. Will provide further information for IRS in determining the taxable income of private individuals and corporate bodies.
7. Encourage a culture of saving, which will add to liquidity of the Banking sector – and the economy as a whole.
8. Presently companies that rent their accommodation declare this expenditure against their taxable income – resulting in a “double whammy” for the IRS – in that the declared rental expenditure is set against the taxable income of the company (i.e. loss of tax revenue) whilst at the same time the IRS does not benefit from the tax amount that should be realized from the landlord renting the property in question.
The above infrastructural framework will ensure that the IRS is no longer exposed to such a fiscal disadvantage.
Tax is the key fiscal ingredient that supports every country's development agenda. It is incumbent upon all stakeholders in Ghana Plc to realise that our individual contributions provide the basis for our collective growth and advancement.
It is in this vein of thought of enhancing the pillars of national development that this article is presented.
Presented By: Ibrahim Adjei – Senior Consultant: Premier Inter Pares Business Solutions Ltd.