Bob is a Ghanaian contractor who lives and runs his firm in Ghana. He has his permanent home at East Legon and is therefore regarded as a tax resident. This means that Ghana is entitled to tax his income, no matter where in the world that income is earned.
For about three months, Bob travels to the United States to undertake a short-term project. At the end of the engagement, he earns US$10,000 from the work done there.
Because the income was earned in the United States, the U.S. tax authorities assert a right to tax it, on the basis that the income has its source within their jurisdiction. Bob then returns to Ghana and, upon his return, the Ghana Revenue Authority also lays claim to the same US$10,000 for the straightforward reason that, as a tax resident of Ghana, he is liable to tax on his worldwide income, regardless of where that income arises. The obvious result is that Bob is taxed twice on the same income.
This simple illustration captures one of the most persistent challenges of international taxation: double taxation.
Globalisation and the Rise of Double Taxation
Globalisation has made it increasingly easy for individuals and businesses to operate across borders. Contractors, consultants, digital entrepreneurs, and multinational firms routinely earn income in jurisdictions other than where they reside or are established. While no State can reasonably demand taxes merely because a person has a fleeting connection with it, the nature, duration, and intensity of economic activity carried on within a country may expose that person to tax liabilities under that country’s laws.
As more than one country asserts taxing rights over the same income, the risk of double taxation becomes unavoidable. Left unchecked, double taxation acts as a disincentive to cross-border trade, investment, and the free movement of labour.
What is Double Taxation?
Double taxation usually takes two forms: economic and juridical.
Economic double taxation arises where income from the same economic activity is taxed in the hands of different persons. A common example is where a company’s profits are taxed at the corporate level and the dividends distributed from those profits are again taxed in the hands of shareholders as personal income.
Juridical double taxation, which is more central to international taxation, occurs where two or more States impose similar or comparable taxes on the same income of the same person for the same period. This typically happens because countries rely on connecting factors such as residence, source of income, or citizenship as sufficient grounds to exercise their sovereign taxing powers.
Bob’s case is a classic example of juridical double taxation: the United States taxes the income because it is sourced there, while Ghana taxes it because Bob is resident here.
Tax Treaties as an International Solution
One of the principal tools used to address double taxation is the tax treaty, more formally referred to as a double taxation agreement (DTA). A tax treaty is an agreement between two or more countries that allocates taxing rights over various categories of income and provides mechanisms to eliminate or reduce double taxation.
Ghana has entered into a number of tax treaties with countries including the United Kingdom, France, Italy, South Africa, and others. These treaties typically contain rules on business profits, employment income, dividends, interest, royalties, and methods for granting relief where income is taxed in both contracting states.
However, tax treaties do not cover every country with which Ghanaian taxpayers may have economic dealings. In such cases, relief from double taxation must be found within Ghana’s domestic tax law.
Unilateral Relief Under Ghana’s Tax Regime
Even in the absence of a tax treaty, Ghana’s income tax system provides unilateral measures to mitigate the burden of double taxation. These measures are contained in the Income Tax Act, 2015 (Act 896), and operate in three main ways.
1. Exemption Method
Under this approach, Ghana excludes certain foreign-source income from taxation altogether. Under Act 896, foreign-source employment income earned by a resident individual is exempt from tax if the employer is non-resident for tax purposes in Ghana.
Where the employer is resident in Ghana, the foreign-source employment income will still be exempt if the individual is present in the foreign country for at least 183 continuous days in a year of assessment. This represents a full exemption, though it applies only to foreign-source employment income.
2. Foreign Tax Credit Method
Under this method, Ghana taxes the taxpayer’s worldwide income but grants a credit for income taxes already paid to a foreign country on the foreign-source income.
The taxpayer’s total tax liability is first computed under Ghanaian law, after which the foreign taxes paid are credited against that liability. The credit, however, is capped and cannot exceed the average rate of Ghanaian income tax applicable to the income.
3. Deduction Method
Here, the taxpayer is allowed to deduct foreign income taxes paid from assessable income before applying Ghanaian tax rates. Act 896 permits a resident person to elect this method by foregoing the foreign tax credit and instead claiming a deduction for the foreign taxes paid.
Closing Reflections
It has long been an established principle, supported by both law and common sense, that so far as a taxpayer can do so within the law, the taxpayer is entitled to arrange their affairs in a manner that does not attract unnecessary tax liabilities. Understanding how double taxation arises, and the relief mechanisms available under Ghanaian law, enables taxpayers to make informed decisions when engaging in cross-border activities.
For individuals and businesses alike, the practical question is not whether double taxation can arise, but which relief method works best in their particular circumstances. The answer to that question often determines how efficiently their international ventures are structured.
