The main goal of taxation is to raise money for the country’s development. Income tax is a key source of revenue for the Government of Ghana. Generally, income earned by individuals or profits made from business activities are subject to tax. Business activities include trade, profession, or vocation.
Trade, in particular, involves exchanging goods or services for money or other considerations. However, a crucial question arises: are profits made through trade always taxable? What about income derived from illegitimate acts such as illegal mining, prostitution or the sale of alcohol or pharmaceuticals without the required license? Can the state still tax the income from such illegal activities?
This article explores the relationship between taxation and illegal income in Ghana, using lessons from similar cases in the United Kingdom (UK) and the United States (US).
In Ghana, income tax is regulated by the Income Tax Act, 2015 (Act 896). This law requires individuals to pay taxes on money earned from business and employment. However, it does not clearly state whether income from illegal activities should be taxed. This lack of clarity creates confusion and raises questions about whether the government can tax money made through unlawful means. To better understand this issue, let’s look at how countries like the UK and US handle the taxation of illegal income.
Approach of United Kingdom
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In the UK, it is clear that money made from illegal activities is still taxed. Tax authorities believe that whether income is earned legally or illegally, it must be taxed. This means that people and businesses involved in illegal trades still have to pay taxes on their profits. Courts have also supported this view in several rulings.
In one court case, a wine seller illegally smuggled whiskey into the USA. When asked to pay income tax, he argued that since the money came from an illegal activity, it shouldn’t be taxed. However, the court ruled that selling the whiskey was still a business, even though it was illegal. So, the income from the smuggling was still taxable. (Lindsay v Inland Revenue (1932) 18 TC 43)
Similarly, in another case, a prostitute was assessed for tax on her income from prostitution and related activities over a six-year period. She challenged the assessment, arguing that her activities were unlawful and therefore not taxable. However, the court ruled that prostitution constitutes a trade, regardless of its legality, and that the taxpayer’s income from it was subject to tax. (Inland Revenue Commissioners v Aken [1988] STC 69)
Approach of the United States of America
The US follows the same approach as the UK when it comes to taxing illegal income. Tax authorities care only about whether money is earned, not whether it comes from legal or illegal activities. This means that income from crimes like drug dealing or stealing is still taxed. US courts have repeatedly confirmed this, stating that tax laws apply to all income, no matter how it is made.
In one case before the US Supreme Court, an employee of a union had embezzled funds from his employer but failed to report them as income. He was convicted of tax evasion. The Supreme Court affirmed the conviction, ruling that the embezzled funds were still taxable income, despite being acquired illegally. [James v United States 366 US 213 (1961)]
Ghana’s Emerging Perspective
Ghana’s courts have yet to weigh in on the tax implications of income from illegal trading. However, many experts believe that when they do, the decision will align with those of the UK and US. This is because the Income Tax act does explicitly limit taxation to lawfully acquired income. The omission suggests that the Act does not intend to exempt illegal income from taxation.
From a tax policy standpoint, it wouldn’t be fair to tax legal income while allowing illegal income to go untaxed. This could create a loophole where people avoid taxes by saying part of their business is illegal. Taxing illegal income ensures that both legal and illegal earnings are treated the same, preventing unfair advantages for those making money dishonestly.
As Ghana’s tax laws continue to evolve, it’s likely that the country will adopt a similar approach to the UK and US. This would ensure that all income, regardless of its source, is subject to tax, promoting fairness and integrity in the tax system.
Alhassan Aboagye on behalf of OSD and Partners. [email protected]
