AT – Nov 2019 – L3 – Q4a – Tax administration in Ghana

Determine the tax obligations of an NGO involved in both charitable activities and business operations.

Question

Scenario:

Bubandushe is a Non-Governmental Organisation (NGO) located in Accra with operational areas in the Northern Regions of Ghana. The NGO buys rice from a supermarket in Accra and transports it to the Northern Regions for distribution to widows and orphans. Its main source of funding is from a benefactor based in the Netherlands, who has been supporting the project since its inception.

In support of its operations, it engaged Chartered Accountants from the Institute of Chartered Accountants (Ghana) as employees. Their role is basically to organize training programmes for Government Institutions on budget preparation using advanced financial models for a fee. This additional source of income equally supports the operations of this NGO.

Ghana Revenue Authority (GRA) has written to this NGO to regularize its operations with it for tax purposes. The Management of the NGO has argued that it is exempt from tax on its income. The management has written to you to offer professional help on the matter.

Required:

i) Determine whether the NGO is required under the tax laws to pay tax and if yes, what type of taxes. (6 marks)

ii) On what basis are NGOs liable to tax or exempt? (2 marks)

Answer

Part i) – Tax Obligations of the NGO:

NGOs are treated as charitable organizations subject to approval by the Commissioner-General. The Commissioner-General must ensure that the entity operates as a charitable institution of a public nature or as a religious institution of a public nature, or as a body of persons formed for the purpose of promoting social or sporting activities.

The NGO, Bubandushe, engages in two types of activities:

Charitable Activities: The purchase and distribution of rice to widows and orphans. This activity is generally exempt from tax.
Business Activities: Organizing training programs for Government Institutions and charging fees for these services. Income derived from such business activities is taxable.

Types of Taxes:

Corporate Tax: The income from the business activity (training programs) is subject to corporate tax at the standard rate of 25%.
Withholding Tax: Payments for the purchase of rice above GH¢2,000.00 are subject to withholding tax at the rate of 3% on the gross value on payment to the suppliers.

(6 marks)

Part ii) – Basis for Tax Liability or Exemption:

Exempt Income: The income accruing to or derived by a charitable organization is exempt from tax on its core charitable activities.
Taxable Income: When the same organization engages in business activities and generates business income, that income is subject to tax.

(2 marks)

Tags: Charitable Organizations, Corporate Tax, NGO Taxation, Withholding Tax
Level: Level 3

Topic: Tax administration in Ghana
Series: NOV 2019

Uploader: Theophilus