Distinction Between Tax Planning Schemes and Tax Avoidance Arrangements

Tax Planning

Tax planning is the arrangement of a person’s business or private affairs to minimize tax liability by making optimal use of tax exemptions, deductions, and benefits. It is a legitimate strategy to reduce tax obligations within the framework of the law.

Examples under Ghanaian Tax Law:

• Utilizing temporary concessions in the First Schedule of the Income Tax Act, 2015 (Act 896), such as reduced tax rates for businesses in specific locations (e.g., 12.5% for manufacturing outside regional capitals).
• Leveraging concessions in the Sixth Schedule of Act 896, such as the 1% tax rate for agro-processing businesses for the first five years.

Tax Avoidance

The International Tax Glossary defines tax avoidance as behavior aimed at reducing tax liability that falls short of tax evasion. It is often used pejoratively to describe actions that are within the letter of the law but against its spirit, involving elements of artificiality.

Ghanaian Legal Definitions:

• Section 34 of the Income Tax Act, 2015 (Act 896) defines tax avoidance as “an arrangement, the main purposes of which is to avoid or reduce tax liability.”
• Section 99 of the Revenue Administration Act, 2016 (Act 915) defines a tax avoidance arrangement as:
  (a) An arrangement with the main purpose of providing a tax benefit for a person; or
  (b) An arrangement where the main benefit expected is a tax benefit, including:
  • Avoiding, reducing, or postponing a tax liability;
  • Increasing a claim for a tax refund; or
  • Preventing or obstructing tax collection.
    However, it is only a tax avoidance arrangement if it involves misuse or abuse of a tax law provision, considering the purpose of the provision and the wider law.

Examples of Tax Avoidance Arrangements (Income Tax Act, 2015):

• Transfer Pricing: Manipulating prices in related-party transactions to shift profits to low-tax jurisdictions.
• Thin Capitalization: Using excessive debt to reduce taxable income through interest deductions.
• Income Splitting: Dividing income among related parties to lower tax brackets.
• Indirect Payments: Structuring payments to avoid tax obligations.
• Change in Accounting Year: Altering fiscal years to defer tax liabilities.

Conclusion

Under Ghanaian tax law, tax avoidance is narrowly defined as unacceptable or illegitimate arrangements that misuse tax provisions. Tax planning, conversely, is a legitimate strategy to optimize tax benefits within the law’s intent.