This article examines the dynamics surrounding Technology Transfer Agreements and their impact on the taxes of companies.
In Ghana, an enterprise (entity) in which foreign participation is permitted is required to, after its incorporation or registration and before commencement of business operations, register with the Ghana Investment Promotion Centre (“GIPC” or “the Centre”).
The GIPC is a government agency responsible under the GIPC Act, 2013 (Act 865):
(i.) To encourage and promote investments in Ghana and
(ii.) To provide for the creation of an attractive incentive framework and a transparent, predictable and facilitating environment for investments in Ghana.
In addition to the requirement to register with the GIPC, such entities are required to register all qualifying technology transfer agreements they have signed with non-resident entities with the Centre.
What is a Technology Transfer Agreement (TTA)?
Act 865 defines a TTA to mean an agreement with an enterprise which has a duration of not less than 18 months and which involves:
• The assignment, sale and licensing of all forms of industrial property, except trademarks, service marks and trade names when they are not part of transfer of technology;
• The provision of technical expertise in the form of feasibility studies, plans, diagrams, models, instructions, guides, formulae, basic or detailed engineering designs, specifications and equipment for training, services involving technical advisory and managerial personnel and personnel training;
• The provision of technological knowledge necessary for the installation, operation and functioning of the plant and equipment, and turnkey projects; and
• The provision of technological knowledge necessary to acquire, install and use machinery, equipment, intermediate goods or raw materials which have been acquired by purchase, lease or other means.
How TTAs impact taxation
Generally, these TTAs require a non-resident person to make services or technology available to the Ghanaian business at a price and this results in business expenses being incurred in the normal course of the business. Withholding taxes are payable on these expenses at the point of accrual or actual payment, whichever is earlier.
Based on the definition of a TTA, withholding tax rates are generally 20 per cent in the absence of a Double Tax Agreement.
In addition to the withholding tax obligation, where these expenses are determined to be wholly, exclusively and necessarily incurred in generating business profit, they are fully deducted when calculating the tax profit for the year.
While full deductibility of expenses was taken for granted, recently a number of tax audits have challenged that position by disallowing such TTA expenses for the reason that the TTAs were not registered with the GIPC. The criteria for deductibility is based on the provisions of the Income Tax Act, 2015 (Act 896) and its associated regulations.
Therefore, on the assumption that the criteria is met, such expenses should ordinarily be allowed. However, there seems to be the practice developing where failure to register such agreements will compel the tax authorities to treat the expenses as though they had not been incurred, hence making the taxpayer pay the applicable taxes on the expenses it had previously deducted.
In a recent ruling, the High Court in Accra agreed with the tax authorities that such expenses incurred on TTAs not registered with the GIPC are not tax deductible as they were unenforceable.
It seems that these conclusions reached by the tax authority have come to stay unless the decision of the High Court is successfully appealed. Given the magnitude of the decision, it is advised that the tax laws should be expressly amended to include a provision that disallows payments made on account of illegal or unenforceable contracts.
It is important to note that the provision of services of the nature outlined in the above definition qualify for registration with the GIPC. For example, agreements solely involving the licensing and use of trademarks, service marks and trade names may not be considered registrable by the GIPC (unless they are part of an agreement for the transfer of technology).
It must be noted, however, that the title of an agreement may not be sufficient in determining whether or not it should be registrable.
Other factors such as the duration, nature of services to be provided under the agreement, residency of the parties, among other factors, may also be considered by the GIPC.
In some cases, licence agreements and other non-registrable agreements will have some terms that fall within the definition of technology transfer agreements. The tax authority is likely to treat the whole agreement as registrable and may disallow those expenses.