Laws on Tax Avoidance and Evasion, What is tax avoidance, attitude of the court on tax avoidance, activities that constitute tax avoidance, Tax Avoidance under Act 896, Anti Tax Avoidance Sections in Act 896 and Tax Evasion Provisions under Revenue Administration Act 2015, Act 915

1. LAW OF TAXATION IN GHANA
TAX AVOIDANCE AND TAX EVASION
PATRICK A.N. ABOKU
22.04.2019

2. OUTLINE
 Introduction
 Tax Avoidance
 Courts Approaches to Tax Avoidance
 Whose Job is it to Fill the Gap in Law Legislation
 Anti Tax Avoidance Legislation in Ghana
 Tax Evasion

3. Introduction
 Resistance to tax could be attributed to many reasons
 As protest against government policies
 To reduce/limit tax liability and increase profit
 Etc
 Focus of this discussion is on the second reason:
 “to reduce or limit tax liability and to increase profit”
 Effect of Tax Resistance
 Loss of revenue to the state with its attending problems
 Unemployment
 Poor infrastructure development etc
 Shift of tax burden to a few tax payers
 Resistance to Tax is of two forms:
 Tax avoidance
 Tax evasion

4. Definitions
 Tax Evasion
 Considered illegal and frowned upon by the courts
 Tax evasions are offences and are associated with penalties
 They are usually associated with Tax Administration and thus are provided
for in Act 915

5. Definitions
 Tax Avoidance
 Professor Wheatcroft in “The attitude of the legislature and the courts to Tax Avoidance”
 “the act of dodging tax without breaking the law”
 S.34(2) of Act 896
 “an arrangement the main purpose of which is to avoid or reduce tax liability”
 S.99(4) of Act 915
 a.“an arrangement that has as a main purpose the provision of tax benefit for a
person”or
 b.“an arrangement where the main benefit that might be expected to accrue from
the arrangement is a tax benefit for a person”
 Considered as an art of exploiting legislative lapses for once benefit
 If there are not anti-tax avoidance legislations, tax avoidance is considered to
be within the law

6. Attitudeof the
Courtstowards
Tax Avoidance
 The attitude of the courts can be categorized into three eras:
 Traditional Approach
 Individuals can arrange their affairs to minimize or reduce their tax liabilities
 Tax avoidance not considered as an offence or wrong
 Judicial sympathy are with the tax payer
 Strict literal interpretation of statutes – limited tax liability to the letter of the
statute
 Key case: IRC v Duke of Westminster per Lord Tomlin
 Modern Approach
 Shift of judicial sympathy from tax payer to fiscal policy
 Court now willing to consider a series of transactions as a single transaction each
of which might individually be genuine but collectively a scheme to avoid tax
liability
 Key case:W.T. Ramsay ltd v IRC
 The doctrine of form and substance or substance over form
 Court extends just considering a series of transaction to the purpose of the
transactions or contracts
 i.e. to ascertain the genuineness of a transaction court will look to substance over
form
 Key case: case is per rule of law applied

7. Traditional
Approach
 Courts attitude is pro tax payer
 Tax payer is entitled to arrange his affairs to minimize his tax liability as
long as he stays within the law
 Strict liberal interpretation of statutes – e.g. if the tax payer cannot be
brought under the letter of the statute he must be free however within
the spirit of the law he might be liable
 Relevant Cases
 IRC v Fishers Executors
 IRC v. Duke of Westminster

8. Traditional
Approach
 Historical Decisions confirming Judiciary accommodated Tax Avoidance
 IRC v. Fisher’s Executors per Lord Sumner (1926)
 “…the subject is entitled so to arrange his affairs as not to attract taxes imposed by
the Crown,so far as he can do so within the law,”
 “…and that he may legitimately claim the advantage of any expressed terms or any
omissions that he can find in his favour in taxing Acts.”
 “In so doing,he neither comes under liability nor incurs blame”
 Lord Sumner here is clearly indicating the courts support for tax avoidance as long
as it does not offend the law.
 The subject just needs to search within the tax laws for omissions that may be in
his favour and take advantage of same
 Vestey’s Executors v. IRC per Lord Norman (1949)
 “tax avoidance is an evil but it would be the beginning of much greater evils if the
courts were to overstretch the language of the statute in order to subject o taxation
people whom they disapprove”
 Lord Norman’s dictum did not entirely indicate the court accommodated or
condoned tax avoidance.
 His view was that it was better to let a few fish escape that to use a sweeping
interpretation of the statute in order to catch innocent persons

9. Traditional
Approach
 Historical Decisions confirming Judiciary accommodated Tax Avoidance
 Partington v AG per Lord Cains (1869)
 “As I understand the principle of fiscal legislation it is this - ”
 “if the person sought to be taxed comes within the letter of the law he must be taxed
however great the hardship may appear to the judicial mind to be”
 “on the other hand if the Crown seeking to recover the tax cannot bring the subject
within the letter of the law the subject must be free however apparently within the
spirit of the law the case might otherwise appear to be”
 Lord Cains in this case is showing clearly the attitude of the court at the time.
 He indicates that as far as fiscal legislation is concerned, it is only the letter of the
statute matters. One cannot be taxed using the spirit of the law.
 Otherwise, one can only be taxed if the tax statute says clearly in plain text that he
should be taxed
 Rollatt J in Cape Brandy Syndicate v. IRC ()
 “in the taxing Act one has to look at what is clearly said.There is no room for
intendment; there is no equity about tax.There is no presumption as to tax. Nothing
is to be read in, nothing is to be implied, one can only look fairly at the language
used”
 Rolatt J is indicating here the only system of interpretation for tax status is the
literal interpretation. No room for intendments or equity. It is only what he been
clearly said in the statute that matters
 Use this case just to buttress the case of Partington v AG

10. Traditional
Approach
 Historical Decisions confirming Judiciary accommodated Tax Avoidance
 Ayshire Pullman Motors Services v. IRC per Lord Clyde
 “No man in this country is under the smallest obligation, moral or other so as to
arrange his legal relations to his business or property so as to enable the Inland
Revenue to put the largest possible shovel into his stalls”
 Simply put, the tax payer at the time was under no obligation to arrange his affairs
so as to increase his tax liability
 IRC v. Duke of Westminster per Lord Tomlin (1936)
 “Every man is entitled if can to order his affairs so that that tax attaching under the
appropriate Acts is less than it otherwise would be.If he succeeds in ordering them
so as to secure this result,then,however unappreciative the Comissioners of Inland
Revenue or his fellow tax gatherers may be of his ingenuity,he cannot be compelled
to pay an increased tax”
 Refer Fisher’s Executors – the ruling is similar
 This became known as the rule in IRC v. Duke of Westminster
 Howard de Walden v. IRC per Lord Greene MR (1942)
 His dictum was a warning to would be tax avoiders
 His dictum is to the effect that for many years their has been a struggle between
the tax avoiders and their advisers on the one hand and the legislators on the
hand.

11. Modern
Approach
 This is after the WWII
 Judicial sympathy shift to fiscal policy
 Court is now willing to go beyond literal interpretation of statute
 Court now sees Tax avoidance as a crime and is willing to go beyond
looking at single transactions to collectives in order to unearth schemes
 Key cases:
 IRC v Duke of Westminster per Lord Tomlin
 W.T. Ramsay v IRC per Lord Wilberforce

12. Modern
Approach
 Historical Development of Modern Approach (1968)
 Griffith v J P Harrison per Lord Denning.
 Lord Denning likened tax avoiders and their advisors as
 Prospectors digging for wealth in the subterranean passages of the revenue
searching for tax repayments
 Although this was a dissenting judgement, it sent the right message to would be
tax avoiders
 This is similar to Lord Greene’s warning in Howard de Walden v. IRC
 Re Weston’s Settlement per Stamp J.
 “there must be some limit to the devices which this court ought to countenance in
order to defeat the fiscal intentions of the legislator”
 Stamp J is indicating that much as tax avoidance might be accepted by the court,
some of the schemes must be considered as criminal and treated as such
 In Greenberg v. IRC per Lord Reid
 “We seem to have travelled a long way from the general and salutary rule that the
subject is not to be taxed except by plain words”
 “But I must recognize that plain words are seldom adequate to anticipate and
forestall the multiplicity of ingenious schemes which are constantly being devised to
evade taxation”
 “Indeed,I sometimes suspect that our normal meticulous methods of statutory
construction tend to lead us astray by concentrating too much on verbal niceties and
paying too little attention to the provisions read as a whole”
 Notice the shift towards purposeful interpretation

13. Modern
Approach
 W.T. Ramsay v. IRC per Lord Wilberforce (1982)
 “Given that a document or transaction is genuine, the court cannot go behind it
to some supposed underlying substance.This is the well-known principle of
Inland Revenue Commissioners v. Duke ofWestminster”
 “If can be seen that a document or transaction was intended to have effect as
part of a nexus or series of transactions, or as an ingredient of a wider
transaction intended as a whole, there is nothing in the doctrine to prevent it
from it being so regarded: to do so is not to prefer form to substance or
substance to form”
 “They (court) are not, under theWestminster doctrine or any other authority,
bound to consider individually each separate step in a composite transaction
intended to be carried through as a whole”
 Notice the U-Turn in the courts approach and how the Lord maneuvered his
way away from the Westminster doctrine which they would have been bound
to obey by virtue of the principle of stare decisis or judicial precedent

14. Modern
Approach
 IRC v Burmah Oil Company ltd per Lord Diplock
 “it would be disingenuous to suggest and dangerous on the part of those who
advise on elaborate tax avoidance schemes to assume, that Ramsay’s case did
not mark a significant change in the approach adopted by this House in its
judicial role to a pre-ordained series of transactions (whether or not they
achieve a legitimate commercial end) into which there are inserted steps that
have no commercial purpose apart from the avoidance of a liability to tax,
which in the absence of those particular steps would have been payable”
 The difference is in approach. It does not necessitate the overruling of any
earlier decisions of this House; but it does involve recognizing that Lord
Tomlin’s oft-quoted dictum in IRC v.Westminster tells us nothing as to what
methods of ordering one’s affairs will be recognized by the courts as effective
to lessen the tax that would attach to them if business transaction were
conducted in a straight forward way”
 Notice the successful adoption of the rule in W.T. Ramsay’s case

15. Modern
Approach
 IRC v. Burmah Oil Company Per Lord Scarman
 “First, it is of the utmost importance that the business community (and others
including their advisers) should appreciate, as my noble and learned friend
Lord Diplock has emphasized, that Ramsay’s case marks ‘a significant change in
approach adopted by this House in its judicial role’ towards tax avoidance
schemes”
 “second, it is now crucial when considering any such scheme to take the
analysis far enough to determine where the profit, gain or loss is really to be
found”
 Lord Scarman is just emphasizing what Lord Diplock has already indicated
 Funiss v Dawson per Lord Brightman (1984)
 “the fact that the court accepted that each step in a transaction was a genuine
step producing its intended legal result – did not confine the court to
considering each step in isolation for the purpose of assessing the fiscal
results”
 The principle in Ramsay was also applied in this case

16. Modern
Approach
 Per Lord Fraser on the Principle in Ramsay
 “The true principle of the decision in Ramsay was that the fiscal consequences
of a preordained series of transactions, intended to operate as such, are
generally to be ascertained by considering the result of the series as whole and
not by dissecting the scheme and considering each individual transaction
separately”
 Per Lord Scarman on the Principle in Ramsay
 “The law will develop from case to case”
 “What has been established with certainty by the House in Ramsay’s case is that
the determination of what does and what does not, constitute unacceptable tax
evasion is a subject suited to development by judicial process”
 Per Lord Roskill quoting Atkin likening tax avoidance to a ghost
 “When these ghosts of the past stand in the path of justice clanking their
medieval chains, the Proper course for the judge is to pass through them
undeterred”
 “Perhaps the decision of this House in these appeals will now suffice as
exorcism”

17. Modern
Approach
 Thus, the ghost of Westminster (in the words of Lord Roskill) has been
exorcised in England
 The courts are now concerning themselves not merely with the
genuineness of a transaction, but with the intended effect of it on fiscal
purposes
 Note S. 34 of Act 896 is used to prevent the use of
 fictitious arrangements or
 arrangements that do not have a substantial economic effect or
 arrangements the form of which doesn’t reflect the substance
 to deny the State of its needed revenue

18. Modern
Approach
 Note that in the case of Ransom v Higgs, the court of appeal delivered a
judgement that seem to reverse the tide
 “it may be hard that a cunningly advised taxpayer should be able to avoid
what appears to be his inevitable share of the general fiscal burden, and cast
it on the shoulders of fellow citizens. But for the courts to stretch the law to
meet hard cases is not merely to make bad law, but run the risk of subverting
the rule of law itself”
 Per Lord Hoffman
 To say tax avoidance is a scheme intended to avoid what Parliament intend to
impose is a contradiction
 The only way Parliament can impose a tax which it intends to impose is by
statute
 If that is what Parliament means the courts should be trusted to give effect to
its intentions
 Any other approach will lead into dangerous and unpredictable territory
 These final remarks is to place some limitations to how far the courts
should stretch the spirit of the tax statute to catch tax avoiders

19. Whosejobis it
to fillthegapin
ataxstatute
 Seaford Court Estates v. Asher per Lord Denning
 When a defect appears a judge cannot simply fold his arms and blame the
Draftman
 He must set to work on the constructive task of finding the intention of
parliament and must do this not only from the language of the statute but also
from considerations of special conditions which gave rise to it
 And the mischief with which it was passed to remedy
 A judge must ask himself how if the makers of the Act have themselves come
across the suck of the texture of it, they would not straighten?
 He then does as they would have done.
 The judge must not alter the material of the which it is woven but he can and
should iron out the creases
 Magor & St Mellons RDC v Newport Lord Denning again repeated his
judgement in Seaford only to be taken to task by the Court of Appeal
 Per Lord Simmons. He described Lord Denning’s approach as
 “a naked usurpation of the legislative function. If a gap is disclosed the
remedy lies in amending the law”

20. TheDoctrineof
Formand
Substance
 Before a taxing statute can be applied in relation to any given transaction, the
revenue office or court must first ascertain the effect of the transaction as
between the parties, that is the rights and obligations created by the
transaction, must first be determined in accordance with the general
principles of law
 Cite IRC v. Duke of Westminster
 Three Rules adopted by the court
 Rule 1
 Descriptions attached to a transaction by the parties to it are not decisive of its true
nature -
 Secretary of State in Council for India v Scoble – Installment payments were described
as an annuity but was held that it would not determine the rate of the payment for tax
purposes
 S. 34 of Act 896
 Rule 2
 Rights and liabilities created by sham transactions are utterly disregarded
 Johnson v Jewith in which flagrant attempt to create an artificial loss was rejected by the
Court of Appeal as a a cheap exercise of “fiscal conjuring and bookkeeping fantacy”
 S. 34 of Act 896
 Rule 3
 Whiles rights and liabilities created by genuine transactions cannot be disregarded, the
surrounding circumstances are used in determine those rights and liabilities
 IRC v Horrocks

21. Anti-Tax
Avoidance
Legislation
 Per Lord Morton
 The struggle between tax avoiders and their advisers on the one hand and
parliament on the other is like a game of chese in Chapman v. Chapman
 Parliament imposes a charge
 The adviser finds a way to avoid it
 Parliament enacts anti-avoidance legislation
 Advisers device more elaborate avoidance
 S. 18 (3) – change in accounting date requires approval of the
Commissioner General
 S. 27 – Indirect payments
 S. 31 – Arm’s Length Standard
 S. 32 – Income Splitting
 S. 33 – Thin capitalization
 S. 34 – General tax avoidance rule
 S. 62 – Change in ownership
 S. 134(5) – Temporary Concession

22. KeyTerms
 Arm’s Length Standard
 Requires related entities in a controlled environment to conduct transactions
with each other as they would if they were unrelated parties
 Transfer price is the price at which related parties in a transaction use for
pricing goods transacted between them
 Market price is the prevailing price of similar goods in the open market
 Transfer pricing is not an illegality or an avoidance scheme, however if it is
manipulated such that it is not at arms length it leads to profit erosion and
becomes a matter of concern to the tax officers
 S. 34 and The Transfer Pricing Regulations, 2012 (L.I. 2188)

23. KeyTerms
 Income Splitting
 Involves any scheme where a person artificially assigns income to another
person in order to reduce the tax liability of the assignor
 Thin Capitalization
 Investments are normally financed through capital assets of a company
(equity) or through borrowing (debt).
 If the debt exceeds equity, payment of interest on loans can affect profits
 Hence the law requires the ratio not to exceed 1:3 in equity to debt

24. TaxEvasion
 Tax evasion is an illegal act and thus attract penalties
 They are resolved tax administration mechanisms
 Notable anti-evasion provisions in Act 915
 S. 72 to 76
 S. 72 – Failure to maintain documents
 S. 73 – Penalty for failing to file tax return
 S. 74 – Penalty for making false or misleading statements
 S. 75 – Penalty for unauthorized attempt to collect tax
 S. 76 – Penalty for aiding and abetting