The tax treatment of retirement funds in Ghana is among the most generous in the world, depriving the government of significant revenues, the World Bank has disclosed in its 8th Ghana Economic Update.

Internationally, it said the key policy options for pension taxation focus on three major choices.

They are Exempt (E) or tax (T) the contributions made into a retirement fund, Exempt (E) or tax (T) the interest or gains earned from such funds and Exempt (E) or tax (T) withdrawals from such funds during retirement.

In Ghana, it said no tax is paid on contributions made towards or on benefits received from retirement or pension schemes.

“Withdrawals of accrued benefits from a provident fund or personal pension scheme are tax exempt. Benefits from the Social Security and National Insurance Trust are also tax exempt.”

“As a result, Ghana runs a generous EEE model. In addition, employer contributions are tax deductible, and additional contributions up to a maximum of 16.5 %t of a contributor’s monthly income are tax deductible for the purposes of determining the income of the contributor or their employer effectively lowering the taxable income”, it added.

Several investments are tax exempts

Furthermore, the World Bank report said several investment income streams, which usually accrue to high-income individuals, are tax exempt—thus reducing the progressivity and efficiency of the PIT regime.

“Investment income that is exempt from taxation includes interest paid to an individual by financial institutions; interest on Ghanaian sovereign bonds; and interest or dividends paid to members of approved unit trusts or mutual funds. Moreover, an extensive withholding tax regime applies to payments from transactions made by business entities, simplifying tax management but also opening up opportunities for potential abuse: for example, rent derived from residential properties attracts a lower withholding rate (8.0%) than that from commercial properties (15%)”.

This it said creates an incentive to misclassify commercial properties as residential.