Carry forward losses to spur business growth — Tax Expert

The extended duration for businesses to carry forward their losses without paying tax under the new Income Tax Act, 2015 (Act 896) is expected to provide a convenient reprieve for them to grow, a tax consultant, Mr Abdallah Ali-Nakyea, has said. 

Speaking in an interview with the GRAPHIC BUSINESS after the GRAPHIC BUSINESS/Stanbic Bank Business Breakfast meeting in Accra, he dismissed assertions that companies could misapply the Act, saying that it used to be there for the specialised industries. 

“The only thing is that mining was five years, and  petroleum was unlimited. So the good thing is that we have limited how long petroleum companies can also carry forward losses. And then, all other businesses used not to carry forward losses; now they can,” he said. 

Analysts have maintained the provision would be most beneficial to businesses in distress, especially as the country had no laws on corporate insolvency  which could allow companies in distress to resort to restructuring as an option to prevent them from premature liquidation.

According to the Ghana Association of Restructuring and Insolvency Advisors (GARIA), a well-structured insolvency regime would enable companies to fall on alternative options to recover rather than closing shop, as was the common prescriptions under the country’s current laws. In the absence of that, such a generous losses carry forward losses regime. 

Mr Ali-Nakyea explained that the losses being referred to were not the accounting loss; “it is the loss that the revenue authority has arrived at, unrelieved loss so they will do all the adjustments to your returns and what they arrive at which is not disputable is what you can carry forward.”

Carry forward losses 

An accounting technique that applies the current year's net operating losses to future years' profits in order to reduce tax liability. Generally accepted accounting principles (GAAP) specify that loss carryforwards can be used in any one of the seven years following the loss.

For example, if a company experienced a negative net operating income (NOI) in year one but positive NOI in one of the next two to seven years, the company could reduce its  tax expense for one of those years by applying the loss experienced in the first year.

In Ghana, carry forward of tax losses which were previously restricted to business entities in specific industries, is now available for all businesses. 

However, the number of years the losses can be carried forward will depend on the industry in which the business organisation operates. The mining sector will enjoy up to five years, while all other businesses will have that previleged extended to them to cover three years. 

According to Mr Ali-Nakyea, the change will not have any impact on revenue because when businesses make gains they pay taxes and when they make losses the government needs to support them to be able to recover. 

“So it will not have an impact on revenue because revenue will audit and make sure that the loss is indeed a loss not that the business cooked it to be able to take advantage of it,” he said. 

He added that any audit would uncover whether it was real loss or a cooked up loss.  

Deferment of capital allowance 

Section 14 of the Act defines capital allowance as adispensation; (a) granted in respect of a depreciable asset owned and used by a person during a year of assessment in the production of the income of that person from a business; and (b) Calculated in accordance with provisions specified in the Third Schedule.

The law also provides that a person to whom capital allowance with respect to a particular year of assessment is granted shall take the capital allowance in that year and shall not defer it.

Mr Ali-Nakyea said that now capital allowance cannot be deferred and this means that one cannot use any planning measure to try not to use his / her capital allowance in one year but save it to use in another year. 

“You are automatically required to use it. The good thing is that if there are any unutilised balances they feed into the profit and loss that you can carry forward. But my challenge is that because loss carry forward is restricted for three years for all businesses and five years for specialised sectors it means if you are in a heavy investment sector you will loose out because after five years you are done with all that you could have claimed,” he said.  

He said the worry for businesses would be that capital allowance would be given in lieu of depreciation, ‘so now that my capital allowance has ended will revenue be still disallowing my depreciation going forward knowing that I still have some value of my capital investment outstanding. That is the area i would want us to look at,” he said.