Judgment summary
This is an appeal against the ruling of the High Court (Commercial Division), Accra, dated 19th October 2022, which had upheld in part an appeal brought by Maersk Drillship IV Singapore against the Final Objection Decision of the Commissioner-General of the Ghana Revenue Authority dated 27th September 2021.
The dispute concerned the interpretation and application of Articles 12(1) and (3) and Article 26 of the Offshore Cape Three Points Petroleum Agreement, Sections 27 and 39(3) of the Petroleum Income Tax Act, 1987 (PNDC Law 188), the Internal Revenue Act, 2000 (Act 592) and the Income Tax Act 2015 (Act 896).
The Appellant contended that, properly construed, it was not liable to pay any other tax under any other tax law after a 5% final withholding tax was withheld on its behalf by ENI, and that the High Court erred in holding that the Respondent was right to impose income tax and branch profit tax on its earnings for the 2015-2017 period.
The Court of Appeal dismissed the main appeal in totality, holding that the Appellant, as a non-resident entity earning repatriated profits through a Ghanaian permanent establishment, was subject to investment income tax under Section 60 of Act 896. The Respondent's cross-appeal succeeded only in part.
Background
The Appellant, based in Singapore, was registered on 28th January 2015 under the laws of Ghana as an external company. It described itself as engaged in the business of providing services to the upstream petroleum industry in Ghana.
On 30th January 2015, the Appellant entered into a subcontract agreement to provide services to ENI Ghana Exploration and Production Limited (ENI), successor to a Petroleum Agreement (PA) entered into by its predecessor Heleconia Energy Ghana Limited and the Government of Ghana acting through the Ghana National Petroleum Corporation, in respect of blocks offshore Cape Three Points.
Article 12(1) of the PA provides that no tax, duty, fee or other impost shall be imposed by the State or any political subdivision on the Contractor, its Subcontractor or its Affiliates in respect of activities related to Petroleum Operations and to the sale and export of Petroleum other than as provided in that Article.
Heleconia assigned its interest under the PA to ENI. ENI entered into a Subcontract Agreement dated January 2015 with Maersk Rigworld Ghana Limited and the Appellant for the provision of services at the deepwater drilling rig for a period of two years (2015-2017), entered into evidence as Exhibit MDS 4.
In 2018, the Respondent commenced a tax audit into the affairs of the Appellant and issued a Final Tax Audit report dated 20th November 2020 (Exhibit MDS 6), assessing the Appellant with a total direct tax liability of US$20,185,531.36 and an indirect tax liability of US$8,441,746.18, making a total tax liability of US$28,627,295.54.
The Appellant objected on 15th January 2021. On 27th September 2021, the Respondent issued its Final Objection Decision, revising the direct tax liability downwards to US$19,915,318.99. The Appellant filed an appeal against this decision at the High Court on 8th November 2021, and the Respondent filed its Reply on 24th December 2021 pursuant to Order 54 Rule 7 of C.I. 47.
On 8th July 2022, the High Court delivered judgment in relation to certain reliefs sought and ordered an independent auditor to reconcile the Appellant's VAT/NHIL liability, PAYE and Withholding Tax figures. A reconciliation report was filed on 30th September 2022, and the Appellant's counsel also filed an application for clarification regarding whether the Respondent could impose branch profit tax on the Appellant's income from the OCTP block.
Core dispute
The central contention of the Appellant was that, on a true and proper construction of Article 12(1) and (3) of the Offshore Cape Three Points Petroleum Agreement and Sections 27 and 39(3) of the Petroleum Income Tax Act, 1987 (PNDC Law 188), it was not liable to pay any other tax under any other tax law after a 5% final withholding tax was withheld on its behalf by ENI.
The Appellant argued that the High Court erred in holding that the Respondent was right in imposing income tax on its earnings for the period 2015-2017 and branch profit tax on the same, and that the learned Judge misconstrued the legal effect of a final withholding tax, contending that such a taxpayer is not liable to pay any more tax under any circumstance whatsoever.
The Respondent maintained that the treatment of the 5% withholding tax as final under section 27 of PNDCL 188 does not preclude the payment of other taxes, such as branch profit tax, on the same income, and that branch profit tax is a tax on investment income (akin to dividends) payable by the Appellant's non-resident shareholders, and not a tax on the business income of the Appellant's Ghanaian operations.
A central issue for the Court was whose income was the true subject matter of the assessment: the Appellant's own business income as a subcontractor, as the Appellant argued, or the investment income of the Appellant as shareholder of a separate Ghanaian permanent establishment, as the Respondent argued.
The Respondent also brought a cross-appeal (a Notice of Contention under rule 15 of the Court of Appeal Rules, 1997, C.I. 19), arguing that the High Court erred in barring it from imposing income tax under any other law except PNDCL 188 and the PA, and in construing the stability clause (Article 26.2) of the Petroleum Agreement to cover the Appellant as a subcontractor.
Court findings
The Court held that resolution of the dispute required answering three questions: whose income was the subject matter of the assessment; whether that income was assessable income; and whether the income was exempt from income tax.
On the first question, the Court found that the Appellant's Ghanaian branch, registered as an external company, is a permanent establishment which, under Section 107 of Act 896, is 'an entity separate from its owner'. The Court found this bolstered by the Appellant's own Exhibit MDS 1 Series 2 (Form 20), which listed the Appellant as the 'Parent Company' of the Ghanaian permanent establishment, and by Section 311 of Act 992. The Court concluded that it was the Appellant's Ghanaian permanent establishment, a separate legal entity, which was the earner and party to the subcontract under the Petroleum Agreement, and that when this establishment remits profits to the Appellant, the Appellant earns repatriated profits akin to dividends.
On the second question, the Court found that this income was assessable under Section 3(2)(b) of Act 896, since the Appellant is a non-resident person (not incorporated under the Companies Act, and without established management and control in Ghana per Section 104(4)) earning income connected with a Ghanaian permanent establishment.
On the third question, the Court held that while the income of the Ghanaian permanent establishment itself is not subject to further taxes under the Petroleum Agreement, the Appellant, as the non-resident parent receiving repatriated profits from that permanent establishment, is subject to Section 60 of Act 896 (Branch Profit Tax). The Court stated that the imposition of branch profit tax does not depend on whether the income is subject to final tax, but rather depends on the repatriated profits earned by a non-resident person carrying on business in Ghana through a permanent establishment.
The Court declined to adopt the reasoning in Maersk Reginald Ghana Ltd. v The Commissioner-General S/N Cm/TAX/0099/22 (delivered 31st January 2023, unreported HC), on the basis that any profit the Appellant repatriates to its parent company is subject by law to branch profit tax as explained in this judgment.
On the cross-appeal, the Court upheld the Respondent's second ground, finding that the Appellant is not the subcontractor contemplated by the Petroleum Agreement; rather, its Ghanaian Permanent Establishment (external company/subsidiary) is the subcontractor covered by the Agreement.
On the Respondent's first ground of cross-appeal, concerning retrospective application of the repeal of PNDCL 188 and the introduction of Act 896 and Act 919, the Court held that these new fiscal regimes cannot apply to the Cross-Respondent's (subcontractor's) corporate income tax obligations because its rights accrued as a subcontractor at the time it became a subcontractor of ENI, a party to the Petroleum Agreement. The Court approved the invocation of Yew Bon Tew v Kanderaan Bas Mara [1982] 3 All ER 833, Hon. Clement Apaak v GRA (2018) JELR 63988 (HC), and Maersk Rigworld Ghana Ltd. v The Commissioner-General CM/TAX/0099/2022 on this point of retrospectivity, and held that the Cross-Appellant cannot impose further taxes on the Cross-Respondent's subsidiary, its Ghanaian Registered External company.
Outcome
The main appeal brought by the Appellant was dismissed in totality.
With regard to the cross-appeal, the second ground of appeal was upheld, and the first ground of appeal failed.
The cross-appeal therefore succeeded in part only.
The Court affirmed that the Appellant's income arising from its Ghanaian permanent establishment is assessable income and that the provisions of the Petroleum Agreement do not exempt it from taxation. The Appellant, as a non-resident entity earning repatriated profits through a Ghanaian permanent establishment, was held subject to investment income tax under Section 60 of Act 896.
The judgment of the High Court dated 19th October 2022 was affirmed, subject to the variation in respect of the second ground of the cross-appeal.
Major issues / areas of contention
- Whether, on a true and proper construction of Article 12(1) and (3) of the Offshore Cape Three Points Petroleum Agreement and Sections 27 and 39(3) of PNDC Law 188, the Appellant's income is exempted from further taxes after a 5% final withholding tax.
- Whether the Appellant's aggregate income earned from works and services under the OCTP Petroleum Agreement is subject to branch profit tax after being subjected to the 5% final withholding tax.
- Whether the provisions of the Income Tax Act, 2015 (Act 896), including Section 6(2), are applicable to the Appellant given the special fiscal regime under PNDCL 188 and the Petroleum Agreement.
- Whose income was the true subject matter of the tax assessment: the business income of the Appellant itself, or the investment/repatriated income of the Appellant as parent of a separate Ghanaian permanent establishment.
- Whether the Appellant's Ghanaian branch/permanent establishment is a separate legal entity from the Appellant for tax purposes under Section 107 of Act 896.
- Whether the repeal of PNDCL 188 and the introduction of Act 896 and the Petroleum (Exploration and Production) Act, 2016 (Act 919) could retrospectively affect the Appellant's/subcontractor's corporate income tax obligations.
- Whether the stability clause (Article 26.2) of the Petroleum Agreement between the Contractor (ENI) and the State extends to cover the Appellant as a subcontractor.
- Whether the Respondent was entitled to reject VAT Relief Purchase Orders (VRPOs) and impose a VAT/NHIL liability on the Appellant.