The World Bank, in its eighth Ghana Economic Update, revealed that Ghana’s tax treatment of retirement funds is among the most generous globally, resulting in a significant loss of revenue for the government.

The report notes that, on an international scale, pension taxation policy typically revolves around three key decisions: whether to Exempt (E) or tax (T) contributions to a retirement fund, whether to Exempt (E) or tax the interest or gains earned from these funds, and whether to Exempt (E) or tax withdrawals from the funds upon retirement.

In Ghana, contributions to retirement or pension schemes, as well as the benefits received from them, are entirely tax-exempt.

“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

Additionally, the World Bank report highlighted that several forms of investment income, typically benefiting high-income individuals, are exempt from taxes. This exemption diminishes both the progressivity and effectiveness of the personal income tax (PIT) system.

“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.