Move to make leasing a vibrant sector-Introduce preferential tax treatment-IFC report

Story: Boahene Asamoah

THE International Finance Corporation (IFC), the investment arm of the World Bank, has called for the government to introduce preferential tax treatments in the leasing industry to encourage local investments in the leasing sector.
“The main reason for providing preferential treatment should be to increase domestic investments, not to stimulate the leasing sector,” the report stated.
According to the IFC report on leasing in Ghana, a survey of the leasing market in the country has shown that the introduction of any preferential tax treatment should only be for a limited time period.
“The whole tax system must be considered in making such a policy decision. In many cases, some tax benefits are given to offset other disadvantages and this approach may be pragmatic and effective,” the report stated.
The report observed that to promote the leasing sector and generally to encourage investments in capital equipment, legislation and tax provisions should be amended to encourage cross-border leasing.
“This is even more important, because most capital equipment is imported,” the report stated.
It observed that legislation in the country did not permit cross-border leasing involving non-resident lessors, and even if it permitted, there was a tax provision of 15 per cent withholding tax on rental payments to a non-resident person who made cross-border leasing transactions expensive and unattractive to non-resident lessors.
The report also called for the harmonisation of the Bank of Ghana’s rules and provisions and tax requirements.
It also explained that presently, the Bank of Ghana’s (BoG) guidelines required that lessors make provisions for overdue payments and had given rates based on the period that payments were overdue.
“These guidelines are given by the BoG to protect the integrity of lessors lease portfolios. However, for tax purposes, the tax authorities do not recognise these provisions,” the report indicated.
It further stated that this situation compelled the lessor to pay taxes on an income they might not have received, adding that “this creates a mismatch between income earned and tax expense which may impact adversely on cash flow on the lessor”.
On the calculation of depreciation and capital allowances for operation leases, the report called for a change in computing of allowances from the reducing balance to the straight line method to encourage operating leases.
“These changes would make operating leases more attractive and also increase interests,” the report stated.
In Ghana, all assets are depreciated on reducing balance method for all depreciable assets other than buildings for the purpose of capital allowance. The tax rate for depreciation is between 20 and 40 per cent for all fixed assets, except mining, petroleum operating assets and buildings.
“This implies that it takes a much longer time to be fully depreciated for tax purposes,” the report stated.
The Ghana Leasing Report 2007 is an advisory service offering of the IFC, aimed at enhancing the role of leasing as an alternative financing mechanism and other businesses in the country.
The programme is sponsored by the State Secretariat for Economic Affairs of Switzerland (SECO).
In Ghana, more than 90 per cent of businesses are Small-and Medium-Scale Enterprises (SMEs), and the benefits of leasing as an alternative form of assets financing cannot be overemphasised.