FAN MILK GHANA LIMITED VRS THE COMMISSIONER GENERAL, GHANA REVENUE AUTHORITY

Citation: Suit No H1/247/2020 (Unreported judgment of the Court of Appeal)

Brief Facts
Fan Milk Ghana Limited (the Appellant), an ice cream and dairy products manufacturing company, had its accounts audited for tax purposes for the accounting periods in 2014, 2015 and 2016. The Ghana Revenue Authority (GRA) (the Respondent) imposed a tax liability of GH¢7,655,676.22 on the Appellant for failing to withhold taxes from payments to its distributors who received ‘discounts’. The Appellant paid 30% of the disputed tax liability and objected to the tax decision, but the objection was dismissed. The Appellant then requested to pay the outstanding 70%. The Appellant appealed to the High Court, which affirmed the tax decision of the Respondent. Dissatisfied with the decision of the High Court, the Appellant further appealed to the Court of Appeal.

Grounds of Appeal

The grounds of appeal canvassed by the appellant are as follows:

  1. The GRA re-classified the relationship between the Appellant and its distributors (Independent Purchases/Distributors) from principal-agent to one of independent purchases.
  2. The GRA reclassified discounts granted to the distributors as commissions.
  3. The GRA imposed a withholding tax liability based on these re-classifications.
  4. The GRA ignored its own practice of treating discounts under the Appellant’s Model as exempt from tax.
  5. The High Court Judge erred in law by holding that the Appellant’s business model was a tax avoidance scheme.
  6. The High Court Judge erred in law by applying a new law retrospectively to invoices issued prior to the law coming into effect.
  7. The High Court Judge erred in law by ruling that discounts must appear on invoices to be valid.
  8. The High Court Judge erred in law by holding that payments to distributors were commissions, not discounts.
  9. The High Court Judge erred in law by upholding the tax liability.
  10. The judgment was against the weight of evidence.

Issues

  1. Whether or not the Respondent was justified in its tax decision that the Appellant failed to withhold taxes on payments made to its Independent Purchases/Distributors from 2014 to 2016.
  2. Whether or not the payments made by the Appellant to its Independent Purchases/Distributors were ‘discounts’ or ‘commissions’ in substance.
  3. Whether or not the payments made to the distributors were cash discounts.

Areas of Tax Law Considered

  • Withholding tax.

Arguments

 Appellant (Taxpayer)

  1. The relationship between the company and its distributors was not one of principal and agent, but rather a system of ‘indicative discounts’ at the end of every month.
  2. These payments were discounts, not service fees to sales agents, and therefore not subject to withholding tax.
  3. The discounts were based on purchases made by the distributors and were calculated from invoices raised for the month.
  4. The payments were cash discounts.
  5. The word “agents” in the agreement with distributors was not used in its proper legal connotation.

Respondent (GRA)

  1. The payments to distributors were commissions, not discounts.
  2. These payments were subject to withholding tax.
  3. The Appellant did not make necessary price adjustments in its books for the discounts. Thus, the Tax Audit did not find price adjustments in the books of the Appellant.
  4. The agreement between the Appellant and its distributors indicates that payments were a motivation for the distributors to achieve targets, which is similar to a commission.

Ruling
The Court of Appeal affirmed the findings of the High Court and dismissed the appeal in its entirety. The Court established that the payments made by the Appellant to its distributors were in substance “commissions” and not discounts”. Thus, the Respondent was justified in imposing a withholding tax liability on the Appellant for failing to withhold tax on payments which were actually commissions. The model operated by the Appellant could not be regarded as cash discounts.

Reasoning

  1. The Court determined that the fundamental issue was whether the payments made by the appellant to its distributors were discounts or commissions. The court adopted the use of interpretative aids such as the Black’s Law Dictionary (8th and 9th Editions) to differentiate between ‘discounts’ and ‘commissions’. The ordinary meaning of a discount for purposes of sales is a reduction in the original price of a product, while a commission is a fee paid to an agent or employee, usually as a percentage of the money received.
  2. The court found that the payments were an incentive for the distributor to sell more products, not a reduction in price, and thus were commissions, which the Appellant had not recorded as cash discounts in its accounting books according to standard accounting principles.
  3. The court concluded that the arrangement between the Appellant and its distributors was a sham to avoid withholding tax and reiterated that tax avoidance, which is the act of dodging tax without breaking the law, was illegal.
  4. The court emphasized that the burden of proof is on the taxpayer to show compliance with tax laws.
  5. The court stated that a withholding agent who fails to withhold tax must pay the tax that should have been withheld.

Principles for Tax Practitioners

  1. The case clarifies the distinction between discounts and commissions for tax purposes, emphasizing that the substance of a transaction, not just its label, determines its tax treatment.
  2. It is important for a tax practitioner to adhere to standard accounting practices for recording discounts.
  3. The court emphasized the illegality of tax avoidance schemes and that the law will not countenance such acts.
  4. In highlighting the importance of the burden of proof on the taxpayer, the aggrieved taxpayer must discharge this by leading evidence to show compliance with the law.
  5. The case demonstrates that in interpreting technical tax words, the court will look beyond the form of an agreement, and examine the substance, when determining tax liability.
  6. The case emphasizes that the failure to withhold taxes can lead to a liability for the amount that should have been withheld.

References

Statutory

  • sections 42, 92(1) and (2) and 117(3) of the Revenue Administration Tax Act 2016 (Act 915).
  •  sections 116(1)(a)(v), and 34 of the Income Tax Act, 2015 (Act 896).

Case Law

  • Achor and anor V. Akanfela SCGLR 209
  • Greenberg v IRC 3 All ER 136
  • Koglex Ltd (NO.2) V. Field SCGLR 175
  • Johnson V Jewith 40 TC 231
  • Mamudu Wangara v. Gyato Wangara GLR 639
  • Shell Company Of Australia Ltd V Nat Shipping Bagging Services Ltd (1988) 2 Lloyd’s Rep 1