PERSEUS MINING GHANA LTD vs THE COMMISSIONER GENERAL, GHANA REVENUE AUTHORITY

Citation: Unreported judgment of the Court of Appeal….

High Court SUIT NO: CM/TAX/0515/2021 (8th February 2022)       

Brief Facts:
Perseus Mining Ghana Limited (PMGL), a mining company engaged in the production and sales of gold was subjected to a tax audit by the Ghana Revenue Authority (GRA) covering assessment years from 2010 to 2017. The GRA issued a revised tax assessment, raising the company’s tax liability from $8,725,387.49 to $10,207,164.17, citing tax avoidance concerns related to forward sales contracts.
PMGL objected to the assessment, contending that losses incurred from forward sales contracts should be deductible as business losses. However, the GRA maintained that these transactions constituted investment losses, not business losses. The High Court ruled in favor of the GRA, prompting PMGL to appeal to the Court of Appeal.

Grounds of Appeal

  1. The Judgment of the High Court was against the weight of evidence as the Court erred in evaluating the facts.
  2. The High Court wrongly upheld the GRA’s position on tax avoidance and hence misapplied the law.
  3. The Court erred in treating forward sales contracts as tax avoidance mechanisms.
  4. The Court wrongly classified forward sales losses as investment losses instead of business losses.
  5. The Court misdirected itself by concluding that PMGL used different prices for royalty payments to the Government of Ghana and Franco Nevada Corporation.
  6. The GRA failed to justify its discretionary power in recharacterizing the forward sales contract and abused its exercise of discretion under Article 296(c) of the 1992 Constitution.
  7. The Court erred in treating forward sales contracts as related party transactions without evidence.

Issues:

  1. Whether or not the forward sales contract losses should be classified as investment losses or business losses for tax purposes?
  2. Whether or not GRA’s recharacterization of transactions complied with Ghana’s tax laws?
  3. Whether PMGL’s royalty payments were miscalculated based on spot gold prices and contract prices?
  4. Whether the GRA lawfully exercised its discretion under Article 296(c) of the 1992 Constitution?

Areas of Tax Law Considered

  1. Corporate tax – Tax treatment of business income and deductible losses.
  2. Transfer pricing – Application of related party transaction rules.
  3. Tax avoidance – GRA’s power to recharacterize transactions under Section 34 of the Income Tax Act, 2015 (Act 896).
  4. Computation of Royalties – Treatment of mineral royalties under the Minerals & Mining Act, 2006 (Act 703), as amended.

Arguments

               Appellant (Taxpayer)        

  • Forward sales contracts are business transactions, not investments. Losses incurred should be deductible from taxable income under Sections 19, 21, and 25 of Act 896.
  • Forward sales contracts were conducted with independent third parties (Macquarie Bank Ltd and Credit Suisse AG), making them legitimate transactions rather than related party dealings.
  • The High Court misapplied Section 34 of Act 896, as the forward contracts were neither fictitious nor a tax avoidance scheme.
  • Royalty payments were correctly computed based on contractual obligations, distinguishing between statutory royalties (to the Government) and contractual royalties (to Franco Nevada Corporation).

Respondent (Ghana Revenue Authority)

  • Forward sales contracts were tax avoidance schemes, structured to reduce taxable income artificially.
  • Losses from forward sales contracts were investment losses, not business losses, and thus not deductible.
  • PMGL used different prices to compute royalties, leading to inconsistencies.
  • Under Section 34 of Act 896, it had the power to disregard transactions structured to minimize tax liability artificially.

Ruling

The Appeal succeeded.

  1. The Court of Appeal ruled that Forward sales contract losses are deductible business losses, not investment losses, as per Section 7(2) of Act 592 (now Section 5(2) of Act 896).
  2. The respondent misapplied its discretionary power under Section 34 of Act 896, failing to provide sufficient evidence that PMGL’s transactions were tax avoidance schemes.
  3. Royalty computations were correctly done by PMGL, with contractual payments to Franco Nevada Corporation separate from statutory royalties owed to the Government.
  4. The forward sales contracts were legitimate business transactions, not related party dealings.
  5. The High Court failed to resolve primary facts, making conclusions unsupported by evidence.

Reasoning

  1. The burden of proof in tax appeals (Section 92(1) of Act 915) lies with the taxpayer, but the GRA must objectively apply tax laws.
  2. GRA’s discretion is subject to Article 296(c) of the 1992 Constitution – it must be exercised fairly and consistently.
  3. Investment losses and business losses are distinct – business losses incurred in the normal course of trade are deductible.
  4. Royalty payments should follow statutory and contractual obligations – PMGL did not engage in price manipulation.

Principles for Tax Practitioners

  1. Forward sales contracts in mining are valid business transactions – losses from such contracts can be deducted from taxable income.
  2. The GRA must apply discretion fairly and within statutory limits – recharacterization of transactions must be evidence-based.
  3. Taxpayers should maintain clear documentation to defend the legitimacy of business transactions.
  4. Courts will uphold legitimate tax planning but strike down abusive tax avoidance schemes.

References

Constitutional and Statutory

  • Article 296(c) 1992 Constitution of Ghana
  • Sections 5(2), 9, 19, 21, 25, 31, 34, 131 of the Income Tax Act, 2015 (Act 896)
  • Section 92(1) of the Revenue Administration Act, 2016 (Act 915)
  • Section 7(2) Internal Revenue Act, 2000 (Act 592)
  • Minerals & Mining Act, 2006 (Act 703), as amended by Act 794 and Act 900

Caselaw

  • Placer Dome Canada Ltd v. The Queen
  • James S.A. Macdonald v. Her Majesty the Queen (2019), Supreme Court of Canada