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Importance for tax purposes of clear discount and rebate policy highlighted

Ghanaian tax law provides for the use of discounts and rebates in the course of business activities, to the extent that the discount satisfies specific conditions and is correctly recorded for VAT purposes in the company’s accounting records. Although historically not considered a risk item during tax audits by the Ghana Revenue Authority (GRA), the discount and rebate policies of some large enterprises have failed to meet the required conditions when tested by the GRA during tax audits.

The GRA has invoked the general anti-avoidance rule under section 34 of the Income Tax Act, 2015 (Act 896), to recharacterize discounts not correctly accounted for from a VAT perspective as commission expenses, which may then be subject to withholding tax. This treatment has been challenged before the courts in two cases, in 2019 and 2022, and settled in favor of the tax authorities. In both cases, the taxpayers had appealed the decision of the GRA to recharacterize the discounts.

This article highlights the underlying reasons for the court’s decisions, summarizes the relevant provisions of the tax law, and highlights the importance of drafting and implementing accurate discount and rebate policies.

VAT requirements

Section 43 of the Value Added Tax Act, 2013 (Act 870) provides that the value of a taxable supply is:

  • The amount of the consideration with the addition of all duties and taxes excluding VAT, where the supply is for monetary consideration; or
  • The open market value of a similar supply excluding VAT, where the supply is not for monetary consideration, or is only partly for monetary consideration.

Section 65 of Act 870 provides that the consideration for a supply of goods or services or an import of services may be reduced by any discounts or rebates allowed and accounted for at the time of the supply or import.

Discounts are therefore generally allowed as a reduction in the value of taxable supplies, to the extent that the discount is granted (subject to certain eligibility criteria) and accounted for at the time of supply. A VAT invoice is required for taxable supplies and where applicable, the discount rate or amount must be disclosed on the invoice in order to be considered as accounted for at the time of supply. Discounts granted after the issuance of a VAT invoice are treated separately.     


Regulation 11 of the Value Added Tax Regulations (LI 2243) provides that any discount or rebate is acceptable only if the discount or rebate is nondiscriminatory and available to every recipient of the supply.

Businesses are generally required to put in place a written discount and rebate policy that is communicated to all customers, and where possible, displayed in an accessible location at any point of sale (including on websites or social media platforms). These conditions are generally met, for example, in the retail sector where discount rates or reduced prices are displayed on products for all customers.

Invoicing requirement

Section 41 of Act 870 requires that a VAT registered person must issue a tax invoice for a supply in the format prescribed by the tax authorities, which includes details of the rate of any discount. This requirement is critical, as discounts allowed and accounted for at the time of supply will reduce the value of the supply for VAT purposes.

In the 2019 case, the court made the following observations in respect of invoicing requirements:

  • Discounts are intended to result in the reduction of the price of an item sold or service provided before or after the sale.
  • There should be evidence that prices are actually reduced by the discount. The court observed that the taxpayer failed to demonstrate that adjustments were made in its books to reflect the reduction of the sale price.
  • The court emphasized that if the taxpayer had recorded the discount as required, there would have been no basis for the GRA to recharacterize the discount as commission.  The court emphasized the requirement for a taxable person making a taxable supply to issue a tax invoice to the recipient, displaying various items including the rate of any discount.

Based on the above, the indication of the rate of discount on a tax invoice is a key factor, and critical evidence to demonstrate that the price or consideration is reduced by the discount provided.

In the 2022 case, the court re-emphasized the requirement for the discount to be displayed on the tax invoice. The court referenced the prior ruling and stated that the inclusion of the discount on the tax invoice is one of the most convincing ways to prove that a discount was granted, and the adjustment was not therefore a commission payment.


Accounting for discounts in the books of account 

Generally, any discounts and rebates granted at the time of invoicing must be disclosed on a VAT invoice. The courts in both cases emphasized this requirement as justification for the reduction in the consideration.    

 In situations where the previously agreed consideration has been altered with the consent of the recipient after the invoice was issued, or the return filed, any discounts or rebates are accounted for by way of a credit note. Section 45 of Act 870 permits these discounts and rebates to be claimed as deductible input VAT.


Recharacterization of discounts as commission

Discounts are not specifically defined in the tax legislation, and therefore the courts have relied on the ordinary meaning of the words, noting that a discount for the purpose of sale is a reduction in the original price of the product, either as a result of prompt or bulk payment. Conversely, commission is a fee paid by a principal to an agent for undertaking a transaction for and on behalf of the principal. For a fee to be considered as commission, there must be a principal/agent relationship, whether express or implied.

The courts acknowledged that commission can only be paid by a principal to an agent where the agent acts on behalf of the principal. In a product sale arrangement, the principal typically holds title to the product and the agent earns a commission on the sale. The commission is generally structured as a flat fee, or as a percentage of the revenue, gross margin, or profit generated by the sale.

In the 2019 case, the court held that as the taxpayer controlled the prices at which its products were sold by the intermediary distributors to final consumers, and did not provide any opportunity for the distributors to add a mark-up, this was conclusive evidence of a principal/agent relationship. Therefore, the court decided that the payment to the distributors could only be intended to compensate them for achieving a monthly sales target, and could not be described as a discount.

Retail price controls allow certain manufacturers to achieve uniform prices for products in specific locations or jurisdictions, which eliminates potential competition among distributors and boosts sales. The provision of a discount is used simply to promote or encourage bulk sales over a defined period and is not intended to compensate the distributors for acting as agents of the manufacturers. The distributors take full responsibility for the risks and rewards associated with the products, and manufacturers do not compensate the distributors for any loss or damage suffered on the products, in contrast to standard agency relationships. The recharacterization of discounts as commission by the GRA, as upheld by the courts mainly on the basis of inaccurate accounting, may be correct in law, but does not correlate with the economic reality of the transaction. Clear discount policies, developed with the involvement of industry players, may provide some protection to affected industries.    


Deloitte Ghana comments

The tax consequences resulting from the potential reversal of a discount either due to incorrect accounting or enforced recharacterization as commission may be significant. These include the requirement to account for additional VAT and levies, currently at 21.9% (plus communications service tax at 5% where applicable) and withholding tax of 7.5% (payments to legal entities) or 10% (payments to individuals) on deemed commission, plus the applicable late payment interest.

It is therefore important for businesses to review discount policies and the associated accounting mechanism used to ensure compliance with the relevant provisions of the tax law. Businesses may wish to consider the following actions:

  • Review any discount policy to ensure it is nondiscriminatory and available to all customers. Evidence of compliance with these conditions may include the display of available discounts at places of business, including websites and electronic platforms.
  • Disclose the rate or amount of discount granted on tax invoices issued to customers, and in instances where discounts or rebates are granted after the completion of a sale, issue credit notes and account for the deductible input VAT.
  • Review discount policies on any price-controlled retail products to mitigate against potential recharacterization of the discount as commission by the GRA.
  • Review the commercial and legal relationship with distributors to mitigate the risk of creating an agency relationship.
  • Where potential accounting errors are identified, a detailed review and corrective adjustments, including obtaining the approval of the commissioner-general to resubmit relevant tax returns before a tax audit, may be necessary.       

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