Introduction
Adwoa lives in Accra and owns a flat in London. The United Kingdom taxes the rent because the flat is there. Ghana taxes the same rent because Adwoa lives here. Both are acting within their rights. Meanwhile a consultant from Nairobi spends three weeks in an Accra office and Ghana taxes his fee at the point of payment, even though he has never lived here. These are the two bases of taxation in action, and the pair is named in a single line of the CITG International Taxation syllabus: “Residence versus source: residence system; source system; mixed system.” The ADIT 2023 syllabus places it in Module 1, Part I (20 percent of the module). This article separates the two bases and shows how the Income Tax Act, 2015 (Act 896) combines them. For who counts as a resident, see our June 30 lesson.
Concept A — Residence-based taxation: tax follows the person
Under a residence basis, a country taxes its residents on everything they earn, wherever it arises. The Handbook for International Taxation states it as “Tax all income of a resident irrespective of source”, and calls the system worldwide taxation. Roy Rohatgi explains that both residence and source rest on the benefit theory: “The State of residence retains its rights to tax its citizens or residents on their worldwide income.”
Ghana’s rule is section 3(2)(a) of Act 896. The assessable income of a resident person is “the income of that person from each employment, business or investment for the year, whether or not the source from which the income is derived has ceased.” Section 111(1) adds: “The income of a resident person derived from a foreign source is taxable.”
The location of the income does not matter, and neither does remittance. The Handbook puts it plainly: income of residents is taxable “even when earned outside whether brought into Ghana or not.”
If you want to see this explained visually with worked examples, watch the full YouTube lesson. Bill walks through every point step by step.
Concept B — Source-based taxation: tax follows the money
Under a source basis, a country taxes the income that arises inside its territory, whoever earns it. The Handbook calls this source jurisdiction: “residents and non-residents alike are taxed on income from economic activity within a particular country”, and notes that it is also called territorial taxation.
Ghana’s rule for non-residents is section 3(2)(b)(i): income “to the extent to which that income has a source in this country”. Section 3(3) gives the test: the income has a source in the country “if the income accrues in or is derived from this country.”
Section 105 lists the payments with a Ghana source: dividends paid by a resident company; interest paid by a resident person or a Ghanaian permanent establishment, or secured on Ghana real property; rent and royalties for assets or rights used in the country; payments for employment or services rendered in the country “regardless of the place of payment”; and natural resource payments.
“Accruing in” is a regular source, such as a salary earned in Ghana; “derived from” covers the one-off, such as a foreign musician performing in Accra for a week. And “trading in” Ghana (physical presence: place of contract, place of operations, place of control) is taxable, while “trading with” Ghana (selling in from outside) is not.
Ghana is a mixed system
Section 3(2) uses both bases at once. A resident is taxed on worldwide income. A non-resident is taxed on Ghana-source income and, under section 3(2)(b)(ii), on income connected with a Ghanaian permanent establishment “irrespective of the source of the income”. Even the residence basis has source features: section 103 requires local and foreign income and losses to be calculated separately, and section 111(2) exempts a resident individual’s foreign employment income where the individual is abroad for 183 continuous days or more.
The seven differences
| # | Residence-based | Source-based |
|---|---|---|
| 1 | WHO is the taxpayer? | WHERE did the income arise? |
| 2 | Connecting factor: the person (residence, domicile, citizenship) | Connecting factor: the income (situs, “pay” and “use” rules) |
| 3 | Worldwide income | Income with a source in the country only |
| 4 | Ghana: s.3(2)(a), s.111(1) | Ghana: s.3(2)(b)(i), s.3(3), s.105 |
| 5 | Hits residents | Hits non-residents (and residents on domestic income) |
| 6 | Collected by return, instalment and assessment | Collected by withholding at source, final for non-residents (ss.116, 119(1)(d)) |
| 7 | Residence country gives relief (s.112; Art 23A / 23B) | Source country taxes first; treaty caps its rates |
When the two collide: double taxation and relief
Adwoa’s rent is caught by the UK on the source basis and by Ghana on the residence basis. The Handbook calls this juridical double taxation, arising from “the combination of the residence principle of taxation and the source principle of taxation”. Economic double taxation is different: two taxpayers, same income, such as company profit and the dividend paid out of it (tested in ICAG Advance Taxation May 2020, Q1(c), 6 marks).
By convention the source country taxes first and the residence country gives relief. The OECD Model offers two methods. Article 23A, exemption: the residence country does not tax income the source country may tax. Article 23B, credit: the residence country taxes the total and credits the foreign tax. Ghana’s domestic credit is section 112: a resident person other than a partnership may claim a credit for income tax paid to a foreign country on assessable foreign income, calculated separately for each year and for each employment, business or investment, and it “may not exceed the average rate of Ghanaian income tax of the person for the year applied to the assessable foreign income”. Section 112(3) lets the person elect to relinquish the credit and claim a deduction instead; otherwise no deduction is available.
Teaching example (Profs teaching figures): Adwoa has foreign income of GHS 100,000 and an assumed Ghana average rate of 30 percent.
- Foreign tax 40 percent = GHS 40,000. Credit capped at GHS 30,000. Ghana collects nil. Total tax GHS 40,000; GHS 10,000 of foreign tax is unrelieved.
- Foreign tax 10 percent = GHS 10,000. Credit GHS 10,000. Ghana collects GHS 20,000. Total tax GHS 30,000.
Credit relief lifts the total to the higher of the two rates, never below it.
How Ghana collects from non-residents
A non-resident has no practical return to file, so the law collects at payment. Section 116(1)(b) requires a resident person to withhold tax on a service fee or insurance premium with a source in the country paid to a non-resident; section 116(9) covers management and technical service fees; and section 119(1)(d) makes payments to non-residents subject to that withholding final, other than payments derived through a Ghanaian permanent establishment. Rates are in paragraph 8 of the First Schedule. Where the non-resident operates through a permanent establishment, section 107 taxes the PE like a resident company and section 60 adds a final branch profit tax on repatriated profits within thirty days after the basis period, at the prescribed rate.
The trap
- Calling Ghana “worldwide” and stopping. It is mixed.
- The “brought into Ghana” myth. A non-resident’s foreign income remitted to Ghana is not taxed; a resident’s foreign income is taxed whether remitted or not.
- Relief from the wrong side. The residence country gives credit; the source country does not.
Past-question evidence
The ADIT Principles of International Taxation paper of December 2016, Q4 (25 marks) asked candidates to discuss: “Except for the United States, every major developed nation now operates a territorial system of taxation.” The model answer notes that most countries tax residents on worldwide income and “also apply source tax on income to the extent it arises within their territory”, then covers connecting factors, the “pay” and “use” rules, US citizenship taxation, capital export and import neutrality, and CFC rules. The ICAG Advanced Taxation paper of November 2020, Q3(b) (8 marks) tested the credit computation for UK rent and interest, and the November 2019 paper, Q2(a) (3 marks), the conditions for the credit.
Applying it: a five-step answer layout
- Classify the person (s.101).
- State the basis with the section: worldwide for a resident, source for a non-resident, plus PE income.
- Test each payment against s.3(3) and s.105.
- Spot double taxation and name the relief: s.112 / Art 23B, or Art 23A.
- Compute, capping the credit at the Ghana average rate.
📌 EXAM TIP: Residence is WHO. Source is WHERE. Classify the person, state the basis with the section, test each payment against the source rules, then deal with double taxation and relief. A resident’s foreign income is taxable, a non-resident’s is not, and the credit never exceeds the Ghana average rate.
Conclusion
Residence follows the person. Source follows the money. Ghana uses both, and when they collide the residence country gives the relief.
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