A case which congregated interest from the banking fraternity, tax pundits, corporate lawyers and the whole business community in its entirety, a first of its kind in Botswana judicial chambers, set a critical precedence when it overruled Botswana Unified Revenue Services (BURS) claim for Value Added Tax (VAT) on finance leases from Bank of Gaborone.
What aroused this court case emanated from a banking norm which has been a practice for years in Botswana. In some of the banking customs which can be seen even in Botswana jurisdiction, a bank would buy a car from a car dealer and sell it to a customer or client upon request without mark-up. In this case the tittle for the car is reserved by the bank until full payment is made. But VAT is charged on the buyer by the bank after it paid VAT when purchasing the car for the individual. This facility or transaction is categorized under asset financing or finance leases.
In 2014, Bank Gaborone was entangled in a legal fracas in which its operation of finance leases was being put on the spotlight by the taxman; the bank could have been defaulting on paying VAT as per the BURS case. After BURS did audit on Bank Gaborone VAT matters in 2014 it concluded that the bank has a tax bill of P3.9 million from a vehicle sale facility.
The Bank Gaborone versus BURS case was regarded as a first of its kind and anticipation was on the case because it was dealing with the never-been- challenged issue in Botswana of dealing with VAT on asset financing (finance leases). As Bank of Gaborone’s modus operandi, the financial institution would receive request for financing from clients and it would in turn purchase vehicles chosen by the clients from car dealers then claim VAT that it is charged.
Bank of Gaborone then sells the vehicles to the clients at the same price, charging VAT and adding loan arrangement fees plus interest. But the bank would not put a mark-up on the price of the vehicles, which makes the VAT incurred similar to the VAT it charges on the vehicles. In this practice, the bank makes these sales under what it refers to as installment sale agreements.
Between 2011 and 2012 BURS assessed Bank Gaborone and demanded P3 890 964.49 as VAT withheld by the bank. The amount of P3.9 was perceived to be unpaid VAT as a result of mistreatment of the vehicle finance leases. In the BURS Commissioner’s opinion in 2014, he stated that for purposes of VAT, the bank supplies both taxable and exempt supplies. The Commissioner concluded that what Bank of Gaborone was doing was provision of loans which it earned interest and it therefore miscalculated its VAT apportionment ratio by including the financed vehicle sales as subject to VAT.
Bank Gaborone was aggrieved by the taxman’s assessment saying that even though it grants loans, which are an exempt supply, it also grants vehicle finance by way of installment sale agreements of which the acquisition cost of the vehicle and its sale are a taxable supply for VAT purposes. Bank Gaborone took its grievances to Board of Adjudicators, a tax court set-up by the Ministry of Finance and Economic Development to expedite the resolution of tax disputes.
The Board of Adjudicators decided that the bank’s vehicle sale arrangements were not ‘finance leases’ subject to VAT, upholding BURS’s judgment that Bank of Gaborone underpaid VAT. The Board of Adjudicators also looked into the Banking Act questioning the practice of banks dealing in vehicles. As if that was enough, the bank’s appeal to the High Court was also rebuffed as BURS and the Board of Adjudicators’ findings were upheld leading to Bank of Gaborone parting with P3.9 million which was destined to the taxman’s coffers as unpaid VAT.
The highest court in the land, Court of Appeal, last week quashed both the Board of Adjudicators and High Court concluding that the two were wrong in their judgment. Court of Appeal said the two misdirected themselves by considering whether the vehicle sales qualified as ‘finance lease’ sales for VAT instead of considering whether the bank’s standard installment agreement was ‘a taxable supply’ or an ‘exempt supply.’
Emphasizing its landmark ruling, much to the delight of bankers, Court of Appeal said the High Court was wrong to opine that since the bank did not add value to the price of vehicles, the arrangement could not be held to be subject to VAT, a tax which requires that value be added.
When delivering another blow to the taxman, the Supreme Court found fault on BURS for contending that since the vehicles were immediately sold to the bank’s clients on purchase, the bank at no time owned the assets and therefore it did not make sales but merely provided finance. Bank Gaborone’s appeal was upheld by the higher court with costs as the Commissioner’s assessment was annulled while the taxman was ordered to refund the bank its P3.9 million.
The significance of the landmark judgment to banking sector and tax fraternity
This judgment will remain significant in the tax history with regard to the banking sector. All in all the judgment clear air over the treatment of installment sale agreements, a well-established practice among banks, which has in practice, always been subjected to VAT. “It makes it certain that banks can include asset sales in the determination of their VAT apportionment ratio. This brings clarity as to what affects the said ratio, which is so critical in accounting for the VAT for banks, considering the magnitude of the amounts involved in such transactions,” said one tax expert interviewed by this publication.
According to this tax observer, whilst the Court of Appeal held that the bank’s installment sale agreements were correctly subject to VAT on the basis that they are ‘hire purchase agreements,’ it would appear that the bank’s installment arrangements were in fact ‘finance leases.’ It has always been the issue in the case, a headache also for Board of Adjudicators and High Court, whether the sales were in fact finance leases.
However the tax expert told this publication that the critical issue is that the installment sale agreements by banks have always been subject to VAT, which was confirmed by the Court of Appeal.“The issue of whether they are hire purchase agreements or finance leases does not change the VAT treatment of such sale agreements. The Court of Appeal ruling comes with so much relief to the banking sector which was under scrutiny by the taxman,” said a tax expert.
The Bulb World Chief Executive Officer (CEO) and entrepreneur, Ketshephaone Jacob has been selected as a 2021 Top 50 Africa’s Business Hero.
Jacob was chosen from a pool of 12,000 applicants – many of whom are highly-skilled and accomplished entrepreneurs.
Africa’s Business Hero, sponsored by technology entrepreneur, Jack Ma, aims to identify, support and inspire the next generation of African entrepreneurs who are making a difference in their local communities, working to solve the most pressing problems, and building a more sustainable and inclusive economy for the future.
The initiative is as inclusive as possible and applications were open in English and French to entrepreneurs from all African countries, all sectors, and all ages who operate businesses formally registered and headquartered in an African country, and that have a 3 year-track record.
Every year, finalists are selected to compete in the ABH finale pitch competition and participate in a TV Show that will be broadcast online and across the continent.
The finalists will compete for a share of US $1.5 million in grant money.
The Bulb World, is home grown LED light manufacturing company, which was partly funded by Citizen Entrepreneurial Development Agency (CEDA) at the tune of P4 million, to manufacture LED lighting bulbs for both commercial and residential use in 2017.
The Bulb World operate from the Special Economic Zone of Selibe Phikwe. Early this year, The BulB World announced its expansion to South Africa, setting in motion its ambitious Africa expansion plan.
During the first quarter of 2021, production in Botswana’s economic nucleus- the mining sector contracted by 12 percent. This is according to Mining Production Index released by Statistics Botswana this week.
The country’s central data body revealed that Index of Mining production stood at 74.4 during the first quarter of 2021, showing a negative year on-year growth of 12.0 percent, from 84.6 registered during the first quarter of 2020.
The main contributor to the decline in mining production came from the Diamonds sector, which contributed negative 11.7 percentage points. Soda Ash was the only positive contributor in the mining production, contributing 0.1 of a percentage point. However Soda Ash’s contribution was insignificant to offset the negative contribution made by Diamonds.
The quarter-on-quarter analysis by Statistics Botswana experts shows an increase of 16.3 percent from the index of 64.0 during the fourth quarter of 2020 to 74.4 observed during the period under review.
Diamond production decreased by 12.1 percent during the first quarter of 2021 compared to the same quarter of the previous year. The decrease was as a result of planned strategy to align production with weaker trading conditions mostly linked to Covid-19 protocols restrictions.
Botswana’s diamond sector is underpinned by Debswana, the country’s flagship rough producer- a 50-50 joint venture between government and global mining giant De Beers Group. The other producer is Canadian based Lucara Diamond Corp through its wholly owned Karowe Mine which is a relatively small but significant production that has made a name for itself worldwide with rare diamond recoveries of unprecedented carat size.
On the other hand, quarter-on quarter analysis shows that production has improved, registering a positive growth of 17.5 percent during the first quarter of 2021 compared to the preceding quarter – 2020 Q4.
Though production was significantly lower in the first quarter, the two producers ended Q2 with rare diamond recoveries. Debswana early last month found the world’s third largest gem diamond – weighing 1098 carat at Jwaneng Mine, its flagship gem quality diamonds producer, also regarded the world’s richest diamond mine.
A week later Lucara announced its second biggest recovery, the 1174 carat clivage near-gem dug from its Karowe Mine. The diamond is the world third in carat size after the plus-3000 carat Cullinan found in South Africa back in 1905 and the 1758 carat Sewelo unearthed at its Karowe mine in 2019. Debswana and Lucara are investing billions of pulas in underground mining projects to extend the life of its mines, Jwaneng & Karowe respectively.
In terms of Gold which is produced at Mupani mine near Botswana’s second city of Francistown output decreased by 17.9 percent during the first quarter of 2021 compared to the same quarter of the previous year.
Similarly, quarter-on-quarter analysis reflects that production decreased by 21.4 percent during the first quarter of 2021, compared to the preceding quarter. The decrease was as a result of the deteriorating lifespan of the mine as well as the impact of COVID-19 which slowed down the mining activities.
Soda Ash production increased by 11.1 percent during the first quarter of 2021 compared to the same quarter of the previous year. In terms of quarter-on-quarter Soda Ash production also showed an increase, picking up by 2.1 percent during the period under review. The increase in production is attributable to the effectiveness of the plant following refurbishment which occurred in the third quarter of 2020.
Salt production decreased by 34.0 percent during the first quarter of 2021, compared to the same quarter of the previous year. Similarly, the quarter-on-quarter analysis shows that salt production registered a decrease of 32.9 percent during the period under review. Both salt and Sodash are produced by partly government owned Botswana Ash (BotsAsh) operating from Sowa town near Makgadikgadi pans.
Coal production decreased by 11.2 percent during the first quarter of 2021, compared to the corresponding quarter of the previous year. The decrease was attributed to the reduced demand from Morupule B Power Station following the remedial works being undertaken, as one boiler was in operation during the period under review.
Although production fell, Statistics Botswana says there was no shortfall in supply of coal due to stockpiling. On the other hand, the quarter-on-quarter comparison shows that coal production increased by 20.4 percent compared to the preceding quarter.
Botswana’s flagship coal producer is Morupule Coal Mine; a wholly state owned mining company located in Palapye producing primarily for Botswana Power Corporation (BPC)’s power generation plants Morupule A & B.
The other coal producer is Botswana Stock Exchange listed Minergy which operates a 390 MT Coal Resource mine in Masama near Media in the southwestern edge of the Mmamabula Coalfields.
Department of Mines in the Ministry of Mineral Resources, Green Technology & Energy Security has awarded mining licence to Tshukudu Metals-a subsidiary of Aussie firm Sandfire Resources ,giving the company a green light to start piecing the ground at its Motheo Copper Project near Gantsi.
Lefoko Moagi, minister in charge of mineral resources in Botswana confirmed to weekendpost on Tuesday. Minister Moagi revealed that “the licence has been approved , but Sandfire Resources as a listed company will report to its shareholders and investors then make an official public statement” he said.
Based on a forecast copper price of US$3.16/lb (reflecting current long-term consensus pricing) the Base Case 3.2Mtpa – Ghantsi copper project is forecast to generate US$664 million (over P7 billion) in pre-tax free cash-flow and US$987 million (over P10 billion) in EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation), at a forecast all-in sustaining cost of US$1.76/lb over its first 10 years of operations.
In December 2020, the Board of Sandfire Resources approved the commercial development of the Motheo Copper Mine located in the Kalahari Copper Belt in Botswana, marking a key step in its transformation into a global, diversified, and sustainable mining company.
Tshukudu Metals Botswana (Pty) Limited (Tshukudu) a 100% owned subsidiary will be the owner and operator of the Motheo Copper Mine which is scheduled to produce up to 30,000 tonnes per annum of copper in concentrate over a 12 year mine life.TMB is targeting development of its Motheo Copper Mine in 2021 and 2022, with its first production in 2023.
GOVERNMENT NOT TAKING UP 15 % STAKE ON OFFER
Beginning of this year presentations were made to the Department of Mines as part of the Mining Licence approval process and to the Ghanzi Regional Council, additional information was requested by Department of Mines in April and was duly supplied by the company.
As part of the Mining Licence approval process, the Government of Botswana has a right to acquire up to a 15% fully contributing interest in all mining projects locally. Quizzed on whether government through Mineral Development Corporation Botswana (MDCB) would be taking up stake in the project Minister Moagi said, “No consideration is being made on that regard”.
“Government is not considering taking up a stake in the Ghantsi Copper Mine project, every opportunity is assessed on all risks, but Government makes money all the while from leases, taxes and royalties, remember if you take stake you are liable for liabilities of the project as well,” Moagi said.
Last month Sandfire announced that it has awarded over P5 billion worth mining contract to African Mining Services (AMS), a subsidiary of Perenti, to deliver the open cast operation.
The contract, which has an estimated value of US$496 million (over 5 billion), is the largest single operational contract for the new Motheo Project covering a period of 7 years and 3 months, with provision for a one-year extension.
The contract according to Sandfire Resources was awarded following a competitive 3-stage tender process which saw a number of key factors taken into consideration when selecting the preferred contractor.
These included Citizen Economic Empowerment, safety culture, equipment suitability and availability, commercial terms and identified improvement opportunities. Under the terms of the contract, AMS has agreed to form a 70:30 Joint Venture with a suitable local Botswana partner or partners.
The JV is expected to be finalized ahead of commencement of mining in early 2022. African Mining Services has been operating in Africa for over 30 years. AMS’ parent company, ASX listed diversified mining services group Perenti, already has a presence in Botswana through Barminco, their underground mining division, at the large-scale Khoemacau Copper Mine located 200km north-east of Motheo.
Last month Sandfire executives said the award of the open pit mining contract represents another key milestone in advancing the Motheo Project towards production, with all components of the contract in line with the key parameters outlined in the December 2020 Definitive Feasibility Study (DFS).
The company said full-scale construction of the US$279 million (over P 3 billion ) mine development is expected to commence immediately upon receipt of the Mining Licence, with mining scheduled to commence in early 2022 ahead of first production in early 2023. This week Sandfire Resources advertised over 10 positions in calling on applications from geologists, mining engineers and geotechnical engineers.
The Motheo mine has an initial mine life of 12.5 years based on production from the T3 pit. The initial development is expected to generate approximately 1,000 jobs during the construction phase and 600 direct full-time jobs during operations, with at least 95% of the total mine workforce expected to be made of up of Botswana citizens.
Later in the week Sandfire Resources announced in the company website that it has received the licence. Sandfire’s Managing Director and CEO, Mr Karl Simich, said the award of the Mining Licence represented a major milestone that would see a significant increase in construction and development activities on site.
“We are absolutely delighted to now be in a position to move to full-scale construction at Motheo, with our construction crews expected to mobilise to site over the next few days. I would like to thank the Government of Botswana for their support throughout the approvals process, which will see Motheo come on-stream in 2023 as one of very few new copper mines commencing production globally.”
Simich said the project is expected to generate approximately 1,000 jobs during construction and 600 full-time jobs during operations, and represents the foundation for Sandfire’s long-term growth plans in Botswana.
“Our vision is that Motheo will form the centre of a new, long-life copper production hub in in the central portion of the world-class Kalahari Copper Belt, where we hold an extensive ground-holding spanning Botswana and Namibia,” he said.