The 2018 amendment of the income tax regime which took effect from December last year has caused a stir in the property industry with some companies crying foul and proposing a re-look into the new dispensation.
PrimeTime Properties, one of the leading property companies in Botswana, also operating in Zambia reported this week that the Income Tax amendment 2018 was hurting its investor take home as a company listed on Botswana Stock Exchange. The company further went on to highlight that the current income tax at play paints a blur picture on their business future outlooks. “We cannot talk about the Group’s future prospects without highlighting the effect on our investors of the recently introduced Income Tax Amendment Act 2018.
As advised in the recent interest payment announcement made in February 2019, this Act limits the deduction of net interest expense in calculating taxable income and will result in the Company suffering income tax on its profits prior to their distribution as debenture interest,” writes PrimeTime executives in its interim financial results released on Wednesday. The company shared that the Act which was passed in December 2018 retrospectively affects the Group current financial period commencing 1 September 2018 as no transitional provisions for its implementation have been imparted.
New African Properties another BSE listed group owning assets such as Riverwalk mall shared the same sentiment when reporting for their half year financial performance ended January 2019. The company highlighted that following Income Tax Amendment Act promulgated in late December 2018, it has emerged that the extent to which variable rate Loan Stock (VRLS) companies are able to treat debenture interest declared to unit holders as a deduction in determining taxable income will be limited
New African Property further revealed that it has initiated engagement with regulators to investigate avenues for reinstating the VRLS exemption, which retain the principle of VRLS companies being a conduit for net rentals earned in line with globally accepted norms. “We are seeking to reverse or delay the impact of this amendment on the current financial year, especially when considering that it was promulgated five month into the financial period” said NAP in its report released last month.
The BSE listed retail group says they have successfully assessed and qualified the maximum possible impact for the first half to be a loss of P10.2 million from its distributable dividend in the event that no favorable solution is reached but, given the ongoing engagements referred to above, no provision has been made in these results for this tax charge. “ Should we be unsuccessful in obtaining any revision to the amendment as currently enacted, the tax charge will be recognized in the year results” said NAP.
NAP says its anticipation is that it will be able to fund payment of the initial tax liability for the current financial year from available cash without impacting the current year’s total distributions. However, such an approach will not be sustained in future periods and the amendment will thus impact on the quantum of the future distributions if it remains in force as promulgated.
This week Prime Time Properties shared that its board of directors was currently assessing what options are available to the Group in order to protect the unitholders interests in this regard, as well as working actively with the listed property sector to find a workable long-term solution.
For Prime time which was reporting for their half year period ended February 2019 estimates of the taxation payable have been made in these interim financials and the provisional tax payable of P4.5m for the period has been provided for. The company communicated that the interest distribution already paid for the 4 months to 31 December 2018 was adjusted for the tax cost.
The 2018 Income Tax amendment Bill was passed parliament late last year after an urgent proposition to legislators by Minister of Finance & Economic Development Kenneth Matambo with a view to clean Botswana and remove the tax haven tag that was painted about the country worldwide.
When presenting the bill then, Minister Matambo told lawmakers that it was critical that the amended Bill be passed to enable Botswana to meet the requirements with the Forum on Harmful Tax Practices, an initiative of Organization for Economic Cooperation and Development (OECD). “Such amendment is mainly to remove the features that have been identified as potentially harmful by the Forum on Harmful Tax Practices. Based on the commitment to amend the Act, Botswana is scheduled for a final review by the Forum on Harmful Tax Practices in January 2019” he said
He convinced Members of Parliament that the passage of the Bill was a move imperative to put Botswana on the right path, so as to be able to pass the January 2019 review by this Forum on Harmful Tax Practices. Matambo emphasized to parliament that it was important for Botswana to amend the act in order to remove what he termed “the ring-fencing in order to comply with the requirements of the Forum on Harmful Tax Practices” and also to revitalize the sector. The amendment‘s effect was that that the process of offshore trade would still be taxed at 15 per cent, while those of domestic trade will be taxed at the normal rate of 22 per cent.
Ever since the amendment was announced observers have been sharing different views about the act , Tumelo Rannau a local tax expert and commentator observed in his series of opinion publication on this newspaper that though some developments such as restricting trading to related parties is a welcome development about move as it is aligned to international practice, the new amendment may result in the country being less competitive compared to countries that we have been competing with such as Seychelles and Mauritius.â€¨â€¨
“This may lead to loss in revenue in terms of directors’ fees, company secretary fees, legal fees, audit fees, and general business expenses to those that provided support services. Income that would otherwise be earned through spending on transport and accommodation by foreign investors visiting the country is also likely to be lost. Though it is always good to get accolades from organizations such as OECD, it is important to consider the country’s needs and strive towards ensuring that unemployment is reduced” he said.
The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.
The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.
University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.
According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.
The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”
The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”
According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”
The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.
Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”
According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”
Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.
The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.
Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.” He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.
It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.
He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.
The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.
On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.
BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”
Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.
In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.
Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.
Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.
The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.
The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.
“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.