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Income Tax Act Amendment alters IFSC Regime

Tumelo Rannau

International Financial Service Centre (IFSC) is one of the most common tax regimes used in the world to promote investment. Botswana, like other countries, also has this regime as one of the incentives available to investors who have interest in doing business in Botswana.

Tax benefits available for IFSC companies in Botswana include a corporate tax rate of 15% (compared to the normal 22%) for dealings with non-residents and no tax on capital gains on shares in an IFSC company. Other tax benefits are in relation to exemption of IFSC companies from the obligation to deduct withholding tax on management and consultancy fees, commercial royalties, interest and dividends paid to non-residents.

All these benefits are geared towards encouraging meaningful investment in the country with the hope of creating employment and diversifying the economy. The IFSC tax regime has recently been amended by the new Income Tax Amendment Act 2018 as it was considered harmful to the Botswana economy.

What was harmful about IFSC?

The ever rising pressure on countries to protect revenue against Base Erosion and Profit Shifting (BEPS) has led to Organization of Economic Cooperation and Development (OECD) developing some action steps and a framework on transparency. Action 5 of the OECD BEPS Action steps deals with harmful tax practices and through the Forum on Harmful Tax Practices (FHTP), our IFSC regime was identified among those that may have potentially harmful features.

It should be noted that being potentially harmful means that there are no risks yet identified thus far but in the future, the country may be exposed to tax loss risks if the features that are identified as being potentially harmful are not attended to. Other tax jurisdictions were outright identified as having harmful practices. To address the harmful practices, the Income Tax Act (The Act) was recently amended to remove the, ‘exploitation of intellectual property,’ and, ‘development and supply of computer software for use in the provision of other approved financial operations,’ as approved financial operations.

Further, the IFSC operations have been restricted to those in which the Botswana IFSC trades with its related or associated entities. Effectively, this minimizes the expenses that local entities incur by dealing with non-residents such as management fees, interest and commercial royalties. These repealed operations stated above normally give rise to fees such as royalties and management and consultancy fees and therefore entities supplying these services were exempt from withholding tax on royalties and consultancy fees when paying them to non-residents.

Additionally, such entities could also be provided with loans and have to pay huge interest bills on those loans but still, no tax would be deducted as long as they traded with non-residents. This therefore meant that all these transactions exempted from withholding tax would reduce tax collections for BURS.  Additionally, the IFSC entities could claim the expenses paid to non-residents as tax deductions, reducing the tax base, not mentioning that they would also probably be taxed at 15% instead of 22%. The concern of the FHTP is not the benefit arising to local entities from the IFSC regime but the tax losses that the country was experiencing.

Other concerns regarding the IFSC were in relation to ring-fencing of income by only sourcing financing from foreign investors and that would entail local entities having to incur significant interest bills, which could only be taxed in other countries, given that the payments were exempt from tax in Botswana.  In simple terms the benefits above only benefited foreign investors and excluded local investors who may have a larger impact on development of the economy.

As mentioned above, the Act has restricted IFSC status to trading between IFSC entities with its associated or related parties only, that is, companies in which the IFSC has at least 20% of the shareholding, as per the Act. The old regime allowed for IFSC companies to trade with third parties outside the country and other IFSC companies.

Effects of the amendment on local economy

The full utilization of the IFSC regime has been a challenge in Botswana especially due to infrastructural issues such as water and electricity and permit issues. Though some developments such as restricting trading to related parties is a welcome development 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.

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.

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Business

Gambling Authority tender dangles as a jittery lottery quandary

30th November 2020
SEFALANA MD: CHANDRA CHAUHAN

Lucrative and highly anticipated national lottery tender that saw several Batswana businessmen partnering to form a gambling consortium to pit against their South African counterparts, culminates into a big power gamble.

WeekendPost has had a chance to watch lottery showcase even before the anticipated and impending national lottery set-up launches. A lot has been a big gamble from the bidding process which is now set for the courts next year January following a marathon legal brawl involving the interest of the gambling fraternity in Botswana and South Africa.

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The uncertainty of getting the next meal in Botswana

30th November 2020
uncertainty of getting the next meal

Households representing more than half of Botswana’s population-mostly residing in rural areas- do not know where their next meal will come from, but neither do they take into consideration the quality and/or quantity of the food they consume.

This is according to the latest Prevalence of Food Insecurity in Botswana report which was done for the 2018/19 period and represents the state of food insecurity data even to this time.
The Prevalence of Food Insecurity was released by Statistics Botswana and it released results with findings that the results show that at national level 50.8 percent of the population in Botswana was affected by moderate to severe food insecurity in 2018/19, while 22.2 percent of the population was affected by severe food insecurity only.

According to the report, this translates to 27 percent of the population being food secure that is to say having adequate access to food in both quality and quantity. According to Statistician General, Burton Mguni, when explaining how the food data was compiled, Food and Agriculture Organization of the United Nations (FAO), is custodian of the “Prevalence of Undernourishment (PoU)” and “Prevalence of moderate or severe food insecurity in the population based on the Food Insecurity Experience Scale (FIES)” SDG indicators, for leading FIES data analysis and the resultant capacity building.

“The FIES measures the extent of food insecurity at the household or individual level. The indicator provides internationally comparable estimates of the proportion of the population facing moderate to severe difficulties in accessing food. The FIES consists of eight brief questions regarding access to adequate food, and the questions are answered directly with a yes/no response. It (FIES) complements the existing food and nutrition security indicators such as Prevalence of Undernourishment.

According to the FIES, with increasing severity, the quantity of food consumed decreases as portion sizes are reduced and meals are skipped. At its most severe level, people are forced to go without eating for a day or more. The scale further reveals that the household’s experience of food insecurity may be characterized by uncertainty and anxiety regarding food access and compromising the quality of the diet and having a less balanced and more monotonous diet,” says Mguni.

The 50.8 percent of the population in Botswana which was affected by moderate to severe food insecurity are characterized as people experiencing moderate food insecurity and face uncertainties about their ability to obtain food. These people have been forced to compromise on the quality and/or quantity of the food they consume according to the report on food insecurity.

Those who experience severe food insecurity, the 22.2 percent of the population, are people who have typically run out of food and, at worst, gone a day (or days) without eating. According to the statistics, rural area population experienced moderate to severe food insecurity at 65 percent while urban villages were at 46.60 percent and cities/town were at 31.70 percent. Those experiencing the most extreme and severe insecurity were at rural areas making 33.10 percent while urban villages and towns were at 11.90 percent and 17.50 respectively.

According to a paper compiled by Sirak Bahta, Francis Wanyoike, Hikuepi Katjiuongua and Davis Marumo and published in December 2017, titled ‘Characterization of food security and consumption patterns among smallholder livestock farmers in Botswana,’ over 70 percent of Botswana’s population reside in rural areas, and majority (70%) relies on traditional/subsistence agriculture for their livelihoods.

The study set out to characterize the food security situation and food consumption patterns among livestock keepers in Botswana. “Despite the policy change, challenges still remain in ensuring that all persons and households have access to food at all times. For example, during an analysis of the impacts of rising international food prices for Botswana, BIDPA reported that food prices tended to be highest in the rural areas already disadvantaged by relatively low levels of income and high rates of unemployment,” said the study.

According to the paper, about 9 percent of households were found to be food insecure and this category of households included 6 percent of households that ranked poorly and 3 percent that were on the borderline according to the World Food Programme’s (WFP) definition of food security.

Media reports state that the World Bank has warned that disruption to production and supply chains could ‘spark a food security crisis’ in Africa, forecasting a fall in farm production of up to 7 percent, if there are restrictions to trade, and a 25 percent decline in food imports.

Food security in Botswana or food production was also attacked by the locust pandemic which swept out this country’s vegetation and plants. The locust is said to have contributed to 25 percent loss in production.

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Business

Solid demand for diamonds towards the ‘gift’ season

30th November 2020
Diamonds

Global lockdown have been a thorn in diamonds having shiny sales, but a lot of optimism shows with the easing of Covid-19 restrictions, the precious stones will be bought with high volumes towards festive season. The diamond market is however warned of the resurgence of Covid-19 in key markets presents ongoing risks amid the presence and optimist about the new Covid-29 vaccines.

The latest findings published as De Beers Group’s latest Diamond Insight ‘Flash’ Report, which looks at the impact of the pandemic on relationships and engagements, has revealed that in the US that more couples than ever are buying diamond engagement rings. Bridal sales is mostly the primary source of diamond jewellery demand in recent months, De Beers said.

According to De Beers, interviews with independent jewellers around the US revealed that the rate of couples getting engaged has increased compared with the period when Covid-19 first had an impact in the US in the spring.

“In addition, despite challenging economic times, consumers were spending more than ever on diamond engagement rings – often upgrading in colour, cut and clarity, rather than size. Several jewellers speculated that with consumers spending less on elaborate weddings and/or honeymoons in the current environment, they had more to spend on choosing the perfect ring,” said De Beers.

According to De Beers, a national survey of 360 US women in serious relationships, undertaken in late October in collaboration with engagement and wedding website, The Knot. This survey is said to have found that the majority of respondents (54%) were thinking more about their engagement ring than the wedding itself (32%) or the honeymoon (15%), supporting jewellers’ hypothesis that engagement ring sales were benefiting from reduced wedding and travel budgets in light of Covid-19 restrictions.

When it came to researching engagement rings, online was by far the predominant channel for gaining ideas/inspiration at 86% of consumers surveyed, with 85% saying they had saved examples of styles they liked, according to De Beers. According to the survey, only a uarter of respondents said they had looked in-store at a physical location for design inspiration.

“For many couples, the pandemic has brought them even closer together, in some instances speeding up the path to engagement after forming a deeper connection while experiencing lockdown and its associated ups and downs as a partnership. Engagement rings are taking on even greater symbolism in this environment, with retailers reporting couples are prepared to invest more than usual, particularly due to budget reductions in other areas,” De Beers CEO Cleaver said.

According to De Beers Group, its Diamond Insight Flash Report series is focused on understanding the US consumer perspective in light of Covid-19 and monitoring how it evolves as the crisis evolves. Also, the company said, it is augmenting its existing research programme with additional consumer, retailer and supply chain touch-basis to understand the pain points and the opportunities for stakeholders across the diamond pipeline.

Demand for diamonds is as hard and resilient as the precious stone itself. De Beers pocketed US$ 450 million in its recently held ninth rough diamond sales cycle, and the company says it is more flexible approach to rough diamond sales during the ninth sales cycle of 2020, with the Sight event extended beyond its normal week-long duration.

“Steady demand for De Beers Group’s rough diamonds continued in the ninth sales cycle of the year, reflecting stable consumer demand for diamond jewellery at the retail level in the US and China, and expectations for reasonable demand to continue throughout the holiday season. However, the resurgence of Covid-19 infections in several consumer markets presents ongoing risks,” said De Beers CEO Bruce Cleaver recently.

High expectations are on diamonds being a sentimental gift for holiday season or as the most fetished gift. However the ninth cycle was lower than the eighth which registered US$ 467 million. For the last year period which corresponds with the current one, De Beers managed to raise US$ 400.

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