Income Tax Act Amendment alters IFSC Regime
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 These repealed operations stated above normally give rise to fees such as royalties and management and consultancy fees and therefore entities supplying these services were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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Stargems Group establishes Training Center in BW
Internationally-acclaimed diamond manufacturing company StarGems Group has established the Stargems Diamond Training Center which will be providing specialized training in diamond manufacturing and evaluation.
The Stargems Diamond Training Institute is located at the Stargems Group Botswana Unit in Gaborone.
“In accordance with the National Human Resource Development Strategy (NHRDS) which holds the principle that through education and skills development as well as the strategic alignment between national ambitions and individual capabilities, Botswana will become a prosperous, productive and innovative nation due to the quality and efficacy of its citizenry. The Training Centre will provide a range of modules in theory and in practice; from rough diamond evaluation to diamond grading and polishing for Batswana, at no cost for eight weeks. The internationally- recognized certificate offered in partnership with Harry Oppenheimer Diamond Training School presents invaluable opportunities for Batswana to access in the diamond industry locally and internationally. The initiative is an extension of our Corporate Social Investment to the community in which we operate,” said Vishal Shah, Stargems Group Managing Director, during the launch of the Stargems Diamond Training Center.
In order to participate in this rare opportunity, interested candidates are invited to submit a police clearance certificate and a BGCSE certificate only to the Stargems offices. Students who excel in these programs will have the chance to be onboarded by the Stargems Group. This serves as motivation for them to go through this training with a high level of seriousness.
“Community empowerment is one of our CSR principles. We believe that businesses can only thrive when their communities are well taken of. We are hoping that our presence will be impactful to various communities and economies. In the six countries that we are operating in, we have contributed through dedicating 10% of our revenues during COVID-19 to facilitate education, donating to hospitals and also to NGOs committed to supporting women and children living with HIV. One key issue that we are targeting in Botswana is the rate of unemployment amongst the youth. We are looking forward to working closely with the government and other relevant authorities to curb unemployment,” said Shah.
Currently, Stargems Group has employed 117 Batswana and they are looking forward to growing the numbers to 500 as the company grows. Majority of the employees will be graduates from the Stargems Diamond Training Center. This initiation has been received with open arms by the general public and stakeholders. During the launch, the Minister of Minerals and Energy, Honorable Lefoko Moagi, stated that the ministry fully endorses Stargems Diamond Training and will work closely with the Group to support and grow the initiative.
“As a ministry, we see this as an game changer that is aligned with one of the United Nations’ Six Priority Sustainable Development Goals, which is to Advance Opportunity and Impact for Diversity, Equity, and Inclusion (DEI). What Stargems Group is launching today will have a huge impact on the creation of employment in Botswana. An economy’s productivity rises as the number of educated workers increases as its skilled workmanship increases. It is not a secret that low skills perpetuate poverty and widen the inequality gap, therefore the development of skills has the potential to contribute significantly to structural transformation and economic growth by enhancing employability and helping the country become more competitive. We are grateful to see the emergence of industry players such as Stargems Group who have strived to create such opportunities that mitigate the negative effects of COVID-19 on the economy,” said the Minister of Minerals and Energy.
Food import bill slightly declines
The latest figures released by Statistics Botswana this week shows that food import bill for Botswana slightly declined from around P1.1 billion in November 2022 to around P981 million in December during the same year.
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Moody’s Reaffirms African Trade Insurance’s A3 Rating & Revises Outlook to Positive
Moody’s Investors Service (“Moody’s”) has affirmed the A3 insurance financial strength rating (IFSR) of the African Trade Insurance Agency (ATI) for the fifth consecutive year and changed the outlook from stable to positive.
Moody’s noted that the change in outlook to positive reflects the strong growth in ATI’s membership base – that has resulted in improved portfolio diversification, strengthened capital adequacy, and the good profitability despite the challenging operating environment. In addition, ATI benefits from its preferred creditor status (PCS) amongst sovereign member states which protects it from the risk of default by member sovereigns through securing recoveries against claims paid on guarantees.
The strong membership and equity growth are some of the key considerations for the consistent reinstatement of ATI’s A/Stable rating by Standard & Poor’s and Moody’s rating, over the years. Also supporting the rating affirmation are; consistent improvement in financial performance, commitment of its shareholders who continue to uphold the preferred creditor status, its high quality and conservative investment portfolio as well as strong relationships with a number of global reinsurers that provide significant risk-bearing capacity.
With the change in outlook to “positive”, ATI is now better placed to provide enhanced support to its member countries, attract additional shareholding and grow its portfolio. The positive outlook is an indication that if ATI continues to demonstrate its strong underwriting performance and ability to recover claims under the preferred creditor arrangements, among other factors, an upward pressure towards an upgrade may be generated. The Moody’s press release can be accessed from here
Commenting on the rating, Africa Trade Insurance Chief Executive Officer Manuel Moses said: “This positive revision is in line with our 2023 – 2027 strategic objectives in which we set to improve our rating outlook to positive in the first year, and achieve an upgrade of at least “AA”/Stable rating by both Moody’s and S&P within this Strategic Plan period. We aim to achieve this by doubling our exposures and increasing our capital to more than USD1 billion.”
ATI’s mandate is to provide trade-credit and political risk insurance, as well as other risk mitigation products to its member countries and related public and private sector actors. These insurance products not only directly encourage and facilitate foreign direct investment as well as local private sector investment in our member countries, but also contribute to intra- and extra-African trade.
About The African Trade Insurance Agency
ATI was founded in 2001 by African States to cover trade and investment risks of companies doing business in Africa. ATI predominantly provides Political Risk, Credit Insurance and, Surety Insurance. Since inception, ATI has supported US$78 billion worth of investments and trade into Africa. For over a decade, ATI has maintained an ‘A/Stable’ rating for Financial Strength and Counterparty Credit by Standard & Poor’s, and in 2019, ATI obtained an A3/Stable rating from Moody’s, which has now been revised to A3/Positive.