The new income tax act amendment: what are the implications?
Business
TUMELO RANNAU
On the 12th of December 2018, Parliament passed some Income Tax Act amendments that are aimed at maximising domestic revenue collection in the country. The main change to the law is the introduction of what are known as Transfer Pricing (“TP”) provisions. TP concerns itself with ensuring that transactions that happen between and among related entities are not affected by their relationship i.e. are arm’s length. In general, related companies tend to have relaxed dealings such as interest-free loans, provision of goods at reduced prices or at no cost etc. This eventually affects the revenue that the Botswana Unified Revenue (“BURS”) collects, hence the introduction of the TP rules.
Section 36 on tax avoidance has been amended by deleting section 36 (2) and by removing the phrase “or is entered into or carried out otherwise than as a transaction between independent persons dealing at arm's length” in subsection one. The two will be replaced with section 36A that introduces Transfer Pricing (TP) regulations that detail conditions that are consistent with the arm’s length transactions.
The new subsection will focus on avoidance of tax and leave the arm’s length principle to TP regulations. The Income Tax Act (The Act) states that such rules on arm’s length transactions will be prescribed by the Minister of Finance and Economic Development (“The Minister”). The Arm’s length principle states that transactions between parties should be on a commercial basis with the involved parties being independent from each other and cannot control or influence over the other party.
It is expected that the Minister will provide taxpayers with options of either using the United Nations (“UN”) or the Organisation of Economic Cooperation and Development (“OECD”) models in preparing their TP documentation. It should be noted that the regulations will apply to related parties (persons who have control or influence over each other) regardless of whether the other entities are resident or non-resident for tax purposes. The Act also introduces a provision for Advance Pricing Agreement (“APA”) where taxpayers will be able to get into fixed price agreements with BURS. These are normally put in place to avoid TP disputes between taxpayers and revenue authorities during TP audits.
Though the Act does not prescribe how long the APA will be valid, however the international best practice is normally 5 years. The Minister is expected to issue eligibility criteria for application for an APA. Further, the deductibility of interest for tax purposes will now be capped at 30% of Earnings before Interest, Tax, Depreciation and Amortization across all sectors save for banking and insurance companies. This provision will also apply to mining operations and the 3:1 ratio for mining entities will no longer be applicable.
Non-compliance with the transfer pricing regulations comes with some penalties that will hit hard on both multi-nationals and local group companies. Penalties for failure to produce TP documentation will range between P250, 000 and P500, 000. Additionally where an entity had failed to comply with ensuring that they transact at market rates as if dealing with third parties, they will be liable a to 200% penalty on the tax that was lost due to a tax avoidance scheme or transaction. The legislation will not only be useful to BURS but to taxpayers as they will be able to do their tax planning using the recommended procedures. The legislation will come into effect after Presidential assent.
Other amendments are in relation to International Financial Service Centre Companies (“IFSCs”). This is in response to worries by the Forum on Harmful Tax Practices (“FHTP”) that the country’s IFSC regime has potentially harmful features. “Intellectual property exploitation” and “development and supply of computer software for use in the provision of other approved financial operations” will no longer be considered as approved financial operations.
Therefore any entities that were exclusively offering such services will no longer be considered IFSC companies and will now be taxed at 22% instead of the 15% that is currently applicable. Furthermore an IFSC company is now defined as “a company incorporated in Botswana to provide any of the approved financial operations under section 138(7) to its associated or related parties”. Initially there was no clear definition of IFSC Company but there was a list of the approved financial operations mainly tailored towards dealing exclusively with non-residents and other IFSC companies.
Tumelo Rannau is a practicing Tax Consultant, writes on his own capacity.
Business
Grit divests from Letlole La Rona
Grit Services Limited, a member of the pan African real estate group, London Stock Exchange listed Grit Real Estate Income Group is divesting from Letlole La Rona Limited (LLR), a local real estate company established by government investment arm Botswana Development Corporation over a decade ago.
The Board of Directors of Letlole La Rona Limited this week announced in a statement to Unitholders that Grit Services Limited (‘Grit’) has informed them of its intention to exit its investment in the company.
Grit has been a material shareholder in LLR since 2019. On 07 March 2023, Grit sold 6 421 000 linked units, representing 2.29% of the Company’s total securities in issue, at a market value of BWP 22 537 710.
This trade follows previous sales of 6.79% in December 2022, as communicated to Unitholders on 10 January 2023, as well as a further sale of 4.78% (representing 13 347 068 linked units) on 24 February 2023 to various shareholders.
In aggregate, Grit has sold 13.9% shareholding in the Letlole La Rona between December 2022 and March 2023, resulting in current shareholding of 11.25% in the Company.
Letlole La Rona said in the statement that the exit process will take place in an orderly manner so as to maintain stability of the Company’s share price.
The statement explained that Grit’s sale of its entire shareholding in LLR is in line with its decision to exit investments where it does not have majority control, or where it has significant exposure to currencies other than US dollar, Euro or hard-currency-pegged revenue streams.
“Grit has announced similar decisions pertaining to certain of its hospitality assets in Mauritius recently. The Company would like to advise Unitholders that it remains focused on long-term value delivery to all stakeholders” LLR said
In July last year as part of their Go-to-Africa strategy Letlole La Rona acquired an initial 30% equity stake in Orbit Africa Logistics, with an option to increase this investment to 50%. OAL is a special purpose vehicle incorporated in Mauritius, owning an industrial asset in a prime industrial node in Nairobi, Kenya.
The co-investment was done alongside a wholly owned subsidiary of London listed Grit. The Orbit facility is situated on a prime industrial site on Mombasa Road, the principal route south of Nairobi center, serving the main industrial node, the port of Mombasa and the industrial town of Athi River and is strategically located 11 kilometers south of the international airport and 9.6 kilometers from the Inland Container Depot.
Grit shareholding in Letlole La Rona was seen as strategic for LLR, for the company to leverage on Grit’s already existing continental presence and expand its wings beyond Botswana borders as already delivered by Kenya transaction.
Media reports have however suggested that LLR and Grit have since late last year had fundamental disagreements on how to go about the Go-to-Africa strategy amongst other things, fuelled by alleged Botswana government interference on the affairs of LLR.
Government through LLR founding shareholder – Botswana Development Corporation has a controlling stake of around 40 percent in the company. Government is the sole shareholder of Botswana Development Corporation.
Letlole La Rona recently released their financial results for the six months ended December 2022, revenue increased by 4% to P50.2 million from P48.4 million in the prior comparative six months, whilst operating profit was up 8% to P36.5 million. Profit before tax of P49.7 million was reported, an increase of 8% on the prior comparative six months.
“We are encouraged by the strong results, notwithstanding a challenging economic environment. Our performance was mainly underpinned by annual lease escalations, our quality tenant base and below average market vacancy levels, especially in our warehouse portfolio,” Kamogelo Mowaneng, Letlole La Rona Chief Executive Officer commented.
LLR reported a weighted average lease expiry period of 3.3 years and escalation rates averaging 6.8% per annum for the period ended 31 December 2022.Its investment portfolio value increased by 14% year-on-year to close the period at P1.4 billion, mainly driven by the acquisition of a 30% stake in OAL in July 2022.
The Company also recorded a significant increase in other income, predominantly due to foreign exchange gains on the OAL shareholder loan. “We continue to explore pipeline opportunities locally, and regionally in line with our Go-to-Africa strategy and our interest remains on value-accretive investments,” Mowaneng said.
An interim distribution of 9.11 thebe per linked unit was declared on the 6th of February 2023 for the half-year period to 31 December 2022, comprising of a dividend of 0.05 thebe and debenture interest of 9.06 thebe per linked unit which will be paid to linked unit holders registered in the books of the Company at the close of business on 24 February 2023.
Business
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.
Business
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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