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The new income tax act amendment: what are the implications?

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.

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Botswana on high red alert as AML joins Covid-19 to plague mankind

21st September 2020
Botswana-on-high-alert-as-AML-joins-Covid-19-to-plague-mankind-

This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.

The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.

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Finance Committee cautions Gov’t against imprudent raising of debt levels

21st September 2020
Finance Committe Chairman: Thapelo Letsholo

Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.

He was speaking in  Parliament on Tuesday delivering  Parliament’s Finance Committee report after assessing a  motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.

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Gov’t Investment Account drying up fast!  

21st September 2020
Dr Matsheka

Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.

The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.

The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.

The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.

This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.

Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.

Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.

However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.

Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.

When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.

This  as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.

Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.

The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.

Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.

In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.

Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.

Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.

Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.

Acknowledging the need to draw down from GIA no more, current Minister of Finance   Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”

He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”

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