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Botswana, region unite to fight illicit finance


The tax authorities of the southern African region, among them, Botswana Unified Revenue Service (BURS), are taking positive, concerted efforts to work together in curbing illicit financial flows (IFFs), which run in billions of dollars, robbing countries of development funds.


The meeting that took place in Pretoria, South Africa, last week, was also “a precursor to formalizing a Commissioners General Forum to discuss tax and customs matters in the region.”


The meeting discussed several issues of Illicit financial flows (IFFs) which impact revenue authorities’ statutory mandates as well as other items falling withing the IFF ambit such developments in the international tax arena, like base erosion and profit shifting, Transfer Pricing, trade mispricing; Cross border tax and customs issues, such as illicit trade, counterfeits, smuggling; Cooperation on the exchange of information; and a proposal for the establishment of a Sub-regional forum to enhance cooperation.


South Africa, which is hardest hit by IFFs on the continent, has assumed a leading role in the initiative, offering to school experts from the member countries on the nitty gritties of Transfer Pricing for technical experts from the region as well as to share with countries, its Tax Gap methodology. South Africa has also offered to share experiences on detector dog training as a means to enhance border protection and improve the detection of undeclared and illicit goods.


In a joint statement by representatives of tax authorities from the southern African region, Mr Segolo Lekau, Commissioner of Internal Revenue, Botswana Unified Revenue Service; South African Revenue Service;  Lesotho Revenue Authority;  Swaziland Revenue Authority;  Zambia Revenue Authority Mozambique Revenue Authority  and the Deputy Director: Legal at Ministry of Finance, Namibia.


“We note the negative impact illicit financial flows have on our statutory mandate and agree that we need closer cooperation to deal with this matter as it relates to tax and customs,” read the statement.


“We note with satisfaction efforts undertaken globally to encourage greater transparency and the exchange of tax and customs information We agreed to increase our resources and capabilities. For exchange of information units and Competent Authorities in order to enhance our ability to share information faster and more efficiently. We stand ready to actively assist one another in building the necessary capacity, and agree that the establishment of a regional customs academy be explored further,” the statement read.


The region is concerned with the challenges posed by practices aimed at circumventing domestic legislation, Such as VAT (value added tax) fraud, smuggling, round-tripping of tobacco, undervaluation of textile and clothing and all other related crimes.


“In this regard and taking full advantage of the legal instruments at our disposal we conclude to work much closer, share information and act jointly to ensure increased compliance. We will make it as easy as possible for those that are willing to comply with the spirit of the law and vow to combine our efforts to root out acts of non-compliance,” the joint statement read.


However, the region felt that the threshold for multinational corporations reporting in the country by country format was too high for MNCs in this region and needed to be negotiated with OECD, to bring it in line with local levels.


On 16 September 2014, the Organisation for Economic Co-operation and Development (OECD) released a series of deliverables that address seven of the focus areas in its Action Plan on Base Erosion and Profit Shifting (BEPS).

The report released on Action 13 (the Report) contains revised standards for transfer pricing documentation and a template for country-by-country (CbC) reporting, both of which will be included in the OECD Transfer Pricing Guidelines.

The Report indicates that the transfer pricing documentation standards and the CbC reporting standards will be revisited by the OECD and G20 countries no later than the end of 2020 to assess whether additional or different data should be required to be reported.


The CbC reporting template requires multinational enterprises (MNCs) to report the amount of revenue of both related and unrelated party profits, income tax paid and taxes accrued, employees, stated capital and retained earnings, and tangible assets annually for each tax jurisdiction in which they do business.

In addition, MNCs are also required to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity conducts. This information is to be made available to the tax authorities in all jurisdictions in which the MNC operates.


The OECD posits that BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs) and therefore, the BEPS measures once implemented, will benefit developing countries and provide them with tools to mobilise domestic resources.


The continent loses an estimated $60 billion each year in illicit financial flows and the multiplier effects of these losses are much larger. IFFs from Africa in real terms mean loss of jobs, income, decent education, health facilities and other basic infrastructure critical to transforming the economy of countries in Africa and the socio-economic conditions of Africans.


According to reports, the major perpetrators of IFFs from Africa are multinational companies, especially those operating in Africa’s extractive sector, mostly in oil, gas and mining. These activities pose a major threat to sustainable development and security.

HOW IT WORKS

Transfer pricing is the setting of the price for goods and services sold between controlled or related legal entities within an enterprise, such as when a subsidiary company sells goods to a parent company; the cost of those goods is the transfer price.


Money launderers, corrupt politicians, terrorists, arms traffickers, drug smugglers, and tax evaders, in moving their dirty money, all rely on: company structures that allow them to hide their identity, and banks and other professionals willing to do business with them, both which are currently all-too available in some jurisdictions termed tax havens.


These allow the entities to charge each other, non arms length prices that reduce profits, reducing the tax burden in the process. The illicit profits realised remain offshore in the havens and deny the host countries tax revenues.


The scale of the offshore industry’s dirty-money problem is hotly disputed. Economists at Global Financial Integrity, reckon that developing countries alone suffered illicit financial outflows—defined as money that is illegally earned, transferred or used—of at least $5.9 trillion over the past ten years.


The world is said to have between 50 and 60 active tax havens, mostly clustered in the Caribbean, parts of the United States such as Delaware, Europe, South-East Asia and the Indian and Pacific oceans. They serve as domicile for more than 2 million paper companies, thousands of banks, funds and insurers and at half of all registered ships above 100 tonnes.

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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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