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.
The recent study on youth entrepreneurship in Botswana has identified difficult access to funding, land, machinery, lack of entrepreneurial mindset and proper training as serious challenges that continue to hamper youth entrepreneurship development in this country.
The study conducted by Alliance for African Partnership (AAP) in collaboration with University of Botswana has confirmed that despite the government and private sector multi-billion pula entrepreneurship development initiatives, many young people in Botswana continue to fail to grow their businesses into sustainable and successful companies that can help reduce unemployment.
University of Botswana researchers Gaofetege Ganamotse and Rudolph Boy who compiled findings in the 2022 study report for Botswana stated that as part of the study interviews were conducted with successful youth entrepreneurs to understand their critical success factors.
According to the researchers other participants were community leaders, business mentors, Ministry of Trade and Industry, Ministry of Youth, Gender, Sport and Culture, financial institutions, higher education institutions, non-governmental institutions, policymakers, private organizations, and support structures such as legal and technical experts and accountants who were interviewed to understand how they facilitate successful youth entrepreneurship.
The researchers said they found that although Botswana government is perceived as the most supportive to businesses when compared to other governments in sub-Saharan Africa, youth entrepreneurs still face challenges when accessing government funding. “Several finance-related challenges were identified by youth entrepreneurs. Some respondents lamented the lack of access to start-up finance, whereas others mentioned lack of access to infrastructure.”
The researchers stated that in Botswana entrepreneurship is not yet perceived as a field or career of choice by many youth “Participants in the study emphasized that the many youth are more of necessity entrepreneurs, seeing business venturing as a “fall back. Other facilitators mentioned that some youth do not display creativity, mind-blowing innovative solutions, and business management skills. Some youth entrepreneurs like to take shortcuts like selling sweets or muffins.”
According to the researchers, some of the youth do not display perseverance when they are faced with adversity in business. “Young people lack of an entrepreneurial mindset is a common challenge among youth in business. Some have a mindset focused on free services, handouts, and rapid gains. They want overnight success. As such, they give up easily when faced with challenges. On the other hand, some participants argue that they may opt for quick wins because they do not have access to any land, machinery, offices, and vehicles.”
The researchers stated that most youth involved in business ventures do not have the necessary training or skills to maintain a business. “Poor financial management has also been cited as one of the challenges for youth entrepreneurs, such as using profit for personal reasons rather than investing in the business. Also some are not being able to separate their livelihood from their businesses.
Lastly, youth entrepreneurs reported a lack of experience as one of the challenges. For example, the experience of running a business with projections, sticking to the projections, having an accounting system, maintaining a clean and clear billing system, and sound administration system.”
According to the researchers, the participants in the study emphasized that there is fragmentation within the entrepreneurial ecosystem, whereby there is replication of business activities without any differentiation. “There is no integration of the ecosystem players. As such, they end up with duplicate programs targeting the same objectives. The financial sector recommended that there is a need for an intermediary body that will bring all the ecosystem actors together and serve as a “one-stop shop” for entrepreneurs and build mentorship programs that accommodate the business lifecycle from inception to growth.”
Botswana Housing Corporation (BHC) is said to have recorded an operating surplus of P61 Million, an improvement compared to the previous year. The housing, office and other building needs giant met with stakeholders recently to share how the business has been.
The P61 million is a significant increase against the P6 million operating loss realized in the prior year. Profit before income tax also increased significantly from P2 million in the prior year to P72 million which resulted in an overall increase in surplus after tax from P1 million prior year to P64 million for the year under review.
Chief of Finance Officer, Diratsagae Kgamanyane disclosed; “This growth in surplus was driven mainly by rental revenue that increased by 15% from P209 million to P240 million and reduction in expenditure from P272 million to P214 million on the back of cost containment.” He further stated that sales of high margin investment properties also contributed significantly to the growth in surplus as well as impairment reversals on receivables amounting to P25 million.
It is said that the Corporation recorded a total revenue of P702 million, an 8% decrease when compared to the P760 million recorded in the prior year. “Sales revenue which is one of the major revenue streams returned impressive margins, contributing to the overall growth in the gross margin,” added Kgamanyane.
He further stated professional fees revenue line declined significantly by 64% to P5 million from P14 million in the prior year which attributed to suspension of planned projects by their clients due to Covid-19 pandemic. “Facilities Management revenue decreased by P 24 million from P69 million recorded in prior year to P45 million due to reduction in projects,” Kgamanyane said.
The Corporation’s strength is on its investment properties portfolio that stood at P1.4 billion at the end of the reporting period. “The Corporation continues its strategy to diversify revenue streams despite both facilities management income and professional fees being challenged by the prevailing economic conditions that have seen its major clients curtailing spending,” added the CEO.
On the one hand, the Corporation’s Strategic Performance which intended to build 12 300 houses by 2023 has so far managed to build 4 830 houses under their SHHA funding scheme, 1 240 houses for commercial or external use which includes use by government and 1 970 houses to rent to individuals.
BHC Acting CEO Pascaline Sefawe noted that; BHC’s planned projects are said to include building 336 flat units in Gaborone Block 7 at approximately P224 million, 100 units in Maun at approximately P78 million, 13 units in Phakalane at approximately P26 million, 212 units in Kazungula at approximately P160 million, 96 units at approximately P42 million in Francistown and 84 units at approximately P61 million in Letlhakane. Emphasing; “People tend to accuse us of only building houses in Gaborone, so here we are, including other areas in our planned projects.”
Researchers from some government owned regulatory institutions in the financial sector have projected that the banking sector’s profitability could increase, following Bank of Botswana Monetary Policy Committee recent decision to increase monetary policy rate.
In its bid to manage inflation, Bank of Botswana Monetary Policy Committee last month increased monetary policy rate by 0.50 percent from 1.65 percent to 2.15 percent, a development which resulted with commercial banking sector increasing interest rate in lending to household and companies. As a result of BoB adjustment of Monetary Policy Rate, from 1.65 percent to 2.15 percent commercial banks increased prime lending rate from 5.76 percent to 6.26 percent.
Researchers from Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority, the Financial Intelligence Agency and the Botswana Stock Exchange indicated that due to prospects of high inflation during the second half of 2022, there is a possibility that the Monetary Policy Committee could further increase monetary policy rate in the next meeting in August 25 2022.
Inflation rose from 9.6 percent in April 2022 to 11.9 percent in May 2022, remaining above the Bank of Botswana medium-term objective range of 3 – 6 percent. According to the researchers inflation could increase further and remain high due to factors that include: the potential increase in international commodity prices beyond current forecasts, logistical constraints due to lags in production, the economic and price effects of the ongoing Russia- Ukraine conflict, uncertain COVID-19 profile, domestic risk factors relating to possible regular annual administered price adjustments, short-term unintended consequences of import restrictions resulting with shortages in supplies leading to price increases, as well as second-round effects of the recent increases in administered prices “Furthermore, the likelihood of further increases in domestic fuel prices in response to persistent high international oil prices could add upward pressure to inflation,” said the researchers.
The researchers indicated that Bank of Botswana could be forced to further increase monetary policy rate from the current 2.15 percent if inflation rises persistently. “Should inflation rise persistently this could necessitate an upward adjustment in the policy rate. It is against this background that the interest rate scenario assumes a 1.5 percentage points (moderate scenario) and 2.25 percentage points (severe scenario) upward adjustment in the policy rate,” said the researchers.
The researchers indicated that while any upward adjustment on BoB monetary policy rate and commercial banks prime lending rate result with increase in the cost of borrowing for household and compnies, it increase profitability for the banking sector. “Increases in the policy rate are associated with an overall increase in bank profitability, with resultant increases in the capital adequacy ratio of 0.1 percentage points and 0.2 percentage points for the moderate and severe scenarios, respectively,” said the researchers who added that upward adjustment in monetary policy rate would raise extra capital for the banking sector.
“The increase in profit generally reflects the banking industry’s positive interest rate gap, where interest earning assets exceed interest earning liabilities maturing in the next twelve months. Therefore, an increase of 1.5 percentage points in the policy rate would result in industry gains of P71.7 million (4.1 percent increase), while a 2.25 percentage points increase would lead to a gain of P173.9 million (6.1 percent increase), dominated by large banks,” said the researchers.