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COVID19 – Possible tax implications

Corona Virus has disrupted international supply chain and business operations and markets of the world over, lot of traders have lost value on their stocks and businesses have also lost revenue due to the pandemic.
Hence, countries have responded by closing borders in order to prevent and control further spread of COVID 19. As such traders are forced to use alternative ports of entries which might not be economically favorable to them and therefore resulting in elevated cost of doing business. In response traders are likely to increase final prices of product in order to cover for inputs cost. Similarly, few border post means congestions hence delay of clearance which also will lead to cost and inconveniences to final consumers. In addition, the supply chain security maybe compromised due the speed of the events which did not allow customs officials to revise their risk criteria and risk target.

Transit goods are also likely to be delayed due to border procedure requirements especially for first timers due diverged from their usual routes as a result of closure of ports of entries. Medical equipment and related drugs may also be delayed at ports of entries especially when they come as donations due to non-compliance with rebates on donations as the pressure might not allow donors to consult for purposes of compliance. Border procedures can drive up costs of trading by imposing delays and transactions costs.

According to the OECD Trade Facilitation Indicators, the simplification and harmonisation of border procedures could reduce transaction costs by 10% (Moise et al., 2011), while earlier OECD work shows that 65% of worldwide welfare gains from trade facilitation would accrue to developing countries (Walkenhorst and Yasui, 2009).

According to the World Bank’s Doing Business data, it takes three times as many days, nearly twice as many documents, and six times as many signatures to import goods in poor countries as it does in rich ones (cited in McLinden, 2012). Africa has substantially more import procedures than the most efficient developing country region, East Asia, and nearly twice as many as OECD countries (World Bank, Doing Business 2012). Delays in passing through customs have often been singled out as the villain in border delays.

In fact, more often than not, it is the combination of other agencies – health, agriculture, quarantine, police, immigration, and standards – that cause processing delays, as shown by the Time Release Studies undertaken by several countries to measure the average time for each step of border process interventions (see Matsuda, 2011). These problems coupled with the new pandemic will definitely cause more delays even for procedures that are automated because of the health checks involved.

From a government perspective there is likely to be loss of revenue such as Income Tax, VAT and Customs Duty due to closure of borders and business losses arising from factors arising from the pandemic. The closure of borders and limited number of people in one area, the revenue authority is likely to receive fewer goods than in a normal day and therefore affecting revenue that is generated by government due to movement of people and goods.

Due to these losses, businesses or traders may receive some form of compensation or support in the form of insurance or government intervention. These interventions have some tax implications that businesses need to ensure that they are taken care of to avoid interest and penalties in relation to these transactions. Business and trading losses arising from this pandemic are tax deductible as they meet the deductibility test in section 39(2) of the Income Tax Act, therefore these should be well documented to ensure that they are claimed in the financial statements.

Furthermore, any related compensation such as insurance and other forms of compensation such as government grants will be part of business income and should therefore be included as part of revenue. The insurance claim received under a short term insurance contract for business losses also has some Value Added Tax (VAT) implications.

The amount received by the business is deemed to be inclusive of VAT and therefore when accounting for the VAT received form the insurance claim businesses should use the VAT fraction (12/112) to determine the VAT payable to BURS. For instance, if a business has received P112, 000 insurance claim for losses arising from the pandemic the VAT amount payable will be P12, 000 (12/112*P112, 000).  Failure to record this as revenue for the business may be interpreted as some form of sales suppression and tax evasion from both income tax and VAT perspective.

The penalties and interest arising from these may be huge and reach up to a maximum of 200% of the tax liability arising from such transactions if not declared, therefore businesses should ensure these are accounted for properly. Apart from the losses or income received from compensation or insurance businesses, individuals can donate to medical institutions such as Princess Marina or National Laboratories Centre to aid them in fighting the pandemic.

These donations will be tax deductible and will reduce the business or individual’s taxable income provided the donations are worth more than P1, 000, the deduction will be limited to 20% of the person’s income. This provision encourages individuals and companies to have Corporate Social Investment initiatives aimed at improving conditions in the health sector as it is one of the basic necessities in the society.

The civic organizations that may receive grants and donations to fight this pandemic and are not specifically exempt from tax will have to pay Capital Transfer Tax at the rate of 12.5% from receipt of the donations. In conclusion businesses and government should ensure that their business continuity strategies and risk management policies are functional to enable them to recover quickly from the effects of the pandemic.

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Returning Resident and Natural Persons on Change Of Permanent Residence

23rd September 2020

A returning resident of Botswana and natural persons changing residence to Botswana for whatever reasons upon satisfying immigration requirements are entitled to duty free of goods upon entry into the country. Reason of change of residence may be employment, investment, joining family or returning after long absence from the country.

Customs Act of 2018 Section 234(1) “returning resident shall be authorized to re-import, free of duties and taxes, his or her personal effects and means of transport for private use, which were in free circulation in Botswana, if the goods have not undergone any manufacturing, processing or repairs while abroad other than maintenance in connection with their use abroad

(2) “The Revenue Service may, where necessary, require proof that the personal effects and means of transport for private use were owned and used in Botswana by the returning resident under subsection (1) prior to his or her departure”.

Tariff book volume II rebate 407.06 Household effects and other articles for own use and 407.06/00.00/01.00/05 household furniture , other household effects and other removable articles, including equipment necessary for the exercise of the calling, trade or profession of the person, other than industrial, commercial or agricultural plant and excluding motor vehicle, alcohol beverages and tobacco goods the bona fide property of a natural person(including a returning resident of Botswana after an absence of 6 months or more) and members of his or her family, imported for own use on change of his her residence to Botswana : provided these goods are not disposed of within a period of 6 months from the date of entry.

In addition Tariff book volume II rebate 407.04 Motor vehicles imported by natural persons on change of permanent residence and  407.04/87.00/01.02/20 states the one is allowed to import duty free one motor vehicle per family, imported by natural persons for his or her personal or own use, who permanently changes his or her residence to Botswana and

  • Provided the vehicle so imported is the personal property of the importer and has personal property of the importer and has personally been used by him or her
  • For a period of not less than 12 months prior to his or her departure to Botswana (FULL DUTY REBATE) or;
  • For a period of less than 12 months prior to his or her departure to Botswana (PRO RATA)
  • In the case of approved intended residents arriving from an African country, is owned and used for such shorter period as the Commissioner General may in exceptional circumstances decided and
  • Provided the vehicle is not offered, advertised, lent, hired, leased, pledged, given away, exchanged, sold or otherwise disposed of within a period of 20 months from the date of entry.

The returning resident or natural persons changing residence, entering Botswana are expected to engage a clearing agent who will manage her/his paper work clearance. The clearing agent will charge a service fee and submit a declaration to customs official.

When the customs official is satisfied that the client is qualifying as per the above requirements the officer will issue authenticated Rebate certificate101 which will be used to waive duties.

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The current two Pandemics that have affected Botswana: HIV/AIDS and Covid-19 – and the response (Reflections from an observer)

4th August 2020

Dr Edward T. Maganu
Introduction

The Human Immunodeficiency Virus (HIV) was first detected in Botswana in 1985. The coronavirus that causes Covid-19 was detected in 2020. Both viruses were new, and it was their global occurrence that led to their classification as pandemics.

They have both been traced to animals, something not surprising as most new viruses are actually cross-overs from animals. A virus crosses species, in this case to humans, and its subsequent behaviour depends on how it adapts to the new species. Many are “dead-ends”, the virus cannot multiply or be transmitted between members of the new species.

In the case of the two which are our subject in this paper, the viruses adapted to the new species (human) and underwent mutations that allowed them to be easily transmitted between humans, hence the rapid spread.

The two viruses, HIV and the Covid-19 virus are very different, hence their mode of spread is different and their mechanisms of disease causation and epidemiology are very different. The approach to their control is of necessity very different. To illustrate their difference, HIV is transmitted mainly by sexual intercourse, Covid-19 virus mainly by the droplet method through the respiratory tract.

HIV causes ill health a long time after infection, which can run from about two years to many years (incubation period); the incubation period of Covid-19 is a few days, estimated at between 10 and 14 days. HIV infection leads to the destruction of the immune system, and when the victim gets ill, it can be from any of a wide variety of diseases caused by “opportunistic infections or even cancers”, hence the name Acquired Human Immunodeficiency Syndrome (AIDS).

Covid-19 on the other hand presents generally as an upper respiratory tract infection (URTI) although there are some presenting differently, especially with lower respiratory infection (lungs affected) in the more severe cases. Another but very important difference is that, while Covid-19 is generally an acute, self-limiting illness, with most patients recovering fully within a few weeks, and in fact many showing no symptoms, HIV/AIDS is a chronic condition; once the patient starts signs and symptoms, usually years after infection, this leads invariably to death from one of the opportunistic infections or diseases.

This last scenario used to be the case in the first decades of HIV/AIDS, but has fortunately changed after the development of drugs that in combination are referred to as Highly Active Anti-Retroviral Therapy (HAART, now known as ART).

HIV/AIDS is now treatable and no longer a death sentence, although treatment lasts for life as the drugs do not eliminate the virus from the body but suppress it. As for Covid-19, there is currently, as is the case generally with viral infections, no effective antibiotic or antiviral drug that kills the virus or eliminates it from the body.

Where does this put us? We are essentially dealing with two diseases or pandemics that are very different from each other. I did my post-graduate studies in Public Health during the last years of smallpox eradication, actually I finished the studies in 1978, the year Smallpox eradication was certified in Botswana.

What used to be emphasized, why the world succeeded in eradicating Smallpox was that it had epidemiological characteristics that supported eradication: it was easy to diagnose, even by lay people; it had a consistent incubation period of about 10 days; it virtually had a 100% manifestation rate (everybody infected showed typical signs and symptoms); there was a vaccine against it that was virtually 100% effective. Unfortunately, there have been few diseases with such favourable characteristics for eradication. Hence the next disease targeted for eradication, Polio, is almost done but still causing some problems.

Response to the HIV/AIDS and Covid-19 pandemics in Botswana

When HIV was detected in Botswana in 1985, the world had been aware of the existence of AIDS for about five years, that is, since the outbreaks among gays in America in 1981. By 1985 the virus had been identified but little was known about it; it was still a subject of intense research. However we knew that it caused AIDS and was no longer just transmitted in gay sex, but that most transmission in Africa was through heterosexual sex, and that sexual transmission was responsible for more than 90% of transmission occurring in Africa.

Some African countries were already experiencing severe HIV/AIDS epidemics, especially in Central and East Africa. In some of them (Uganda is sometimes quoted) people started dying in large numbers before the cause was known, only for people to move to neighbouring villages and infect others there!

The Botswana HIV epidemic, as well as those of SACU countries generally, was later than those of Central and East Africa. The latter had already experienced high disease and mortality rates for some years. In the late 1980s, Botswana was experiencing a big economic boom, and this attracted professionals, technicians and artisans from African countries badly affected by HIV/AIDS, and this really speeded up transmission in the country.

When the first seropositive people were identified in 1985, I was Assistant Director of Health Services responsible for Primary Health Care. So, Disease Control fell in my Department, and I had the responsibility of reporting to my seniors at the Ministry and hence to the country that we now had HIV.

Control measures were started immediately, such as screening all blood donated for transfusion and putting together with the help of WHO, the first short-term control plan. A unit was created which was headed by an appropriate professional. In 1986 I became Director of Health Services and Deputy Permanent Secretary, and in January 1990 I became Permanent Secretary.

In all these positions I was intimately involved in HIV/AIDS control, working intimately with those directly responsible for the unit/programme, and also doing at least one assignment with Global Programme on AIDS (GPA) when it was still with WHO before UNAIDS was created to share the AIDS programme with other UN Agencies. In the same manner, here at home we started pushing for the multisectoral approach to HIV/AIDS control in the early 1990s, that resulted in the formation of the National AIDS Council and eventually NACA.

The Ministry of Health undertook a very intensive public education from early in the HIV epidemic. The Ministry warned the people of Botswana (through and including the political, traditional and community leaders) about what was going to happen, the impending doom of high morbidity and mortality. What was needed was change is sexual behaviour.

Everyone knows that the main message from the Ministry was “ABC” (abstain, be faithful, condomise), which had become a universal message especially in Africa was used by the Ministry. Put in other words, the message aimed at three things; i) delaying sexual debut, ii) avoiding multiple concurrent partners and iii) consistent condom use.

This message never made an impact on the Botswana population, so when the clinical cases started hitting the country after the several years of silent spread (the silent phase of HIV spread), the effect was disaster. We had a nasty surprise in the health system that while the countries in central Africa that had early HIV/AIDS epidemics had their HIV prevalence plateauing at 15% and we thought the same would happen here, in Botswana and Southern Africa prevalence rates went past 30%.

This was due partly to the sexual practices of our people but also to the HIV sub-type that was prevalent in our part of the world. By 1966 Botswana was declared as having the highest prevalence of HIV in the world.

The real heavy load of cases in Botswana started in the mid-1990s, and everybody remembers it; funerals and funerals and funerals. That time ARVs were still under development, and it was only at the end of the 1990s that they became available but very expensive, so most poor and middle income countries could not immediately afford them.

Thanks to India, Thailand and Brazil who broke the patents and manufactured the drugs, their availability to many developing countries would have taken a long time. Here in Botswana, it was due to the initiative of the then President that HAART became available for general use in Government facilities in 2002, with massive aid from PEPFAR and ACHAP (supplied by Merck Foundation and the Bill and Gates Foundation).

Otherwise there was talk of extinction, and the expected population pyramid produced by UNAIDS was frightening. Luckily because of ARV’s that scenario did not occur. The rest of Botswana’s HIV/AIDS trajectory up to now is history. I left Government service on 31st December 1996 after seven years as P.S. and joined WHO.

I had almost joined WHO in 1989 but deferred it when I was appointed PS and did not want to appear unpatriotic and disappoint President Masire and PSP Legwaila with both of whom I had very excellent relations. My initial job with WHO was in Tuberculosis, a disease that had been my passion since I did Public Health and took over its control as head of disease control in 1979.

No matter what post I held in the Ministry thereafter, I participated directly in Tuberculosis control. And as we all know. Tuberculosis became and is still one of the manifestations of HIV globally and in Botswana.

HIV/AIDS was and is a slow epidemic. So, the public did not really perceive it as a threat in Botswana, except perhaps in the late 1990s and early 2000s when it caused very high mortality in the country. The Covid-19 epidemic/pandemic is different. Although it doesn’t kill everybody who gets it like HIV-related disease did, we have seen in highly affected countries that the 2-5% it kills translate to large numbers, because this is an acute infection that spreads very quickly. So, it should be easy for the public to perceive its danger.

The surveillance and containment that has been employed so far in Botswana to control the spread of Covid-19 has been very effective. Those responsible, the Ministry of Health and Wellness and the Task Force deserve to be acknowledged and thanked for a job well done. I am confident that the health care system can also adjust itself and not be disrupted by this new threat.

Since the chances of developing a drug against such a virus seems a bit remote, we are all putting our hope on a vaccine. Many viral diseases have very effective vaccines, so this keeps our hope up. We also need to know if one attack of this disease results in life-long immunity (like measles, mumps, chicken pox etc.) or if one can be attacked more than once, implying that the virus keeps mutating and bringing up new sub-types.

We are still to see if the public will do better than they did with HIV/AIDS and follow the health education. Experience is what usually persuades people to change; that is why many believe the celebrated change in Uganda when people changed and HIV infections dropped was due to the large mortality they had experienced before they even knew what was killing them.

Regarding Covid-19, we are seeing in a number of badly affected countries, people ignoring or resisting social distancing measures and masks, sometimes encouraged by politicians! Here in Botswana we have not yet experienced large losses of lives from Covid-19, so it is still to be seen how the public will really conform to advice, especially on social distancing and other measures like masks and hand washing.

What one sees so far is not very encouraging -in combis, bars etc., and during weekends in homes. In health we talk of KAP (Knowledge, Attitude, Practice). We know that K does not always lead to change in A, and to P. We saw this plainly in HIV/AIDS, what is going to happen in Covid-19?

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Shedding off the tax haven tag: amendment of section 5(4a) of the income tax act

4th August 2020

Botswana has been under scrutiny from organizations such as Organisation of Economic Cooperation and Development (OECD), French government and Financial Action Task Force (FATF) in relation to secrecy laws in relation to sharing information with other countries.

In its 2017 report, the FATF stated that some Acts that aim at combating financial crime including the Income Tax Act have some limitations in relation to confidentiality of information exchanged, its protection, and use of the information for the purposes it was requested for. The worry was that there may be refusal by competent authorities to provide requested information under unreasonable or unduly restrictive conditions to courts or prosecuting bodies.

This has resulted in the country being grey listed by the FATF and has been under close monitoring by the FATF in relation to the deficiencies identified in our laws. The European Union also recently listed us in countries that may be blacklisted in October 2020 if it doesn’t address identified deficiencies.

Amending of secrecy law for Income Tax purposes may have been influenced by these developments and as the deadline comes closer for compliance it is not surprising that we have such a proposal including amendment of Acts such as Botswana Unified Revenue Service Act (which is mentioned in the report as one of the Acts to be strengthened).

Though there are some exchange of information provisions in various tax agreements Botswana has, there was worry that the current section 5(4A) had some limitations. The current subsection only references subsection 4 and doesn’t mention other sections in the Act or the whole Act. The phrase “…notwithstanding subsection (4)…..” has been replaced with “notwithstanding this Act or any other written law….” This now means the tax authority will not be limited by any section in this Act or any other law to provide information to other tax authorities or any other institution that needs such information whether within or outside the country.

The provision will supplement other available protocols such as the Southern African Development Community (SADC) exchange of information protocol and Article 25 of various double taxation avoidance agreements Botswana has with different countries. Some commentators though believe that the provision might be limited as it still references section 53 which deals with tax agreements the country has with other tax jurisdictions. The worry is that it may make it difficult for non-counterparts to access information as the same provision may be used by the authority to refuse releasing of such information where the countries do not have agreements or partnership of any form.

However apart from the tax agreements Botswana has some Tax Information Exchange Agreements (TIEAs) with some countries that are not in SADC and also do not have tax agreements with. There is also a tax information exchange manual that provides guidance on how such information is provided to whoever needs it. As parliament debates the bill in the coming weeks, we can rest assured that the passing of the bill as is or with some improvements such as allowing for a provision that caters for countries without tax agreements we will be moving towards the “white list”. Botswana will indeed be shedding off the tax haven tag and complying with the FATF and EU recommendations.

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