Botswana Investment & Trade Centre (BITC), the country‘s intergraded trade & investment promotion agency has reiterated Botswana’s position on the International Finance Services Centre (IFSC), a tax incentive provision for accredited companies.
Speaking at a media engagement session on Tuesday BITC Chief Executive Officer, Keletsositse Olebile underscored that the IFSC is not a breeding vehicle of illicit capital flows but a provision purely crafted as an investment wooing instrument which already has tangible and significant benefits to the country’s economy.
Olebile explained that the provision is a mechanism to attract foreign investment, channel capital into local investment projects, provide additional opportunities for local investors and create sustainable employment opportunities for suitable and qualified Batswana.
Furthermore the BITC Chief added that the IFSC fiscal framework plays a role in the enhancement of skills base for the Botswana workforce, fostering of innovation and sophistication in financial and business services and enhancement of Botswana’s already excellent reputation in the international financial and business community as well as generate tax revenue for Botswana.
BENEFITS TO ACCREDITED COMPANIES
Whilst most companies pay Corporate Tax at 22%, IFSC companies are generally taxed at 15%, Eighth Schedule to Income Tax Act. When deliberating on the provision leading tax consultant Jonathan Hore of Aupracon said because IFSC companies predominantly deal with non-residents, they are taxed 15 % on nonresident proceeds, while paying the normal 22 % for Botswana resident’s proceeds.
“This means that the tax computation of an IFSC company will most likely have two columns, to separate the 15% income from that taxable at 22%, IFSCs can, just like any other taxpayer, also claim withholding tax credits for tax suffered in foreign countries,“ he said. Hore added that such credits cannot exceed the Botswana tax on the foreign income, that is to say BURS cannot refund a taxpayer because the taxpayer paid tax offshore.
An IFSC entity which invests in an offshore entity to the extent of at least 25 % is not taxed on the dividends it earns from such investments. The investments are called Qualifying Foreign Participation (QFP) and are exempt in terms of the Second Schedule to the Income Tax Act, which states that, any dividends received by international financial services Centre Company in respect of a qualifying foreign participation as defined under section 2; shall be exempt from tax to the extent indicated.
The act defines Qualifying Foreign Participation (QFP) as participation held by an international financial services centre company in a company which is not resident in Botswana, where the international financial services centre company controls either directly or indirectly, alone or with connected persons, 25 per cent or more of the share capital including 25 per cent or more of the voting rights of the nonresident company.
IFSC companies also enjoy zero Capital Gains Tax (CGT). CGT is levied on the capital appreciation of any specified assets such as shares, immovable properties etc. Any person who disposes shares must pay the CGT.
However, IFSC companies do not suffer CGT when they dispose of shares held in a Qualifying Foreign Participation, i.e. at least 25% shareholding in nonresident subsidiaries. Secondly, the shareholders in an IFSC company are exempt from CGT.
WHAT ARE BOTSWANA’S BENEFITS?
Jonathan Hore noted that IFSC is an incentive which attracts FDI as foreign dividends are not taxed – “CGT exemption means that investors can set-up holding companies in Botswana and when they want to exit, they don’t have to worry about CGT.
Mauritius doesn’t have CGT at all and this Botswana incentive can only be compared to Mauritius. Most SADC states have CGT for most investors. Botswana is therefore ahead of the pack, together with Mauritius,” he said.
The renowned Tax consultant explained that this helps IFSC entities to obtain the best of non-resident consultants and investors. “Dealing with IFSCs is more business-friendlier as compared with dealing with any other BW entity, which deducts WHT from payments due to non-residents.”
BITC CEO noted that as a consequence of the framework insisting on a physical presence (Office) as opposed to brass plating, indirectly this contributes to business tourism in the form of shuttle services, lodging, dining fees when non-resident directors visit their head offices.
Previously various global economic and financial commentators such as the International Monetary Fund (IMF), Organisation for Economic Cooperation & Development (OECD) expressed concerns over Botswana’s tax incentives noting a possibility of the provisions being used as window of tax invasion, raking in all returns, eroding national tax bases and compromising domestic resources mobilization systems.
OEDC observed that tax exemptions such as IFSC fiscal framework if not tightly managed have little impact on investment attraction but only cripple the country‘s revenue collection vehicles. “Under pressure to offer internationally-competitive tax environments, developing countries offer generous tax breaks that undermine their domestic resource mobilization efforts with little demonstrable benefit in terms of increased investment,” said OECD in previous publications in 2018.
“There is limited information on the way in which Botswana’s IFSC is used for illicit and criminal practice, but according to a 2017 evaluation carried out by Eastern and Southern Africa Anti-Money Laundering Group, without developed anti-money laundering and counter-terrorist financing regime the country is at risk of being used as a conduit,” noted the Tax Justice Network in 2017.
THE FRAMEWORK & SUCCESFULLY DUSTING OFF THE ‘TAX HAVEN’ TAG
Botswana as since refined the IFSC fiscal framework in a bid to tighten compliance with international practices. The investment promotion boss who championed Botswana‘s campaign against the tax haven tag in 2014 noted that Botswana has since joined the Inclusive Framework by OECD and G20.
Furthermore Botswana has since complied with resolutions of OECD Forum on Harmful Tax Practices (FHTP) by subscribing to Base Erosion and Profit Shifting Standard (BEPS), Substantive Presence, Tax Information Exchange agreements which are requested from time to time.
Olebile reiterated that Botswana is not a tax haven, noting that in conjunction with respective industries regulatory and compliance authorities such as Bank of Botswana, NBFIRA , BURS , IFSC accredited companies are regularly zoomed into check if they living up to promises and comply with the law.
Government is currently sitting on 4 400 vacant posts that remain unfilled in the civil service. This is notwithstanding the high unemployment rate in Botswana which has been exacerbated by the recent outbreak of the deadly COVID-19 pandemic.
Just before the burst of COVID-19, official data released by Statistics Botswana in January 2020, indicate that unemployment in Botswana has increased from 17.6 percent three years ago to 20.7 percent. “Unemployment rate went up by 3.1 percentage between the two periods, from 17.6 to 20.7 percent,” statistics point out.
Leading commercial bank, First National Bank Botswana (FNBB), expects the central bank to sharpen its monetary policy knife and cut the Bank Rate twice in the last quarter of 2020.
The bank expects a 25 basis point (bps) in the beginning of the last quarter, which is next month, and another shed by the same bps in December, making a total of 50 bps cut in the last quarter. According to the bank’s researchers, the central bank is now holding on to 4.25 percent for the time being pending for more informed data on the economic climate.
An audit of the accounts and records for the supply of food rations to the institutions in the Northern Region for the financial year-ended 31 March 2019 was carried out. According to Auditor General’s report and observations, there are weaknesses and shortcomings that were somehow addressed to the Accounting Officer for comments.
Auditor General, Pulane Letebele indicated on the report that, across all depots in the region that there had been instances where food items were short for periods ranging from 1 to 7 months in the institutions for a variety of reasons, including absence of regular contracts and supplier failures. The success of this programme is dependent on regular and reliable availability of the supplies to achieve its objective, the report said.
There would be instances where food items were returned from the feeding centers to the depots for reasons of spoilage or any other cause. In these cases, instances had been noted where these returns were not supported by any documentation, which could lead to these items being lost without trace.
The report further stressed that large quantities of various food items valued at over P772 thousand from different depots were damaged by rodents, and written off.Included in the write off were 13 538 (340ml) cartons of milk valued at P75 745. In this connection, the Auditor General says it is important that the warehouses be maintained to a standard where they would not be infested by rodents and other pests.
Still in the Northern region, the report noted that there is an outstanding matter relating to the supply of stewed steak (283×3.1kg cans) to the Maun depot which was allegedly defective. The steak had been supplied by Botswana Meat Commission to the depot in November 2016.
In March 2017 part of the consignment was reported to the supplier as defective, and was to be replaced. Even as there was no agreement reached between the parties regarding replacement, in 51 October 2018 the items in question were disposed of by destruction. This disposal represented a loss as the whole consignment had been paid for, according to the report.
“In my view, the loss resulted directly from failure by the depot managers to deal with the matter immediately upon receipt of the consignment and detection of the defects. Audit inspections during visits to Selibe Phikwe, Maun, Shakawe, Ghanzi and Francistown depots had raised a number of observations on points of detail related to the maintenance of records, reconciliations of stocks and related matters, which I drew to the attention of the Accounting Officer for comments,” Letebele said in her report.
In the Southern region, a scrutiny of the records for the control of stocks of food items in the Southern Region had indicated intermittent shortages of the various items, principally Tsabana, Malutu, Sunflower Oil and Milk which was mainly due to absence of subsisting contracts for the supply of these items.
“The contract for the supply of Tsabana to all depots expired in September 2018 and was not replaced by a substantive contract. The supplier contracts for these stocks should be so managed that the expiry of one contract is immediately followed by the commencement of the next.”
Suppliers who had been contracted to supply foodstuffs had failed to do so and no timely action had been taken to redress the situation to ensure continuity of supply of the food items, the report noted.
In one case, the report highlighted that the supplier was to manufacture and supply 1 136 metric tonnes of Malutu for a 4-months period from March 2019 to June 2019, but had been unable to honour the obligation. The situation was relieved by inter-depot transfers, at additional cost in transportation and subsistence expenses.
In another case, the contract was for the supply of Sunflower Oil to Mabutsane, where the supplier had also failed to deliver. Examination of the Molepolole depot Food Issues Register had indicated a number of instances where food items consigned to the various feeding centres had been returned for a variety of reasons, including food item available; no storage space; and in other cases the whole consignments were returned, and reasons not stated.
This is an indication of lack of proper management and monitoring of the affairs of the depot, which could result in losses from frequent movements of the food items concerned.The maintenance of accounting records in the region, typically in Letlhakeng, Tsabong, and Mabutsane was less than satisfactory, according to Auditor General’s report.
In these depots a number of instances had been noted where receipts and issues had not been recorded over long periods, resulting in incorrect balances reflected in the accounting records. This is a serious weakness which could lead to or result in losses without trace or detection, and is a contravention of Supplies Regulations and Procedures, Letebele said.
Similarly, consignments of a total of 892 bags of Malutu and 3 bags of beans from Tsabong depot to different feeding centres had not been received in those centres, and are considered lost. These are also not reflected in the Statement of Losses in the Annual Statements of Accounts for the same periods.