BOTSWANA INCOME TAX AMENDMENT ACT (January 2019)

[We acknowledge gratefully the efforts taken by the Botswana Institute of Chartered Accountants in meeting with the Commissioner General (Feb 2020) to seek clarifications on the position of Botswana Unified Revenue Service.  This article is based on our interpretation of the minutes of the meeting and these are not the opinions of the Institute or BURS but only our interpretations.  Further this is a general advice and it may not apply to your situation as they are.  Please consult RSM Tax team for your individual requirements]

Transactions designed to reduce or postpone tax

At present, Botswana Tax Act empowers Commissioner General to ignore any arrangement or scheme or transaction that has the effect of reducing or postponing tax obligation (Section 36). 

This section is now strengthened further to include changes in shareholding made with a view to (wrongly) using the assessed loss of another company.  (Sec. 36 (1) and 36 (2)). 

What is the penalty for such schemes?  200% of tax avoided or P 10,000 whichever is higher.  (See Sec. 118 (2A)).

Transfer princing

A Sec. 36A deals with transfer pricing – buying and selling of goods between non-resident (foreign) connected (related) companies, because through questionable transfer pricing arrangements tax is reduced or postponed.   What is questionable transfer pricing?  The price for goods and services bought from or sold to outside group companies should be as if they are independent third party companies.   This is called "arm's length principle",  meaning the price is decided by economic forces of demand and supply and is not manipulated just because the other party is a group company or connected person.  If the price is different then it is questionable.  Where transfer pricing is not proper (not at arms' length), Commissioner General can tax on the income reduced because mispricing.  What is the penalty for such erroneous or faulty transfer pricing?  200% tax avoided or P 10,000 whichever is higher.  (See proposed Section 118 (2B)).

Four things should be kept in mind when it comes to transfer pricing. 

  • One, these provisions apply to transactions with non-resident connected companies (Group companies).
  • Two, the arrangement or transaction should be as if the related party is independent and non-related. 
  • Three, all documents relating to the arrangement or transaction should be kept for production upon demand by the Commissioner General.   Further these documents shoud be submitted with the Tax Return where the turnover arising out of such inter-group transactions are P 5 million or above.  What if you don’t have the papers?  Commissioner General may charge you with a penalty of not exceeding P 500,000.  Sec. 129A does not allow the Commissioner General to mitigate this to below P 250,000.
  • Four, if a company buys an asset from a non-resident related company, the the resident company should produce the original invoice from the independent third party (received and accounted for by the non-resident related company).  Otherwise Commissioner General will take the price to be NIL, meaning that capital allowance woould not be allowed and the entire sale price would be taxed.

You will be able to always make an agreement with the Commissioner General for advance pricing for a fixed period of time (Sec 36A (7)).   BURS beleives that both tax payers and BURS are at present experiencing a learning curve and threfore no Regulations on Advance Pricing have been made.  Further no Advance Price arrangements have been made so far.   In the unlikely event where a tax payer believes that there is a need for the Advance Price Agreement at this stage, the tax payer can ask for it.  The Minister will prescribe proper guidelines as soon as adequate experience is obtained by both BURS and tax payers.   When it comes to any Advance Price Agreement, Commission General may agree unilaterally or with the consent of another authority of another country with whom Botswana has double tax avoidance agreement.

Interest

Effective 1st July 2019, interest can’t be deducted as in the past.  Net interest expense can’t be more than 30% of Tax EBIDTA (Earnings before interest, depreciation, tax and amortization per Tax Computation).  Anything about 30% can be carried forward for 3 years.   For mining companies carry forward is for 10 years.  (Secs. 41A / 43A).  The purpose is to discourage thin capitalisation, meaning where equity in real sense is called a loan just to reduce the tax.

This 30% Tax EBITDA limitation to interest deduction does not apply to Micro, Small and Medium Size companies (SMMEs), variable loan stock companies and also for companies in banking and insurance industry.  What is SMME?  For the purpose of interest deduction (and not for the any other purposes under Botswana Tax Act), it is a company that is not part of a group.  What is a group?  A group means two or three or more associated companies.  What is an associated company?  An associated company can be a resident or non-resident holding 20% shares in another resident or non-resident company.  Simply put, once you have an inter-company shareholding of 20% or more, then 30% of Tax EBITDA restriction for interest applies, whether the associated company is resident or non-resident. 

There are two instances of interest that has nothing to do with thin capitalisation rule but we have to mention them here.  Sometimes a participator (a closely connected person to a company whether a shareholder or creditor) takes away dividends but calls it a loan taken from the company.  Commissioner General has got powers to call it a dividend and ignore it as a loan and thus force 7.5% withholding tax.  Sometimes a participator can take a loan from his own company at a reduced rate of interest.  In that case whatever is the advantage he gets in terms of redued interest payment can be deemed as his income and he may have to pay tax on that benefit.

Head Office Charges for mining companies

For mining companies head office charges are limited to 1.5% of turnover.  Any amount paid in excess of 1.5% will be taken as dividends.  This does not mean that transfer pricing rules will not apply to this transaction.  Sometimes trasfer pricing rules or arm's length principle can only allow, say 1%, then Commissioner General may deem anything paid in excess of 1% to be dividends.  Therefore 1.5% of turnover can be taken as a cap in the context of transfer pricing rules.

General Compliance

Please don’t ignore notices calling for returns.  Don’t submit returns carelessly.  Don’t give false information.  Please don’t ignore keeping proper records.  Don’t neglect answering any queries from the Commissioner General.  You will be fined P 10,000 and you may also be jailed for a year for such "misconduct".  Sometimes you won’t get away just with the fine and imprisonment.  You may be further fined P 100 per day of offence.  (Sec. 122).

International Financial Services Centre

IFSC activities now have a narrower definition.  It can apply to share transfer, stock broking, banking, investment and insurance businesses.  It can extend to accounting and financial administration and registration and transfer agency services.  Here the idea was to comply with the recommendations of Forum of Harmful Tax Practices which felt that Botswana IFSC laws are potential harmful.  All these services should be rendered to related companies and not to outsiders.

Foreign Controlled Mining Operations

Twelfth schedule that deals with taxation on mining income will not have provisions relating to foreign controlled mining operations.