Botswana finally cracks down on transfer pricing

17 Dec 2018

BY BONNIE MODIAKGOTLA

The multinational firms that dominate Botswana’s private sector will have to make adjustments as the country’s ministry of Finance and Economic development brought in a raft of changes to the Income Act, in particular to clamp down on transfer pricing which was rampant.

The Tax Justice – an independent advocacy group concerned about tax avoidance, tax competition, tax evasion, and tax havens - says transfer pricing is one of the most important issues in international tax, and defines it as when two companies that are part of the same multinational group trade with each other: when a South African based company, for example, buys something from its Botswana-based subsidiary. When the parties establish a price for the transaction, this is transfer pricing.

Furthermore, the advocacy group disclosed that about 60 percent of international trade happens within, rather than between, multinationals: that is, across national boundaries but within the same corporate group. Suggestions have been made that this figure may be closer to 70 percent.

Tax Justice acknowledges that transfer pricing is not, in itself, illegal or necessarily abusive. What is illegal or abusive is transfer mispricing, also known as transfer pricing manipulation or abusive transfer pricing - they may wish to artificially distort the price at which the trade is recorded, to minimize the overall tax bill. This might, for example, help it record as much of its profit as possible in a tax haven with low or zero taxes.

Now Botswana for the first time, acting under exerted pressure, has introduced transfer pricing rules. The current Income Tax Act does not have explicit provisions on transfer pricing. But this has now changed after Kenneth Matambo, Finance minister, successfully lobbied legislators on Wednesday to pass the amended Income Tax Bill.

The new Bill introduces provisions relating to the treatment of transfer pricing - Matambo says the introduction of transfer pricing rules would act as a deterrent to transfer pricing abuses which would in turn be beneficial to Botswana. The Income Tax Act was also amended to empower Botswana Unified Revenue Services’ (BURS) Commissioner General to disregard any transactions that have the effect of reducing, limiting or postponing liability to tax by companies, including fraudulent transactions.

Another amendment expected to rile up multinationals which used transfer pricing to move funds from one country to another disguised as expenses is a new clause which limits the amount of net interest that can be deducted as an expense in any year.

“The provision seeks to disallow deduction of interest expense that exceeds 30 per cent of tax earnings before interest, tax, depreciation and amortization; otherwise in the accounting language referred to as EBITDA. Currently, there is no limit to the amount of net interest that can be deducted as an expense,” revealed Matambo.

The crackdown on errant tax payers continues with amendment that now makes it a requirement for taxpayers to furnish the BURS Commissioner General with all documentation required under the transfer pricing provisions in the new Act. Prior to that, there was no requirement for taxpayers to furnish the Commissioner General with such documentation.

Matambo’s recently amended Income Tax Act now includes penalties for failure by a taxpayer to comply with the new transfer pricing rules. Moreover, the Bill introduced a new civil penalty on failure to provide transfer pricing documentation. In addition, the Income Tax Act has now made it an offence for entering into a transaction which is regarded as artificial or fictitious.

“This current practice is by companies entering into the accounts fictitious transactions. That is going to be disallowed from now on,” warned Matambo.

Amendments passed by parliament on Wednesday which now form part of the Income Tax Act include a limit on the mitigation for a penalty, and firm definition of International Financial Services Centre (IFSC) - by removing reference to dealing exclusively with non-residents, thus removing the ring-fencing of activities relating to IFSC companies.

Matambo says Botswana made a commitment to have the IFSC regime amended to remove harmful tax features as flagged by Organisation for Economic Cooperation and Development (OECD) and its agencies, and we put a date of December 18 for this purpose.