The Botswana Government has invited diamond manufacturers to provide opinions on an overall strategy for the country’s expanding cutting industry.
The move is part of an overall review of Government’s resource policy and is aimed at identifying areas for improvement in its current legislation.
Once primarily reliant on De Beers, but now increasingly independent, the Government is trying to re-establish a more independent mining sector to cater for an increasing number of new players that have applied for exploration and operating licenses.
A number of diamond companies are understood to have submitted their views about what they believe would be a sensible long-term strategy for the sector in terms of rough distribution, local trading facilities as well as fiscal changes.
According to a government official, the proposals will be discussed as part of the next National Development Plan (NDP10) which is being prepared.
“The diversification of our economy depends largely on foreign investment. There is no point in encouraging foreign investors to come to Botswana if the legislation works against them,” said Dr Akolang Tombale, current Permanent Secretary in the Ministry of Minerals, Energy and Water.
He added, however, that companies across the mining sector had done little so far to make the Government aware of some of the apparent stumbling blocks.
“The Ministry mainly deals with day-to-day issues in assisting foreign companies. It is not there to examine and improve the legislation unless it receives feedback from industry,” Tombale said.
A tax expert at one of the big international accountancy firms, who spoke on the basis of anonymity, said Botswana’s mining tax regime was outdated and full of uncertainties.
“The current mining tax legislation was updated in 1999 at the same time that the new Mines and Minerals Act came in and this was done as a new Schedule in the Income Tax Act. However, the existing legislation in the main body of the Act was not amended in any way and is very outdated, ambiguous and investor unfriendly.”
“As a consequence of this, new investors are encountering tax risks which give rise to uncertainties that impact on their feasibility studies. Business abhors a vacuum and investors would rather have certainty surrounding the taxes that they will have to pay and want to be able to quantify with a reasonable degree of accuracy the amounts to be included in their feasibility studies,” he said.
Diamond mining companies can enter into a separate tax agreement with government which overrides the provisions of the Income Tax Act, and therefore gives them a degree of tax certainty. But companies mining other types of minerals cannot enter into such agreements, he said.
Several financial experts in Botswana have criticized its withholding taxes and high interest rates, claiming they form an impediment for foreign investors wanting to do business in the country or raise finance locally.
“Unless reduced in terms of Double Taxation Agreements, withholding taxes at 15 percent of dividends, royalties, interest and management fees remitted by Botswana resident companies to their non-resident shareholders represent a significant disincentive for foreign investment,” said Stephen Pezarro, at Capital Corporate Finance, a Botswana-based financial services advisory firm.
“With the prime bank rate at 16 percent per annum and inflation at 7.3 percent – as at October 2007 – Pula denominated commercial debt finance is an expensive alternative for hard currency exporters,” he said.
He added however that domestic demand from institutional investors for Botswana Stock Exchange listed stocks have driven the current average historic multiple to 17.1 times, making the stock exchange a very attractive platform on which to raise capital. ( IDI).