BY PORTIA NKANI
The Business Botswana (BB), the mouthpiece of the business community have strongly called on the government to remove the amendment to increase the rate of transfer duty on the sale and transfer of property to non-citizens on the Transfer Duty Bill.
The proposed change to the Transfer Duty Act which was published in the Government Gazette dated 2nd November 2018 will raise the rate of transfer duty on property transactions for sales to non-citizens (both individuals and firms) from 5 percent to 30 percent.
In a detailed document seen by Sunday Standard, prepared by Business Botswana to the Minister of Finance, Kenneth Matambo dated 28th November 2018, raised that it would mark a huge step backwards and undermine the benefits of the many positive steps that have been realized in recent months.
The document signed by the Director, Policy and Advocacy Dichaba Molobe, indicated the proposal to increase this rate on foreigners is inconsistent with the objectives of increasing the openness of the economy and increasing competitiveness, both of which are central to the National Transformation Strategy.
“The potential negative effects on many participants in the economy are substantial, and will far exceed the benefits of any additional tax revenues that may be raised. We therefore strongly recommend that the proposal to increase the rate of transfer duty on the sale and transfer of property to non-citizens from 5% to 30% be removed from the Bill,” reads the document directed to Matambo.
In its defense, BB argued that, it is clearly “anti-foreigner” and anti-foreign investment, and therefore sends a negative message to the outside world, in contrast to the positive message being put forward by President Mokgweetsi Masisi and his senior officials.
This therefore conflicts with other moves such as relaxing visa and work/residence permit requirements.
It will raise costs for foreign investors, and therefore discourage investment, especially given that the acquisition of land or property is central to almost all business ventures.
This will further impact, not just on incoming Foreign Direct Investment (FDI) projects, but on the majority (by value of economic output) of firms in the country.
Given that it will apply to both wholly-owned foreign companies and joint ventures between citizens and foreign investors only 100% citizen owned companies are exempt.
The wide┬¡ ranging impact is in part due to the fact that the definition of non-citizen includes all companies unless they have 100% citizen ownership, as well as non-citizen individuals.
Given that the acquisition of land or property is required for new or expanding businesses, the document further argues that investment will be discouraged by higher costs, as will employment creation.
This will apply to many economic activities, such as a bank opening a new branch, a manufacturer acquiring land for expansion, a supermarket chain opening a new store, and more generally the development and opening of new offices, warehouses, factories, shops and mines.
Further the impact on companies listed on the Botswana Stock Exchange (BSE) could be substantial; given that all listed companies (apart from BTCL) have foreign shareholders.
As a consequence, this will be subject to the higher tax, and hence will be discouraged from investment and growth, and their profits will be reduced.
This will reduce their valuations, affecting the BSE index negatively as well as the value of investments in BSE shares held by pension funds etc.
Secondly, it notes that, the property companies listed on the BSE (RDC, NAP, Turnstar, Far Properties, Letlole and PrimeTime have business models based on property development, acquisition, and management. This business model will be devastated, as the economics of property development will be fundamentally and negatively affected by the increased tax which they will all be subject to.
Thirdly, it will put an end to the BSE’s efforts to attract new listings by local citizen-owned companies.
“Any such company listing on the BSE will acquire non-citizen shareholders, and will therefore find its tax rate on property acquisition rising from 5% to 30%, making listing unattractive. There will also be a substantial impact on the domestic market for all types of property.”
In his economic review document for the fourth quarter of 2018, Dr Keith Jefferis also shared the same sentiments arguing that although some policy changes are intended for a good purpose, they still need to be better thought through from the perspective of their impact on the private sector.
Dr Jefferis and his team of economists, Sethunya Sejoe and Kitso Mokhurutshe said this punitive change runs the risk of undermining the positive developments with regard to reaching out to attract foreign investors.
The pair also said will undermine the domestic property market, reduce property prices, and reverse recent efforts to expand mortgage lending by banks.
The definition of a citizen firm applies only to those that are 100 percent citizen owned, which means joint ventures between citizens and non-citizens are classified as foreign.
This in turn penalizes such joint ventures, which is counter-productive as they are one of the most effective ways to promote citizen empowerment.
Coming on top of this, the economic review noted that the Tax Amendment Bill makes changes that will effectively kill off one of the most important business structures in the property sector – the Variable Rate Loan Stock (VRLS) company.
The duo says this structure enables (tax-exempt) institutional investors such as pension funds to invest in property funds, and has been an important driver of the listing of property companies on the Botswana Stock Exchange (BSE). Combined with the transfer duty changes ÔÇô under which all BSE-listed property companies are classified as foreign ÔÇô the negative impact could be substantial.
Back on the Business Botswana document, the impact of the tax increase will be to remove a substantial portion of property market participants (i.e. non-citizen individuals, companies and joint ventures), or at least to substantially reduce their role in the market. This will in turn lead to much reduced property market liquidity, fewer transactions, and reduced property prices.
The knock-on effects
It is no doubt this may have been the main reason for the measure – an attempt to reduce property prices.
But BB is of the concern that many properties will now become unsaleable, or saleable only at much lower prices, with many potential buyers now out of the market, or willing to only offer much lower prices given the higher tax burden.
The value of property held as security for bank loans will be reduced which could trigger demands for loan repayments.
It will certainly make banks less willing to make property loans, affecting all buyers and they will reduce the proportion of property values that they are willing to finance, hence requiring larger deposits.
Lower property values could cause banks to make greater losses when they need to foreclose, thereby weakening the banking sector. Engineering lower property prices in this way could lead to a downward spiral of property price collapse, which would have a widespread negative impact.
While it may raise some additional tax revenue, BB further noted that this is unlikely to be significant as the measure is likely to substantially reduce property transactions by non┬¡ citizen individuals, companies and joint ventures that will be liable to pay the increased tax.
Alternative proposals by Business Botswana
It is understood that the proposal to raise the transfer duty for non-citizens was prompted by concerns that too many non-citizens are buying tribal land plots.
BB called on Matambo’s Ministry to provide data and evidence to demonstrate the magnitude of this perceived problem.
Should it be established that there is a problem that needs to be addressed, BB propose that this is done by introducing a minimum transaction value for transfer of tribal land to non-citizens.
This would have to be done through an amendment of the Tribal Land Act. BB’s proposal figure is to range P500, 000 to P 1 million be established as the minimum transaction value.
Another request on clarification by BB is on receipt for payment of transfer duty to BURS issued in the normal course of business will be sufficient for this purpose, and confirmation that the process will not introduce any delays in the transfer of properties.
The section of the Bill relating to the payment of transfer duty on transactions involving the sale of shares should be re-worded to include only companies where ownership of property is the main part of the company’s business, and should exclude all companies listed on the BSE.
Requiring a third-party valuation will add unnecessary expense and delay to property transactions, and is inconsistent with the principle of deregulation of the economy that is being pursued elsewhere.
BB therefore urged that this provision be removed from the Bill, and that an independent valuation only be required in exceptional circumstances where the Commissioner-General wishes to challenge the sale price.
In acknowledging the receipt of the raised concerns by Business Botswana on December 6th 2018, the Ministry promised to arrange a meeting early January this year, which has not yet happened.