De Beers is refusing to sign the sales agreement with Botswana until its tax issues for the Botswana Unified Revenue Services (BURS) are resolved – Sunday Standard investigations have revealed.
BURS on the other hand is stalling to sign a bilateral Advance Pricing Agreement (APA) with the world leading diamond group and the United Kingdom tax administrator, the HM Revenue & Customs, because of suspected base erosion, profit shifting and international tax and transfer pricing by De Beers with tax implications estimated at P 7 billion owed to the Botswana taxman.
The bilateral APA is a binding agreement between the two tax administrations and De Beers Diamond Company. This is entered into by reference to the relevant double taxation convention. It governs the treatment for tax purposes of future transactions between associated taxpayers.
A recently leaked BURS audit report on De Beers activities suggests that profits from the De Beers operation in Botswana are shifted to the De Beers subsidiary in UK through inflated service charges.
The Office of the President (OP) is alleged to have ordered BURS to sign off the APA with De Beers and the British HM Revenue & Customs and and write off the P7 billion tax bill in favor of diamond company.
Information reaching Sunday Standard suggests OP prevailed over the taxman following De Beers’ refusal to sign the Sales Agreement with Botswana Government.
The decision to cancel the debt was allegedly reached at a meeting attended by De Beers Botswana Resident Director Dan Moroka, Permanent Secretary to the President (PSP)Emma Peloetletse, Director of the Directorate of Intelligence and Security (DIS) Peter Magosi, Permanent Secretary at the Ministry of Finance Wilfred Mandlebe, and BURS Commissioner General Jeanette Makgolo. It is understood that the initial bill stood at approximately P3 billion but rose to an estimated P7 billion in interests and penalties.
De Beers has refused to respond to a Sunday Standard inquiry regarding the cancellation of the tax bill, opting to rather focus on question relating to a recently leaked BURS internal audit report questioning the parasitic relationship between the diamond company and the Botswana government.
“Any allegation of tax malpractices by De Beers in Botswana are untrue and do not reflect the facts. We are fully committed to paying the right amount of tax, at the right time, everywhere we operate, and engage with the Botswana tax authority in an open, transparent and collaborative manner,” said Otsile Mabeo Vice-President, Corporate Affairs, De Beers Group.
“On the broader question of whether De Beers pays its fair share as a corporate citizen in Botswana. This is a debate we welcome, and the facts here are beyond doubt: De Beers Group, through its Gaborone-based Global Sight-holder Sales (GSS) business and the Debswana and DTCB joint ventures, is the largest single tax contributor to Botswana.” Both BURS and OP also refused to address questions from Sunday Standard.
The allegations about the tax bill cancellation come at a time when the diamond company and the government of Botswana are locked in protracted negotiations over a new 10 year partnership following the expiry of the 2011 contract.
Botswana wants more from the partnership with De Beers. The government has been pushing for more transparency and a greater share of the profits from the partnership. Botswana also wants to be more involved in the diamond value chain, including the cutting and polishing of diamonds. The government wants to develop the local diamond industry and create more jobs in the sector.
The business partnership between De Beers and the Botswana government has been seen as exploitative in favor of De Beers because the Botswana government has been forced to accept unfavorable terms in order to gain access to diamond mining resources.
A recently leaked internal audit of De Beers’ operations by BURS has raised more questions about the exploitative relationship between De Beers and Botswana. The audit explores how De Beers, through its subsidiary De Beers Global Sight-holder Sales (DBGSS) has exploited loopholes in the contractual partnership with Botswana.
The audit attempts to indicate how De Beers has used marketing and intellectual property fees paid to De Beers UK (DBUK) as a tax evasion strategy. DBGSS moved from London to Gaborone in 2013 as part of a new 2011 agreement between Botswana and De Beers.
DBUK is a wholly-owned subsidiary of De Beers. De Beers is an 85 percent owned subsidiary of Anglo American Plc, incorporated in the United Kingdom with Botswana owning just 15 percent.
DBUK’s principal activity is the provision of corporate functions and marketing services for the De Beers Group, and development and maintenance of intellectual property. The key function of the Company is to develop and maintain intellectual property relevant to the diamond industry, and to provide marketing services to other Group companies. The Company receives income for marketing and intellectual property services provided on behalf of the Group.
The audit report by BURS claims the transactions between DBGSS and its related parties have had significant tax implications on the government of Botswana, giving rise to possibilities of base erosion and profit shifting.
Base erosion and profit shifting (BEPS) refer to tax planning strategies used by multinational enterprises to exploit gaps and mismatches in tax rules to avoid paying tax.
The BURS audit report points to a strong negative correlation between marketing fees paid to DBUK and the sales and revenues from rough diamond sales. “DBUK faced a dilemma prior to the migration of its diamond aggregation and sales functions to Botswana from the UK,” the BURS audit report says. “In the 5 year period between 2006 and 2010, the company had sales revenues of US$26 billion and earned operating profits of US$293 million-about 1% of the rough diamond sales over the same period.” The audit report sales in order for the migration to Gaborone to be commercially viable, DBUK would need to continue to earn an average operating profit of 1 percent of rough diamond sales that would be made in Botswana. That could only be achieved through license and marketing fees, the audit report says.