Monday, March 30, 2020

“Shady” business costs Botswana billions – report

Botswana is believed to be losing billions of Pula because of a “shady” economic model sponsored by De Beers diamond mining company and a clutch of experts from “notorious secrecy jurisdictions” – Luxembourg, Bermuda and the Isle of Man the Tax Justice Network has revealed.

It has further emerged that although Botswana has a relatively high secrecy score of 62, it has gained an insignificant market for offshore financial services. Botswana accounts for just 0.00142% of the global market in financial secrecy. The cost to the economy from revenues forgone has however not been quantified although it is estimated in billions of pula.

In its Financial Secrecy Index 2020 published on 18th February, the tax justice watchdog noted that the unknown cost of Botswana’s secrecy dates back as early as 1995 with its shady relationship with De Beers. Years later Botswana explored the option of establishing an International Financial Services Centre (IFSC) ‘as a possible engine of growth for the economy’.

At the time, the United States Agency for International Development provided funding to carry out a feasibility study. Deloitte & Touche South Africa managed the project, along with advisors from Luxembourg, Bermuda and the Isle of Man – all notorious secrecy jurisdictions. The team recommended that ‘in the face of increasing international and regional competition. Botswana needs to act quickly and decisively. Several years later, diamond-rich Botswana appears to have followed these recommendations, earning itself the nickname ‘the Switzerland of Africa’.

In 2003, it established an International Financial Services Centre offering packages that exempt companies from capital gains and withholding tax, with limited foreign exchange controls. Tax benefits also include a discounted corporate tax rate of 15% on profits, although they are taxable on worldwide income, and a zero rate for VAT.

The report says that tax exemptions are extended to interest, dividends, management fees and royalties when paid to a non-resident or IFSC company.

Residence permits can also be obtained through investment, starting as low as EUR 43,000.

In competition with Mauritius to be an entry point to doing business in other African countries, the report says, Botswana currently has 13 Double Taxation Avoidance Treaties; another six are awaiting ratification, and six more are in various stages of negotiation.

It emerges from the report that Botswana comes in at 113rd place in the 2020 Financial Secrecy Index. Although the country has a relatively high secrecy score of 62, it has gained an insignificant market for offshore financial services. Botswana accounts for just 0.00142% of the global market in financial secrecy.

The international tax watch dog noted that Botswana “is in the process of setting up eight special economic zones for activities ‘with perceived comparative advantage, including mineral beneficiation, leather, beef, financial services and agricultural processing.”

The Tax Justice Network Financial Secrecy Index, warned “the arrangements and incentives offered to companies are likely to come at a cost to the country’s coffers.”

Illustrating how the secrecy may be haemorrhaging Botswana, the tax justice watchdog states: “For example, the arrangement that the government has with De Beers for the country’s famous diamonds is shrouded in secrecy: contracts are not public, the valuation formula of diamonds produced is unknown, increasing the risk of trade mis-pricing, and the corporate ties between the ruling party and the company are not transparent.”

According to a recent study into De Beers and Botswana’s diamonds, ‘Botswana’s paper success does not translate to the kinds of gains the country should be receiving.

The Tax Justice Network added that “Disclosure of key information and removal of De Beers’ monopoly would liberate the economy and its democracy; Botswana has faced international scrutiny.”

 “The financial sector contributed 15.3% to GDP in 2017, up from 14.7% in 2011.  Yet as of mid-2017, well over a decade after tax concessions and holidays were instituted, the cost of these to the country in terms of revenue forgone has not been quantified, according to the International Monetary Fund (IMF),” the report says.

The Tax Justice Network further noted that “IMF warns against tax incentives: ‘international best practice has shown that accelerated depreciation allowances or investment tax credits associated to a loss carry-forward period are far more cost-effective and better to attract long-term investments than temporary tax holidays and rate reductions, which tend to attract foot-loose enterprises.”

It says “Foot-loose enterprises or not, Botswana does not appear to be heeding this advice as it continues to seek to create a so-called ‘investor-friendly’ business environment.”

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