Friday, July 10, 2020

Taxman moves against De Beers, multinationals

De Beers Botswana is being audited by the Botswana Unified Revenue Services (BURS) as government moves against multinational corporations in a bid to curb revenue leaks through tax evasion and tax avoidance.

The BURS inspection of De Beer’s books coincides with the Transfer Pricing regulations through Income Tax (Transfer Pricing) Regulations 2019 Bill which took effect nine days ago and the UN Economic Commission for Africa (ECA) annual Economic Report published two months ago which stated that multinational corporations, corrupt officials, and financial intermediaries around the world siphon off African wealth, leaving national budgets starved for resources to invest in health, education, and sustainable economic growth.

De Beers which has been in the news for years accused of tax avoidance in Botswana, South Africa and Namibia attracted the interest of BURS even before the Bill becomes law.

Under the new law, all multinational enterprises (MNEs) and International Financial Services Companies (IFSC) (including subsidiary or entities related to IFSC companies) are required to keep all documentation relating to their transactions which would stipulate how the prices of the goods and or services they trade in among each other were arrived at.

The Bill was published by the Minister of Finance & Economic Development (MFED), Kenneth Matambo on 12th July and regulation intended to take effect immediately.

The Minister pointed out that the shifting of profits from high tax regimes to low tax regimes resulted in base erosion.

This may be done by understating prices of goods sold by a Botswana entity to its non-resident parent and reflecting the true value of goods in the low tax regime, thereby shifting profits outside Botswana. De Beers has been accused of this practice especially when dealing with so called special stones.

Under the new law, in the event of any detected tax leakages due to transfer pricing, BURS is empowered to charge penalties equivalent to 200% of the under declared tax as well as annual effective interest of 18.96%.

Matambo explained government’s move  at his 2019/2020 Budget presentation thus, “…Transfer Pricing Rules guard against attempts by multi-national corporations to minimize their tax liability by transferring profits to low tax jurisdictions in order to pay less tax or where costs are charged to a company in a high tax jurisdiction to reduce profits and thereby pay less tax.”

Concern has been raised by tax experts that the regulations came much late as the transfer pricing laws were supposed to commence on 1 July 2019, hence the expectation that the regulations should have been in place at least three or so months before commencement.

Jonathan Hore, Managing Consultant-Tax, at Aupracon, shared his professional view on the motivation of the new law.

“The tax authorities fear that MNEs can use their relationships with subsidiaries to manipulate prices in a way which would prejudice tax revenue collections in Botswana. The most common example is the overstatement of management fees charged on Botswana based companies by non-resident parent companies, Hore highlighted.

He said this results in what is called Base Erosion, which means the reduction of profits otherwise taxable in the country being inflated from head office costs.

Matambo pointed out that

He pointed out that the shifting of profits from high tax regimes to low tax regimes as earlier alluded to by Matambo, results in reduced group tax costs. This then allows shareholders to take more in dividends.

The requirement to file transaction documentation is cited as just one of the five, Organization for Economic Cooperation & Development (OECD) methods. These are the Cost Plus, Comparable Uncontrolled Price, Resale Price, Transactional Net Margin and Transactional Profit Split methods.

Every entity which enters into a transaction covered by transfer pricing is required by the stipulated International Best Practice codes to use any one of the five.

These are reportedly complicated price determination methods which require the skilled input of specialized tax consultants to assist in implementation.

The actual compliance documentation entails at least 25 different components. These include relationships between MNEs, databases used to obtain comparables, the OECD method chosen and linking the prices to the financial statements.

To demonstrate the taxman’s seriousness, the regulations stipulate, among other various requirements, any service in respect of which payments are made can only be those which are, ‘actually rendered.’

Experts contend it is clear BURS will pay particular attention on management fees charged by parent entities to Botswana subsidiaries.

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Sunday Standard July 5 – 11

Digital copy of Sunday Standard issue of July 5 - 11, 2020.