The government has once again sent a signal that it will introduce regulations relating to transfer pricing. This is not the first time the Finance Minister Kenneth Matambo makes such a hint.
In February 2017, still in his budget speech Matambo announced that the government was considering proposals from the Taxation Review Committee that include the introduction of transfer pricing rules to address tax avoidance and to align Botswana’s tax system with international best practice.
Grant Thornton Partner (Outsourcing and Taxation) Rajesh Narasimhan explained that transfer pricing pertains to the costing and pricing of tangible goods, intangible asset and supplies of services transferred or moved between related companies or group of companies located in the same or different tax jurisdictions.
“Transactions involving related companies should apply the concept of arm’s length transactions”, Narasimhan said.
As it stands, Botswana does not have a transfer pricing regime but the government revenue agency, Botswana Unified Revenue Service (BURS) is said to be conducting transfer pricing audits under the general anti-avoidance provisions of the Income Tax Act.
It is expected that when introduced, a transfer pricing regime would bring some degree of certainty regarding the tax treatment of related-party transactions.
In their national budget commentary early last year, experts at KPMG Botswana indicated that currently capitalisation rules are specific to mining and International Financial Services Centre accredited entities.
“It is expected that future thin capitalisation rules would have a more general application”, KPMG Botswana said then.
Meanwhile in his 2018/19 speech Matambo indicated that the government has kick started the process of reviewing the Income Tax Act to introduce Transfer Pricing Rules.
“Review of the layman’s drafts of the Bills is ongoing and the plan is to have the laws approved by Parliament in 2018”, Matambo said adding that the Tax Administration Act to will also be developed to improve efficiency of tax revenue collection in the country.
The decision to speed up changes in tax legislation comes hardly a few months after the International Monetary Fund (IMF) called on the government to accelerate the planned tax revenue reforms. Hardly three months after the 2017 budget speech, the IMF team met with Matambo amongst other policy makers and made it public that Botswana’s tax revenue reforms need to be accelerated to protect public finances against any adverse developments and maintain the country’s track record of sound fiscal management.
The IMF says the fiscal profile is predicated on the authorities’ intention to increase tax revenues and slowdown the pace of spending on wages and salaries and on transfers to state-owned enterprises.
“In this connection, tax revenue reforms need to be accelerated to protect public finances against any adverse developments and maintain the country’s track record of sound fiscal management”, reads part of the statement released in mid 2017.