Bank of Botswana targets illicit financial flows

  • BURS amending tax rules to curb transfer mispricing
  • Tax revenue lost from transfer pricing
  • Companies inflate operational costs to evade tax
  • Transfer pricing rife in Banks and Mining companies


For the first time ever, Bank of Botswana (BoB) has come out with guns blazing in condemnation of illicit financial flows, leading to billions of Pula being shipped out of Botswana every year.
According to Dr Tshokologo Kganetsano, Director at the Research and Financial Stability Department at the Bank of Botswana (BoB), government needs to swiftly address illicit financial outflows, which are robbing the country of money that could develop the economy.
He spoke to this publication on the sidelines of the launch of the Central Bank annual report recently. According to the financial guru, illicit financial flows mostly originate from corrupt economic practices, fraud, illegal resource exploitation and tax evasion, as well as through profits earned from dubious accounting practices, such as transfer mispricing and complex corporate structures, which results in the loss of tax revenue.
Botswana has lost approximately P7.2 billion between 2003 and 2012 through illegal and deliberate misinvoicing, Global Financial Integrity revealed in its 2015 annual report while ranking Botswana number 17 of the worst hit countries in the African continent.
Among others, tax evasion involves companies inflating operating costs in order to reduce their reported profits. As a concern for Africa, the 2011 Report of the High Level Panel on Illicit Financial Flows from Africa (referred to as the Mbeki Report) focused on the matter, including the steps that must be taken to radically reduce these outflows to ensure that the resources remain within the continent.
Through Illicit Financial Flows (IFF), the report says, Africa loses more than $50 billion annually, 13 percent of the portion sourced for Southern Africa (Botswana included). West Africa, North Africa, Eastern Africa and the Central account for 38 percent, 28 percent, 11 percent and 10 percent respectively.
Further, Dr. Kganetsano said there is need to institute laws and regulations to prevent and penalise mispricing in order to enable externalisation of funds, evade or avoid income and trade taxes.
Moreover, he said there is need to ensure that African states establish or strengthen the independent institutions and agencies of government responsible for preventing illicit financial flows; and to also endorse instruments and commitments to combatting illicit financial flows by individual countries and at the global level.
“In this case, a well-developed regulatory framework and tax administration is required to enforce desirable public policy, conformity to accounting standards and to promote willingness to pay taxes,” he said.
Dr. Kganetsano said other potential sources of funds forgone include interest payments on foreign debt and profits repatriated by foreign investors which could reflect a shortage of opportunities to support domestic retention of funds.
Interestingly with assistance from the BoB, the Botswana Unified Revenue Service (BURS) is already at work, crafting a framework that would address such illicit financial flows. “BURS is aware that a number of corporations avoid tax through transfer pricing,” Gaitswe Motsewabagale, the General Manager: Research and Reporting said while responding to an inquiry from this publication.
The tools of such financial exploitation, commercial tax evasion, trade misinvoicing and abusive transfer pricing, are used by corporate entities to over inflate their operational expenses (most of which is paid to the parent company), to facilitate the declaration of reduced profit margins, according to Motswewabagale. His concerns are also captured in a Joint research paper by the African Union Commission and the United Nations Economic Commission which found that large corporations and financial entities use loopholes in national laws to engage in Illicit Financial Flows.
Transfer pricing is mostly rife within the banking and mining sector though Motsewabagale argues that it is not only limited to the mining and banking sectors. He said BURS has observed the  trend across all sectors of the economy. Information sourced indicates that corporates also tend to exhaust at least 70 percent of revenue in management fees and expenses not clearly accounted for. This according to insiders is meant to dwarf declared taxable profits. During the audits, BURS says it verifies intra group expenses including management fees as they tend to be risky to ensure they are deductible in accordance with the law.
Industry observers say the banks and big financial services companies in Botswana, which are all subsidiaries of international companies have for years now, been typically paying their parent companies for management services, group business development and sales services, finance and cash flow functions, group Information Technology (IT) services, administration as well as for accounting and financial reporting. The payments  reduce the entities’ overall profitability and are made to internal accounts that further benefit the parent company. Experts also say BURS has to worry about mining companies in Botswana which have been mining for many years, extracting minerals and making revenue but declaring losses so not to pay tax, while their operational expenses and insider trading are high.
Through transfer pricing, blue-chip corporates have exploited slow oversight institutions and lax monetary policies as well as weak legislation which until recently the tax collector has been slow to address. Over pricing of transactions occurring between related companies, in particular companies within the same multinationals group, have been observed as the main vehicle by which illicit funds are moved. The transfer price can be manipulated to shift profits from one jurisdiction to another, usually from a higher tax to a lower jurisdiction. Commercial banks are accused of moving hundreds of millions of Pula to their foreign holding companies, a technique called transfer pricing, a form of Illicit Financial Flows (IFFs).
In view of such, Motsewabagale says BURS is building its capacity of auditors specializing in transfer pricing (TP). “We have proposed amendments to strengthen the anti-avoidance provision in the Income Tax Act, by introducing specific TP legislation and guidelines. We are subscribing to a transfer pricing database. A number of corporations are being audited for transfer pricing as we speak.”