- New law to curb capital flight
- BURS corporate tax collections expected to rise
With impetus from the United Nations and the African Union, the Minister of Finance and Economic Development, Kenneth Matambo, published the much-awaited Income Tax (Transfer Pricing) Regulations 2019 on 12 July 2019, paving way for the Botswana Unified Revenue Service (BURS) to pursue – and punish – multinational companies that have been avoiding tax by transfer pricing.
The regulations took effect from the date of publication (12 July 2019) but were expected some time in March 2019 as the transfer pricing law contained in the Income Tax Act could not be implemented without the regulations. The regulations therefore came very late because their enforcement should have commenced on 1 July 2019, hence the expectation that the regulations should have been out about three or so months before commencement to give taxpayers time to acquaint themselves with them.
Transfer pricing rules guard against attempts by multi-national corporations to minimise 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.
The tightening of the screws on companies follows a joint research by the African Union Economic Commission and the United Nations Economic Commission that has found that Africa loses more than $50 billion annually through illicit financial flows (IFF), 13 percent of it from Southern Africa, Botswana included. West Africa, North Africa, Eastern Africa and the Central Africa account for 38 percent, 28 percent, 11 percent and 10 percent respectively.
IFF, according to the report, is the money illegally earned, transferred or utilised. The money typically originates from three sources: commercial tax evasion, trade misinvoicing and abusive transfer pricing. The report was released last year.
THE STIPULATIONS OF THE REGULATIONS
Jonathan Hore, the Managing Consultant at Gaborone-based tax advisory firm Aupracon Tax, says the regulations require that all multi-national entities (MNEs) and international financial services companies (IFSC) companies (including subsidiary or entities related to IFSC companies) keep transfer pricing documentation that shows how prices of the goods and or services they trade among each other are arrived at.
Hore explains: “It is worth noting that transfer pricing will only apply between or among entities which are controlled by non-resident parent MNEs or those which control non-resident subsidiaries. Control, for income tax purposes, envisages instances where an entity holds at least 51 percent shareholding in another.”
Further, says the tax expert, every entity which enters into a transaction covered by transfer pricing is required to use any one of five methods of the Organisation for Economic Cooperation and Development (OECD). These are Cost Plus, Comparable Uncontrolled Price, Resale Price, Transactional Net Margin and Transactional Profit Split. Hore admits that these are complicated price determination methods and so will require the skilled input of specialised tax consultants to assist in implementation.
In order to apply the OECD methods, Hore says corporates will have to be prepared to fork out large sums of money to get the transfer pricing documentation prepared. He explains: “This is so because such corporates will have to pay heavy costs to access online data from international transfer pricing databases which give prices of comparable transactions from global trends. There are no such data bases in Botswana, meaning that corporates will rely on international suppliers who charge handsomely for access to such information.”
Even so, Hore says there is a measure of relief from these onerous obligations on MNEs for subsidiaries in Botswana because they will not need to prepare the documentation from scratch as they mainly consume services from their parent companies. Effectively they need only to notify their parent entities to provide them with transfer pricing documentation that complies with the regulations. However, he explains, local enterprises with non-resident subsidiaries as well as IFSC entities will need to create the documents from scratch and so are the ones that will feel the weighty tax compliance obligations brought about by the regulations.
Under the new regime, affected corporates are required to file the transfer pricing documents with each of their annual income tax returns. According to Hore, BURS can also request the transfer pricing documents at any time. Failure to avail the documents attracts a penalty of P500 000 that may be negotiated to not less than P250 000.
“The reason for filing of transfer pricing documents with income tax returns is to allow BURS to do pricing verification to detect any tax leakages,” he explains. “In the event that BURS detects any tax leakages due to transfer pricing, it can charge penalties equivalent to 200 percent of the under-declared tax as well as annual effective interest of 18.96 percent. These penalties and interest can literally cripple businesses, hence the need to ensure compliance with the tax laws.”
To show that the taxman is particularly worried about management fees charged to local MNEs by their parent companies, the regulations stipulate, among other various requirements, that any service for which payments are made can only be those that are actually rendered. Hore says this is a clear indication that BURS will pay particular attention on management fees charged by parent entities to Botswana subsidiaries. With the law now in place, BURS, according to Hore, will be able to get more tax from corporate that have been avoiding tax through transfer pricing.