Letshego’s Tax Reduction Strategy Pays Off
- Tax paid to BURS to decline further
- Looks to Mauritius for tax efficiency
Blue chip microfinance group, Letshego Holdings Limited, has effectively lessened taxation paid to the taxman, Botswana Unified Revenue Service (BURS), the company’s latest financial results show.
For the year ended 31st December 2019, Letshego’s effective tax rate was 39 percent, which is 11 percent lower than the 50 percent effective tax rate achieved during the 2018 corresponding period. According to Group Chief Executive Officer (CEO) Andrew Okai, the low tax rate is a demonstration of progress towards the target range of 30 percent to 35 percent, as tax health and compliance is optimised.
During the 2018 reporting period, half of Letshego’s pretax profit was swallowed up by tax. At that time, Letshego paid P510 million in tax. The unfavourable group effective tax rate of 50 percent was the result of three main factors: partial write-down of the carrying value of deferred tax assets at Letshego Holdings, higher withholding tax charge on dividends from subsidiaries, and tax provisions in respect to two subsidiaries.
The company resubmitted historical tax returns to BURS in 2018 pursuant to legal advice on the appropriate treatment of foreign tax credits for its Botswana tax returns for the periods 2014 to 2016. The group effective tax rate improved in 2019. Letshego in 2018 was also affected by a specific tax provision for East Africa, increased dividend flows from subsidiaries leading to a higher withholding tax on these dividends, and inter -group tax costs.
The one off tax charge from an East African subsidiary did not re-occur. The at-source withholding tax on dividend flows from subsidiaries is expected to remain part of the overall tax charge going forward as higher dividend volumes are declared from subsidiaries to the holding company on the back of profitability.
Profit before tax was P1.1 billion, an 11 percent increase from the prior year. Through the 39 percent effective tax rate, BURS was paid was over P430 million, leaving the company with P692 million in profit after tax. The post tax profit was, however, 35 percent higher than what was recorded in 2018.
Okai further said initiatives to optimise the group’s tax structure are being explored.
The premier micro-finance firm is in the process of moving its subsidiaries to the tax haven of Mauritius in a quest to minimise its tax obligations. Infact, Letshego, a Botswana-born company, announced in its previous financial results statement that the group has introduced an intermediate holding company structure in Mauritius. The company said this will not result in any change in the ultimate ownership of the subsidiaries but will allow for a more tax efficient movement of dividends within the group.
In August 2017, Letshego transferred its ownership in Letshego Financial Services Swaziland to Letshego Mauritius Limited for a purchase consideration of P135 million. The cost of the investment was P85 and Letshego Holdings Limited recognised a gain of P135 million. Further, in September 2017, Letshego Holdings Limited transferred its ownership in Letshego Microfinance Bank Nigeria to Letshego Mauritius Limited for a purchase consideration of P70 million. The cost of the investment was P212 million and Letshego Holdings Limited recognised a loss of P142 million.
Before he unexpectedly quit his position as CEO three weeks ago, Smit Crouse announced that Letshego’s group effective tax rate was expected to improve in 2019, which happened. It emerged that Letshego was restructuring its business to achieve lower taxes.
From 2017, Letshego embarked on a re-organisational structure to be rolled out in three years (2017 to 2019) aimed at achieving tax efficiency. According to the structure, Letshego will in three years’ time (from 2017), effect the exercise which will see all subsidiaries fall under Letshego Mauritius, subject to regulatory approval and tax laws. Mauritius offers a number of incentives to offshore investors, including an open economy, favourable tax laws and a modern banking system all in a rich tropical environment. Mauritius is a small island located in the Indian Ocean. Various global rating institutions have placed Mauritius under a few of the world’s worst tax havens, looking at the extent to which Mauritius employs the most damaging tax policies, such as zero corporate tax rates, the provision of unfair and unproductive tax incentives, and a lack of cooperation with international processes against tax avoidance – including measures to increase financial transparency.
Letshego intends to allow for the lowest possible withholding obligation on dividends flow from the subsidiaries to Letshego as part of the overall capital management of the group. The lender, which owes its life blood to Botswana, is the holding company of 11 subsidiaries located in Botswana, Ghana, Kenya, Lesotho, Mozambique, Namibia, Nigeria, Rwanda, Swaziland, Uganda and Tanzania. With the establishment Letshego Mauritius, the company will be taxed differently as Mauritius will act as the treasury hub for the group, thus reducing considerably on the tax it pays to BURS as well.
The microfinance firm had sought legal advice in each of the jurisdictions that the subsidiaries operate to determine what local regulatory approvals are required for the reorganisation aimed at achieving what they call “tax efficiency.” Similarly, Letshego engaged tax advisers in the respective jurisdictions to determine the feasibility of implementing the reorganisation.
The former CEO also acknowledged that the group was moving its operations to Mauritius because like any other profit motivated company, Letshego will do anything legal to minimise tax rates and pay more dividends to its shareholders.