The new law—The Income Tax (Amendment) Act, 2018—includes measures that:

• Introduce transfer pricing rules
• Revise the general anti-avoidance provisions to exclude any reference to related-party transactions that are now specifically addressed under the transfer pricing provisions
• Introduce legislation to counter “earnings stripping” by companies
• Align the provisions of the legislation relating to international financial services company to the standards set by the Forum on Harmful Tax Practices (FHTP)
• Update the civil and criminal sanctions for non-compliance with specified provisions of the legislation

Under Section 36A, the legal framework is effective to allow for transfer pricing regulations in Botswana. The transfer pricing legislation is premised on the arm’s length principle, and the major features of the transfer pricing regulations include the following.

• Taxpayer obligations—a taxpayer is required to:
  • Determine taxable income arising from a transaction with a related or connected person in a way consistent with the arm’s length principle.
  • Prepare and keep transfer pricing documentation and furnish such documentation as and when required by the Commissioner General.
  • Furnish the Commissioner General with third-party invoices in support of all claims for deduction of the cost of acquisition of new or used assets acquired from a non-resident connected party when such assets were purchased by the non-resident connected person from an independent third party. The Commissioner General will deem the cost of such assets to be “nil” if third-party invoices are not provided.
• Arm’s length principle—A transaction will be treated as consistent with the arm’s length principle if conditions of the transaction do not differ from conditions that would have applied between independent persons in comparable transactions, conducted under comparable circumstances.
• Authority granted to the Minister—The Minister is authorized to prescribe:
  • Regulations governing;
    • The determination of transactions consistent with the arm’s length principle
    • The quantum of transfer pricing adjustmentso Advance pricing agreements (APAs)
  • Transfer pricing documentation to be maintained by taxpayers
• Authority granted to the Commissioner General (tax authority)—The Commissioner General is authorized to: 
  • Make transfer pricing adjustments so that the resulting taxable income is consistent with the amount that would have accrued had the conditions of the transaction been consistent with the arm’s length principle.
  • Deem the cost of assets acquired by a taxpayer from a non-resident related party to be “nil” when the non-resident related party acquired the assets from an independent third party and the taxpayer has not provided the third-party invoice.
  • Enter into unilateral, bilateral and multilateral fixed-term APAs. Bilateral and multi-lateral APAs are restricted to persons that are residents of countries which have double taxation avoidance agreements with Botswana.
  • Mitigate any penalties chargeable for the failure to furnish transfer pricing documentation to an amount of not less than P 250,000 (approximately U.S. $23,600).
• Penalties—The amounts of penalties chargeable for failure to comply with transfer pricing legislation are:
  • Penalties resulting from a transfer pricing adjustment—the greater of 200% of the tax arising from the transfer pricing adjustment or P 10,000.
  • Penalties for failure to furnish transfer pricing documentation—an amount not exceeding P 500,000 subject to a minimum of P 250,000 upon mitigation.

Tax professionals in Botswana understand that the transfer pricing legislation will apply to all related-party transactions including transactions between resident connected persons. There is a certain amount of ambiguity in the application of the legislation because the following key terms are not defined:

• “Assets”—the view of tax professionals is that the general definition of assets, which includes “assets in any form including inventory,” will apply.
• “Connected person”—the view of tax professionals is that the definition in Section 2 will apply.

Taxpayers are advised to review their transactions with related parties to determine that these transactions are consistent with the arm’s length principle.

The general anti-avoidance provisions of Section 36 have been amended to exclude related-party transactions because these are covered by the transfer pricing legislation. Under amended Section 36, the Commissioner General is authorized to:

• Restate transactions considered to be fictitious or artificial—that is, when such transactions have the effect of avoiding, reducing or postponing the tax liability of any person in any tax year—in such a manner that the Commissioner General deems appropriate in order to counteract the avoidance, reduction or postponement of tax
• Disallow the deduction of an assessed loss when the Commissioner General is of the opinion that the purpose (or one of the purposes) for a change in the shareholding in a company was to use an assessed loss or the balance of an assessed loss of the company in order to avoid or reduce tax liability of the company or any other person
• Impose a penalty of not less than P 10,000 but not more than 200% of the additional tax payable as a result of adjustments made in terms of Section 36

The tax law has been amended as follows:

• Repeal of Section 41 (1) (k) that allowed a deduction of interest incurred in the production of assessable income
• Addition of new Section 41(A) to:
  • Limit the deduction of “net interest expense” for any company (except banking and insurance companies) to 30% of “earnings before interest, tax, depreciation and amortisation” (EBITDA)
  • Define the term “net interest expense” as “interest paid or accrued by the company during the tax period, minus the amount of interest included in the taxable income of such company for that tax period”
  • Broaden the definition of the term “interest” to include, inter alia, loan raising or establishment fees, guarantee fees, and any payments that are economically equivalent to interest
  • Provide a carryforward period for the amount of “net interest expense” disallowed for (1) 10 years in the case of mining companies; and (2) three years for all other companies

These provisions will apply to entities included in the definition of “company” in Section 2, and as such apply with respect to:

• Any body corporate
• Any specified corporation
• A collective investment undertaking
• Any association or society whether incorporated or registered or not, but not a partnership
• Any charitable or religious or educational institution or a trust established for public purposes

Companies will want to review their debt-expenditure-to-tax-EBITDA ratios in the light of the potential tax exposures under the anti-earnings stripping rules. 

The provisions of the tax law governing the taxation of international financial services company (IFSC) companies have been amended as follows:

• Section 137 has been amended to define an IFSC company as “a company incorporated in Botswana to provide any of the approved financial operations under section 138(7) to its associated or related companies.” This effectively removes a previous restriction imposed on IFSC companies allowing only trade with non-resident entities or other IFSCs or specified collective investment undertakings.  
• The list of activities that constitute “approved financial operations” has been amended in Section 138(7) to:
  • Exclude the exploitation of intellectual property and the development and supply of computer software for use in the provision of IFSC approved services
  • Remove the restriction of banking and financial operations to transactions in foreign currency
  • Remove the restriction of broking and trading of securities to securities denominated in foreign currency

While IFSC companies are now allowed to do business with both residents and non-residents—provided that the activities are restricted to “approved financial operations”—it appears that only income arising from approved operations with non-residents will be subject to tax at 15%.

The provisions in paragraph 6 of the Twelfth Schedule—relating to interest payable by a foreign-controlled resident mining company—were repealed. 

The deduction of such interest is now subject to the 30% of EBITDA restrictions under Section 41A and the 10-year carryforward period of disallowed interest under Section 43A (2). 

This change may have a significant affect on the short-term cash flows projections of mining projects that are calculated on the basis of the former and now repealed provisions. 

The tax law was amended to increase the following fines or penalties:

• A taxpayer that fails to comply with any of the specified provisions of the tax law will be guilty of an offence and is liable to a penalty of P 10,000 (increased from P 1,000) and one-year imprisonment.
• Continued non-compliance and failure to comply with a notice issued by the Commissioner General renders the taxpayer liable to a further penalty calculated at the rate of P 100 (increased from P 10) and imprisonment for one month for each day of non-compliance with the notice.

Prison sentences would be imposed upon conviction by a competent court of law.

For more information, contact a KPMG tax professional in Botswana:

Silvia Camara-Roos | +267 71628684 | silvia.camara-roos@kpmg.bw

Leonard Muza | +267 3912400 | leonard.muza@kpmg.bw