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Botswana: Transfer pricing regulations, effective July 2019

Botswana: Transfer pricing regulations

The transfer pricing law in Botswana has an effective date of 1 July 2019. Under the legislation, the Minister of Finance and Economic Development is required to publish transfer pricing regulations.

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The Income Tax (Transfer Pricing) Regulations, 2019 were published on 12 July 2019 (which is also the effective date of the regulations).

Overview of transfer pricing regulations

The transfer pricing regulations provide a framework for enforcing the arm’s length principle, as envisaged under Section 36A of the Income Tax Act (Cap.52:01).

The transfer pricing regulations, among other items:

  • Exclude transactions between Botswana residents from the scope of transfer pricing adjustments except when one or both the parties are subject to the IFSC tax regime
  • Prescribe five approved methods of transfer pricing, namely:
    • Traditional methods—comparable uncontrolled price method (CUP), resale price method and cost plus method
    • Transactional methods—Transactional net margin method (TNMM) and profit split method
  • Prescribe the use of the CUP method when the approved transfer pricing methods are found to be equally applicable
  • Prescribe the use of a traditional method when a traditional method and a transactional method are found to be equally applicable
  • Authorize the Commissioner General to approve a transfer pricing method other than the approved methods when none of the approved methods can reasonably be applied and the other method yields results consistent with the arm’s length principle
  • Prevent the Commissioner General from overriding the taxpayer’s transfer pricing method if that method is consistent with the transfer pricing regulations
  • Require taxpayers to conduct comparability analysis by applying the appropriate transfer pricing method
  • Provide that no adjustment is to be made when the relevant financial indicator being tested is within the arm’s length range
  • Provide for the use of the median in the arm’s length range in making adjustments
  • Set out parameters for determining the median of the arm’s length range (i.e., the range of comparable and relevant financial indicator figures arising from the application of the appropriate transfer pricing method)
  • Limit the use of information on external uncontrolled comparables to information that is available to both the taxpayer and the Commissioner General
  • Authorize the use of comparables from “other geographic markets” in benchmarking studies when information on comparables from the same geographic market is not available
  • Specify circumstances when charges for services between connected (related) persons are to be considered to be at arm’s length and circumstances when such charges will be considered as not consistent with the arm’s length principle
  • Set out factors to be taken into account when determining arm’s length prices in transactions involving intangible property
  • Authorize the making of corresponding adjustments, provided certain conditions are met
  • Prescribe rules for maintaining contemporaneous documentation to verify the consistency of transactions for each tax year with the arm’s length principle and the filing of such documentation together with the relevant annual income tax return
  • Authorize the Commissioner General to obtain additional information as deemed necessary including requesting group information, in writing, when in a tax year, the taxpayer’s transactions with a related party within a multinational entity (MNE) group exceed P5 million (approximately U.S. $466,000)
  • Provide legal authority for reference to the Organisation for Economic Cooperation and Development (OECD) “Transfer Priding Guidelines for Multinational Enterprises and Tax Administrations” in the interpretation of Botswana’s transfer pricing regulations

The transfer pricing rules currently do not provide authority to the Commissioner General to enter into legally binding advance pricing agreements (APA) with taxpayers or to issue legally binding rulings on other tax matters.

KPMG observation

The introduction of the transfer pricing regulations is viewed by tax professionals as a significant development in the Botswana tax environment. However, some may view these rules as imposing onerous compliance obligations on taxpayer. Because benchmarking studies and the compilation of transfer pricing documentation are complex time-consuming tasks, taxpayer entities with financial years that close earlier than 30 June 2020 may face challenges in meeting the compliance obligations under the transfer pricing regulations. To avoid incurring penalties for a failure to file or late filing of transfer pricing documentation (currently, the minimum penalty is P250 000 or just over U.S. $23,000), taxpayers may want to consider making a request to the Commissioner General for an exemption from or an extension of time for filing their transfer pricing documentation for the 2020 tax year.

With the publication of transfer pricing regulations, it is expected that the tax authority (BURS) will intensify the focus on transfer pricing audits. Taxpayers with related-party transactions, therefore, need to consider reviewing their related-party transactions for compliance with the arm’s length principle and to have systems in place that will allow for compliance with transfer pricing documentation and filing obligations.

Finally, there are certain unanswered questions about the transfer pricing regulations, such as do they apply to transactions entered into before 12 July 2019?

 

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

Leonard Muza | +26 777 19 9067 | leonard.muza@kpmg.bw

Olivia Muzvidziwa | +26 777 19 9022 | olivia.muzvidziwa@kpmg.bw

Kenneth Sakonda | +26 777 19 9079 | kenneth.sakonda@kpmg.bw

Masa Selerio | +26 777 19 9069 | masa.selerio@kpmg.bw

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