Taxing times

Corporates incorrectly applying new tax laws

Corporates, primarily Variable Rate Loan Stock Companies and property developers, are wrongly applying the new tax law on interest, Voice Money has learnt.

Most of these companies stated in their half-year financial results that their tax bill has gone up by millions due to the Income Amendment Tax publicised last December.

The amendment introduced a limit on the amount of interest that companies can claim as tax deductions or expenses for tax purposes, effective beginning of July.

Speaking to Voice Money this week, tax consultant at Aupracon, Jonathan Hore, queried how a law that is not yet active could affect financial results released before the period.

“The obvious answer is that these companies are assuming that simply because their financial year-ends will close after 1 July 2019 for example, maybe 1 October 2018 to 30 September 2019 or 1 January 2019 to 31 December 2019, their full year interest expense will have to be capped to the new limit of 30 percent of tax EBITDA,” Hore told Voice Money.

However, the tax specialist stressed this was not the case.

“If their interest expense exceeds 30 percent, they only consider interest incurred from the 1st of July 2019 going forwards and not interest incurred before the date,” he explained, adding that according to the courts, laws cannot be applied retrospectively if there is a clear commencement date.

Hore further noted that the correct treatment for corporates whose financial year ends after the stipulated date is to firstly exempt the interest earned up to July 1 from the law as it was not yet operational.

“They should only subject interest earned after the commencement date to the 30 percent limit. The effect of this incorrect treatment is that these corporates will overpay corporate tax, which will hurt their shareholder’s earnings as they go down,” he warned.

Though property developers have been the most vocal about the law, according to Hore it affects all companies and is not limited to just property.

The law itself has been met with resistance as it is feared it could slow down business borrowings, effectively impacting on economic growth and job creation.

It is not yet clear whether Botswana Unified Revenue Service (BURS) has made any public guidance regarding the law but Hore insists even if they were to issue a guidance, it would still need to follow the mentioned rules of interpreting statutes.

The tax expert says the problem with this provision is that it penalizes businesses for incurring interest genuinely borne in earning taxable income.

“Also notice that the taxable income from that business is not capped but the interest expense is limited. The most affected entities are those which need financing which far exceeds their capital injections such as property development companies, particularly Variable Rate Loan Stock companies,” he concluded.

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