Four months after its original stipulated date, Transfer Pricing Regulations were finally put into effect last Friday (12 July).
Last week, the Minister of Finance and Economic Development, Kenneth Matambo published the regulations through the Income Tax Regulations 2019.
Transfer Pricing is best described as the analysis of prices at which multinational enterprises transfer goods and services among themselves.
This practice has caused concern amongst the taxman, who worry that multinational organisations can use their relationships with subsidiaries to engage in tax erosion and profit shifting.
Earlier this year, when reading the 2019/2020 budget speech before parliament, Matambo noted that Transfer Pricing Regulations guard against multinational corporations’ attempts to minimize their tax liability by transferring their profits to low tax jurisdictions.
Following the delay, government has now moved to implement tax laws that will guard against such practice, which will ensure multinationals honour their correct tax liabilities.
Speaking to Voice Money this week, tax consultant, Jonathan Hore explained the most common example of Transfer Pricing is the overstatement of management fees charged on Botswana companies by non-resident parent companies, which result in what is known as Base Erosion.
This is the reduction of the Botswana taxable profits arising from inflated head office costs.
“Taxmen also fear that transfer pricing can be used to shift profits from high tax regimes to low tax regimes, which results in reduced group tax costs, allowing shareholders to take more in dividends,” he explained.
It is feared that multinational corporations could use their relationships with subsidiaries to manipulate prices in a way that would prejudice tax revenue collection in Botswana.
Under the new Transfer Pricing Regulations, multinationals and International Financial Services Centre (IFSC) companies will be required to keep transfer pricing documentation which stipulates how the prices of goods and services they trade among each are arrived at.
According to Hore, it is worth noting that Transfer Pricing will only apply between or among entities which are controlled by parent non-resident multinational corporations or those which control non-resident subsidiaries.
By control, he said the Income Tax envisages instances where one entity holds 51 percent shareholding in the other.
Having been introduced late, it is feared these developments could catch taxpayers off-guard, leaving them with little time to prepare for the time-consuming documentation and file them with income tax returns.
“The obvious effect is that some corporates may be found without the required documentation and be liable to penalties, if BURS does not provide commencement date concessions,” warned Hore.
Another challenge noted by observers is that the regulations do not provide transitional arrangements, which leaves some taxpayers in a fix.
Furthermore, with the Income Tax stipulating that the Finance Minister shall specify to the taxpayers terms and conditions under which such taxpayers may enter into in advance with BURS, it has however been noted that the regulations are silent on the matter.