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Tax laws tighten around megacorps

MBONGENI MGUNI
A legislative loophole through which some multinational corporations detoured millions of pula annually away from the taxman, is set to close soon, ending years of free rein, BusinessWeek has learnt.

Through abuse of a practice known as transfer pricing, multinational corporations have been able to reduce their tax obligation in Botswana by manipulating the pricing of products and services between local subsidiaries and their cross-border parent or sister companies.

By fudging the prices of intra-group management, legal and IT services, as well as the cost of loan/s guarantees and royalties amongst others, some multinational corporations have been able to lower their local tax obligations.

While various sections of the Income Tax Act touch on transfer pricing, experts say these do not cover the complexity of the practice, provide sufficient guidance to multinationals or adequately empower the Botswana Unified Revenue Service (BURS), meaning the loophole has remained open.

The Finance Ministry is fine-tuning legislation to close the loophole and tax experts have warned multinationals to get their affairs in order.  

“It is time to review your transfer pricing policies because the legislation is coming and you have to clean your houses,” KPMG senior advisor, Omphemetse Chimbombi told a workshop for local businesses on Wednesday.

“Botswana is under a lot of international scrutiny for its tax laws, which is putting the country under pressure. Taxpayers should be alert and prepare for this legislation.”

Ahead of the upcoming legislation, the BURS has conducted a few audits of multinational corporations’ transfer policy, with reports that some were found flouting the “arm’s length” principle.

The principle states that the transfer price paid by related entities should be as though the entities were not related. It is understood the BURS plans

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to intensify its transfer pricing audits once the new legislation is passed.  “Taxpayers should expert more coordinated and robust audits,” Chimbombi said.

“Train your staff and re-look your policies.” KPMG senior partner, Nigel Dixon-Warren told BusinessWeek that transfer pricing abuses were not necessarily focussed on large multinationals, as many of these had already regularised their activities in line with the global pressure on tax morality seen in recent years. 

“Perhaps 15 years ago, it would be a multinational asking ‘how can we minimise the tax we pay,’ but now they’re asking ‘how can we make sure we comply,’” he said. 

“I don’t think the issue is with large multinationals. The developed world has come down very hard on issues of tax morality and this is filtering through.

“It’s more about the people under the radar, making a lot of money and perhaps not having the information or the interest to make sure they pay the right tax in the right place.

“It’s up to the BURS to go out and find this money. They have the training, they know the information to request and look for and they have the databases for comparison.”

On the transfer pricing audits, Dixon-Warren said firms that did not have the benefit of tax advisory support, were at risk of finding themselves flouting the law without even knowing.

In his budget speech, finance minister, Kenneth Matambo said transfer pricing regulations were part of a slew of initiatives designed to rid the country of its stubborn tax haven tag.



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