De Beers ‘dribbles’ BURS in tax saga
Sharon Mathala | Monday January 30, 2023 06:00
In 2021, a report from the Auditor-General (AG) raised alarm that some mining companies could be short-changing Batswana and the Botswana government by providing incorrect reports on their production and sales, which in turn would affect the amounts they pay government in royalties, taxes and other dues.
Mineral revenues are government’s most important source of funding and account for one third of budget incomes.
Government earns the mineral revenues through royalties paid on production and dividends in instances where it has equity in the mining companies as well as taxes, arguably the most important income line as the other two are dependent on production and equity ownership.
In the same report, the Auditor-General stated that the top-secret agreement between De Beers and Botswana government made it difficult for her office to analyse whether state coffers were receiving best value from De Beers, something which is claimed by the report to BURS seen by Mmegi this week.
The explosive report was compiled by African Tax Academy owned by former South African Revenue Service (SARS) chief officer, Jonas Makwakwa, who since 2018 has been contracted by the BURS in various roles.
According to the report, De Beers allegedly avoided paying government almost P4 billion in taxes over seven years, apparently by lowering its tax liability in the country.
The report focuses on the performance of De Beers Global Sightholder Sales Pty Ltd (DBGSS), the local company formed by De Beers in 2013 to act as its primary rough diamond sales organ. The company’s establishment was part of the 2011 agreement between Botswana and De Beers to bring the global group’s sales and processing operations to Gaborone.
The report claims that the tax liability owed by DBGSS to the BURS came about due to the creative treatment of certain transactions over the years, specifically around the relationship between the local entity, De Beers UK and other affiliated entities.
In particular, researchers at the African Tax Academy claim that their investigation shows that marketing expenses of about P9.6 billion between 2014 and 2020 paid by DBGSS to De Beers UK, as well as royalty expenses of about P6.8 billion over the same period as well as other charges should not have been charged to the local entity.
The result was that the charges became deductibles allowing DBGSS to reduce its tax liability to Botswana to the cumulative value of P4 billion over the years, researchers claim.
At the heart of the affair, the report says, was the need to keep De Beers UK afloat with the same or better profit margins it enjoyed prior to the move to Gaborone. “In order for the migration as required by the Government of Botswana to be commercially viable i.e not leading to the ceasing of De Beers UK’s trade and not to affect the quantum of profits De Beers UK was making from the rough diamond sales, De Beers UK would need to continue to earn an average operating profit of one percent of rough diamond sales that would be made in Botswana,” the researchers said. “How would De Beers UK be able to continue to earn operating profit margin of one percent of rough diamond sales when the business activities earning this one percent profit would now be moved to another company in Botswana?
“Solution: licence and marketing fees”.
In order to keep the UK profit margins ticking, the report’s researchers claim that other fees such as for intellectual property, research and development, royalty licence fees and others that should have been paid by other members of the De Beers Group of Companies, were put on DBGSS’ shoulders over the years.
The researchers claim that the net result was that profits kept ticking up in the UK, while the DBGSS’ books showed lower than forecast numbers, thus reducing the tax liability to the BURS.
“Our research shows that between 2013 and 2020, De Beers UK extracted all the rough diamond sales profits made by DBGSS in Botswana,” the report claims.
“Gross profits from sales of rough diamonds by DBGSS were $1.35 billion (while) royalty licence fees and marketing fees charged by De Beers UK were $1.5 billion thus taking out of Botswana not only all the profits from rough diamond sales but also extracting ‘other operating income’”. The report adds: “There are significant tax consequences for the Botswana economy arising from these marketing and licence agreements.
“There are also other related party transactions such as financial services which also give rise to other tax consequences.”
The researchers added that it was possible for BURS to recover the tax revenues lost over the years, by arguing that certain expenses deemed as deductible were not “wholly, exclusively and necessarily” incurred in the production of the assessable income.
However, De Beers Group Vice President, Corporate Affairs, Otsile Mabeo dismissed the allegations made by the researchers in a response to Mmegi. “Any allegation of tax malpractices by De Beers in Botswana are untrue and do not reflect the facts,” she said in a written response on Thursday evening
“We are fully committed to paying the right amount of tax, at the right time, everywhere we operate, and engage with the Botswana tax authority in an open, transparent and collaborative manner.
“On the broader question of whether De Beers pays its fair share as a corporate citizen in Botswana; this is a debate we welcome, and the facts here are beyond doubt.”
Mabeo said the De Beers Group in Botswana, through the DBGSS business, Debswana and the Diamond Trading Company Botswana joint ventures, were the largest single tax contributor to Botswana.
“It is impossible to predict future earnings in the diamond market with exact precision,” Mabeo said.
“Despite this, however, during the most challenging economic periods De Beers has continued to purchase rough diamonds in Botswana, supporting Debswana and the economy even when such activity is unprofitable, and this is by far the most important contribution that De Beers can make to Botswana’s national fiscus.”
For his part, African Tax Academy director, Makwakwa, declined to engage Mmegi on the report. “Unfortunately, I can’t comment on the work which our company did for the BURS.
“I suggest that you direct your questions to the BURS,” he said. BURS spokesperson, Mable Bolele on the other hand said the tax agency could not disclose its clients’ information to third parties.