Anxiety rises as tax incentive shakeup looms
Mbongeni Mguni | Friday February 9, 2018 15:16
Under the International Financial Services Centre (IFSC) incentives package, qualifying firms enjoy a 15% corporate tax rate (as opposed to 22%) and conditional exemptions on Capital Gains Tax, Withholding Tax and other rates.
The package, initially designed to help economic diversification by encouraging the growth of the financial services sector, was broadened over the years to include areas such as business process outsourcing and taxes on foreign incomes by a wide range of sectors.
Some IFSC accredited firms include Letshego Holdings, Choppies, Motovac, Flotek and a range of asset firms, financial services units and others. While some of the firms directly benefit from the lower corporate tax, others benefit through exemptions or discounts on the Capital Gains Tax and Withholding Tax.
On Monday, when delivering 2018-2019 Budget Speech, Finance Minister, Kenneth Matambo announced the review of the IFSC framework as part of complying with international standards and the need to remove any perception that Botswana is a tax haven.
Several IFSC-accredited firms have come up in global tax evasion exposés such as the Panama Papers, while critics have also pointed out that many of the accredited firms are dormant, while some of those active have little employment or revenue impact locally.
The move comes as international pressure has been mounting on Botswana to review its tax laws and ensure greater transparency, while the Bretton Woods institutions have questioned the benefits of the tax discount framework.
European states, particularly France, have previously labelled Botswana as a tax haven or non-cooperating jurisdiction, a move that tarnishes the country’s carefully curated image as a dream investment destination.
Local tax expert, Jonathan Hore told BusinessWeek that chances were high that the IFSC framework as a whole would be scrapped. “The most likely action - 95% chance and above - is that the tax rate for the IFSC companies will be increased from 15% to 22%, including those who had already been accredited,” Hore told BusinessWeek.
The EU is citing the IFSC as one of the issues that make the country a tax haven. The developed world considers tax incentives as harmful to development as taxes which could otherwise have been collected are foregone to benefit a few people/investors. “Such taxes could be used for developmental reasons.
“The Finance Ministry is therefore worried that the tax haven tag will hurt its efforts to attract the much needed Foreign Direct Investment, which in turn hurts economic development and job creation.” Deloitte Botswana managing partner, Max Marinelli told BusinessWeek that the review could possible include revisions of the WHT exemptions and increases to the 15% tax rate.
“I would not dismiss the possibility that the IFSC legislation could be scrapped. There are so few of them and it has not yielded the business that it was designed to.“Yes, we have 30 or so, but we should have 300 companies. Again, a lot of them are companies that were already in Botswana and restructured their businesses. Many are not new businesses.
“The IFSC framework has not brought in the major financial names we anticipated. All these factors will have to be borne in mind.
Experts at other local tax advisories however played down the chances of a scrapping of the IFSC framework. They pointed out that government had demonstrated its commitment to the structure a few years ago, when it removed the sunset clause under which the IFSC benefits were due to end on December 31, 2020.
“The review envisaged by the Minister will likely be about tightening the framework to ensure that only deserving and serious companies benefit. There are numerous companies right now IFSC accredited but dormant.
“There could also be a review to clearly state the double tax avoidance provisions under the IFSC,” one professional told BusinessWeek.
Efforts to obtain comment from the Finance Ministry this week were fruitless. The planned amendments to the Income Tax Act, under which the reviews to the IFSC framework will be done, will come before Parliament later this year.