'Tax flaws could constrict investment flows'

MBONGENI MGUNI
Staff Writer | Tuesday October 5, 2010 00:00

 

The Global Forum on Transparency and Exchange of Information for Tax Purposes released its critical report last week, following a peer review conducted by tax experts from South Korea, South Africa and the Forum's Secretariat.

Botswana was one of eight countries reviewed under Phase One of the Forum's mandate, which involves assessing the quality of a country's legal and regulatory framework. Other countries assessed include Bermuda, Cayman Islands, India, Jamaica, Monaco, Panama and Qatar.

The Forum's focus was on how each country's regulations ensure that tax information is readily available, how this can be accessed by competent authority and whether mechanisms are in place to exchange this information with foreign tax authorities. The assessors also gauged Botswana's conformity with the UN Model Tax Convention, compliance with which is a major tool for the attraction of international investors.

Botswana scored poorly in several categories, resulting in the Forum's Peer Review Group suspending the country from a Phase Two review until 'it has acted on recommendations contained in the report.' The Phase Two review looks at practical implementation of the legal and regulatory tax framework in the individual country.

A positive review by the Forum is seen as a boost to international capital flows, as investors draw confidence around the country's adherence to the highest international tax standards.

'The review of Botswana's legal and regulatory framework reveals a number of serious deficiencies, which, taken together, make it impossible for Botswana to engage in effective exchange of information in tax matters,' the Peer Review Group's report reads.

'Botswana does not have in place elements which are crucial to it achieving an effective exchange of information and therefore will not move to a Phase 2 review until it has acted on recommendations contained in the report to achieve an improved legal and regulatory framework. Botswana's position will be reviewed when it provides a detailed written report to the Peer Review Group within 12 months of the adoption of this report.'

Sticking points included the issue of nominees, with the group noting that current legislation does not require that information be available identifying the person on whose behalf the nominee holds the shares.

'The absence of such information is problematic, as company formation can be accomplished by legal representatives who hold the shares on behalf of an unidentified client,' the group said.

The report also cites bank secrecy as a major impediment to the exchange of information on tax matters. The Peer Review Group said bank information could only be obtained where relevant to civil or criminal proceedings taking place in Botswana. This, the group noted, clashes with the 11 tax agreements Botswana has signed with countries like the United Kingdom (UK), France, India, Mauritius, South Africa, Zimbabwe, Russia, Sweden and others. Under these agreements, Botswana and its partners are entitled to the free flow of tax information, including banking information, with the UK accord specifically prohibiting the two countries from withholding information held by banks, financial institutions, nominees and others.

'Botswana has bank secrecy provisions that prevent the effective exchange of information and it is unclear whether a specific provision in a treaty requiring the exchange of bank information would take precedence.

'Botswana should amend its law such that the provisions for the exchange of information in its existing treaties can be given effect, particularly as regards the exchange of bank information,' reads the report. The Peer Review Group cautioned that the country's aim of establishing itself as an international hub for investment into Africa would be hampered by ineffective exchange of information.

'Given Botswana's aim of establishing itself as an international hub for investment into Africa, effective exchange of information should be available for all jurisdictions from which investment flows originate and to which the capital is destined to be invested.'

In a response attached to the group's report, finance ministry officials pledged government's commitment to upholding the international tax standards, stating that efforts were already underway to plug legislative and regulatory loopholes. The officials said government was considering amending both the Income Tax Act and the Banking Act to give the Botswana Unified Revenue Service (BURS) Commissioner General powers to obtain and provide information requested by foreign tax authorities from local banks.

'Botswana is committed to implementing the agreed international standards on transparency and effective exchange of information and also to working with other members of the Global Forum to ensure as wide and complete an implementation of the standards as possible,' the officials said.