Botswana tightens legal loopholes to plug illicit financial flows

Finance Minister, Kenneth Matambo walking out of parliament PIC. THALEFANG CHARLES
Finance Minister, Kenneth Matambo walking out of parliament PIC. THALEFANG CHARLES

Botswana is taking new steps to make tax evasion and avoidance more difficult for international companies. Struggling to attract foreign investors, the country in the past eased regulations to the point that it gained the status of a tax haven - a counterproductive situation that jeopardised efforts to secure new investment.

Lawmakers recently approved a bill that will create a freely accessible public database of active companies indicating direct, indirect and beneficial ownership, measures designed to ensure that these companies are not used for money laundering, terrorism funding or other illicit financial activities.

 “I don’t think the new law can totally eliminate money laundering and other illicit practices, but that’s definitely a tool to reduce this and make businesses as honest as possible, which is welcome,” Botswana Exporters and Manufacturers Association (BEMA) president, Nkosi Mwaba says. 

“Re-registration is going to help with these issues. Money laundering is certainly eroding our capability to make money as businesses and if there are laws to help curb this money being misplaced, that is welcome,” says the president of BEMA, one of the country’s largest and oldest exporting and manufacturing business lobby groups.

The new bill is among a raft of legislative changes government is pushing through Parliament this year, as it attempts to shake off the persistent label that Botswana is a tax haven with loose laws on Illicit Financial Flows (IFF). The government, which has traditionally pushed back on being listed as one of Africa’s tax havens, has recently changed its stance.

Finance Minister, Kenneth Matambo, who told Parliament in December 2016 that “the situation is not as bad as you might have read on the Internet” in February this year said that government would introduce laws on transfer pricing and revise a special tax incentives framework for offshore financial services companies known as the International Financial Services Centre (IFSC).

Matambo said the legislative changes were part of “complying with international standards” and the need to “remove any perception that Botswana is a tax haven”. His office did not respond to requests for an interview.

Under the new law, all companies in Botswana will be given a period of time within which they have to submit shareholder and other documents for registration on the newly formed public access online platform. Any company that has not registered on the online platform after the transition period will be considered non-existent under the law.

 “The Amendment Bill requires that companies disclose who their beneficial owners are to ensure that the company is not being used as a vehicle for money laundering, terrorist financing or other illegal activities,” said Armstrongs Attorneys pupil attorney, Kagi Mogae.

“The new bill also removes the status of ‘dormancy’ for companies. In the past companies could apply for dormant status under which they would not be liable to submit annual tax returns. 

“Going forward they will thus either have an active or de-registered status. The coming into force of the Amendment Bill will result in the loss of this advantage and the dormant status of companies.”

Struggling to attract Foreign Direct Investment (FDI) to diversify its economy from diamond mining, Botswana for years relaxed its investor laws, removing controls on capital flows and setting up various tax incentive frameworks, including the IFSC, which was legislated in 2003.

However, the loose investment climate led to rising concerns around money laundering, tax evasion and trade misinvoicing, with the non-profit, Washington, DC-based research and advisory organisation, which produces analyses of illicit financial flows Global Financial Integrity estimating the country was losing up to $845 million annually.

Botswana’s revenues from the mining sector, which traditionally provides a third of the national annual budget, average $600 million, suggesting the IFF leaks are burning a considerable hole in the state’s coffers.

The European Union, a key trade partner for Botswana, twice placed the country on its blacklist of tax havens, in 2012 and 2016.

Local tax consultant, Jonathan Hore says that the new approach underlined by Matambo’s policy moves is motivated by the blowback the country has been receiving from the West and in particular, the European Union. 

The blowback, as seen in the tax haven tag, has ironically threatened to constrain FDI flows to Botswana, as global corporations clean up their acts in terms of tax avoidance.

“The EU is citing the IFSC as one of the issues that make the country a tax haven,” Hore said.

“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 FDI, which in turn hurts economic development and job creation.”

 The question of where to strike a balance between fostering the continent’s most attractive investment climate and more diligently scrutinising investors, for instance through the impending laws, is something that has troubled policymakers. 

“It’s a difficult one,” said Mwaba. “You are saying come and invest your money and take it out anytime, but you also say we need to see what you are going to do with that money and where that it is coming from. Those checks and balances provided by the new legislation will point us in the right direction. It’s a trial and error approach.” 

Business Botswana deputy CEO, Norman Moleele said while the re-registration exercise would by necessity be cumbersome, there was no better alternative to achieving the objectives envisioned by the new laws. Business Botswana is the country’s main organisation of employers, representing most of the private sector. The organisation is government’s main partner in the private sector in terms of policy formulation.

 “The new laws are a step in the right direction. Whether they will be adequate will be determined by implementation. The law is a deterrent and if it is not adequate, it will be improved upon, but this is a good first step,” Moleele said.

Local market watchers expect big changes around the IFSC framework, which the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) has singled out as a major vulnerability for illicit financial flows. NBFIRA is a statutory regulator of all non-bank financial institutions, which include asset managers, stock exchanges, insurance sector players and IFSC-accredited firms.

The IFSC framework houses some of the country’s biggest trans-national corporations, asset management firms and financial services units, which enjoy a 15% corporate tax rate (as opposed to 22%) and conditional exemptions on Capital Gains Tax, Withholding Tax and other rates.

An internal NBFIRA national risk assessment report on money laundering compiled in April names the IFSC as a high-risk sector for illicit activity.

“The reason for the high vulnerability in the IFSCs segment was that the entities were foreign-owned and there was absence of cross-border supervision and monitoring,” reads the NBFIRA report. “The IFSC portfolio is diverse and complex, comprising of insurance, fund management, lending and leasing and holding companies.

“There was a challenge in risk assessment of IFSCs due to the complexity emanating from the fact that a majority of the IFSC-accredited entities set up headquarters in Botswana, but have their subsidiaries and clients abroad, away from NBFIRA jurisdiction.”

Large multinationals are often targeted as vehicles to avoid taxes via so-called transfer pricing, or transactions within and between enterprises with common ownership and control. Tagging a price above or below the real value of these transactions can distort profits and in this way also manipulate taxable income out of a country and into another.

 The new laws around transfer pricing, which specify what the practice is, its abuse and the penalties for defaulters, suggest the Finance Ministry has evidence indicating this as a concern for the country. The country’s tax advisory sector, where transfer pricing is conducted on behalf of clients, is dominated by the Big Four, KPMG, Ernst & Young, Deloitte and PwC.

Members of the Big Four have, however, come out strongly against accusations that they are facilitating the abuse of transfer pricing. 

“These perceptions could not be further from the truth,” KPMG senior partner, Nigel Dixon-Warren said.

“We see tax practitioners as a very necessary role player in assisting with compliance with tax laws, and assisting taxpayers to understand their obligations under the tax laws.

“We are also bound by our professional and ethical standards, which require us to ensure that all advice provided to clients is both within the spirit and compliance with tax laws,” he said.

In response to a question seeking an industry’s point of view of the scale of transfer pricing abuse or tax evasion and avoidance, Dixon-Warren said any answer would be “purely speculative”.

“I would not know, with any certainty, the answers to these questions. The most appropriate source of this information would be the Botswana Unified Revenue Services,” he said.

Dixon-Warren, however, added: “The current laws and regulations in Botswana are based on solid principals which are designed to minimise the issues you have identified.

“I think where the challenge lies is that we have very little precedent in Botswana to guide interpretation of our tax laws, and therefore we need to rely on precedent in other countries to guide – and obviously such precedents would not be binding in Botswana legally.

“My understanding from interactions with the Ministry of Finance is that the tax laws are currently being reviewed and re-written in their entirety to bring them up to date with latest developments in tax such as transfer pricing, e-commerce and others.”

The Botswana Unified Revenue Services, the country’s tax agency, was unwilling to discuss the latest tax amendments laws or the scale of practices such as transfer pricing abuse, tax evasion and avoidance. Questions sent to the agency last month were still unanswered by Press time and a request for an interview with the Commissioner General had not been responded to.

 Legislators are supportive of the new direction government has taken with regard to illicit financial flows. Dithapelo Keorapetse, the opposition Member of Parliament for Selebi Phikwe West, has campaigned for stronger fiscal response to money laundering, tax evasion and other forms of illicit financial flows for years. 

“The fiscal and revenue laws have lots of loopholes and from the view of outsiders, they see us as a tax haven.

“More can be done to tighten anti-economic crime legislation and anti-graft, even coming up with new laws such as targeted lifestyle audit laws, tighter insider trading laws so that, for instance, senior government officials don’t do business with government,” said Keorapetse from his constituency, 410 kilometres north-east of the capital, Gaborone.

He recalled previous years when he struggled to rally Parliament against illicit financial flows.

“I asked the Finance Minister if he had figures on how much was lost through illicit financial flows and he had no idea.

“International reports show that we are very vulnerable and are losing a lot.

“We don’t even have the data to show to what extent we are affected. Our laws are not tight enough and we are among countries with very lenient penalties for fiscal and revenue crimes and corruption,” he said.

The new laws are expected to take effect in the new tax year beginning on July 1, 2018.


*This story was produced by Mmegi. It was written as part of Wealth of Nations, a pan-African media skills development programme run by the Thomson Reuters Foundation in partnership with the African Centre for Media Excellence.

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