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Industry awaits transfer pricing rules

Industry awaits transfer pricing rules
February 05
09:38 2018


Industry players in the financial services will have to wait for Finance Minister Kenneth Matambo’s budget speech to hear more about the introduction of Transfer Pricing rules.

Estimates from Global Financial Integrity in its 2017 report showed that Botswana lost about P100 million ($10 million) in potential tax revenues due to in-trade misinvoicing, highlighting the need to plug the losses of the much needed development money, through legislation.

In his 2017-2018 budget speech presented to the National Assembly on 6th February 2017, the Minister of Finance and Economic Development announced that government was considering proposals from the Taxation Review Committee that include the introduction of transfer pricing rules to address tax avoidance and to align Botswana’s tax system with international best practices.

No mention has been made since of the introduction of the rules. Industry players say it is expected that the presentation of the 2018/2019 budget speech will shed light on the rules which are widely expected to follow guidelines from Organisation for Economic Co-operation and Development (OECD).

Transfer Pricing, which involves transactions between related parties requires that fair market value be applied.

transfer price is the price at which divisions of a company transact with each other, and transfer prices are used when individual entities of a larger multi-entity firm are treated and measured as separately run entities.

However, for countries that want more efficient tax collection, they will be concerned with Transfer Pricing, through which corporations located in high-tax jurisdictions can “transfer the prices” of income and expenses and shift their income to a low-tax jurisdiction in order to avoid or reduce taxation. These transactions all result in income tax avoidance.

Money launderers, corrupt politicians, terrorists, arms traffickers, drug smugglers, and tax evaders, in moving their dirty money, all rely on: company structures that allow them to hide their identity, and banks and other professionals willing to do business with them, both which are currently all-too available in some jurisdictions termed tax havens.

Currently, Botswana does not have a transfer pricing regime. Instead, the Botswana Unified Revenue Service conducts transfer pricing audits under the general anti-avoidance provisions of the Income Tax Act.

“It is expected that when introduced, a transfer pricing regime would bring some degree of certainty regarding the tax treatment of related-party transactions. Current thin capitalisation rules are specific to mining and International Financial Services Centre accredited entities. It is expected that future thin capitalisation rules would have a more general application,” reads the KPMG website, in anticipation of the rules.

On 16th September 2014, the OECD released a series of deliverables that address seven of the focus areas in its Action Plan on Base Erosion and Profit Shifting (BEPS).


The report released on Action 13 (the Report) contains revised standards for transfer pricing documentation and a template for country-by-country (CbC) reporting, both of which will be included in the OECD Transfer Pricing Guidelines.


Some of the changes the BEPS brought include that: Actual business transactions undertaken by associated enterprises are identified, and transfer pricing is not based on contractual arrangements that do not reflect economic reality; Contractual allocations of risk are respected only when they are supported by actual decision-making; Capital without functionality will generate no more than a risk-free return, assuring that no premium returns will be allocated to cash boxes without relevant substance; and Tax administrations may disregard transactions when the exceptional circumstances of commercial irrationality apply. In combination, the changes are intended to help align transfer pricing outcomes with the value creating activities performed by members of a multinational group.

The Report indicated that the transfer pricing documentation standards and the CbC reporting standards will be revisited by the OECD and G20 countries no later than the end of 2020 to assess whether additional or different data should be required to be reported.



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