African tax administrations report that transfer pricing represents one of the highest risks to their tax bases. According to the United Nations Economic Commission for Africa the continent is losing approximately USD 50 billion a year in illicit financial flows. Abusive transfer pricing practices is one of the primary sources of these losses.
Having effective transfer pricing legislation is a key element in African countries’ fight to combat abusive transfer pricing practices and is also important in providing taxpayers with greater tax certainty and encouraging voluntary compliance.
With the assistance of the ATAF International Taxation team Botswana passed new transfer pricing legislation and new interest deductibility legislation in its 2018 Finance Act
which will come into operation on 1st July 2019. The new transfer pricing legislation is based on the ATAF Suggested Approach to Drafting Transfer Pricing Legislation. The law now requires taxpayers to compute their taxable income in accordance with the arm’s length standard. The new legislation will encourage voluntary compliance and strengthen the Botswana Unified Revenue Service combat non-compliance.
African countries have also reported that the use of third party and related party interest is one of the most prevalent and simple of the profit-shifting techniques used in Africa and poses a significant risk to African tax bases.
The new interest deductibility legislation is based on the ATAF Suggested Approach to Drafting Interest Deductibility Legislation. The Botswana legislation is based on a fixed ratio rule which limits an entity’s net interest deductions to 30% of its earnings before interest, taxes, depreciation and amortisation (EBITDA) except for a company whose main business is banking or insurance. This is a straightforward rule to apply and ensures that an entity’s interest deductions are directly linked to its economic activity. It also directly links these deductions to an entity’s income, which makes the rule reasonably robust against planning. It will provide Botswana with a strong defence against interest stripping by multinational enterprises operating in Botswana.
If you are an ATAF member and your country faces tax loss risks from ineffective transfer pricing rules and/or ineffective rules to combat interest stripping our International Taxation team is here to help you introduce new effective rules based on our Suggested Approach to Drafting Transfer Pricing Legislation and ATAF Suggested Approach to Drafting Interest Deductibility Legislation. Please feel free to contact the ATAF team on.
Telephone: +27 12 451 8800
E-Mail: info@ataftax.org
