A key talking point in the recent amendments to the Income Tax Act of Botswana, promulgated in December 2018, was the introduction of transfer pricing rules that took effect 1 July 2019. The introduction of transfer pricing requires taxpayers to transact at arm’s length with any connected person, local or foreign. However, the local transactions are limited to those involving an International Financial Services Centre company. This differs from most other jurisdictions where the transfer pricing rules only apply to cross border related party transactions.
Taxpayers also need to prepare and potentially submit relevant transfer pricing documentation to support the arm’s length nature of the transactions. The documentation requirements, as recommended by the OECD, should include detailed information about the transactions entered into, the related entities, the nature and summary of company activities as well as any agreements and an overall group transfer pricing policy. When submitting the documentation, the regulations require a taxpayer to submit a local file together with the tax return and a master file will have to be submitted if transactions with connected persons are more than BWP5 million. Should a transaction between connected persons not take place at arm’s length the Commissioner General is authorised to adjust the taxable income so that it is consistent with the arm’s length principle.
Furthermore, taxpayers in Botswana should be mindful of the proposed penalties for not adhering to transfer pricing provisions. The following penalties may be imposed:
- A penalty equal to the greater of 200% of the tax arising from a transfer pricing adjustment or BWP 10,000 (R13,000).
- A maximum penalty of BWP 500,000 (R650,000) for failure to furnish transfer pricing documentation upon request.
MNEs with one or multiple operations in Botswana should understand the effect of the new transfer pricing requirements. Please get in touch if you have any questions.