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Global transfer pricing guide

Transfer pricing - Botswana

30 Aug 2023

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Introduction to transfer pricing in Botswana
Transfer pricing rules
  • The Botswana Transfer Pricing (TP) legislation is contained in the Income Tax Act (Chapter 52:01) (ITA), Sections 36A and 118A and the Income Tax (Transfer Pricing) Regulations,2019 (the Regulations). The legislation is based on the arm’s length principle, and it follows the OECD Guidelines. The OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are prescribed as a relevant source of interpretation of the TP regulations.
  • The TP legislation applies to transactions between Botswana taxpayers and connected persons (related parties). Except for entities accredited to the International Financial Services Centre, the TP legislation does not apply to transactions between connected persons that are both resident in Botswana. 
  • A transaction is said to be consistent with the arm’s length principle where the conditions of the transaction do not differ from the conditions of the transactions that would be applied between independent persons in comparable transactions carried out under comparable circumstances.
  • The burden of proof is on the taxpayer to demonstrate that income from connected party transactions is consistent with the arm’s length principle. 
  • Taxpayers are required to keep documentation, equivalent to an OECD Local File, that explains any transaction with a connected person including contemporaneous documentation that verifies that the conditions of the connected party transaction are consistent with the arm’s length principle. As a concession, the Commissioner General has issued a ruling that exempts any person from filing transfer pricing documentation, in a tax year, where the arm’s length value of connected party transactions in that tax year does not exceed BWP 5 million.
  • A person whose transaction or transactions, in a tax year, with a connected person, within an MNE group exceeds BWP 5 million (approximately USD 500 000) should, upon written request by the Commissioner General of the Botswana Unified Revenue Service (BURS), furnish the Commissioner General with additional information, equivalent to the OECD Master File.
  • Currently there is no Country-by-Country reporting (CbCR) in Botswana.
OECD guidance
  • The Regulations stipulate that Organization for Economic Cooperation and Development (OECD) Transfer Pricing Guidelines for Multinational Companies and Tax Administrations (TPG) are a relevant source for interpretation of the Regulations. 
Transfer pricing methods
  • There are five approved TP methods namely, the traditional methods: (i) Comparable Uncontrolled Price Method (CUPM), (ii) the Resale Price Method (RPM), and (iii) the Cost Plus Method (CPM), and the transactional methods: (iv) Transactional Net Margin Method (TNMM) and (v) Transactional Profit Split Method (TPSM). The taxpayer is required to apply the most appropriate method.
  • Where any of the approved methods can be applied with equal reliability the CUP method must be used.  
  • Where a traditional method and a transactional method can be applied with equal reliability the traditional method must be used.
  • Subject to approval by the Commissioner General, a method, other than the approved methods may be utilized provided the taxpayer can demonstrate that the method is more appropriate than any of the approved methods.  
Self-assessment
  • Botswana has a self-assessment regime, and the burden of proof is on the taxpayer to ensure that TP regulations are adhered to.
Transfer pricing documentation
Preparation of transfer pricing documentation
  • Generally there are two types of TP documentation: (i) local file, and (ii) master file.
  • Currently there is no CbCR legislation.
  • The content of both the local file and master file is stipulated in the Regulations. 
Master and local file
  • A taxpayer has an obligation to prepare a local file where the arm’s length value of transactions with connected persons exceeds P5 million in a tax year. The local file is due for submission, together with the corporate tax return, within four months of the financial year-end.
  • A master file is due for submission where the value of transactions with connected persons exceeds BWP 5 million only on receipt of a written request received from the Commissioner General.
  • Both the local file and the master file must be prepared in English.
Some risk factors for challenge
  • Limited risk distributor, contract services, intra-group loans.
  • Persistent losses in any entity.
  • Transactions with related parties resident in low tax jurisdictions.
  • Business re-structure
  • Group or head-office charges if excessive or locally the expense is also incurred.
Penalties
  • Penalties of up to 200% of the additional tax arising from a TP adjustment made by the Commissioner General or a fine of BWP10,000 whichever is the greater. 
  • Penalties of up to BWP 500,000 (approximately USD 50,000) may be levied for failure to submit transfer pricing documentation. The penalties may be mitigated to an amount not less than BWP 250,000 (approximately USD 25,000). 
Economic analysis and how to demonstrate an arm’s length result
  • Local file content includes the following information:
    • An overview of the person’s business operations and markets of reference;
    • Company organizational chart, business strategy pursued, the group’s operational structure, details of key competitors;
    • Detailed description of controlled transactions and breakdown of intra-group payments and receipts for each category of controlled transactions by the tax jurisdiction of payer or recipient;
    • Comparability and functional analysis;
    • Copies of inter-company agreements
    • Details of assumptions made in applying the transfer pricing methodology;
    • Any other information necessary for determination of the company’s compliance with the arm’s length principle.
  • In the absence of uncontrolled comparable transactions from the same geographic market, regional and worldwide comparables are accepted with adjustments for differences in the markets where the comparable companies operate vs. the analyzed taxpayer.
  • A transfer pricing adjustment is made where the financial indicator falls outside the arm’s length range. The arm’s length range is the full range of financial indicators of comparable uncontrolled transactions. A transfer pricing adjustment is made to the median of the arm’s length range.
Advance Pricing Agreements (APAs), dispute avoidance and resolution
  • Currently there are no regulations for implementation of Advanced Pricing Agreements (APAs).
Exemptions
  • Transactions between resident connected parties are exempt from transfer pricing provisions. This exemption does not apply to companies accredited to the International Financial Services Centre.
  • On 1 September 2021 the Commissioner General issued a ruling that exempts a taxpayer from filing transfer pricing documentation where, in a tax year, the ‘cumulative arm’s length value’ of connected party transactions does not exceed BWP 5 million.  
Related developments

ADD ACCORDION ITEMS

Digital services tax
  • Currently there is no digital services tax. 
Transfer pricing and taxpayer behavior
  • Due to the fact that transfer pricing was recently introduced no observations on taxpayer behavior have been noted. 
COVID-19
  • Extension of time to file is given on a case-by-case basis, where just cause is shown.

For further information on transfer pricing in Botswana please contact:

 

Kalyanaraman Vijay 
T  (+267) 3707 105
E kalyanaraman.vijay@bw.gt.com

 

Anthony Quashie
T (+267) 3707 111
E anthony.quashie@bw.gt.com

 

Olivia Muzvidziwa 
T (+267) 3707 109
E olivia.muzvidziwa@bw.gt.com

Motswagosele MG Moagaesi    
T  (+267) 3707 163
E motswagosele.moagaesi@bw.gt.com

 

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