Mining sector cheats the Taxman

Botswana Unified Revenue Services is looking to harness tax revenue potential of the extractive industries as well as be transparent and exchange information on large businesses with other jurisdictions.

These were among topical issues discussed at this week’s Commonwealth Association of Tax Administrators (CATA) Technical Conference in Gaborone which began on Monday and ended yesterday (Thursday). In an interview, BURS Commissioner General Keneilwe Morris told BG News they were targeting the “mining sector” in their efforts to widen the tax base, although he conceded BURS’ limitations in the area.

“The mining sector is a complex sector to tax because we do not know how exactly the mining industry operate and being a tax administration you have to learn that.” For instance he said if the same corporate tax rate of 22 percent is to be applied to the mining sector possibilities are that BURS would not generate more revenue from the sector. This is a problem felt by all other countries involved in extractive industries and ordinarily that is where more revenue comes from, according to Morris.

He revealed that mining companies in some instances come into a country and plead with the government to be given tax holidays some ranging from 10 to 15 years and others indefinite. “Effectively although the potential is there to tax the sector, sometimes you do not actually tax it for years on end. You are extracting a resource that is owned by your people and they are not getting the benefit of it.

Those companies come to mine the resource and take their profits and plough them offshore. We therefore, want to establish how best we can maximise as government without necessarily affecting the profitability of the mines because they are extracting a non-renewable resource from our country,” said Morris. Botswana which has over 40 years mining experience can add value to other members of CATA if they tap from her experience. The country is modelled as one of the best that has harnessed the process of taxing the extractive sector. 

Morris said that those countries need not reinvent the wheel as it were and repeat the same mistakes that Botswana would have made in-case there are any.  BG has learnt that in Botswana, there is a special dispensation that has been accorded particularly in the diamond industry to tax the companies. “It is a quite complicated formula, but ultimately they know they are also the largest employers, and we just charge their employees the normal ‘Pay As You Earn’ (PAYE) and the company’s profits are taxed. Ultimately the formula ensures that the company continues to generate profits and government also benefits by generating revenues from it,” he said.

Meanwhile, on transparency and exchange of information Morris revealed that there are some instances that multi-national companies do not disclose their profits locally and end up transferring them offshore. “There are multinational companies, they have got the most expensive and experienced tax lawyers they are able to structure the agreements with governments. This then enables them to pay less and less tax and sometimes the issues are around transfer pricing which we face as tax administrators. We therefore need to exchange information as tax administrators on these multinational companies with other jurisdictions and come up with a framework in exchange of information.”

He explained that the companies come to sell goods in Botswana and pretend they are not making profits but when traced to their country of origin it is then discovered that they make huge chunks of profits. Morris indicated that in these instances, “there are often issues around hiding profits and transferring profits where there is high tax regime to a country where the tax regime is low so that they pay lower taxes or even shift to tax haven countries where virtually tax is not paid.” The Commissioner General emphasised that as jurisdictions they should trust one another and be able to know so that both jurisdictions get their fair share of tax.  More often than not, the problems that are encountered here are encountered in other jurisdictions.

Research Fellow at Botswana Institute for Development Policy Analysis (BIDPA) Professor Roman Grynberg shared with BG that there should be proper monitoring and evaluation in the industry and identify the costs being incurred. “Most countries do not monitor these firms, they just accept what they are being told and fail to monitor and evaluate. On the other hand, Botswana has not lowered tax to compete with other countries, as opposed to what other African countries have done. I must say we are not competitive,” he observed.