Botswana tax system in a nutshell
Celia Becker is an Africa regulatory and business intelligence executive at ENSafrica in South Africa.
The tax regime in Botswana consists of a number of direct and indirect taxes including income tax, VAT, import duty and excise duty.
The Botswana tax system is sourced-based, with a current standard corporate tax rate of 22 percent applicable to residents and 30 percent to non-residents. It is required to file a tax return at the end of each tax year and provisional tax payments are to be made in advance in four quarterly installments. Capital gains are generally subject to the standard corporate income tax rate of 22 percent. VAT at a standard rate of 12 percent is imposed on the local supply and importation of goods and services. Withholding tax is deducted at source on specified payments to both residents and non-residents.
Botswana introduced its International Financial Services Centre (IFSC) regime in 2003 with the aim to establish and develop Botswana as a world class hub for cross border financial and business services into Africa and the region. An IFSC company is a company which is licensed to carry on specified activities with non-residents, specified collective investment undertakings or other IFSC companies and qualifies for a reduced corporate income tax rate.
II. Corporate income tax
Persons subject to corporate income tax include any body corporate, specified state corporations, collective investment undertakings, any association or society, whether incorporated, registered or not and any charitable, religious or educational institution or a trust established for public purposes.
Tax exempt entities include any collective investment undertaking managed by a IFSC company where all the unitholders in the undertaking are non-resident persons, an approved benefit, provident or superannuation fund, a stock exchange established in Botswana by statute, a building society, a mutual savings bank or a mutual loan association, any special purpose vehicle formed by the government for securitization of public assets, diplomatic missions, a trade union or employers’ association, political parties, the Botswana Institute of Accountants or any other professional institution established by statute, a local authority, the Bank of Botswana and most banks or corporations wholly owned by the Botswana government.
In respect of a partnership, each partner is liable to tax individually according to his share in the partnership income and at the rate of tax applicable (company or individual).
Companies are subject to tax on all Botswana-source or deemed Botswana-source receipts and accruals, in cash or otherwise, less allowable deductions.
For Botswana income tax purposes, a resident company is defined as having its registered office or place of incorporation in Botswana or being managed and controlled in Botswana.
A. Concept of “permanent establishment” (PE)
A permanent establishment is defined by the Income Tax Act as a fixed place of business or a fixed base for the performance of professional services. A “fixed place of business” includes a place of management, branch, office, factory, mine or any other place of extraction of natural resources, an installation or structure used for exploration of natural resources and a building site or construction or assembly project.
B. Corporate tax rates
The standard corporate income tax rate in Botswana applicable to resident companies is 22 percent, whereas non-resident companies (branches) are subject to corporate income tax at 30 percent.
The following specific rates of tax apply:
C. Alternative minimum tax
Botswana does not have an alternative minimum tax regime.
D. Capital gains
Capital gains from the disposal of moveable and immovable property of a business carried on in Botswana, investment in shares and debentures and residential property (excluding any amount which is included in gross income and resulting from the disposal of any property in the ordinary course of business) are taxable at the standard corporate income tax rate.
A 25 percent allowance is permitted in the calculation of capital gains on the sale of shares. The disposal of shares listed on the Botswana stock exchange is exempt from tax, provided the shares are in the hands of the general public.
E. Deductible expenses
For the purpose of determining the taxable income derived by any person from carrying on a trade within Botswana, there shall be allowed as a deduction any expenditure which is wholly, exclusively and necessarily incurred in producing the income, subject to such evidence as the Commissioner General may require.
F. Carry forward losses
Ordinary losses may be carried forward for up to five years, whereas capital losses may be set off only against capital gains in the year in which the loss is incurred and in the following year. Farming, mining and prospecting losses may be carried forward indefinitely.
G. Tax treaty network and transfer pricing
Botswana has entered into double tax treaties with Barbados, France, India, Mauritius, Russia, Seychelles, South Africa, Sweden and the UK.
In terms of Botswana’s general anti-avoidance provisions, the Commissioner General may adjust the tax liability of a taxpayer where he is of the opinion that a transaction, scheme or operation is fictitious or artificial, or has been entered into or carried out by persons not dealing at arm’s length with the effect of avoiding, reducing or postponing tax liability. No specific transfer pricing rules or regulations currently exist.
The thin capitalization rules contained in the income tax legislation apply specifically in relation to the taxation of mining companies.
III. Withholding taxes
Withholding tax is applicable on specified payments made to resident and non-resident companies. In respect of payments to resident companies, this tax is generally an advance tax. Withholding tax on payments to a non-resident may be reduced in terms of a relevant double tax treaty. Payments by an IFSC company or a tax-exempt collective investment undertaking are exempt generally from withholding tax.
Dividends paid to both residents and non-residents are subject to a final withholding tax of 7.5 percent. Interest paid to a non-resident is subject to a final withholding tax of 15 percent, whereas interest payments to residents are subject to 10 percent withholding tax.
Royalties (defined as payments for the use of or the right to use any copyright of literary, artistic or scientific work (including cinematograph films, and films or tapes for radio or television broadcasting), patent, trademark, design, model, plan, secret formula or process, the right to commercially develop or exploit software or the use of or the right to use industrial, commercial or scientific equipment or for information concerning industrial, commercial or scientific experience) paid to non-residents are subject to final withholding tax of 15 percent.
Management or consultancy fees paid to non-resident companies are subject to a final 15 percent withholding tax. Management or consultancy fees are defined as any amount payable for the development or customization of software or administrative, managerial, technical or consultative or similar services, whether or not such services are of a professional nature.
Payments made to a resident company under a construction contract (exceeding BWP2 million) are generally subject to 3 percent withholding tax. This is an advance tax that may be credited against the company’s final corporate income tax liability.
There is no branch remittance tax in Botswana.
VAT at a standard rate of 12 percent is imposed on the supply of goods and services by a vendor in Botswana and on the importation of goods and services. The annual turnover threshold for compulsory VAT registration is BWP500 000.
V. Individual or personal taxation (employment income)
An individual is subject to Botswana income tax on all income received or accrued from an actual or deemed source in Botswana, including employment income, business income and income from immovable property. Employment income is deemed to be derived from a source in Botswana if it has accrued in respect of any service rendered or work done in Botswana.
An individual is resident in Botswana if:
• his permanent place of abode is in Botswana;
• he is physically present in Botswana for not less than 183 days in any tax year, whether or not he maintains a place of abode in Botswana;
• he maintains a place of abode and is physically present in Botswana for not less than 183 days in any tax year. A taxpayer will be deemed to be physically present in any part of that period notwithstanding that he is temporarily absent for business, recreation or similar purposes; or
• he is physically present in Botswana for any period of time in any tax year and such period is continuous with a period of physical presence in the immediately preceding or immediately succeeding tax year, provided he is treated as resident for such preceding or succeeding tax year.
Personal income tax is imposed at graduated rates ranging from 0 to 25 percent.
There is currently no payroll taxes or compulsory national social security contributions required in Botswana. Private sector employers are required to contribute to approved privately established insurance and pension schemes for their employees.
VI. Tax incentives and favourable tax regimes
A. International Financial Services Centre companies (IFSC)
To qualify for the incentives offered by the Botswana IFSC regime, the activities of a company must be “approved financial operations” such as:
• banking and financing operations transacted in foreign currency;
• brokering and trading of securities denominated in foreign currency;
• investment advice;
• management and custodial functions in relation to collective investment schemes;
• insurance and related activities;
• registrars and transfer agency services;
• exploitation of intellectual property;
• development and supply of computer software for use in the provision of services described above;
• accounting and financial administration; and
• other financial operations approved by the Minister from time to time.
IFSC companies are subject to a reduced corporate tax rate of 15 percent on income from approved financial transactions, whereas other income is taxed at the standard rate of 22 percent. Dividends received from a non-resident company and gains on the disposal of shares held in a non-resident company, where the IFSC company directly or indirectly controls 25 percent or more of the share capital and voting rights therein, are exempt from tax.
The IFSC company also qualifies for exemption from withholding tax on interest, dividends, royalties and management or consultancy fees paid to non-residents.
B. Manufacturing companies
Approved manufacturing companies are subject to a reduced corporate income tax at a rate of 15 percent. Approved manufacturing companies are required to utilise a process of manufacturing that produces a new product with characteristics distinct from the raw material from which it is made.
Companies engaged in farming operations are entitled to special deductions in relation to specified capital expenditure in addition to the usual annual and depreciation allowances and may carry forward farming losses indefinitely.
Taxable income from mining operations is determined in accordance with special rules contained in the main provisions and the Twelfth Schedule of the Income Tax Act, whereas companies engaged in diamond mining are taxed in accordance with the terms of agreements negotiated between the government and the company concerned.
The annual tax rate imposed on mining profits (other than profits from diamond mining) is determined according to a specified formula, but may in no case be less than the current rate of 22 percent applicable to companies.
E. Special training allowance
Any company carrying on business in Botswana may deduct 200 percent of the expenditure incurred in respect of an employee training programme approved by the Commissioner General in the year in which such expenditure is incurred. The deduction is limited to 100 percent if the company is entitled to be reimbursed by the government.
F. Incentives granted under a Development Approval Order
The Minister of Finance may issue a Development Approval Order granting additional tax relief (specified in the order) to any project which he considers would be beneficial to the development of the Botswana economy or to the economic advancement of its citizens. For this purpose, the Minister will take into consideration:
• the number of Botswana citizens who will be employed and the capacities in which they will be employed;
• any facilities proposed for the training and imparting of skills to Botswana citizens;
• any provisions made for the eventual replacement of non-resident employees by Botswana citizens;
• any provision made for participation by Botswana citizens in the management of the business;
• the degree of investment in the business of capital owned by Botswana citizens;
• the area in which the proposed development project or activity will be carried on; and
• any effect which the proposed project or activity might be expected to have on stimulating the development of other economic, industrial or commercial activities in Botswana, whether of the business or otherwise or in reducing the price in Botswana of consumer goods or services.
VII. Compliance and administration
The corporate tax year in Botswana extends from July 1 to June 30. With the permission of the Commissioner General, companies may use their financial year as their tax year.
The income tax return filing deadline for companies in Botswana is four months after the end of the tax year, but application for an extension of time may be lodged.
Corporate tax is to be paid in advance in four quarterly instalments throughout the year, and the final instalment is payable by the due date of the company tax return.
In respect of individuals, the tax year is the 12 month period from July 1 to June 30. Individuals (other than those earning only employment income) are required to submit an annual return within three months after the end of the tax year, but application for an extension of time may be lodged.
Assessed tax is due and payable within 30 days after the notice of assessment.
Employees’ tax deducted under the PAYE system, as well as withholding tax returns and payments are due by the 15th day of the following month. VAT returns and payments are due by the 25th of every second month. PAYE and other withholding ax annual returns must be filed within one month of the end of the tax year.
VIII. Exchange control
Botswana does not have exchange control regulations.
IX. Document retention
For tax purposes, documents are to be retained for at least eight years.