[Updated based on meeting that Botswana Institute of Chartered Accountants had with BURS (Feb 2020)]
Transfer Pricing Regulations
Minister of Finance and Economic Planning has nwo made Regulations for Transfer Pricing. These Regulations are effective from 12th July 2019 and Transfer Pricing Law (https://www.rsm.global/botswana/insights/tax-insights/transfer-pricing-interest-international-financial-services-centre-and-general) is effective from the 1st July 2019. These Regulations however don't cover Advance Pricing Agreements that the Law allows the Tax Payers to make with the Commissioner General.
At the outset, we should confess that it is very difficult to summarise these Regulations because they apply in each situation based on the merits of the case. These regulations deal with transfer pricing practices that should be employed by the tax payer and the Commissioner General.
These Regulations specify five methods that are used in most cases namely
- Selling Price using Price parameter
- Cost Method using Mark-up parameter.
- Resale method using Gross Profit parameter
- Net Margin Method using Net Profit parameter and
- Profit Split method using the same parameter.
Regulations however allows the Tax Payer use combination of methods or an unspecified method based on circumstances of the case. Further the Regulations prescribes that the first 3 methods (called traditional methods) need to be preferred to the last 2 methods (called transactional methods). Amidst the traditional methods, Price should be preferred even if others are eqully effective. Where there is a range of parameters under any method based on research on transfer prices of independent parties, then the parameters should be contemporaneous (relating to the same tax year) and median of these parameters should be the norm that will the Commissioner General will use for making transfer pricing adjustments. Arithmetic mean may be used 50% values fall below the median.
What is practically important is that the Regulations prescribe 25 types of information that should accompany the Tax Return in support of the Transfer Price used. They are:-
- History, overview, organisational chart
- Description of organisational structure
- Description of group's operational structure
- Description of general business strategy and indication of whether the person is involved in any sort of restructure
- Key competitors
- Description of controlled transaction and analysis of comparability factors.
- Amount of intra group payments and receipts for each category of controlled transaction
- Identification of parties and relationship
- Copies of material agreements
- Detailed comparability and functional analysis including any changes from prior year.
- Which party is tested party and why
- financial statements including overseas financial statements
- Summary of important assumptions for transfer pricing methodology
- Reasons for performing multiyear analysis
- List and description of internal or external controlled transactions, information on relevant financial indicators, description of comparable search methodology and source of information.
- Reasons for conclusions on arms' length nature of transactions
- Summary of financial information used in transfer pricing methodology.
- Information and allocation schedules showing how financial data are tied to information on financial statements.
- Financial data and source
- Selection of most appropriate transfer pricing method
- Comparability analysis including methodology used, explanations for rejection of internal or external controlled transaction, where applicable, description of comparable uncontrolled transaction, analysis of comparability and details of comparability adjustments made.
- Industry analysis, economic analysis, budgets or projections relied upon.
- Advance pricing agreements in other countries.
- Conclusions on consistency of conditions with arms' length principle.
- Any other information that will have material impact.
You have to keep all the above pieces of information ready. You have to submit them with the tax return only when the non-resident inter-company (non-resident connected company) turnover is P 5 million or more. If it is less, you don't have to submit them but you should keep them ready.
Further the Commissioner General may call for the following information where the Transfer Pricing transactions are more than P 5 million.
- Chart of MNE structure
- Important drivers of business profit
- Description of the supply chain of the top 5 products by turnover amounting to more than 5% of turnover
- Agreements, principal locations, transfer pricing policies for allocating services, costs and determining prices to be paid for intra-group services
- Description of geographic markets
- Brief written functional analysis describing the principal contributions in value creation by individual entities - like key functions performed, risks assumed and assets used.
- Important business restructuring transactions, acquisitions and divestitures occurring during the tax year.
The Regulation uses certain technical jargons but it accepts interpretation of OECD (Organisation for Economic Cooperation and Development) Transfer Pricing Guides for Multinationals.
Advance Pricing Arrangement with Commissioner General
The Tax Act allows for the Minister to make Regulations relating to Advvance Pricing Arrangements. So far Regulations have not been made. In a meeting between Botswana Institute of Chartered Accountants and the Commissioner General (February 2020), BURS has confirmed that both BURS and tax payers are learning about transfer pricing at this stage and therefore Advance Pricing Arrangement Regulations will be released after gaining some experience on transfer pricing issues. We believe that nothing however stops a tax payer to get into Advance Pricing Arrangements if it is fundamentally necessary and one could explain to Commissioner General of the need to make such arrangements in the absence of Regulations.