Botswana: Offshore Legal and Tax Regimes
Following the passing of the Income Tax Amendment Act 1999 and the Bank of Botswana Act 1999, Botswana constituted an International Financial Services Centre (IFSC), whose focus is on the provision of financial services to clients who are domiciled in other countries. The IFSC is modelled on the highly successful Dublin IFSC which has acted as a regional magnet for many types of financial services company. Fiscal incentives are provided to both financial and non-financial institutions to encourage them to establish in the IFSC to provide qualifying services.
The government announced in February, 2006, that the IFSC regime would be extended to holding companies and companies in the BPO and call centre sectors; and to mutual funds. In addition, disposals of shares in IFSC companies will be exempt from tax in future.
The Bank of Botswana is responsible for supervision of IFSC companies and of Undertakings for Collective Investment, which were brought under the IFSC regime by the Collective Investment Undertakings Act 1999.
In July, 2004, Botswana's Finance and Development Planning Minister, Baledzi Gaolathe announced a relaxation of the rules for IFSC companies, which had previously only been permitted to transact business with non-resident and other IFSC companies. To avoid transfer pricing abuses, it was decided that income from approved transactions with resident companies should be subject to the same rate of corporate tax as applies to non-IFSC companies.
By 2007, a total of 39 companies were accredited to the IFSC across a range of sectors, including cross border banking, investment funds, financial advisory services, ICT services and group shared services, as well as administration. These companies have employed about 250 qualified Batswana professionals in areas such as accountancy, banking, funds administration, IT, financial analysis, human resources and administration. A further eight companies commenced operations in 2008/9, during 2009/10 five companies were certified, a decrease by 38% on the previous year. By 31 December 2011, the total number of Botswana IFSC certified companies stood at 47 with overall capital employed by 31 March 2011 of BWP10.3bn.
IFSC companies include Metcash Africa, Brait's African Alliance fund managers, plus Zimbabwe's Econet Wireless and Wilderness Safaris who have set up administrative operations in the IFSC.
In April, 2005, Botswana's parliament passed an International Insurance Bill, which seeks to regulate offshore insurance and related services, to be offered through the IFSC.
Tabling the bill, finance and development planning minister Baledzi Gaolathe said companies operating under the IFSC were restricted to conducting non-domestic business in non-Pula currencies.
"Therefore to be licensed to do business under the IFSC, insurance companies cannot be regulated and supervised under the Insurance Industry Act of 1987, because it is concerned solely with insurance companies serving only the local or domestic market, hence the need for the proposed bill," he explained.
The International Insurance Regulations were in enacted in March 2007 following the promulgation of the International Insurance Act 2005. The Act allows for the conduct of international insurance and related services through a regulatory authority with specific responsibilities and powers. The regulations now cater for the establishment of reinsurance and captive insurance companies.
The Non-Bank Financial Institutions Regulatory Authority Bill was enacted in 2006. The new Authority will regulate all non-bank financial institutions once it is fully operational, including insurance companies, brokers and agents, pension funds, pension fund administrators, asset managers, collective investment undertakings, organized exchanges, security dealers, investment advisors, and specialized financiers. Banks that operate in the IFSC will continue to be regulated by the Bank of Botswana. The new regulatory body was created to plug gaps in the old supervisory framework.
In November 2008 IFSC projected that the eight recently accredited companies would invest over P700 million over the next financial year in accordance with their approved business plans. At the time, Botswana IFSC companies has a cumulative capital employed of P4.1 billion, which represents an increase of 30% from the previous year - despite the on going global financial crisis.
"Much of the growth is a result of continued investment by the promoters and significant capital injection by leading financial services multinationals," the parastal's CEO Alan Boshwaen says in the Botswana IFSC 2008 annual report. The addition of these companies brought to 45 the total number of companies accredited with Botswana IFSC. The new members are expected to contribute significantly to the growth of the country's financial sector. "Some of these companies have investments that we anticipate will incite the growth of nascent sectors," Boshwaen said.
Investec Frontier Property Investment Company (IFPICO) represents a significant milestone in the development of the investment funds sector. The fund will raise US$500 million to be invested in property across Africa.
ZimRe, a re-insurance company, is the first company to be accredited to the Botswana IFSC in accordance with the International Insurance Act of 2005.
Boshwaen said that the Botswana IFSC was involved in three projects strategically aligned to the new economic diversification roadmap laid out by the Business Economic Advisory Council (BEAC). These are the establishment of a new IFSC Legislative Framework, an Integrated Financial Services Cluster and the implementation of a BPO and Call Centre Industry Stimulation Plan.
The new Botswana IFSC Legislative Framework aims to create modern, flexible legislation to position the country as the medium- to long-term preferred offshore financial services centre for sub-Saharan Africa.
The framework is intended to allow for more domestic economic linkages and make it easier for Botswana IFSC companies to leverage domestic assets and to invest in strategic sectors such as diamond financing.
Boshwaen said that a discussion document outlining specific constraints and proposed resolutions in the Income Tax, Banking Act, Collective Investment Undertaking Act and the Companies Act had been submitted to the Ministry of Finance and Development Planning.
However, in delivering his maiden State of the Nation address in November 2008, President Ian Khama said there are concerns that the tax system in Botswana is complicated and is a disincentive to investors. "We are thus in the process of reviewing the tax system with the aim of simplifying it," the President said. "In addition, we will continue to seek double taxation agreements to reduce the cost of doing business in Botswana."
The proposed legislative framework is expected to call for a flexible and appropriate legislation for establishment and administration of various forms of investment businesses; exchange liberalisation, free repatriation of profits and capital; a reliable tax regime. At the moment Botswana offers confidentiality of Global company information and banking secrecy is enshrined in the law – this is seen as one of the attractions for financial and investment sector businesses.
The review of Botswana's IFSC laws was undertaken during the course of 2009 and represents the first comprehensive evaluation of the IFSC legislation since its inception in 1999.
In the 2010 budget, the Minister of Finance and Development Planning announced that the two-tier corporate tax system would be replaced by a single company tax rate of 25% of profits (reduced to 22% in the 2011 budget). Companies designated as manufacturing and International Financial Services Centre-registered will be taxed at 15%, with a final 7.5% withholding tax on dividend distributions. These changes are effective July 1, 2010.
The corporate tax incentives and specific benefits available to Botswana IFSC companies were unchanged by the 2010, 2011 and 2012 budgets.
Also in 2010, the Non Bank Financial Institutions Regulatory Authority (NBFIRA) began a consultation on the proposed annual levy fee structure for asset managers, management companies, micro lenders, stockbrokers and IFSC-accredited companies.
The NBFIRA has been tasked with regulating all non-banking financial entities in Botswana, including pensions funds, asset managers, micro lenders, insurance and collective investment undertakings.