Corporate tax in Botswana

A liberal taxation policy in Botswana since 1990, when the rate of company tax was 40%, has caused the company income tax rate to decline to an inclusive rate of 25% made up of:

• company tax at standard rate 15%
• additional company tax (ACT) 10%.

New developments which are effective from 1 July 2001, are contained in the Income Tax (Amendment) Act 2001, the most important change being the introduction of self-assessment for companies. A new 3% withholding tax deductible from payments under construction contracts was also brought in to replace earlier provisions which referred only to non-resident contractors.

The two-tier system of company taxation
Under the two-tier system of company taxation, dividend withholding tax deducted from dividends payable to shareholders is allowable as a credit against the ACT of 10%. As a rule of thumb, distribution of two-thirds of pre-tax profits results in elimination of the 10% ACT liability.

The 15% dividend withholding tax is a tax on the shareholder. It can therefore be said that the company tax rate is really only 15% or, alternatively, that the combined rate of tax on the company and its shareholders is 25%.

In instances in which dividend withholding tax exceeds the ACT, the excess withholding tax falls away and represents an additional tax liability. On the other hand, where the ACT exceeds the dividend withholding tax, or in financial years in which there are no dividend distributions, the ACT payable is carried forward and can be set off against withholding tax on future dividends. Unused balances of ACT, being ACT already paid, are carried forward indefinitely.

Tax year and accounting dates
The tax year is 12 months from 1 July to the following 30 June. Generally, companies are required to make up financial statements for a twelve-month period for each tax year.

For year-ends other than 30 June, taxable income is calculated by reference to the tax year within which the accounting date falls. For example, financial statements for the year ended 31 December 2001 will form the basis of assessment for the tax year ending 30 June 2002. A ‘prior year’ basis therefore applies. A ‘subsequent’ accounting year is not acceptable as a basis of assessment.

Scheme of taxation of company income
Taxable income on which company tax is imposed is determined on the basis of the following formula:

Business income of companies is aggregated which means that if a company carries on more than one kind of business, a loss on one of its businesses can be set off against chargeable income from other businesses. Aggregation of business income in this way does not apply to farming, mining or prospecting businesses. Similarly, disposal gains for capital gains tax are not aggregated with business income.

Deductions and capital allowances
Deductions comprise expenditure incurred in the generation of assessable income, excluding expenditure of a capital nature.

Allowances in respect of capital assets consist of straight-line annual allowances on moveable assets (plant or machinery) at rates between 10% and 25% fixed by the Commissioner of Taxes. The allowances are not reduced proportionately where the period of use is less than a full year.

Statutory straight-line allowances, mainly in respect of immoveable assets, are as follows:
Industrial buildings:

Commercial buildings:

Assessed losses
An assessed loss, being the excess of deductions over assessable income, is determined on an annual basis and is carried forward for up to five years from the tax year in which the assessed loss was incurred. This means that an assessed loss incurred in the 1997 tax year is available for set-off up to and including the 2002 tax year. The oldest assessed loss, where there is an assessed loss for more than one year, is utilised first.

Assessed losses in the areas of farming, mining and prospecting are carried forward separately for set-off against future chargeable income from the same activities. The five year time limit does not apply to assessed losses resulting from farming, mining or prospecting businesses. Separation of losses on these operations is to prevent tax concessions available to the agricultural and mining industries from being used as a means of tax reduction in respect of income from other business sources.

A disposal loss under the capital gains tax provisions is available for set-off against disposal gains only in the next following tax year. If not so utilised, the disposal loss falls away.

Manufacturing companies
A special low rate of company tax for manufacturing companies was introduced with effect from 1 July 1995. The following rates of tax apply to chargeable income from manufacturing operations of companies which have received Ministerial approval as manufacturers:

• manufacturing company tax 5%
• additional company tax 10%.

As in the case of ordinary company taxation, any payment of the 15% dividend withholding tax is set off against the ACT of 10%. This can be said to reduce the rate of tax payable by a manufacturing company to as little as 5% on the basis that the 15% withholding tax on dividends is a tax on the shareholder.

Capital gains tax
Company taxation is imposed on disposal gains in respect of a limited range of capital assets comprising mainly:

• moveable or immoveable property of a business (excluding moveable assets qualifying for capital allowances);
• shares or debentures of a company (excluding those listed on the Botswana Stock Exchange);
• residential property.

‘Business’ includes the letting of any property. Capital gains tax also applies to liquidation dividends of companies being wound up or liquidated.

Disposal gains and losses in a particular tax year are aggregated. In the event of an overall disposal loss, the loss is carried forward to the next following tax year as stated above under ‘assessed losses’.

For immoveable property, the original cost and an indexation allowance are taken into account in determining the gain or loss on disposal. As regards moveable assets qualifying for capital allowances, such as motor vehicles, plant, machinery, furniture and equipment, the full amount of disposal proceeds is subject to income tax notwithstanding that there may be a capital element in the form of an excess over the original cost of the asset.

Payment of tax by companies
The latest development in this connection is the introduction of self-assessment tax (SAT) for companies with effect from 1 July 2001. Up until the tax year ended 30 June 2001, a current year tax (CYTAX) system was in operation. This system fell away with the introduction of SAT and therefore applies up to and including the tax year ended 30 June 2001. Under the CYTAX system, selected companies were ‘designated’ and were then required to pay income tax on a current year basis during the year of income. Designated companies were generally the larger taxpayers. Income tax of all other companies was charged on assessments based on annual returns and was payable within 30 days of the date of the notice of assessment.

Self-assessment tax (SAT) for companies
There are two main differences between CYTAX and SAT. Under the CYTAX system, the designated company could base the first three quarterly instalments of estimated tax on the income returned for the previous year and pay a final instalment based on actual results for the current year. SAT instalments must be based on the estimated tax payable for the current tax year. The second important difference is that SAT applies to all companies automatically, including companies which were previously designated for CYTAX.

SAT instalments
Company tax under the SAT system is payable in quarterly instalments commencing with the quarter ending 30 September 2001. The instalments must be based on the estimated income tax payable for the current tax year. So for the first tax year the payments will be for the tax year ending 30 June 2002.

Where the financial year of a company ends on a date other than 30 June, the accounting date within the tax year ending 30 June 2002 will apply. For example, if the accounting date is 31 December, the accounting year ended 31 December 2001 will form the basis of the company’s tax liability for the tax year ending 30 June 2002. For the first two years, being a transitional period relating to accounting years, the same due dates will apply to all companies and are as follows:

Transitional arrangements: accounting years differing from the tax year
After the transitional period of two tax years, the due dates for payment of quarterly instalments of SAT will be linked to the financial year of the company. This means that the first instalment for the tax year ending 30 June 2004 in respect of a company with a financial year ending on 31 December 2003 will be due for payment on or before 31 March 2003. The due dates will therefore be:

It can be seen that in the transitional period, overlapping of payments will be inevitable.

Margin for error and interest on underpayments of SAT
To avoid interest charges under SAT, quarterly instalments must not amount to less than 80% of 25% of the eventual tax liability for the tax year concerned. Interest at 1.5% per month, or part of a month, is payable on shortfalls of instalments.

Annual income tax returns and SAT top-up payments
Final top-up payments are in all instances payable by not later than 30 September following the end of the tax year concerned. This time limit applies irrespective of the company’s accounting date. So, for example, a top-up payment for a financial year ending on 31 December 2003 will be due for payment by 30 September 2004.

Unless an extension of time has been requested and granted, the annual income tax return must be submitted within three months of the end of the tax year. Under the new SAT provisions, the tax return is the assessment and the tax payable on the basis of the return is the assessed tax. This illustrates what is meant by ‘self-assessment’ which is further exemplified by the intention of the SAT provisions that the top-up payment should accompany the tax return.

Tax payable of less than P50,000
Where the annual income tax liability of a company is less than P50,000, the company is not required to pay SAT on a quarterly basis, but may do so voluntarily. Annual income tax liabilities of less than P50,000 for the 2002 tax year will be payable in full by 30 September 2002, if not paid by instalments.

Determination of SAT payable and tax credits
Under the two-tier system of company taxation, a payment of dividend withholding tax is allowable as a credit against ACT. When estimating the amount of SAT to be paid, anticipated dividend withholding tax payments should be taken into account. In the case of construction companies (see below), withholding tax deductions from contract payments should also be taken as credits in calculating the amount of SAT to be paid.

Associated companies
‘Associated company’ provisions exist to ensure, firstly, that a dividend payment to a resident associated company is not subject to the 15% dividend withholding tax. The object of the provisions is to avoid a cascading effect that would otherwise result in the event of a series of dividend distributions being made within a group of associated companies. Secondly, the associated company provisions enable ACT available in one group company to be utilised by other group companies as a set-off against dividend withholding tax on dividends distributed outside the group. Non-resident companies are excluded from the associated company provisions.

Non-resident companies
The taxable income of a non-resident company is subject to income tax at 25% which is a final, inclusive tax.

Withholding tax on construction contract payments
Companies which undertake contracts relating to construction operations are subject to a special process for collection of income tax by deduction of withholding tax from contract payments. The rate of withholding tax with effect from 1 July 2001 is 3%. This rate is applied to gross contract payments. Construction companies are required to complete tax returns in the same way as other companies and to comply with the SAT provisions. The 3% tax is not a true withholding tax but represents payment towards the eventual income tax liability of the construction company. Under the SAT system, a construction company should not only estimate its tax liability but should also forecast the amount of tax to be deducted from contract payments and pay only the shortfalls as SAT instalments.

John B Leid FCIS is Tax Consultant for KPMG Botswana