Botswana generally treats each company within a corporate group as a separate taxpayer. This means businesses under common private ownership cannot normally combine profits and losses when determining corporate income tax.
A notable exception applies to wholly owned subsidiaries of the Botswana Development Corporation Limited (BDC). Established in 1970 and wholly owned by the Botswana government, BDC supports the country’s commercial and industrial development.
Where a wholly owned BDC subsidiary incurs an assessed loss, it may elect in writing to transfer all or part of that loss to one or more other wholly owned BDC subsidiaries. The election must be made to the Commissioner General during the relevant tax year.
For example, suppose Kalahari Industrial Holdings and Gaborone Manufacturing Services are qualifying wholly owned BDC subsidiaries.
| Calculation | Kalahari Industrial Holdings | Gaborone Manufacturing Services |
|---|---|---|
| Initial tax position | BWP (2,000,000) loss | BWP 5,000,000 income |
| Assessed loss transferred | BWP 2,000,000 | BWP (2,000,000) |
| Remaining loss | BWP 0 | — |
| Chargeable income after transfer | — | BWP 3,000,000 |
The calculation is straightforward:
BWP 5,000,000 − BWP 2,000,000 = BWP 3,000,000
Therefore, assuming the entire assessed loss qualifies for transfer, the profitable subsidiary’s chargeable income would fall to BWP 3 million.
Transfer Pricing Requirements
Botswana’s transfer pricing framework has applied since July 2019 and generally covers transactions between Botswana taxpayers and connected non-resident parties. Domestic related-party transactions are generally outside these provisions unless an International Financial Services Centre (IFSC) company is involved.
Covered transactions must comply with the arm’s-length principle. In practical terms, connected businesses should establish prices and commercial conditions broadly comparable to those that independent parties would accept under similar circumstances.
Suppose Delta Equipment Botswana purchases components from a connected overseas business for BWP 4 million, while comparable independent transactions suggest a price of BWP 3 million.
| Transfer Pricing Calculation | Amount |
|---|---|
| Related-party transaction price | BWP 4,000,000 |
| Illustrative arm’s-length price | BWP 3,000,000 |
| Potential pricing difference | BWP 1,000,000 |
| Difference against arm’s-length price | 33.33% |
The potential difference is:
BWP 4,000,000 − BWP 3,000,000 = BWP 1,000,000
This difference does not automatically mean that a BWP 1 million adjustment will arise. The company would need to support its pricing by considering contractual terms, market conditions, functions performed, risks assumed and other relevant comparability factors.
Businesses should therefore maintain appropriate contracts, invoices, benchmarking information and transfer pricing documentation.
Non-compliance can result in substantial penalties. Depending on the circumstances, penalties may include the greater of 200% of the tax avoided or payable and BWP 10,000. Failure to provide required transfer pricing documentation may also attract a penalty of up to BWP 500,000.
Interest Deduction Restrictions
Botswana limits the amount of net interest expense that certain companies can deduct. Subject to applicable exclusions, the maximum deduction is generally limited to 30% of taxable income or EBITDA.
Assume Tlou Manufacturing has EBITDA of BWP 10 million and incurs BWP 4 million in net interest expense.
| Interest Calculation | Amount |
|---|---|
| EBITDA | BWP 10,000,000 |
| Illustrative limitation | 30% |
| Maximum interest deduction | BWP 3,000,000 |
| Actual net interest expense | BWP 4,000,000 |
| Deductible interest | BWP 3,000,000 |
| Restricted interest | BWP 1,000,000 |
The maximum deduction would be:
30% × BWP 10,000,000 = BWP 3,000,000
The restricted amount would therefore be:
BWP 4,000,000 − BWP 3,000,000 = BWP 1,000,000
Subject to the relevant requirements, restricted interest may generally be carried forward for three years. Mining companies have a longer ten-year period for carrying forward denied interest.
Specified businesses, including certain financial institutions and qualifying enterprises, may be treated differently under the interest restriction rules.
Read Also: Botswana Corporate Tax Guide: VAT, Customs, Payroll and Business Taxes Explained
Additional IFSC Interest Restrictions
IFSC companies may face further restrictions where financing comes from a foreign controller or a person connected with that controller.
Where total foreign debt exceeds the applicable foreign-equity product, part of the associated foreign debt interest may be disallowed. The calculation can be expressed as:
Disallowed interest = I × (A ÷ B) × (C ÷ 365)
Suppose an IFSC company has foreign debt interest of BWP 900,000, total foreign debt of BWP 6 million and excess foreign debt of BWP 1.5 million. Assume the excessive debt position continues for 180 days.
| Formula Component | Amount |
|---|---|
| I – Foreign debt interest | BWP 900,000 |
| A – Excess foreign debt | BWP 1,500,000 |
| B – Total foreign debt | BWP 6,000,000 |
| C – Period of excess debt | 180 days |
| A ÷ B | 25% |
| C ÷ 365 | 49.32% |
| Approximate disallowed interest | BWP 110,959 |
Applying the formula:
BWP 900,000 × (BWP 1,500,000 ÷ BWP 6,000,000) × (180 ÷ 365) = approximately BWP 110,959
In this simplified example, approximately BWP 110,959 of the foreign debt interest would be disallowed. This illustrates why affected IFSC companies should monitor debt and equity positions throughout the tax year rather than waiting until year-end.
Controlled Foreign Company Rules
Botswana does not currently operate a specific controlled foreign company regime. Consequently, there are no general CFC provisions automatically attributing the undistributed profits of a foreign subsidiary to a Botswana-resident corporate shareholder merely because the foreign entity is controlled from Botswana.
Practical Compliance Considerations
Companies operating in Botswana should identify connected-party transactions early, maintain appropriate transfer pricing records and review their financing arrangements before finalising corporate income tax calculations.
Corporate groups should also recognise that general group-wide loss relief is not available simply because companies share the same parent. The special loss-transfer arrangement discussed above applies specifically to qualifying wholly owned BDC subsidiaries.
The calculation examples in this guide are simplified illustrations designed to explain how the rules may operate. Actual tax outcomes can depend on the legislation applicable to the relevant tax year, available deductions, company classification, transaction terms and the taxpayer’s individual circumstances.
FAQs about Group Taxation in Botswana
Does Botswana allow group taxation for companies?
Generally, no. Botswana treats companies within the same corporate group as separate taxpayers. A special loss-transfer arrangement is available for qualifying wholly owned subsidiaries of the Botswana Development Corporation Limited (BDC).
Can one company transfer its tax losses to another company?
Ordinary corporate groups generally cannot transfer losses between members. However, a wholly owned BDC subsidiary may elect to transfer all or part of an assessed loss to another qualifying wholly owned BDC subsidiary.
What is Botswana’s transfer pricing rule?
Transactions covered by Botswana’s transfer pricing rules must follow the arm’s-length principle. This means related parties should use pricing and commercial terms comparable to those independent businesses would agree under similar circumstances.
Which transactions are generally covered by transfer pricing?
The rules primarily apply to transactions between Botswana taxpayers and connected non-resident parties. Certain transactions involving International Financial Services Centre companies may also fall within the framework.
What happens if a company fails to comply with transfer pricing requirements?
Non-compliance can result in significant financial penalties. Businesses may also face penalties of up to BWP 500,000 for failing to provide required transfer pricing documentation.
How much interest can a company deduct?
Subject to applicable exclusions, deductible net interest is generally restricted to 30% of taxable income or EBITDA. Any amount exceeding the permitted limit may be disallowed for the relevant year.
Can restricted interest be carried forward?
Yes. Subject to the applicable requirements, denied interest may generally be carried forward for three years. Mining companies benefit from a longer carry-forward period of ten years.
Does Botswana have controlled foreign company rules?
Botswana does not currently operate a general controlled foreign company regime that automatically attributes a foreign subsidiary’s undistributed profits to its Botswana-resident corporate owner solely because of control.