Group companies are widely recognised for their trade advantages, which include increased revenues, economies of scale, and business diversification. Often, they also provide free administrative services that further boost their competitive edge in the market. One of the most common free administrative services offered is bookkeeping or accounting.
Frequently, the accounting duties of subsidiary entities are carried out by the head office or holding company’s personnel. This approach allows the subsidiary entities to focus solely on operations while the parent company manages the administrative burden. However, taxpayers must understand that such free intercompany services can trigger tax implications, especially for Value Added Tax (VAT) registered group entities. This article will help clarify the tax complexities associated with free intercompany bookkeeping services. Please note, throughout this article, masculine pronouns will be understood to include the feminine.
Bookkeeping is the process of recording a business’s financial transactions, including cash flows such as payments and income. As mentioned earlier, some group entities centralise this function, making it the responsibility of the parent company or, in certain cases, delegating it to a subsidiary. In these instances, tax laws, particularly the VAT Act, stipulate that VAT must be charged on the market value of the accounting services, even when provided for free.
The VAT Act generally includes the provision of free bookkeeping services between related entities as taxable supplies. Consequently, such transactions are subject to VAT, regardless of whether payment or invoicing takes place between the involved parties. The VAT Act explicitly states that “a supply made for consideration includes a supply made between related persons for no consideration.” This essentially means that free bookkeeping services provided to a related company must be valued for VAT purposes. In other words, the VAT Act requires that free bookkeeping services between related parties be valued at the fair market price for VAT purposes.
VAT liability typically arises at the earlier of either issuing an invoice or receiving payment. However, in cases of free bookkeeping services between group entities, this principle does not apply. Instead, the VAT Act mandates that VAT is triggered at the time the bookkeeping services are performed. This means that if a holding company provides bookkeeping services to a subsidiary, the VAT liability arises when those services are rendered.
In conclusion, free intercompany transactions, including bookkeeping services, must be subject to VAT to avoid penalties during a tax audit by the Botswana Unified Revenue Service (BURS). Group companies are therefore required to account for VAT based on the fair market value of the services and remit the VAT accordingly.
We hope this information was helpful. As we sign off, remember to “give to Caesar what belongs to Caesar.” If you’d like to consult or join our free Tax WhatsApp group or learn more about our 9 Tax e-books, feel free to contact us at +267 7181 5836 or via email at jhore@aupracontax.co.bw. For more tax-related articles, visit our website at www.aupracontax.co.bw under the “Tax Articles” section.
