The tussle centered around the pricing mechanism which were employed by the diamond company in its transactions with two related entities, Diacore International of Switzerland as well as another entity simply referred in the case as Makinson Holdings.
This case is of paramount importance to the country as it is the first such reported judgment pertaining to the pricing of goods between multinational entities, otherwise known as Transfer Pricing or simply, TP. BURS, just like any tax authority, takes a keen interest in the prices applied on cross-border intergroup transactions as they may be manipulated and therefore prejudice the fiscus. Of particular interest is the fact that the case pertains to periods when the country had not enacted the Transfer Pricing legislation.
Diacore Botswana recorded company tax losses between 2010 and 2014, which triggered its selection for a tax audit by BURS. The company’s business is cutting, polishing and selling of rough diamonds sourced from Botswana. The judgment patently states that, “This audit was spurred by the recorded pattern of losses which Diacore Botswana had submitted tax returns of successive losses for the years 2010 to 2014 consecutively.”
The dispute between Diacore Botswana and BURS arose in November 2015 after BURS conducted an audit on the tax affairs of the company and issued a transfer pricing analysis report (TP report) regarding its findings on the company’s dealings. In that report, BURS observed that Diacore had failed to produce and maintain records which showed that the diamonds were sold to third parties at prices which are arm’s length, i.e., ones which would be applied between independent parties. The Income Tax Act requires that related parties, amongst others, must document and trade as if they were not related as that allows BURS to collect the correct amount of company tax.
BURS then issued company tax assessments which yielded tax of P8 033 276.97, including penalties. On 28 January 2016, Diacore Botswana then engaged an audit firm to act on its behalf to defend its pricing but failed to win the plea, which had been escalated to BURS as an objection. Even though Diacore Botswana acknowledged that they had not changed their company business model or transfer pricing policy during the period under review, Diacore questioned BURS on the rationality of the new assessments.
BURS had adjusted the figures by using cost plus and transactional net margin method in a bid to establish the appropriate sales had been conducted on an arm’s length basis.
The judges ruled that Diacore Botswana had not discharged the onus of establishing that its transactions with the related entities were conducted at arm’s length and that the BURS TP report was a proper basis for the re-assessments.