On the 20th of August last year, Minister of Finance and Development Planning Kenneth Matambo wrote to President Ian Khama and Cabinet seeking approval to invoke some provisions of the VAT Act, to give special permission for China National Electrical Corporation Limited (CNEEC) to escape with P600 million in unpaid taxes. Investigations further reveal that Botswana Power Corporation (BPC) made an undertaking to the Chinese firm that it would get a VAT and Customs Duties exemption on the P15bn project. However BPC failed to get the exemption and when the taxman came calling the power utility turned to the Ministry of Finance to exercise powers to write-off the tax bill owed by the Chinese to BURS.
When BPC engaged CNEEC in 2008 for the construction of the 600 Mega Watt power plant, Morupule B, it appears according to documented information that CNEEC’s contract price was exclusive of the Value Added Tax (VAT) and made no allowance for customs duties and import taxes on equipments and materials imported for the construction of Morupule B. An extract from the BPC-CNEEC contracts reads that, ‘the contract price is exclusive of Value Added Tax and makes no allowance for duties and imports taxes for plant, equipment and materials for the works imported into Botswana. The employer (BPC) has applied for, or will apply for an exemption from the application of VAT in relation to the works.” According to the agreement, if the Chinese were charged VAT, they would then pass it to the BPC, which would be compelled to pay. The extract reads “if, nevertheless, the provision of Goods and Services by Contractor for the works are chargeable to VAT, the employer (BPC) would have to pay the contractor (CNEEC) the amount of such VAT which is properly chargeable, subject to delivery of proper VAT invoice and proof that the contractor is registered in Botswana as a taxable person for VAT purposes”. The same application was supposed to be made by BPC to the Southern African Customs Union (SACU) for such an exemption. When the Botswana Unified Revenue Services came looking for its P600m tax, the CNEEC referred them to BPC which in turned to the Finance Minister for refuge. The Finance Minister, against the position of some senior members of the BURS, made a decision to exempt the Chinese from the tax bill.
The funding of Morupule B Generation and Transmission Project as syndicated by the World Bank and outlined in the Project Appraisal Document of 2nd October 2009 shows that total taxes and duties which were supposed to be paid amounted to US$180.90 million in total (an equivalent of just over P1.8 billion). Total financing required from Morupule B was US$1662.30 million (Just over P16 billion).
But it appears that, BPC signed the contract with CNEEC for an exemption of VAT and customs and import duties before it was given such a waiver by the Ministry of Finance.
Evidence shows that the troubled power utility, in 2008 wrote a letter to Minister Matambo requesting for Morupule B project to be exempted from VAT as well as Customs and Import Duties. However the request was rejected. Ministry insiders say the tax issue caused heated exchanges between the two powerful ministries of, Minerals and Energy Resources, and that of Finance and Development Planning.
BPC CEO Jacob Raleru, however, claims ignorance of the matter. When queried about the request he put to Matambo, Raleru was very diplomatic in his response. He said the agreement between CNEEC and BPC is confidential and he sought to know how the Business Weekly & Review team got the details.
“I said everything at the last press conference and I will not say it again,” he said, adding that for further information, The Business Weekly & Review must contact the Corporation spokesperson Spencer Moreri. But the latter never reverted back to this publication despite the detailed set of questions that were forwarded to him. His mobile phone rang unanswered.
When Matambo initially rejected the same request that Raleru claims ignorance of, the Minister cited in the documents that there were no provisions under both the VAT Act and the Customs and Exercise Duty Act, to exempt the project from the two taxes. Other reasons advanced by the Minister were that while most of the plant components were liable to low or no customs duties, the process of exemption was long and complex. He then advised BPC, which he said was liable to pay VAT, to either charge itself VAT at the standard rate on the quoted price by the contractor and pay it to the Botswana Unified Revenue Services (BURS) or pay the VAT inclusive price to the contractor when the contractor is resident in Botswana and is registered for VAT purposes.
BURS was roped in by Matambo to provide guidance. As per the discussions, BPC opened a designated deferred account number C03642302112 to facilitate ease of purchase and delivery of equipment to the project. So, the VAT obligations were met by the power utility corporation and declared through the monthly VAT returns.
CNEEC which had not registered for VAT at the commencement of the project, then then registered for VAT in 2009, but it did not issue a tax invoice to BPC to enable the latter to charge output VAT, and claim back the amount it would have paid to CNEEC as input credit.
Documents show that no funds would have remained in the books of BPC had BPC attempted to pay the P600m to BURS. When BPC, and subsequently BURS, enquired why CNEEC did not raise a tax invoice after registration, the Chinese contractor insisted that invoices were raised from their head office in China and not from the registered company here in Botswana. CNEEC ended up registering for VAT but BPC did not fulfill some procedural processes which would have led to BPC paying tax to CNEEC and claiming it back as input costs. Documents reveal that BPC did not pay the tax to CNEEC because CNEEC did not include the VAT in invoices since VAT was supposed to be paid by BPC. Since BPC is a Botswana resident it could not charge itself tax and pay to BURS as well. In the absence of VAT Tax returns, BURS resorted to claim VAT from CNEEC. It appears that on the 17th April 2014, BURS issued a Tax Notice, which was served to BPC under provisions of Section 109 of the Income Tax Act (cap 52: 02) and Section 40 of the VAT Act. A similar notice was served to CNEEC bankers.
After further consultation between BURS, BPC/CNEEC and the Ministry of Finance it appears the outstanding P600 million was finally waived by invoking section 62 (6) of the VAT (Cap.50:03), a section that provides the minister with powers to remit wholly or partly any tax payable by any person where he is satisfied that it is just to do so or that the tax is irrecoverable.
That’s when Matambo urged President Ian Khama to approve his tax exemption for the Chinese engineering firm.
“To resolve the current BURS/BPC/CNEEC VAT impasse, I propose to invoke the provisions of section 62 (6) of the VAT Act (Cap. 50:03), because it would be just and equitable that the tax be waived,” reads a letter signed by Matambo. The Cabinet Memorandum was not circulated for the reason that Matambo viewed as ‘sensitive’.
He recommended that cabinet advice President Khama to approve that the provisions be invoked, since it would be just and equitable that the VAT that has been levied by BURS on CNEEC be waived. Like Raleru, Matambo’s response was evasive. He told The Business Weekly & Review that he could not recall the matter. However he then added that perhaps he would be better placed to respond once he saw The Business Weekly & Review’s documents. “Bring the letter to me so I can jog my memory and also tell me who gave you the letter,” he said when this publication called him, before declaring that he was on sick leave and suggested that such a letter be taken to his Permanent Secretary (PS). An enquiry was sent to Matambo’s office and this publication later received a call from a woman who claimed to represent Ministry of Finance but could not say her name. “Matters of taxpayer are not discussed by third parties, “she said. She was queried whether the secrecy of taxpayers covers public institutions which spend money and she answered in the affirmative, before querying about where this publication got the information.
Meanwhile, it seems BURS will not be paid the P600 million in taxes by CNEEC/BPC according to the document. Matambo says BPC is too broke to afford the bill. “On the other hand, looking at the BPC balance sheet, the amount (P600 million) may be deemed irrecoverable. Waiving this amount would result in no revenue loss, but implications of the amount being claimed from CNEEC may be detrimental to the economy of Botswana in relation to provision of electricity,” reads the document. BURS Commissioner General Ken Morris told this publication this week that he also could not discuss anything to do with taxpayers for confidentiality reasons. He was asked how often it happens that a company is given a tax waiver to a point where the new VAT Act provisions could be invoked just to accommodate that ‘special’ company. Morris said such instances are few but the Minister has powers to take such actions if he feels there is need.
Botswana Government engaged CNEEC, against the advice of the Chinese Government, to construct the Morupule B Power Station. It has since emerged that the station is fundamentally flawed, given the shoddy workmanship by the Chinese engineering firm. The relationship between Government and BPC on one hand and the Chinese firm on another is said to have collapsed. The country has had to rely on importing power, at high cost, from South African power utility Eskom. The loadshedding resulting from the malfunctioning power station is said to be having a negative effect on economic growth. Two weeks ago when Minister of Energy Resources Kitso Mokaila addressed media, he hinted that Government would sue the firm for substandard work.