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DANGER

Written by JFG

Tuesday, 30 June 2009 11:49

In the past few weeks I have again experienced firsthand the problems that can arise when agreements are drafted without due regard for the taxation effects. The purpose of an agreement is of course to record the intentions of the parties to a transaction. The meaning that is ascribed to the words in plain English (or whatever language is used in the contract) is first and foremost the meaning that will be enforced in the case of a dispute. Astute businesspeople read all their agreements very carefully and the wise make use of lawyers to assist them in ensuring that the agreements convey the correct meaning. A number of points should be borne in mind when consideration is given to an agreement. From a pure tax point of view, certain words represent very definite concepts which are defined in the taxation statutes. Incorrect use of these terms will certainly cause unforeseen taxation consequences. Then, often the Value Added Tax Aspects of an agreement are not correctly drafted. It will be appreciated that, as VAT is levied at 10% upon vattable items, when a business is sold or bought, there could be a 10% reduction in profits upon sale or a 10% extra charge to contend with. These aspects should be carefully considered before the agreement is finally signed. Disputes as we know, are time consuming, are costly to fix and in terms of the damage caused to a business relationship, the costs might be beyond calculation. The bottom line is that disputes are damaging and that misunderstandings can easily arise due to the unplanned-for incidence of tax. Why not pay a little more at the time of drafting, to ensure that the taxation aspects are completely understood? Whether it is a loan agreement, a contract of sale or whatever, the tax consequences are always a material factor that will impact on the amount of money that will change hands or accrue to a seller. Especially in the VAT arena, contracts can be drafted with a view to saving money and conserving the cash flow. A sale of a business, for instance might be drafted to include VAT at the zero rate. The rules are quite simple in this regard. Any business or part of a business that is sold, as long as it is capable of being a self supporting unit, can be sold at a zero rate. The contract does have to state this. (Certain formalities have to be complied with in terms of paragraph 2(p) of the First Schedule to the VAT Act of Botswana). Especially with regard to the sale of a business, a well thought out agreement, catering for the zero rating thereof can save much heartache and unnecessary cost. Another common mistake made when selling a business is that the sale proceeds all accrue at once when the sale is completed, even though the payments might be staggered. If the contract is drafted without due regard for the income tax consequences, it is possible that the seller might have to account for tax upon an accrual of a large sum of money before he has received the bulk of it. The seller would then be responsible for penalties and interest upon tax that he cannot afford to pay and this would have the effect of reducing the profits due to the sale of his business. Once again, the only remedy against such misfortune is to have the contract thoroughly vetted from a tax point of view, so that each party has an accurate idea regarding the tax consequences. Forewarned is forearmed. When the parties are aware of their obligations from a tax viewpoint as well, they can plan for these eventualities. The parties will then not bicker about the agreement afterwards and a smooth transaction and continued good business relationships are a likely result. Adv. Peter O’Halloran is head of tax at BDO Spencer Steward in Gaborone. Contact Peter on 3902779 or  HYPERLINK "mailto: This e-mail address is being protected from spambots. You need JavaScript enabled to view it " This e-mail address is being protected from spambots. You need JavaScript enabled to view it . < Prev   Next >