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Govt moves to protect forex

The Malawi Government has moved to strengthen foreign exchange controls by, among others, meting out stiffer penalties to those involved in transfer pricing with the intention of moving forex out of the country.

The measures are contained in the Foreign Exchange Bill of 2022, which is currently on the Order Paper of Parliament and is expected to be tabled by Minister of Finance and Economic Affairs Sosten Gwengwe.

A Malawi Gazette Supplement notice dated November 23 2022 signed by Attorney General Thabo Chakaka Nyirenda said the main objective of the Bill is to reflect the shift of the policy of the Reserve Bank of Malawi (RBM) from not only focusing on controlling forex transactions, but also the regulation of forex flows entering or exiting the country.

Reads the Gazette notice in part: “A person who engages or attempts to engage in improper transfer pricing with intent to transfer foreign currency out of Malawi, commits an offence and shall, on conviction, be liable to a fine of K800 million or to an amount equal to the financial gain generated by the commission of the offence, whichever is greater, and imprisonment for 14 years.”

Reacting to the development yesterday, senior tax consultant at E.K. Tax Consultants Emmanuel Kaluluma said tracking down transfer pricing requires skills and expertise as it is heavily denied by the perpetrators.

He said: “Today, businesses or investors advocate for free movement of goods and persons and such measures in the end will not help the country.

“Businesses will take money out because of foreign exchange controls, high tax rates, unstable economic conditions, patriotism to countries they come from, among other reasons.”

Market analyst Cosmas Chigwe said that stiffer penalties are welcome as transfer pricing is one of the channels through which a lot of forex is lost in the country.

He said majority of payments made by businesses are inflated as a means of transferring foreign exchange outside the country.

“In some cases, this foreign exchange is actually converted into cash outside the country and smuggled into the country to be resold on the black market with a significant profit. This is a very lucrative business for those involved,” said Chigwe.

Anti-money laundering expert Jai Banda, who is also a private practice lawyer, is on record as having called for adequate coordination and intelligence exchange between financial agencies on suspicious transactions.

The Foreign Exchange Bill of 2022, among others, requires a person (a bank or tourist operators) who intends to conduct business as an authorised dealer to apply to the central bank for a licence.

The Bill also requires a person, other than an authorised dealer, who intends to buy or sell foreign currency to do so through an authorised dealer.

Further, the Bill bars a person, unless with written permission of the central bank, from quoting prices for goods or services in foreign currency, using foreign currency for indexing or determining the Malawi currency amount payable, accepting quotation of prices for goods or services in foreign currency or demanding payment in foreign currency for goods or services sold or provided in Malawi.

For those taking or sending any foreign currency out of the country, the Bill requires that they provide evidence that the foreign currency was purchased from an authorised dealer.

The Bill comes against a background of existing guidelines introduced by RBM in June last year to track export proceeds and guide operation of foreign currency-denominated accounts (FCDAs).

It also comes against a background of existing guidelines that require exporters to sell 30 percent of their export proceeds to the RBM through authorised dealer banks.

There is also the taxation (Transfer Pricing Documentation) Regulations 2017, which stipulate that a taxpayer must have contemporaneous documentation in place that verifies that its controlled transactions are consistent with the arm’s length principle. Figures from RBM show that Malawi lost about $980 million (about K1.02 trillion) to illegal foreign exchange externalisation and transfer pricing between 2010 and 2017.

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