Most Zimbabwean businesses that venture into export markets often encounter many costs and hassles which sometimes act as barriers to entry into export markets. Such costs or factors often include distance; different social and economic conditions and different national and foreign government regulations amongst others. The decision to enter an export market must therefore be taken after a close and careful examination of the opportunities available and the challenges involved. However, one aspect that is given little attention or is least known by both potential and existing exporters is that the fiscus provides income tax incentives to exporting players. This is because exports are of such a strategic economic importance to the country due to foreign currency demand. This article brings to the fore the two common income tax incentives available to exporting taxpayers namely: double deduction for export market development expenditure and reduced income tax rates as more fully explained below.
Export market Development Expenditure
In order to promote exports, the government provides for a deduction of an amount of any export-market development expenditure incurred by the taxpayer during the year of assessment, together with an amount equal to 100 percent of such expenditure. It means exporters are allowed to claim twice the amount of export market development expenditure incurred during the year of assessment (that is to say, $2 for every $1 incurred). For example if a taxpayer incurs say USD5,000 on a Trade Fair outside the country, the deduction in the income tax return will be USD10,000. The tax law defines export market development expenditure as expenditure, not being expenditure of a capital nature that is proved to the satisfaction of the Commissioner to have been incurred wholly or exclusively for the purpose of seeking opportunities for the export of goods from Zimbabwe or of creating or increasing the demand for such exports. It comprises expenditure incurred for the following purposes:
- Research into, or the obtaining of information relating to, markets outside Zimbabwe;
- Research into the packaging or presentation of goods for sale outside Zimbabwe;
- Advertising goods outside Zimbabwe or otherwise securing publicity outside Zimbabwe for goods;
- Soliciting business outside Zimbabwe or participating in trade fairs;
- Investigating or preparing information, designs, estimates or other material for the purpose of submitting tenders for the sale or supply of goods outside Zimbabwe;
- Bringing prospective buyers to Zimbabwe from outside Zimbabwe; and
- Providing samples of goods to persons outside Zimbabwe.
The general guide for eligibility would be its incurrence in creating or increasing the demand for export of goods. The expenditure should be of a revenue nature and not be of a capital nature. This suggests that capital nature expenditure should be capitalised and rank for capital allowances. The expenditure should be incurred in the process of creating or expanding a person’s trade or market in the foreign markets. Therefore similar expenditure for promoting domestic sales does not rank for a double deduction. Furthermore, this incentive does not apply in respect of services. It only applies to expenditure incurred in relation to the marketing of goods. For the purpose of this incentive, goods are defined as anything that has been manufactured, produced, grown, assembled, bottled, canned, packed, graded, processed in Zimbabwe, or otherwise dealt with in such manner as the Commissioner may approve. The burden of proof as to the eligibility of an item of expenditure as export market development expenditure therefore lies on the taxpayer (exporter). And the proof can only be made provided through documentary evidence and taxpayers should maintain proper records to enjoy the incentive. Besides the costs associated with international trade, competition is inherent and stiff in international trade and hence this incentive makes exporters competitive cost wise.
Reduced income tax rates
The law also provides for tax incentive in the form of reduced income tax rates for exporting manufacturing companies. An exporting manufacturing company refers to a company that conducts manufacturing operations and in any year of assessment exports at least 30% (50% before 1 January 2015) of its manufactured output. The operator enjoys a lower income tax rate compared to the general rate of tax of 25.75%, which depends on the export level as percentage of total annual output as follows: for export level of 30% to below 41%, the rate is 20%, 41% to below 51%, the rate is 17.5% and 15% for exports of at least 51%. These rates took effect from 1 January 2015, prior to this date a single rate of 20% applied for export threshold of at least 51%. The output is measured in terms of the physical units or quantities and assessed separately for each year of assessment. Meanwhile a manufacturing operation is defined as a ‘process of production which substantially changes the original form of, or substantially adds value to, the thing or things constituting the product’
Promotion of exports is therefore key as it may supplement the motive for economic growth and it is through such incentives as the double deduction for export market development expenditure and reduced income tax rates that the tax law makes its contribution. Prospective and existing exporters in Zimbabwe should take this opportunity to expand their markets beyond borders leveraging on these incentives. As already alluded to above, this deduction will reduce their taxable income as well as income tax liability thereby freeing financial resources for capacity utilisation and other critical financial obligations. In all, the incentive promotes growth of the export receipts for the country, boosting the national foreign currency reserves amongst other benefits and ultimately economic growth.