Non-executive directors play a key role in good corporate decision-making hence the importance of engaging honest and experienced non-executive directors despite the size or status of an entity. They can make valuable contributions in determining corporate strategy and provide guidance on achieving strategic goals and the allocation of corporate resources to support strategic plans. The independence, objectivity and business acumen of non-executive directors compliment the detailed knowledge and experience of executive management. They are responsible for managing the affairs of a company through board meetings. There are however, concerns regarding the current tax regime of non-executive directors. Their effective tax rate is higher compared to their compatriots in business. Unlike companies; independent contractors etc; non-executive directors hardly have expenses attached to board fees hence they are taxed on gross fees. The Minister has moved in to address this anomaly through pronouncement made in the Finance Bill number 3 of 2019 and with effect from 1 January 2020 non-executive directors will be relieved of the onerous burden and are possibly one of the biggest winners of 2020 National Budget. These measures are fully explained below.
The current law stipulates that non-executive directors are subject to 20% withholding tax on their fees. The tax is deducted and remitted to the ZIMRA by the company paying the fees. The director will then receive a withholding tax certificate as evidence that the tax has been deducted and paid over to ZIMRA. He/she will then be required to compute income tax and pay Quarterly Payments Dates (QPDs) as and when they fall due. Just like any other person in business, the director will file an income tax return after the year end. The QPDs and the final income tax are both based on 25.75% tax rate from which the director will be entitled to offset against this tax liability the withholding tax deducted by the company at source. The government has now scrapped the 25.75% tax on non-executive directors’ fees together with the requirement to pay QPDs and income tax, as well as filing of income tax return. The 20% withholding tax deducted by the company has been made a final tax thus simplifying the tax rules; and reducing the effective tax rate and the administrative burden for the non-executive directors.
Additionally in terms of the existing laws, a non-executive director not in possession of a valid tax clearance certificate suffers an additional 10% withholding tax on his payment. This means that a corporate which pays fees to a non-executive director not in possession of a valid tax clearance (IFT263) is required to deduct 10% withholding tax in addition to the 20% withholding tax on the non-executive directors’ fees. With effect from 1 January 2020, this is no longer a requirement. The government has exempted non-executive directors from the requirement to avail their tax clearance to corporate bodies paying them directors’ fees. This is a huge relief for non-executive directors considering that under the current tax regime the company would potentially deduct 30% for a non-executive director not in possession of a valid tax clearance certificate.
It is important to note that, whilst the non-executive directors have been offered relief, if they receive anything over and above their fees which would be in the nature of remuneration normally given to employees they risk being treated as employees and the possibility of paying higher tax under such circumstances. Thus there are risks regarding the emergence of hybrid payments (e.g retainer fees, fuel allowance, home security services, accommodation, cellphone etc) made to non-executives over and above or as substitute to board fees and sitting allowances. In summary, non-executive directors are often conflicted when it comes to tax matters because of lack of tax knowledge. Apparently some non-executive directors are aware of the tax rules but know that if proper tax rules were to be applied by the “book” this would result in reduced earnings. Unfortunately for companies and non-executive directors ZIMRA is aware of these practices and is intensifying tax audits on payments made by companies to their non-executive directors to uncover any form of non-compliance.
Although the 20% withholding tax on non-executive director’s fees has been made a final tax, the non-executive directors are not relieved of the VAT implications of the fees in case the fees alone or together with his or her other business income exceeds VAT registration threshold. In such a case, the director will be liable to pay and file VAT returns. Meanwhile, the Minister through his 2020 National Budget Speech has declared the VAT registration threshold to be reviewed upwards to ZWL1 000,000 with effect from 1 January 2020.
In conclusion, non-executive directors are one of the biggest winners of the 2020 National Budget. Come next year, they will not be required to pay income tax and file returns since 20% withholding tax has been declared to be the final tax. In addition, they have been relieved from withholding tax on contracts for lack of tax clearance although the general practice for most appointments to such positions is that one must have a tax clearance. Meanwhile, payment of hybrid fees still exposes non-executive directors to tax risk of being classified as employees. Non-compliance with tax obligations relating to the payment of fees to NEDs may damage a company’s reputation for good governance and risk management. On the part of NEDs, integrity could also be questionable if one receives unauthorized board fees such as hybrid fees alluded to above; hence payment of tax is also a moral obligation.