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Author: Tax Matrix Team

Background

With the shrinking economy, the big businesses have become overladen with taxes. It is opined that if the SMEs contributed their fair share of taxes there could be a lot of revenue that may well have been collected for the benefit of the fiscus and ultimately for the benefit of the country. Fiscal exclusion has also been a factor influencing the lack of formalization of the SMEs. Depending on the type of registration undertaken by SME’s there are tax obligations that must be fulfilled by every business that is registered for tax purposes and this includes the SMEs. These include income tax, withholding tax, PAYE, VAT and Presumptive tax. These obligations may be greater or lesser depending on the structuring of the business. This piece of writing aims to indicate the tax issues that may affect the SMEs.

The Tax Benefits

In Zimbabwe 10% withholding tax is deducted on local businesses to business sales (B2B) upon payment to a supplier without a valid tax clearance certificate. By virtue of formalising tax affairs, SMEs can enjoy exemption of the 10% withholding tax on contracts with other businesses. In addition, it is now a prerequisite for most business transactions. SMEs relationships with big businesses is unavoidable sometimes. A valid tax clearance is one of the documentation required in order to participate in most tenders, including government tenders. Therefore if you do not have a valid tax clearance you will not only suffer withholding tax on payments from customers but you could also lose business opportunities. Further qualification for duty rebates and other import incentives are also linked to possession of a valid tax clearance. By regularizing your tax affairs, you will be entitled to claim expenses that you incur in your business.

Special Initial Allowance

SMEs even have a better capital allowance regime compared to big companies which write off capital assets against their income to reduce tax payable over three years at 50% in the first year then 25% wear and tear in the second and third year compared to 4 years of 25% per annum. SMEs do not enjoy assessed losses which can be carried forward for six years. When making losses the law allows you to use such losses to reduce taxable income, until the losses are used up or expires the company will not pay taxes to the fiscus. The reporting of such losses can be only done by a person or company who is formally registered for taxes.

Monthly payment of provisional tax

The income Tax Act provides for payment of provisional income tax in advance on a quarterly basis. And the quarterly payments are done in instalments of 10%; 25% 30% and 35% of the provisional income tax for each of the quarters of the year. The Income Tax Act provides that the Commissioner-General may, “on application by a taxpayer who qualifies as a “small or medium enterprise”, permit such taxpayer to pay provisional income tax on a monthly basis, that is, one month at a time in advance.” This facility is quite favourable and can allow for working capital management flexibility on the part of SMEs given that for most of them, their business models are quite different from those of large enterprises.

Lower rate of mining royalties

The sale of specified minerals by miners to the buying agents attract a deduction of tax at rates that vary depending on the mineral being sold. Payments to small scale gold miners, popularly known as “gold panners” or “makorokoza” for gold deliveries are deducted mining royalties at a lower rate of 3% as compared to the general rate of 5% applicable to other enterprises. The small scale gold miner should be classifiable as a “micro-enterprise” in terms of the mining and quarrying sector of the economy per the SMEs Act.

Access to funding

For SMEs to enjoy funding and fiscal inclusion, they must formalise their businesses. Formalisation of the SMEs opens up the access to funding and the protection of the law. Banks and financial institutions are more likely to fund formal businesses as opposed to informal businesses. For this they would proper books of accounts to be kept and the business to be compliant with the tax laws. Therefore a formalized SME that shows good organisation and a good business track record is more likely to get the much needed funding to expand the business as opposed to an informal one. A brilliant business idea may fail to grow because of lack of funding. Formalisation can bridge this gap.

IMTT

The recent revision of Intermediated Money Transfer Tax (IMTT) from 5 cents to 2 cents on the dollar value of transactions soar and takes a big knock on persons. The tax is however less burden for formally registered persons with formal books of accounts since transactions such as transfer of money for purposes of paying remuneration are exempt from the 2% IMTT.  This tax is broad based and unavoidable by informal business. The Minister of Finance in his preamble to the introduction of this tax he stressed the target for this tax was largely those trading in the informal.

Conclusion

Formal SME’s that keep proper books of accounts, furnish tax returns and pay taxes are not subject to presumptive tax subject to them being in possession of a valid tax clearance. Informal SME’s on the other hand are liable to pay presumptive tax. It is a misconception that to be registered for tax is expensive. The reverse is actually true. Withholding tax applies on turnover for lack of tax clearance, the business losses on tax opportunities such as claiming business losses when they occur and above all when the taxpayer is eventually caught the law provides for back dating of tax registration and payment of taxes from the date the person was supposed to be tax registered. This comes along with stiff penalties and interest on late paid taxes and returns. It is wise as a business owner or company executive to gain more understanding on how to go about being tax compliant to avoid missing out on business opportunities and being on the right position for growth.

Introduction  

A disposal of a business or part of a business capable of separate operations by a registered operator as a going concern is deemed to be a supply made in the furtherance or course of the operator’s trade. The seller should account for output tax on the disposal, but with proper planning no VAT is payable, the disposal can be zero rated. The purchaser would not need to finance the VAT between making the VAT payment to the supplier and receiving a VAT refund from ZIMRA. We discuss the law on zero rating and the conditions that must be satisfied for the VAT to be avoided.

The Law and interpretation

A sale or transfer of a going concern is zero rated under s 10(1) (e) of the VAT Act as read with s12 of the VAT General Regulations, 2003 (SI 273 of 2003) which provides that “subject to proviso (ii) of paragraph (e) of subsection (1) of section 10 of the Act where the trade or part of a trade, as the case may be, is disposed of as a going concern and has been carried disposed of as a going concern (underlined words appearing to be drafting error) and has been carried on in, on or in relation to goods or services applied mainly for purposes of such trade or as simple  of a trade, as the case may be, and partly for other purposes, such goods or services shall,  where disposed of, be taxed at zero % if the sale represents the disposal of at least 51% of the trade or part of a trade”.  We analyse the key conditions as follows:

Seller and purchaser to be both registered

The sale should be effected by a registered transferor to a buyer who is also a registered operator. In order to safeguard himself from incorrectly applying the zero rate, the seller must obtain and retain a copy of the purchaser’s registration certificate. If the purchaser is not yet a registered operator at the time of the conclusion of the agreement, it is advisable that the agreement provide for the application of the zero rate being subject to the purchaser being a registered operator on the date the supply takes place, and to furnish a copy of the VAT certificate to the seller as soon as it is available.

Agreement must be in writing

The parties must agree in writing that (i) the trade is disposed off as a going concern and (ii) that it will be an income earning activity on date of transfer. Where an agreement for the sale of a trade as a going concern was concluded before, on or after commencement date, but the parties did not agree in writing that the trade is disposed off as a going concern they may enter into a separate agreement – based on the original contract – regarding this aspect. The written agreement(s) must, together with any other written agreements or documents relating to the sale, be retained. The agreement need not necessarily form part of the arrangement under which the ‘supply of a going concern’ is made. Below is an analysis of the conditions that must be agreed in writing by the parties:

The trade must be a going concern

A business transferred must be a going concern before and immediately after the transfer. This disqualifies any business which has actually ceased operation before the transfer. It was held in Belton v. CIR (1997) 18 NZTC 13,403 that there can be no going concern’ where, on the day of the supply, the activity carried on by the enterprise has ceased.  A short period of break or temporary closure immediately after the transfer to facilitate the smooth transfer or for purposes of cleaning and maintenance etc. does not however disqualify the sale as a transfer of a going concern. The activities must be capable of continuing after the transfer to new ownership. The transferee must use the transferred assets to continue with the same kind of business of the transferor, if the nature of business changes it ceases to be a sale of a going concern.  

Supply of an income-earning activity

There must exist an income earning activity on the date the ownership of the trade is transferred. As transfer of the trade might take place only in the future, there can be no certainty at the time of signing the agreement and fixing the VAT inclusive price whether the trade will in fact be as an income-earning activity when transfer takes place. The parties’ intention to transfer an income-earning activity is thus sufficient. The agreement must provide for the sale of an income-earning activity and not merely a trade structure. The new owner must be placed in possession of a trade which can be operated in that same form, without any further action on his part. For this reason an agreement to dispose off a business yet to commence or a dormant business is not a going concern.

Assets necessary for carrying on the trade must also be disposed

Assets which are necessary for carrying on a trade must be disposed off by the supplier to the recipient for zero rating to apply. Where all the assets used by the registered operator in a trade, except the premises from which the enterprise is conducted, are disposed of, it must be determined whether the premises are necessary for carrying on the trade disposed of. The assets or things which are necessary for the continued operation may vary according to the nature of the trade and the thing supplied and each case must be treated based on its facts.

Conclusion

Due to several rules needed to satisfy the requirements of a going concern you will almost certainly need an advisor to guide you through the process. There are serious tax ramifications if the attempt to zero rate the transaction fails. The VAT will become due, penalty and interest certainly apply for failing to pay the VAT due on time. Meanwhile Matrix Tax School will be hosting its Cross Border Taxes Seminar on the 17th of July 2019. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School (Pvt) Ltd. He writes in his personal capacity.

Background

The government introduced transfer pricing legislation with effect from 1 January 2016. The transfer pricing legislation made a number of provisions regarding transactions between associates. The key requirement of transfer pricing laws and rules is that transactions between associates or related parties should be at arm’s length. The arm’s length principle entails that the amount charged by one related party to another for a given product should be the same as if the parties were not related. What had remained a grey area, not clarified by the legislation is the documentation requirements to be maintained by associated persons. The government has through SI 109 of 2019 gazetted the Income Tax (Transfer Pricing Documentation) Regulations, 2019 which require every taxpayer to maintain documentation that verifies that the conditions in its transactions with related parties for the relevant tax year are consistent with the arm’s length principle. The regulations took effect from May 10, 2019, the date of their publication and are the focus of this article.

Law and Interpretation

Contemporaneous documentation is a requirement of transfer pricing laws in many jurisdictions. Documentation is considered to be contemporaneous if it is in place at the statutory tax return’s filing date. Each taxpayer should endeavour to determine transfer prices for tax purposes in accordance with the arm’s length principle, based upon information reasonably available at the time of the transaction. Thus, a taxpayer ordinarily should give consideration to whether its transfer pricing is appropriate for tax purposes before the pricing is established and should confirm the arm’s length nature of its financial results at the time of filing its tax return. However since this law was introduced in year 2016, there had not been any documentation prescriptions provided. The new regulations make detailed documentation requirements as will be discussed in this article. Documentation must include an overview of the taxpayer’s business operations (history, recent evolution and general overview of the relevant markets of reference) and organisational chart (details of business units or departments and organisational structure) together with a description of the corporate organisational structure of the group that the taxpayer is a member (including details of all group members, their legal form, and their shareholding percentages) and the group’s operational structure (including a general description of the role that each of the group members carries out with respect to the group’s activities, as relevant to the controlled transactions). Furthermore, the regulations require a description of the controlled transaction(s), including analysis of the comparability factors as well as an explanation of the selection of most appropriate transfer pricing methods, and, where relevant, the selection of the tested party and the financial indicator. Additionally, the documentation must provide detail of any industry analysis, economic analysis, budgets or projections relied on; details of any advance pricing agreements or similar arrangements in other countries that are applicable to the controlled transactions; as well as a conclusion as to consistency of the conditions of the controlled transactions with the arm’s length principle, including details of any adjustment made to ensure compliance.

Transfer Pricing for Domestic Transactions?

Meanwhile our TP rules are out of sync with the rest of the world because it also focusses on domestic transactions. The imposition of transfer pricing legislation on domestic transactions is administrate expense and presents complications. Firstly, there is anti-tax avoidance legislation that already existed prior to transfer pricing legislation and this legislation provides sweeping powers to the Commissioner General to adjust prices or income where the transactions, arrangements or operations between the parties are found not to be compliant with the arm’s length principle or not reflective of market prices. The second issue is that domestic transactions are being conducted in a jurisdiction with the same tax rate and conditions such that issues of profit or income shifting will not give rise to a permanent tax advantage to taxpayers. Rather, it will simply be a zero-sum game. Thirdly, transfer pricing documentation is very expensive to produce particularly for small to medium enterprises (SMEs) who form the bulk of taxpayers in Zimbabwe. In terms of the OECD Transfer Pricing Guidelines as well as the United Nations (UN) Practical Manual on Transfer Pricingfor Developing Countries (from which the Zimbabwean legislation largely borrow), taxpayers are not expected to incur disproportionately high costs and burdens in producing documentation and therefore require tax administrations to balance requests for documentation against the expected cost and administrative burden to the taxpayer of creating it. In addition, the OECD transfer pricing guidelines do not cover domestic issues as they focus on the international aspects of transfer pricing only. Where a taxpayer reasonably demonstrates, having regard to the principles of the OECD Guidelines, that either no comparable data exists or that the cost of locating the comparable data would be disproportionately high relative to the amounts at issue, the taxpayer should not be required to incur costs in searching for such data. That expensive documentation will be required of SMEs who may not afford it will rock at the core of the principles of taxation, chiefly the principle of Economy which requires costs of compliance to be at the lowest minimum and reasonable level. This problem is compounded by the fact that the new transfer pricing regulations did not specify thresholds in terms of revenue or values of transactions or taxpayers revenues above which transfer pricing documentation would be required. It therefore means that all taxpayers who engage in transactions with associates are obliged to keep contemporaneous transfer pricing documentation.

Decision Impact

The documentation can at any time be requested by the Commissioner and if so requested, it must be submitted within seven (7) days from the date the request is issued in the English Language. Taxpayers with related transactions should therefore prepare and submit transfer pricing documentation in order to avoid penalties. However, the authorities may need to re-examine the need for transfer pricing documentation in respect of domestic transactions as it may be too expensive to have transfer pricing documentation by SMEs. Meanwhile if the authorities maintain transfer pricing regulations on domestic transactions then thresholds for maintenance of documentation should be set.

The tax law requires records to be kept for 6 years. This is simple for income tax purposes because income tax returns have to be filed each year. Besides this, the records are dealt within a business set up. Under the Capital Gains Tax Act, record keeping is more problematic due to the fact that the disposals are infrequent and also because there could be a significant delay between the date the expenditure was incurred and the date of sale of the property. Another problem is that proprieties may also be held by individuals who hardly maintain records of their expenditure. It is rare for individuals to keep records of costs on labour, materials, amounts paid to contractors, any architect’s fees, building permit charges and legal fees directly connected with building their homes. The downside is that Capital Gains Tax will be levied on gross capital amount, against the spirit of the law which provides that capital gains tax should be levied on the net wealth i.e. proceeds less costs.   

In Zimbabwe, Capital Gains Tax is levied on specified assets, namely immovable properties which include homes, marketable securities and certain intangible assets. The tax is levied on capital gain which is the amount by which a specified asset’s selling price exceeds its base cost (cost of acquisition/construction, improvement, inflation allowance, selling costs etc). Capital Gains Tax is then charged at the rate of 20% of the capital gain for a specified asset acquired after the 1st of February 2009 and at 5% of proceeds if the specified asset was acquired prior to 1 February 2009. Marketable securities listed on Zimbabwe Stock Exchange stock are exempt from Capital Gains Tax, but are subject 1% Withholding Tax.

Deductible expenditure includes the cost of acquiring or constructing the specified asset. If you acquired the asset by way of inheritance your expenditure is amount declared for estate duty purposes of the deceased and in the case of a donation your acquisition cost is the amount used for Capital Gains Tax or Income Tax purposes of the donor. Expenditure on improvement, additions or alterations to the specified asset is also deductible, but does not include expenses deductible for Income Tax purposes such as repairs. Inflation allowance is 2.5% of acquisition or construction cost and cost of improvements, alterations or additions. It is granted per year or part of the year thereof from the date of incurring the expenditure until the date of selling the specified asset. Other expenditure that is deductible is that which is directly incurred or in connection with the sale of the asset.

Only provable expenditure is deducted, implying records should be kept of specified asset’s purchase price or construction cost, cost of improvements, additions, and other items that affect the basis of your specified asset. The records are required to prove or justify costs to ZIMRA. The exact information required depends on the type of asset sold, when it was acquired, how it was acquired, whether a valuation was used and how it was sold. On acquisition, documents to retain will include acquisition details, legal costs, stamp duty, valuation fees etc. An estate valuation report is required for an asset acquired by way of an inheritance. If expenditure was incurred in improving the property and this is reflected in the value of the asset on sale, then these costs are usually allowed and the invoices should be retained.

A formal valuation from reputable valuation firms (3 quotations) is required whenever a specified asset is sold. The Commissioner General can set aside the selling price if it has not been established at fair market price. The valuation report is required to justify selling price and should be retained. Any sale agreement giving details of the sale proceeds will be required as well. Where an asset is gifted, the sale proceeds may be the market value and evidence of this is a valuation report and this should be kept. Where the asset is destroyed correspondence relating to an insurance claim including details of any compensation received for a damaged asset should be retained.

Without paper work it is difficult to justify costs and you may be assessed on proceeds or a higher gain. The paper work should be written in the name of the owner of the property. The invoices or receipts should specify details of materials acquired (quantity and prices must be contained). Your file must also contain delivery notes. Quotations are not acceptable to ZIMRA. Where the materials have been bought unfortunately in the name of the contractor or third parties you may need an affidavit to confirm this. Also keep a contract between yourself and the builder or contractor to justify labour cost. The contract must be signed by both parties. Cash purchases tend to be the major area where audit trail often lacks. It is encouraged to transact through a bank account especially for large transactions. Where this is not possible insist on receiving receipts with full details of your purchases. When you are forced to buy from informal traders still insist on receipts and invoices. If these documents are not available consider making one yourself which the person must sign. Include his name, address and I.D. number in addition to the general contents of an invoice. If records of costs of acquiring/constructing or improving a specified asset are not kept you also stand to lose inflation allowance. For safe keeping of title deeds, receipts/invoices of expenditure and other related correspondences you may consider lodging copy files with your banker or lawyer. This way you may also be able to salvage these files if your original file is lost or was destroyed for instance in a house fire.

Background

In terms of the company law, limited companies are legal personas separate from the natural persons who create them. This means they can be owed or owe, sue or be sued in their personal capacities. In so far as the claim is made against a company the shareholder or director’s loss is limited to his /her capital contribution. Creditors cannot therefore attach personal assets of the director or shareholder unless the creditor has suffered the loss through fraud or act of misrepresentation of the shareholder or director. The law therefore allows the piercing of the corporate veil thereby empowering the creditor to attach personal property of the shareholder or director. The Income Tax Act recently upheld this principle so as to protect the fiscus from prejudice by unscrupulous business people. The new law provides that if a company or entity (the old company) is wound up voluntarily, and in circumstances that give rise to a reasonable suspicion that it was deliberately put into liquidation to avoid any tax liability, the directors of the old company shall be jointly and severally liable for the amount of any tax due and payable by the old company.

Law and Interpretation

The Income Tax Act [Chapter 23:06] has been amended by the insertion of a new provision which reads: “If, in Zimbabwe or in its country of formation, incorporation or registration, a company or entity (“the old company or entity”) is wound up voluntarily, and in circumstances that give rise to a reasonable suspicion that it was deliberately put into liquidation to avoid any tax liability, and— (a) the directors (or other persons acting in a similar capacity) of the old company or entity (or any of them)— (i) incorporate or register another company or other entity (hereinafter called the “new company or entity”) that carries out substantially the same business as the old company; or (ii) operate as sole traders, whether individually or collectively, carrying on substantially the same business as the old company or entity; or (b) the whole or a substantial part of its business and property wherever situated is transferred to another company or entity which will be or has been formed, incorporated or registered under any law; the directors of the old company or entity (whether or not any of them become directors of or act in a similar capacity in relation to the new company or entity) shall be jointly and severally liable for the amount of any tax due and payable by the old company or entity.”. This piece of legislation came on the backdrop of a realisation by the authorities that some directors would, as a way of ‘walking out’ of their stinking tax debts resolve to voluntarily liquidate a company and form a new one and get off the hook. It is this cheap escape route that the authorities sought to close and protect the fiscus. The directors’ personal bank accounts can be garnished or personal assets attached to settle the company’s debts.

The Company Law perspective

There had been mixed reactions amongst taxpayers as to the interpretation of this new law, with some suggesting that this law is out of sync with corporate law principles of separate legal persona and therefore this law should be a nullity. It is important to note that the Companies Act (Chapter 24:03) provides for prosecution of directors of a company under liquidation of judicial management where it can be established that they have engaged in acts bordering on criminality. Section 319 of the Companies Act reads: “Prosecution of delinquent directors and others: If it appears in the course of the winding up or judicial management of a company that any past or present officer or member of the company has been guilty of an offence for which he is criminally responsible under this Act or, in relation to the company or the creditors of the company, under the common law, the liquidator or judicial manager shall cause all the facts known to him which appear to constitute the offence to be laid before the Prosecutor-General.” Thus directors can be personally prosecuted if they engage in activities of a criminal nature leading to the demise of a company. Hence the tax law has borrowed the concept of piercing the corporate veil and hold directors personally liable for defunct companies’ taxes.

Decision Impact

Directors of a defunct company are warned that they can now be held personally liable for the taxes of the company if the company is wound up voluntarily, and in circumstances that give rise to a reasonable suspicion that it was deliberately done to avoid any tax liability. They cannot form new companies with the hope of running away from tax debts of their old companies. Meanwhile the government through the new monetary policy as pronounced through SI33 of 2019 has provided for the conversion of United States Dollars balances of assets and liabilities as at 22 February 2019 to RTGS$ on a 1:1 basis implies the government has involuntary given tax amnesty to those with outstanding tax liabilities as at that date. Directors or taxpayers with outstanding tax debts can therefore order their affairs and pay their tax debts or enter into tax payment plan with the ZIMRA to settle such debts because they have been devalued.

Introduction

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’

Conclusion

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.

Introduction

Digitalisation is the adoption in use of digital technology by the market players, i.e. the use of computers and internet in information transformation. Digital transformation in society has had significant effects on the way we interact with one another through the rise of social media and the way we do business in the internet age. It is destroying physical barriers by allowing companies and individuals to enter new markets in which they have no physical presence. It has also resulted in improvement in efficiency and when used intelligently, the digitalization of business can lead to a significant increase in productivity and can reduce some costs. The digitalisation and modernisation of tax systems must be a prerogative of African countries as it enhances the collection of revenue and allows them to tap into the revenue of the digital economy which has grown too rapidly to the extent that our tax laws are left lagging behind.

Governments can boost their tax collection as the system would be able to report illicit financial flows, tax avoidance and evasion. Domestic revenue mobilisation is central to African governments meeting their sustainable developments goals in light of the donor fatigue and shrinkage in development partners. African governments need neither donors nor development partners, but their people and systems.

Benefits of digitalisation

Although digitalisation guarantees significant cost savings and efficiency its challenge is that it requires resources during the development phase. Because of this reason and resistance to change, most African governments have been slow to adapt to the changing global economy. The jig is up for African economies, they need to shape up by embracing technology for the building of sustainable economies through efficient collection of taxes. Automated tax systems reduce the scourge of corruption that often wreaks havoc in African tax administrations caused by human interface. It also reduces administration costs by making it easier for taxpayers to fulfil their obligations whilst freeing up tax authority staff to work on value adding activities. The collection of data and determination of liabilities based on data and not on information supplied by the taxpayer which may often not be a true reflection of the actual revenue generated in a particular business enhances tax collection. The data will also include transaction and income data, behavioural data generated from taxpayers’ interactions with the tax administration, operational data on ownership, identity and location, and open source data such as social media and advertising. This can be used as individual sources or in combination to enable partial or full reporting of taxable income and to uncover under-reporting, evasion or fraud as well as using it to measure the impact of activities and to identify the most effective interventions, both proactive and reactive. Taxes could be paid automatically without the taxpayer’s input. Technology also facilitates advances in tax transparency internationally as well as domestically, in particular through enhanced information exchange between tax administrations. For example the fiscalisation of VAT transactions allows a tax authority to have full data on all sales of goods and services in the country. This way they will be able to see who actually sold what, where and at which price and see anomalies that might indicate non-compliance. It opens opportunities for analytical work and measuring economic performance indicators in real time on a countrywide scale.  

Stages in digitalisation

According to a worldwide research carried out by Ernst & Young, the digitalisation of tax administrations can be categorised into 5 levels. The 1st level is E-filing; the 2nd is E-accounting; the 3rd is E-matching; the 4th is E-auditing and the 5th is E-assessing. E-filing is the first level which involves the use of standardized electronic form for filing tax returns required or optional; other income data (e.g., payroll and financial) filed electronically and matched annually. E-accounting on the other hand entails the submission of accounting or other source data to support filings (e.g. invoices and trial balances) in a defined electronic format to a defined timetable. At this level there may be frequent additional filings. The 3rd level is E-matching which entails the submission of additional accounting and source data; the government accesses additional data (bank statements) and begins to match data across tax types, and potentially across taxpayers and jurisdictions, in real time. This is a more advanced level than the 1st and 2nd levels. The 4th level involves the analysis of accounting and other source data by government entities and cross-checked to filings in real time to map the geographic economic ecosystem and taxpayers receive electronic audit assessments with limited time to respond. E-assess which is the 5th level of digitalisation, entails government entities using submitted data to assess tax without the need for tax forms and taxpayers are allowed limited time to audit government-calculated tax. This is the highest level of digitalisation of tax administration.

Challenges in digitalisation

There are significant challenges for any tax authority to achieve these levels. ICAEW stated that the largest of these challenges is digital exclusion – taxpayers who do not have reliable internet access or are unable to file online.  Although Zimbabwe has wide internet coverage, internet reliability compounded by the cost of maintaining it have been a challenge to most Zimbabweans. The exorbitant license fees and levies that the government collects from the internet service providers, frustrate expansion and in turn has a bearing on the drive to digitalise our tax systems. This also makes the cost of internet services expensive to the ordinary Zimbabwean. There is more revenue to be realised in future by allowing internet service providers to expand as opposed to heavily taxing the sector. Government must strike a balance between realising tax now from the service providers and the drive to expand digitalisation which widens the tax net and taps into even more revenue in the future. Meanwhile Zimbabwe is failing to take off the first stage of digitalisation. It introduced E-filing in 2015 and commands fiscalisation of all VAT registered operators with effective from 1 January 2017. Both these systems are not fully working largely because of resource constraints hence government needs to free up resources for these projects in order to reach the next level of digitalisation.

Conclusion

Digitalisation is a bedrock of African governments meeting their sustainable development goals through domestic revenue mobilisation. It will enable them to monitor tax compliance, prevent tax avoidance and evasion and improve taxpayer services. The decisions they make in the area of technology will change the scene of tax administration thereby boosting tax revenues. They should stay on top of this technological race and make sure that they have access to new digital data flows to be able to respond to the challenges of the new economy. This topic will be discussed in detail at the Tax Conference Victoria Falls 2019 to be hosted by Matrix Tax School from May 22 to 25. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School (Pvt) Ltd. He writes in his personal capacity.

Introduction

Technology is changing fast. And is coming with new and sophisticated products, both financial and others. Amongst the recent and new financial products to hit the global stage are cryptocurrencies and block chains. Debates have erupted around the taxability of these products, which is the focus of this article. This article argues that there are two views on whether cryptocurrencies and block chains are replacing tax havens as super tax havens. The first view is that bitcoins and similar cryptocurrencies are secured private investments acting as super safe havens. The second view states that Bitcoins and Tethers and similar cryptocurrencies are secured conventional investments stored in text algorithms which are transmitted in a real global economy. Thus, information can be accessed by third parties and therefore cannot replace tax havens. Thus, encouraging investors to hold both Bitcoins and Tethers would not create super safe havens and help the development of more stable cryptocurrencies that have the ability to overtake fiat currencies as medium of exchange, store of value and unit of account. Governments could take advantage of, especially, the stable coins for income tax purposes and help stimulate currency development and innovations. Cryptocurrencies are a subcategory of virtual currencies, which are online payment systems that function like real currencies, but which have no central bank backing. Cryptocurrencies are computer files tendered as a form of payment for real goods and services. The most well-known, and currently the most successful example of cryptocurrency is the Bitcoin, first introduced in 2008. However, both views agree that cryptocurrencies are an innovation that attempts to obscure taxpayers’ incomes and help hide such incomes from the tax administration authorities.

First View: Crypto Currencies are Super Tax Havens

Those in support of the first view argue that corporations and individuals are using crypto currencies and block chains to engage in offshore tax evasion and that tax evaders are no longer using the traditional banking industry for savings accounts and international trade transactions, among others.  While corporations and wealthy individuals use cryptocurrencies for legitimate purposes, they are also well suited to support illicit transactions. The proponents of the first view argue that cryptocurrencies possess the two most important characteristics of a traditional tax haven. The first characteristic is that since there is no jurisdiction in which cryptocurrencies operate and because they are “held” in cyberspace, crypto currencies are not subject to taxation at source. The second characteristic is that cryptocurrency accounts are anonymous. Therefore, users can start as many online “wallets” as they want to buy or mine Bitcoins and trade them without ever providing any identifying information. By implication, banks do not have the technology to collect transactional information on the taxpayer. Therefore, the proponents of this view believe that cryptocurrencies have the potential to become super tax havens. To illustrate the super tax have characteristic, they postulate that a service provider could theoretically accept payments for real services in Bitcoin (or any cryptocurrency). Given that the service provider is not required to identify herself when establishing her online Bitcoin wallet, it would be very difficult to trace the earnings accumulated in this wallet back to the service provider. Under current Zambian and Zimbabwean income tax laws, such income is clearly taxable to a Zambian or Zimbabwean service provider. It is unlikely, however, that both the Zambia Revenue Authority (ZRA) and the Zimbabwe Revenue Authority (ZIMRA) or any other tax authority will know about the income unless the service provider voluntarily reports it.

Second View: Crypto Currencies are a source of Taxpayer Information

The second view is supported by those that argue that there is a jurisdiction in which crypto currencies operate and are “held” in cyberspace accounts known as online “wallets”, crypto currencies can be subjected to taxation at source. Furthermore, they argue that cryptocurrency accounts are known, since transactions involve more than one party. Therefore, users can start as many online “wallets” as they want to buy or mine Bitcoins (cryptocurrencies) and trade them without ever providing any identifying information, but this information is easily read by third parties. Therefore, by implication, the proponents say that there is no information transfer that cannot be intercepted by third parties. In this regard, the supporters of the second view do not regard block chains and crypto currencies as perfectly secured and therefore there is no place on earth to hide.

Governments’ Reactions on Cryptocurrencies, Benefits and Costs of Cryptos.

Governments have more regulatory challenges of virtual currencies, including the potential of Bitcoin (cryptocurrencies) that facilitate tax evasion than with stable coins, which facilitate taxation. Thus, governments need to fully consider stable coins and introduce them by encouraging financial institutions to participate and use them as tax-enforcement agents. For example, in 2007, the Internal Revenue Service (IRS), USA looked into potential tax compliance risks associated with web-based payment systems and eventually opted not to act. One of the reasons cited for inaction was the lack of strong evidence of the potential for tax noncompliance related to virtual economies. In 2007, the increasing popularity of Bitcoin had just started to take shape and less information was available. Therefore, the 2007 IRS action did not consider the development of major peer-to-peer, open-flow payment systems such as the Tether coins, which operate in real economies and are not limited by the volume of virtual in-game economies. Governments have recently indicated that the increasing use and misuse of cyber-based currency and payment systems to anonymously transfer illicit funds as well as hide unreported income from the their revenue administration institutions is a threat to the governments’ revenue and is being vigorously responded to. The challenge governments are facing is the development of enforcement mechanisms that allow tax authorities to discover funds hidden in cryptocurrency accounts. As noted, the cryptocurrencies market is growing and better and more stable cryptocurrencies being discovered. Eventually, cryptocurrencies will become more stable than fiat currencies and will be used as real money to purchase real goods and services in the real world.

Conclusion

Cryptocurrencies have been gaining confidence and popularity among users, and their market volume is increasing. On one hand and according to the first view, cryptocurrencies offer, at least theoretically, a near-perfect alternative to tax-evaders who can no longer find a safe haven in tax-haven jurisdictions. It is thus reasonable to expect that as the market volume of cryptocurrencies, such as bitcoins, increases, so will the tax avoidance associated with it. On the other hand and according to the second view, cryptocurrencies traders are known and offer an alternative to conventional investors to hedge against asset volatility and pay taxes. This article is therefore in support of the second view that cryptocurrencies are not taking over tax havens as super tax havens, but that they are designed to take over fiat currencies. To date, most tax policymakers seem to be operating under the traditional assumption that cryptocurrency-based economies are limited by the size of virtual economies and that they exist to aid tax evaders. This is an early misconception of the cryptocurrency market and could be a missed opportunity to tap into tax revenue, especially of the new stable coins.

Introduction

The government has finally gazetted the law in form of Statutory Instrument 72 of 2019 on 22 March 2019 providing for a refund of excise duty on fuel to specified beneficiaries. This move gives impetus to the Zimbabwe Revenue Authority (ZIMRA) to process the fuel duty refunds as initially announced on 20 January 2019. The government had on the 20th of January 2019 issued a statement providing for relief through refund of excise duty on fuel consumed by registered businesses in the manufacturing, mining, agriculture and transport industries. This rebate was specifically available on the basis that, it shall only be applicable to those traders who met the requirements. The major thrust of the refund facility was to ensure that there will be no price increases of goods and services by beneficiaries relative to the change in the price of fuel that had been brought about through statutory instrument 9 of 2019.

Which period is covered by the refund facility?

In terms of the instrument, the regulations shall be deemed to come into operation on 13th January, 2019, up to 22nd February, 2019. This therefore suggests that the beneficiaries will only be allowed to claim the refund in respect of fuel payments that they made from the 13th of January 2019 up until the 22nd of February 2019, when the interbank foreign exchange system was introduced. It therefore means that any claims in respect of fuel payments falling outside the stipulated period will not be refunded. It is worth noting that the period covered by the refund facility is the period when the rate of the RTGS and the US dollar were still at par.  Due to the adoption of the interbank foreign exchange rate system, where the exchange rate between the RTGS and the US dollar is now determined on a willing buyer willing seller the refund facility might have been overtaken by events due to the evening out of the purchasing power parity.

Who qualifies for the refund?

An approved fuel duty refund beneficiary is one who is eligible for the duty refund. The statutory instrument defines an approved fuel duty refund beneficiary as any person or body of persons, carrying on a trade in the agricultural, mining, manufacturing and transport sectors and has made an application on Form No. Ex FRF 2 to the Commissioner to claim refund of duty in terms of section 125 of the Customs and Excise Act. This essentially excludes all other traders in other sectors.

Changes in the registration application process

Whilst the previous announcements required an applicant to submit their application through their business association, the statutory instrument requires an applicant to submit their application to be registered as a beneficiary direct to any ZIMRA customs office and furnish the required documentation. The documentation and details required for registration remained the same as previously announced, that is, the name under which the approved fuel duty refund beneficiary will operate and the address of its principal office in Zimbabwe; the applicant’s company registration/incorporation documents; proof of membership of a business association; and current and valid Tax Clearance Certificate issued by ZIMRA. Submission to ZIMRA of all the required information and documentation would enable them to be registered as an approved fuel duty refund beneficiary, eligible to claim excise duty refunds.

Conditions for granting of the refund

For a beneficiary to be able to get the refund, they should submit an invoice or receipt issued by the supplier of the fuel from which duty paid shall be refunded, which contains the following particulars;-

  • an individual serialised number and the date on which the invoice or receipt is issued; and
  • the name, address and Zimbabwe Energy Regulatory Authority licence number of the supplier; and
  • the name and address of the recipient of the fuel; and
  • a description of the goods supplied; and
  • the quantity or volume of the fuel supplied; and
  • registration number of the vehicle supplied with fuel or description of the container in which the fuel has been loaded; and
  • the value of the fuel supplied; and 
  • any other additional particulars as may be required by the Commissioner.

Documented proof of productive use of the fuel for the period the claim is another key requirement to be submitted to ZIMRA in claiming the refund. If any of the above requirements is not available, the refund will not be processed. The refund claim must be submitted by the 10th day in the month following that of purchase of the fuel. The validity of the invoice shall fall within the period of claim.

Refund set off against outstanding tax obligations

If the Commissioner is satisfied that the application for refund made by a person meets all the relevant requirements; s/he will refund the total amount claimed if the approved fuel duty refund beneficiary has no outstanding tax liability. However, if an applicant has got some outstanding tax liabilities, then ZIMRA will refund the balance, after deducting such outstanding tax liability to the approved fuel duty refund beneficiary. The beneficiaries should also provide truthful information as any false information supplied in connection with the refund claim will render the claimant liable to hefty fines or imprisonment.

Conclusion

The excise duty refund facility covers a fixed period that is 13 January to 22 February 2019. Businesses can therefore not be expected to bank on the facility any more as it has since expired. Going forward, businesses should therefore make their business decisions bearing in mind that the facility no longer subsists. Meanwhile Matrix Tax School will be hosting its 2019 Victoria Falls Tax Conference from the 22nd to the 25th of May 2019. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School (Pvt) Ltd. He writes in his personal capacity.

Introduction

Many a times, Zimbabwean residents seek and import the services of non-residents. The services are oftenly wide in range. They include computer software services, machinery repairs and maintenance, legal, actuarial amongst others. As its name suggests, VAT on imported services is payable on the importation of services. With effect from 1 January 2019, imported services was redefined as a result every resident who imports services is required to account for and pay VAT on imported services to ZIMRA. Prior to this date, VAT on imported services would only be paid by Zimbabwean residents who would have imported services to make exempt supplies.

What is Imported Services?

Imported services means a supply of services that is made by a supplier who is not resident in Zimbabwe or carries on business outside Zimbabwe to a recipient who is a resident of Zimbabwe to the extent that such services are utilised or consumed in Zimbabwe. The services should be rendered by a supplier who is not resident in Zimbabwe to a resident of Zimbabwe. Such services should be utilised or consumed in Zimbabwe. The previous law defined imported services in terms of them being consumed in the making of non-taxable supplies in Zimbabwe. In essence VAT on imported services is now accounted whether one is making taxable and non-taxable supplies. The VAT on imported services is not claimed as input tax. It is therefore an additional cost to business or to the importer. Because imported services are an export from the supplier’s country, they ordinarily would be charged with VAT at the rate of zero percent (zero-rated). This means that imported services, without VAT would be ordinarily cheaper than locally provided services since the local services would be having VAT charged on them.  VAT on imported services is a reverse charge of VAT that is meant to remove an unfair advantage of imported services over services provided by locals. It is paid by the recipient (resident) of the services.

When is VAT on Imported Services paid to ZIMRA?

VAT on Imported services should be paid to ZIMRA within thirty (30) days from the time of supply. The time of supply is the earlier of invoice or payment. This means that the accrual point for this tax is the time that an invoice is received from the foreign supplier or any payment in respect of the imported services is made to the foreign supplier whichever occurs first. The value upon which the tax is computed is the consideration or open market value of the supply, whichever is greater.  The tax is accounted for at the standard rate 15 percent. For example, if a local company XYZ hires a foreign lawyer from South African, to handle their court case and the lawyer invoices them US$12 000, VAT to be paid by XYZ to ZIMRA would be US$12 000 x 15% = US$1,800.

Is VAT in Imported Services Paid in Foreign Currency?

The law – section 38 (4) of the VAT Act provides that where a registered operator— (a) receives payment of any amount of tax in foreign currency in respect of the supply of goods or services, that operator shall pay that amount to the Commissioner in foreign currency; (b) imports or is deemed in terms of section 12(1) to have imported goods into Zimbabwe, that operator shall pay any tax thereon to the Commissioner in foreign currency. Furthermore, a recent amendment inserting section 38 (4a) provides that for the purposes of subsection (4) (cited above) — (a) if the price for the taxable supplies in question is paid for in a foreign currency, then the registered operator shall pay the amount of the tax to the Commissioner in that foreign currency. The above provisions are quite clear on the circumstances in which VAT should be accounted for in foreign currency. VAT is required to be accounted for in foreign currency when registered operator receives payment in foreign currency or when he imports goods into Zimbabwe. The goods in respect of which VAT should be accounted for in foreign currency would be those specified in terms of SI 252A of 2018 requiring import duty in foreign currency. This therefore suggests that it is not a requirement of the law to account for VAT on imported services in foreign currency.

Exclusions from VAT on Imported Services

VAT on imported services does not apply on zero-rated or exempt services (locally). That is to say, all zero-rated or exempt services will not attract VAT on imported services if they are imported by a resident. Such services include medical services, financial services, educational services etc. In other words, VAT on imported services applies to services which would ordinarily be subject to VAT at standard rate (15%) had they been supplied by a supplier dealing in taxable supplies locally.

Withholding Tax on Imported Services

It is important to bear in mind that imported services may also attract other taxes, particularly withholding tax. The withholding tax is known as Non-Resident Tax on Fees (NRTF). Fees as defined means any amount from a source within Zimbabwe payable in respect of any services of a technical, managerial, administrative or consultative nature. There are a number of exclusions from fees in respect of which NRTF should not be deducted. The NRTF rate is 15% of gross fees and is withheld from the payment to a non-resident. It should be remitted to the ZIMRA within 10 days from the date of payment of the fees. However the presence of a tax treaty between Zimbabwe and the country in which the foreigner resides can lower or eliminate this withholding tax.

Conclusion

Every resident is now obliged to pay VAT on imported services should they consume services rendered by a non-resident in Zimbabwe. Failure to pay this tax attracts stiff penalties from ZIMRA. Every business therefore has to evaluate the carefully every foreign payment that it makes in respect of services for such payments can have tax implications in more ways than one, being VAT on imported services, withholding tax or both.