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Author: fadzaimangwende

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.

Introduction

Due to globalization, many developing countries have increased the opening of borders for business with international companies. Such cross-border business has helped significantly in economic development, whilst also growing immensely in intra-group business transactions due to large amounts of foreign direct investment. Meanwhile there has been an exponential growth in tax issues that have been arising from profit shifting by multinational enterprises (MNEs) from high tax jurisdictions to tax havens in order to avoid or minimize tax payment. This is presenting a significant risk on tax revenues for a number of developing countries as they are restricted from collecting tax on profits earned in their countries. Gaps and mismatches in international tax rules can allow the shifting of profits to no or low-tax locations where the business has little or no economic activity. These activities are referred to as base erosion and profit shifting (BEPS). Because of poor technology and weak systems among other reasons, African governments have not been prepared enough to repel the BEPS activities of multinational enterprises, more evidently these governments continue to lose a great deal of their revenues through transfer pricing mismatching. The Illicit Financial Flows report by Global Financial Integrity estimated that Africa lost an estimated US$1.8trillion between 1980 and 2008 while an estimated US$50billion to US$80billion is lost annually through illicit financial flows. The illicit financial flows include amongst other things abusive transfer pricing by MNEs.

What is transfer pricing?

Transfer pricing is a field of taxation that refers to the rules and methods for pricing transactions within and between enterprises under common ownership or control. It involves a set of substantive and administrative regulatory requirements imposed by governments on certain taxpayers. Due to the potential for cross-border controlled transactions to distort taxable income, tax authorities in many countries can adjust intra-group transfer prices that differ from what would have been charged by unrelated enterprises dealing at arm’s length. According to the Organisation for Economic Co-operation and Development (OECD), the arm´s length principle provides that “where conditions are made or imposed between the two enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly”. Over the past years, some companies including large digital economy companies have exploited the complexities of transfer pricing in order to lessen their tax burdens by shifting profits. These practices result in revenue losses for tax authorities. This has of late triggered comprehensive overhauls in transfer pricing legislations amongst developing countries, Zimbabwe included.

OECD Transfer Pricing Guidelines

Intra-group mispricing is one of the issues identified when the OECD released its base erosion and profit shifting (BEPS) action plan in 2013 to ensure that profits are taxed where economic activities are carried out and value is created. Compliance is an area of magnitude and importance in transfer pricing, which obliges the taxpayer to keep documented evidence on related-party transactions and to submit such documentation upon request. Appropriately documenting intercompany transactions to comply with rules and legislation is imperative in managing tax risk. Most African countries have no official guidance regarding the frequency and process of preparing transfer pricing documentation. The statistics of the OECD on the implementation of the three-tier documentation approach stipulated in BEPS Action 13 (Local file, Master file and Country by Country Reporting) illustrates that Africa has the least number of countries, which have adopted this approach so far.

Although a large number of developing countries have adopted and enforced transfer pricing rules, there are consistency challenges. For example rules regarding: transfer pricing methods to be used, legal requirement to prepare documentation as well as documentation submission deadlines all differ by country. Such variations make transfer pricing prone to disputes and audits. The establishment of global transfer pricing standards and methods could be one way of minimizing the mismatches that develop across different jurisdictions. Additionally, adherence to the OECD Guidelines would enable international consistency thereby creating a worldwide structure and promoting international trade. The majority of African countries have developed TP regulations that are in line with the OECD.

The OECD developed its OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations in 2010 in order to harmonize international transfer pricing policies and practices. Moreover, the OECD created the OECD Development Centre and OECD´s Task Force on Tax and Development with the main aim to support developing countries on transfer pricing matters. In addition, the UN complemented the OECD guidelines by issuing their UN Transfer Pricing Manual in 2011, which provides transfer pricing guidance to developing countries. The African Tax Administration Forum (ATAF) is also among the predominant organizations working towards addressing the practical challenges hindering the process of transfer pricing development in Africa.

Although several other international organizations have taken action to address the issues of BEPS, many developing countries lack the administrative and technical resources needed to enforce proposed recommendations. Additionally, there are several other issues hindering the process of transfer pricing development for a number of countries in Africa. Some of the issues include but are not limited to:

  • Differences in TP policies and knowledge of tax authorities.
  • Lack of extensive regulations regarding transfer pricing e.g. Zimbabwe added a 35th Schedule as a guidance for transfer pricing in the Income Tax Act in 2016.
  • Insufficient funds for investment into technology and personnel.
  • Tax policies that are specific to particular industries e.g. mining.
  • Difficulties in accessing information required for comparability.

The incapacity by African countries to deal with transfer pricing issues has left them at the mercy of MNCs who manipulate and rip them through their sophisticated ownership and operating schemes.

Conclusion

Despite the transfer pricing challenges faced by developing countries, it should be noted that, there is remarkable progress in the implementation of transfer pricing rules and regulations in Zimbabwe. However, the Zimbabwean scenario is even more complicated and deterrent to foreign direct investment due to potential double dipping transfer pricing legislation because of the existence of the original anti-tax avoidance rules which have not been repealed.

Introduction

A furious Tropical Cyclone Idai has claimed the lives in Chimanimani and Chipinge in Manicaland Province. Others are still missing and frantic efforts are being made to rescue the stranded. The cyclone has left a trail of destruction on roads, bridges and homes making rescue efforts a herculean task. It is in times like these that donations towards a humanitarian effort are called upon. It is on this background that we implore the business sector to donate towards the affected in Manicaland. Steve Maraboli said “A kind gesture can reach a wound that only compassion can heal”. Social responsibility is an ethical theory that an entity or individual; has an obligation to act to the benefit of society at large and is more evidently required for the affected people in Manicaland. To fulfill social responsibility duty, most business people are generous enough to give donations to various other institutions, sometimes as a way of enhancing brand awareness (marketing tool) and in some instances as a sign of humanity. Making a donation is a good gesture but the fiscus may not be prepared to be a partner in some of these good causes. The Manicaland disaster is a befitting occasion for the fiscus to actively participate in this good cause. The tax implications on donations are ventilated in this article to put you at ease in as far as the taxes on such acts of kindness are concerned.      

Social welfare and humanitarian donations

Any amount paid to the Destitute Homeless Persons Rehabilitation Fund, being a fund established by the Ministry of Finance to alleviate the condition of destitute homeless persons is deductible up to a maximum of US$50 000 in a year of assessment. This entails that excess of US$50 000 paid to this fund will be disallowed for deduction. The Destitute Homeless Persons Rehabilitation Fund is the kind of fund designated for assistance of the victims of the cyclone Idai. However, any amount paid by the taxpayer during the year of assessment, without any consideration whatsoever, to a charitable trust administered by the Minister responsible for social welfare; or the Minister responsible for health is allowable as a deduction. There is no limit as to the amount that a taxpayer can claim in respect of this donation.

Other deductible donations

Medical related donation

The fiscus recognises amounts paid during the year of assessment, without any consideration, to the State or to a fund approved by the Minister of Health for the purchase of medical equipment, construction, extension or maintenance or the procurement of drugs, including anti-retroviral drugs, to be used in a hospital operated by the State, a local authority or a religious organisation. The deduction in this category should not exceed US$100,000 in a year of assessment.

Educational related donation

Also recognised are amounts paid during the year of assessment, without any consideration, to the State or to a fund approved by Minister of Education for the purchase of educational equipment or, the construction, extension or maintenance of school or the procurement of books or other educational materials to be used in a school operated by the State, a local authority or a religious organisation. The allowable donation in this category should nevertheless not exceed US$100,000 in a year of assessment.   

Research related donation

In order to promote research and development the government has provided for a deduction of any amount paid by the taxpayer during the year of assessment, without any consideration whatsoever, to a research institution approved by the Minister responsible for higher or tertiary education. The maximum deduction allowable to a taxpayer in a year of assessment is US$100,000.

Infrastructure related donation

Any amount paid by the taxpayer during the year of assessment to a Public Private Partnership Fund. The maximum deduction in a year of assessment is US$50,000. The amount paid at the request of a local authority up to a maximum of US$50,000 in year of assessment and approved by the Minister of Local Government for the construction or maintenance of any building, road, sanitation works, water works, public works or any other utility, amenity or infrastructure works, which should be under the management or owned by a local authority is also income tax deductible.

Bursary and scholarships

The law also recognizes deduction of payments made by the taxpayer during the year of assessment, without any consideration whatsoever to the National Scholarship Fund and the National Bursary Fund that have been approved.

Disallowed Donations

Some donations are disallowed because they do not satisfy “in the production of income” condition. Therefore clear gratuitous payments such as political, church or social clubs donations are disallowed when computing income tax liability of a person.

Conclusion

Donations made to organisations which carry out public service activities are usually tax deductible in most countries, and Zimbabwe is not an exception. It should also be borne in mind by taxpayers that, donations can also only be income tax deductible if they are made to an approved organisations. Therefore taxpayers should understand that whenever they want to make a donation, they should consider that the income tax deductibility of the donation is being used as a marketing tool and not necessarily for the sake of humanity. Failure to take this into account can result in them having to bear an expenditure which will be disallowed by the Revenue Authority as a deduction, eventually resulting in a loss of funds which cannot be recovered. Let us remember our brothers and sisters in Manicaland who are bearing the wrath of Tropical Cyclone Idai.

Introduction

A key principle in running a successful business is the maintenance of proper business records of income and expenditure. This enables owner(s) not only be able to read into the performance of the business but also the commercial and regulatory environments dictate this as a good practice. Aligned to this, is a principle recognizing a company as a separate person altogether from its owners. This very act of separating the business from its owners is often a challenge in small business environment and often rated one of the factors leading to the demise of such businesses. A small business environment is mainly characterised by a mixture of business and personal transactions. Separate accounting enables the business owner to get a good view of the business performance and to properly comply with their various statutory obligations amongst them payment of taxes.

Tax demands for separation of finances

There are compelling reasons to be proactive about distinguishing between business and personal finances. Tax implications are foremost. The tax authority allows business owners to claim deductions for business-related expenses supported by proper documentation. If your business is audited, the tax authority will look closely at each expense to verify that it is indeed related to the regular operation of the business. When there is no clear paper trail in terms of what the expenses were for, or how you paid for them, it becomes more difficult to validate the deduction resulting in the ZIMRA raising an assessment against the company which will include penalties and interest. Every business transaction has tax implications and in terms of the tax laws, every person who carries on a trade is obliged to account for tax in respect of the income they generate from the trade. If there is no separation between business and private finances, it is difficult to distinguish between the transactions relating to each aspect. As a consequence, it will become difficult to determine the correct tax to be declared and paid to the taxman. Because a business is allowed to claim only business-related expenses that are supported by proper documentation it is in the best interest of the business to separate these expenses. Small businesses should be proactive about this and should make sure they keep the supporting documentation (invoices, receipts, etc.) for their business expenses because the burden of proof lies on them. They are required to prove that their business expenses are legitimate failing to do so they will be penalised. Meanwhile expenses for travelling between home and place of work or vice versa are regarded as private expenses and owners for instance are not permitted by the tax law to deduct fuel and other motor vehicle running expenses associated with travels or journeys.

Other commercial demands for separating finances

Besides the regulatory demands, absence of proper accounting systems may lead to many problems which include theft of stock and funds which may go unnoticed over a long period of time. A business without records is like a car running without engine oil, it will definitely come to a halt. It may be difficult to ascertain whether the business is making any profits or to take corrective action when things are not as planned. A separation is also important when considering owner liability for debts. This underlines the principle of limited liability in limited companies where creditors are not allowed to attach personal assets of shareholders in the event of the company unable to pay its debts. However when there is no clear distinction between business and personal finances, creditors can claim your personal assets to satisfy a debt. For instance the ZIMRA is permitted to recover unpaid tax from the shareholders or directors who have transferred any amount or asset from which tax has become due to themselves or a relation with the intention of avoiding paying tax. Targeted transactions include drawings of shareholders to pay for personal expenses, expropriation of company assets, physically transfer of assets or amounts that are not supported by paper work etc. Tax recovery measures often employed by the taxman include garnishing of bank accounts, filing an order for liquidation or sequestration order, property attachment, imprisonment etc. Bankers to advance loans require accounting books records and are sceptical of accounts containing personal expenses of directors or owners.

Pay yourself a salary

Owners running their business on a day to day basis are more likely than not to deep their hands in the company till as justification for their remuneration if they not on payroll. When you are thinking about your business expenses, one of the easiest items to overlook is your own salary. If you are not allocating funds for your own salary, your books do not accurately reflect the health of your company, since your expenses are missing a large cost, namely you. Without factoring in all expenses, you won’t know if you need to raise prices, market more, cut costs or make other adjustments that will help your company succeed. Besides, how are you expected to pay your bills such as your living expenses, fuel to travel to work, school fees for your children among other domestic and private expenses. These must be paid from your salary or savings and not from funds of the company. A company is a separate person from you and has its own expenses to pay including your salary.

Conclusion

Running a business requires discipline often exhibited by owners staying away from the company till. They should have separate bank/mobile money accounts for personal transactions and for business transactions. A business may have a positive cash flow while having no profit if the cash comes from sources other than income, such as when an owner puts in his/her own money or if he/she takes out a loan. These types of transactions are not income but rather liability or equity transactions. Conversely, a business can have negative cash flows while having a large profit if the owners take cash out of the business (drawings) to pay personal expenses or use it to make investments or loans to others. These types of cash out transactions to meet private expenses have to be accounted properly, mixing transactions result in incorrect tax liability.  Under-declaration of tax is a serious offence in terms of the tax laws and attracts hefty penalties and interest on the part of the taxpayer.

Our MTU is issued monthly and disseminates information about tax developments locally, within the region and beyond for the ensuing month. It tracks and analyses local and relevant international tax developments to enable readers to stay up to date with changes in the tax world. The content comprises of changes in tax and other business related laws, court decisions, announcements and interpretations that bring relevancy to the business environment.  They also identify and examine all relevant publications and ZIMRA’s interpretations of these decisions as well as the institutional application of new legislation or rulings.  In summary they are meant to help you:

  • Identify new tax planning opportunities.
  • Keep you updated with all changes in the tax world.
  • Keep you aware of current ZIMRA interpretations.
  • Recognise pitfalls many professionals miss.
  • Minimise compliance errors and offer practical and effective tax solutions.

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  • A Monthly Tax Update detailing the most critical Tax Updates.
  • Ability to search over 4 years of past articles.

Highlights

Introduction

Most businesses in Zimbabwe are saddled with debts emanating from supply of goods, services and money. In order to lessen the debt burden, some may work out a debt settlement arrangement with their creditors or lenders, such that any portion of the debt reduced by the settlement is considered discharged or forgiven without the debtor having to offer anything in return, or offering something less in value than the debt outstanding. When that happens, the debtor cannot just go off the hook and enjoy the relief in peace without the taxman following him/her especially where the debtor previously enjoyed an income tax deduction of the amount being now waived or written off. There are income tax implications to content with. This article therefore seeks to examine and analyze the income tax consequences arising from the concession granted by, or compromise or arrangement made with a creditor, with the effect of writing off the debts or waiving the right a creditor may have on the taxpayer.

Accounting for Concessions

The Zimbabwe tax legislation makes provisions specifically for the accounting of concessions for income tax purposes. It brings to tax the amount or value of any benefit received by or advanced to a taxpayer as a result of any concession, compromise or arrangement given by or made with a creditor. Such concessions may include discounts, refunds, rebates, write offs or waivers from a creditor. A condition which will have to be satisfied before such an amount is brought to tax is that it should have been claimed as a deduction for income tax purposes either in the current or prior years.  In ITC 1634 (1997) 60 SATC 235 (T) it was held that when amounts are reduced or liabilities are extinguished in the course of carrying on business there is a deemed benefit constituting gross income. This is so because, when the expenditure was accounted for in the first place, it would have reduced the taxable income. Therefore it implies that if a taxpayer‘s liability has been reduced due to a concession or arrangement by a creditor, the waived amount of the liability should be added back to the gross income and included to the taxpayer’s gross income and taxed accordingly. The same position is obtaining in South Africa. Its tax legislation defines it as any arrangement in terms of which any term or condition in respect of a debt is changed or waived or any obligation is traded, whether by means of substituting a new contract in place of an old one. Otherwise, for the obligation in terms of which that debt is owed or a debt owed by a company is settled, directly or indirectly by being converted to or exchanged for shares in that company, or applying the proceeds from shares issued by that company. In South African courts, it was held that when amounts are reduced or liabilities are extinguished in the course of carrying on business there is a deemed benefit constituting gross income. This is so because, when the expenditure was accounted for in the first place, it would have reduced the taxable income

Concessions not limited to revenue expenditure

In instances where a concession is granted for assets ranking for capital allowances, the same principle applies hence the taxable benefit shall be the aforesaid allowances. On that same note, a taxpayer who buys an asset on which he then claims capital allowances on, derives a taxable benefit on those capital allowances should the loan which was used to acquire or construct the asset be subsequently written off by the creditor. The same applies in an instance where a debtor’s loan which was used to finance raw materials or deductible expenses is forgiven by the creditor. South African tax legislation holds the same position as the Zimbabwean tax legislation when dealing with concessions for income tax purposes. Basing on the decision made in the Commissioner for Inland Revenue v Datakor Engineering (Proprietary) Limited, 60 SATC 503 case, it can be drawn that a benefit would also arise upon the conversion of interest bearing debt into share capital. There is therefore the need to include such a benefit in the gross income of the taxpayer so that it will be taxed accordingly.

Exempt transactions

It should however be noted that in Zimbabwe gross income does not include a concession which arises as a result of involuntary winding up of a company by the court because of its inability to pay debts, a taxpayer being declared insolvent or assigned his property or estate for the benefit of creditors or the estate of the taxpayer having been vested in the Corporation. It implies therefore that a concession or benefit from a creditor arising when a company is voluntarily wound up, dissolved by reason of expiration of period or dissolved by reason of a reduction of the number of members below or upon occurrence of event, constitute gross income of the taxpayer.

Compliance Issues

Failure to add back the waived or extinguished expenditure will then result in under declared income thus this may attract penalties and interest for it will be deemed as tax evasion. The taxpayer is then obliged to add back the expenditure to his or her gross income so that the correct picture of the taxable income can be painted.

Conclusion

It can be concluded that both Zimbabwe and South Africa bring the concessions into gross income of taxpayers. Therefore in order for taxpayers to avoid crossing paths with the tax authority, there is need for them to account for every form of benefit that may arise as a result of waiver or extinguishing of expenditure that has once been claimed for income tax purposes. Failure to correct the situation by adding back the expenditure to the gross income can prove to be costly for the taxpayer since it is viewed as tax evasion which can attract penalties and interest, and above all prosecution. Taxpayers should therefore be cognizant of the tax status of the transactions they enter into lest they get caught unawares by the taxman.

Introduction

One of the most innovative and business minded groups are today’s religious organisations. Rather than waiting for donations and offerings, churches and religious organisations are coming up with income generating streams to sustain themselves and fulfill the mandate of preaching the word. Some have ventured into farming, having wedding venues, lodges, transport hiring, bookstores, educational institutions, hospitals, just to mention but a few. Such initiatives generate revenue for the church away from the traditional sources and often cause today’s church to competing with the private sector for tenders. It cannot be over emphasized that a church plays an important role in a society. Without its effort, in providing for an improved and civil society, the society will be much poorer. For this reason most tax jurisdictions exempt churches from income tax. However, some have questioned the rationale of exempting commercial enterprises or activities of religious groups and are of the view that churches involved in such activities must be taxed so as to achieve tax neutrality amongst investors. This piece of writing is about the tax status of the Zimbabwean church.  

Income Tax on business profits

Income tax is payable by persons engaged in trade and investment activities. A trade is generally taken to be an activity, a business, occupation or anything carried on or pursued for purposes of producing income. Although not conclusive in itself profit motive is often one of the objectives of undertaking a trade, and often a missing link in the activities of a church or religious organisation. For this reason receipts and accruals of church or religious organizations are exempt from income tax only to the extent of donations, tithes, offerings or other contributions by its members. However if a church decides to cross the line and enters into ventures often undertaken by entrepreneurs they become liable to income tax. The law therefore taxes the receipts or accruals that are receipts and accruals of income from trade or investment carried on by or on behalf of the church or religious organisation.

Employees’ Tax (PAYE)

A church or religious organisation is regarded as an employer if any of its workers including the pastor earns at least US$300 per month (US$350 per month from 1 January 2019). It should therefore register as an employer within 14 days of engaging any such person and deduct PAYE from the remuneration paid to the employees. A church is liable to PAYE on remuneration, stipend or any benefit accruing to its employees including pastors. This includes gifts from the congregation. Gifts made to a minister during his/her ministry for example at Christmas or on special occasions must be treated as additional stipend and be dealt with through the PAYE system. Thus, amounts paid to pastors as stipends constitute income for services rendered subject to PAYE rules. An ex gratia gift made in token of the esteem in which the pastor or minister has been held by members of the fellowship is non-taxable. A mere gratuity or testimonial given to the minister or pastor especially after he ceases to be one cannot be brought to tax otherwise these items cannot be said to be received by virtue of him being the holder of office. Ministers in training (formerly known as student ministers) are appointed to serve a church whilst also undertaking training at a theological college as a ‘congregation-based student. It is customary for them to receive an appropriate level of stipend which should be taxed through the PAYE system. If they are provided also with fringe benefits, for instance, accommodation (whether church-owned or leased) there is no reason why these should not be taxed.

Value Added Tax (VAT)

Churches or religious organisations should register for VAT if the total value of taxable supplies made in the period of twelve months exceeds $60, 000. They are not exempt from the payment of VAT when they purchase goods or services which are subject to VAT. A supply by an association not for gain or a welfare organisation of any goods or services which it receives as a donation is an exempt supply according to s11 (b) of the VAT Act which states that the supply by any association not for gain of any donated goods or services or any other goods made or manufactured by such association if at least 80% of the value of the materials used in making or manufacturing such other goods consists of donated goods”. The exemption also applies in a case where the organisation sells goods which it has manufactured if at least 80% of the value of the supply consists of donated goods or services. Therefore associations not for gain and welfare organisations do not declare output tax on any donations received by them in the furtherance of their stated aims and objectives. However, the organisation will be liable for output tax if any so-called “donation” is conditional upon some form of reciprocity in the form of a supply of goods or services (identifiable direct valuable benefit) by the association to the “donor” or a relative or other connected person in relation to the donor. In such cases, the payment received is viewed as being a consideration for a taxable supply made by the organisation.  Donated goods or services  refers to “goods or services which are donated to an association not for gain and are intended for use in the carrying on or carrying out of the purposes of that association

Withholding Taxes

The religious organisations are supposed to withhold 10% when making payments to suppliers without a tax clearance. There are other withholding taxes which may affect religious organisations such as non-residents tax on fees, non-residents tax on royalties, non-residents tax on remittances and withholding amounts payable under contracts.

Conclusion

Religious organisations should keep proper books of accounts, register for tax purposes and submit required returns for their business ventures just like anyone else. Some might label their activities as for giving back or for non-profit but this should not be done as a way of avoiding tax. With doors for voluntary disclosure still open till 31 December 2018, as a religious organisation or a church, utilize the opportunity to put your tax affairs in order and come clean. It is wise to engage tax experts who will advise you on tax issues.