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Author: Tax Matrix Team

Input tax is tax incurred by a VAT registered operator on goods or services acquired for use, consumption or supply in the production of taxable supplies including that incurred on imports for use, consumption or supply in the production of taxable supplies. Only persons who are registered for VAT, known as registered operators are permitted to claim input tax. They may either offset it against output VAT or recover it as a refund from the ZIMRA. Taxable supplies are supplies which are charged to VAT at 15 percent, known as standard rate supplies and those charged to tax at zero percent are called zero-rated supplies. A third category of supplies is called exempt supplies and a person supplying 100% exempt  supplies does not charge VAT on his sales nor claim input tax. An operator making both taxable and exempt supplies (non-taxable supplies) during an accounting period can claim input tax in proportion to the taxable element only as more fully explained below.

Theoretically it is easy to account for input tax when an operator only makes taxable supplies or exempt supplies. In practice an operator will make purely taxable supplies or purely exempt supplies only in exceptional circumstances. Such a mixture of supplies gives rise to one of the most problematic areas in any VAT system, namely the question of apportionment of input tax. Apportionment refers to the fact that only a portion of input tax that was paid is claimable – the portion not claimable will be added to the expense and will be deductible for income tax purposes when the business is assessed for income tax. Where possible, input tax suffered should be attributable directly to related supplies based on the actual or intended use of goods or services when they are received. Where input tax is exclusively attributable to taxable supplies, a trader is entitled to deduct it in full from the output tax due on his taxable supplies. In contrast, where input tax is exclusively attributable to exempt supplies, none of it is claimable. This means that the use to which an input is put is important. Input tax can only be attributable if the whole of the supply to which the input tax relates is used for either exclusively taxable or wholly exempt supplies, and there is a direct or an immediate link. Where this is not possible, the input tax becomes residual input tax which must be allocated by way of apportionment.  

Therefore in the event of input tax being incurred for mixed purposes, claimable portion is calculated according to the apportionment percentage by using an approved method of the Commissioner of the Zimbabwe Revenue Authority (ZIMRA). The only approved method which may be used to apportion input tax in terms of the Act without prior written approval from the Commissioner is the turnover-based method. The guidance on how the turnover-based method should be applied is taxable supplies exclusive of VAT divided by the total supplies (taxable plus non-taxable supplies exclusive of VAT) multiplied by total input tax incurred. When computing the income or turnover certain elements such as the cash value of goods supplied under an instalment credit agreement, supplies of capital goods or services which have been used for trade purposes and the value of any goods or services supplied for which input tax deduction is always denied e.g. income from sale of passenger motor vehicle are excluded

A registered operator who wants to use some other method which is not the turnover based should seek the prior approval of the Commissioner. The Commissioner would need to be satisfied that such other method fairly and reasonably represents the extent to which goods or services are used or are to be used by the registered operator in making taxable supplies. In other words the method must suit the special circumstances of individual registered businesses or reflect the use made by the taxable person of the relevant goods or services in making taxable supplies. The courts have held that in order for a method to be regarded as fair and reasonable it should be “sensible”, “sane”, and “not asking for too much”.. For example what may be considered fair and reasonable basis for apportioning the rent could be the floor space. “Taxable floor space” for this purpose means areas of the building used for making taxable supplies of building space to customers. Meanwhile, taxpayers are warned that methods which are not turnover based should be used or applied with caution, because they often change with time. Use of multiple methods notwithstanding the behaviour pattern of the applicable expenses should also be avoided. Further, the method so selected should be based on the information that is in possession of the taxpayer without having to resort to hiring expensive third parties, such as valuators.

The Act provides for de minimis apportionment rules. This means if the proportion of an input tax claim exceeds a given amount or ratio the registered person would be allowed full or 100 percent input tax or refund. The main purpose of these rules is to simplify VAT administration and compliance for tax officers and taxpayers. The VAT Act makes provision for such rule and provides that where the goods or services so acquired are used at least 90 percent for the purposes of making taxable supplies, full input tax credit may be granted. This indicates that input tax should be apportioned when the intended use of goods and services in the course of making taxable supplies is less than 90% of the total intended use of such goods and services. There are tax ramifications for not apportioning input tax where goods or services are acquired for use, consumption or supply in the making of mixed supplies. ZIMRA will disallow the undue input tax and levy penalties and interest.

A leasehold improvement is expenditure which adds something new to the leased property and which should ordinarily be treated as capital expenditure. Because the land or building on which they are effected belongs to the landlord, the improvement will become the property of the landlord upon termination of the lease through accession. For this reason they are treated as additional rental income to him and additional rental paid by the tenant. They have income tax and VAT implications to both the landlord and tenant, but discussion in this article is only concerned with income tax implications as fully explained below.

A tenant is permitted in each year of assessment to deduct the value of lease improvement divided by the shorter of the remaining lease period in years (unexpired lease period) and 10 years. The unexpired lease period is calculated from the date improvements are first used or occupied by the tenant for purposes of his trade or in the production of income. However deduction is not granted to a tenant in respect of improvements effected on property not used or occupied by him for purposes of trade or which does not produce income. If the property is used or occupied by him partly for purpose of trade or in the production of income and for some other purposes, the Commissioner is given the discretion to reduce the allowance by such amount as he, in the circumstances, considers fair and reasonable. To the landlord, the lease improvements represent taxable income which should be spread in equal instalment over the shorter of unexpired period of the lease or 10 years commencing the date improvements are completed. If the tenant is entitled to such use or occupation for an indefinite period or the agreement is silent regarding the lease period, a period of 10 years is deemed and where the lease term is renewable or extended for a further period or periods, the extended period is not counted.

The tenant should ensure that there is a lease agreement which obligates him to effect improvements and that the expenditure is incurred by him in pursuance of such obligation in respect of a property used or occupied by him for purposes of trade or in the production of income. Otherwise an allowance cannot be granted to him if these conditions are not satisfied. Although it is possible at law to conclude an enforceable oral lease agreement, a written agreement serves as a burden of proof in the event of a dispute with the ZIMRA. Des Kruger Tax Strategy 4th Edition on page 94 observed that a contract imposing an obligation on a tenant to effect improvements should constitute an agreement granting the right of use or occupation of property. It provides further that the lease agreement should include a clause on the obligation to effect the lease improvements. This obligation must not be left to the discretion of the tenant to effect the improvements rather it must be compulsory for him to do so. If he fails to do so the landlord should be empowered to demand that the improvements are effected and to sue for specific performance.

Having to stipulate the value of improvement to be effected helps as burden of proof for a tenant seeking to claim the expenditure. However, where none has been stipulated, the Commissioner is given the discretion to determine the value. There are times when the parties due to economic factors such as inflation may want to vary the value of the improvements. In order to cater for such variation they must incorporate a clause in the agreement. This enables acceptance of the amended value of improvements provided such variation is agreed upon prior to completion of construction. If the variation is made after completion of construction, only the agreed original figure is recognised and the excess treated as voluntary improvements. If the improvements are required to meet certain specifications, with certain minimum value, the value of improvements shall be the fair and reasonable value and not merely the minimum amount stated. The case of ITC 1036 (1963) 26 SATC 84 noted that, in such cases the landlord is not simply asking for improvements to be erected, he is requesting for specific improvements, and the tenant must meet his requirements even if the cost exceeds the stated minimum value in the lease. If the value is below the minimum stated value, the improvements are disregarded. Meanwhile, any improvements which are meant to brand the tenant’s business or not required for purposes of the business of the lessor are considered not effected under an obligation under lease.  

If a lease agreement is cancelled, ceded or assigned, or the land or buildings on which the improvements were effected is disposed of or sold or the landlord is deceased or declared insolvent, before the improvements are fully taxed to the lessor, the outstanding balance is deemed to have accrued to the landlord immediately. A tenant who acquires the ownership of improvements in respect of which a lease improvement allowance has been granted, shall cease to qualify for deduction of lease improvement from the year of assessment following that in which he acquires such ownership.

In conclusion, when entering into a new lease agreement, both tenants and landlords need to be careful as to who will be paying for the leasehold improvements. If the landlord bears the cost, in which case he would own the improvements and he would be permitted to claim capital allowances on these improvements over the statutorily prescribed life. There would be no tax consequences for the tenant in this scenario unless he also contributes to the cost of improvements. If the improvements are effected in terms of the agreement, the landlord will be taxable on the improvements and the tenant permitted to deduct the expenditure, as outlined above. In a third scenario, where a tenant is permitted to set off the improvements against rent, the improvements will be taxable and deducted in the hands of the landlord and tenant respectively. The taxable or deductible portion of the improvements must be equal to rent that accrues under the agreement at each taxing period.

There are a number of ways in which jobs are lost and these include mutual separation, retrenchment, dismissal, retirement among others. In the current hyperinflationary environment, retrenchment counts for the highest number of job losses as employers adopt cost rationalization strategies or close their businesses. Where an employee is dismissed through no fault of his or her own, an employer often pays a compensation known as severance pay. In practice severance pay and retrenchment package are used interchangeably. A retrenchment of at least five employees within a period of six months, requires the employer to file a notice of intention to retrenchment to the works or employment council and in the absence of these to the retrenchment board.  This article unpacks the tax issues of severance pay from an employee perspective.

The starting point in taxing a severance pay is that it forms part of the employee’s taxable income because it arises from past services rendered. All amounts in respect of services rendered by an employee in the past, present or to be rendered in the future constitute gross income and may not be taxable if exemption for such amounts are provided for within the law. Meanwhile, the law provides for the exemption of the severance pay, gratuity or similar benefit arising on termination of employment due to retrenchment. The exemption is a third of the package or the first ZWL10,000, whichever is the greater amount. However the maximum exemption is ZWL20,000. This means that the employee will not be taxable on the said exempted amount. Any pension or cash in lieu of leave do not qualify for exemption relief notwithstanding they may also be paid upon retrenchment. These are taxable in full.

Similar benefits as contemplated above may include school fees, medical aid cover, disposal of a motor vehicle to an employee at a discount price or for no consideration, passage benefit among others. These should be aggregated as part of the severance pay for purposes of determining the exemption. However, benefits such as medical aid, passage benefit, disposal of a motor vehicle at a subsidised price or for no consideration to an old person etc have separate exemption provisions from the rest of the benefits contemplated above. Therefore employers should take care to ensure that these amounts are exempted under their provisions to maximise the employees’ after tax earnings. The discount or benefit on sale of motor vehicle to an employee who was 55 years or above on the date of sale of the motor vehicle to him or her is fully exempt in terms of the law. Passage benefit on termination of employment, any journey undertaken by an employee whose costs is borne by the employer is also fully exempt if it represents the first of its kind to be paid by the employer to the employee. The amount of any contributions paid to a medical aid society by an employer on behalf of his employee whether during or termination of employee’s employment is fully exempt from tax. The Income Tax Act defines a ‘medical aid society as any society or scheme which is approved by the Commissioner.  This implies that medical contributions made to an unapproved medical aid society do not rank for exemption as aforesaid so is cash payment given to an employee in place of medical aid contributions.

Meanwhile, a separate exemption applies to amounts payable by way of commutation of a pension or annuity from the Consolidated Revenue Fund or a pension fund, other than a retirement annuity fund to an employee under the age of 55 years whose employment is terminated due to retrenchment. A third of the amount or ZWL10 000 whichever is the greater is exempted from tax provided that the maximum exemption shall be limited to ZWL 20 000. A commutation implies giving up part or all of the pension payable from retirement in exchange for an immediate lump sum payment.  However, where a person is over the age of 55 years any pension granted to the employee is fully exempt.

The above severance pay and pension commutation exemption amounts were reviewed with effect from 1 January 2013 and converted from United States dollar to Zimbabwe dollar on a 1:1 basis through Statutory Instrument 33 of 2019. Whereas most statutory deductions, exemptions and credits were reviewed through the recently gazetted Finance (No.2) Act 2019, these exemptions were not reviewed. As a result, these have lost their economic value as reliefs to employees and we call upon the government to review these amounts in order to cushion the affected employees.  

In order to process the payment of a retrenchment or other similar lump sum payments a directive from ZIMRA is required. The application for the directive must be made by the employer which includes benefit funds, pension funds, pension preservation funds, provident funds, provident preservation fund, and retirement annuity fund among others. The directive is applied by completing certain forms obtainable from the ZIMRA website. A directive is very important because it gives an opportunity to minimize the tax burden on the part of the employee especially those who were under the final deduction system (FDS). The employer will therefore be required to deduct the tax as per the ZIMRA directive opposed to determine the tax itself. The fact that pension commutation is payable by pension or retirement annuity fund, whilst termination benefits are payable by the employer implies there may be two or more tax directives for one employee. The law has not stated how this should be dealt with but there is need for synchronising these tax directives. 

In conclusion employers should ensure they correctly exempt the severance pay and pension commutation in order to cushion their employees from the heavy tax burden that may arise on lump sum payment payable upon retrenchment. In every case it will be important to consider the mixture of the severance pay in order to maximize the after tax benefit to the employee. This implies that employers should identify the packages that are appropriate in line with the circumstances of the affected workers.

The 2019 supplementary budget has seen the Minister of Finance and Economic Development review most monetary amounts in the tax and customs laws in line with inflation and exchange rate developments in order to maintain their economic importance to the business. The minimum taxable income for employees was raised by 100% to ZWL700. Whilst those driving cars should brace up for more taxes as the motoring benefit was increased by a shocking percentage. Alas, some are likely to go home with a negative net pay unless they give up the cars or their employers increase the salary.

The general design of the Income Tax law is to include in the income of an employee all earnings accruing to an employee whether corporeal or incorporeal property. As long as the employee has been saved from taking anything out of his pocket by an employer that must be included in the payroll of the employee and subject to tax unless there is a specific provision within the law that exempts the amount. In light of this, the provision by an employer to an employee of a motor vehicle for use constitute a benefit subject to tax. The right of use includes travelling between home and place of work or between two distinct businesses or use of the vehicle over the weekends for private purposes. Private usage is also assumed if the vehicle is kept at the employee’s home where it can be used by the employee or his family at any time. The taxable benefit is determined using the engine capacity of the applicable vehicle and with a big engine capacity commanding a higher value for inclusion in gross income of an employee. The benefit cannot be apportioned because the vehicle is used for partly business and partly private. As long as the private element is present the full benefit based on the engine capacity of the motor vehicle availed applies. Apportionment can only be made where the period of use is less than a month. Although paid by the employer, costs such as licenses, insurance, toll fees, repairs and maintenance or other cost of running the vehicle, also inure to the benefit of the employee. They do not constitute additional taxable benefit. The deemed benefit based on the engine capacity is all inclusive of the cost of running the vehicle incurred by the employer, however fuel given by the employer for employees’ private use may in certain circumstances be deemed an extra benefit.

The Minister of Finance Prof Mthuli Ncube has through the Finance Bill which is yet to be made into law released shocking increase in the values for motor vehicle benefits.  The Minister reviewed these rates upwards by 700%. The minimum value for engine capacity is ZWL2,400 up from ZWL300 per month for engine capacity of not more than 1500 cc and the maximum value for engine capacity above 3,000cc is ZWL6,367 up from ZWL800. The increase by 700% will be difficult to sustain considering the salaries and wages have not increased by that much. The fact that the Minister has only increased the tax free threshold by 100% is a clear testimony that the motoring benefit would be significant portion in the taxable income of an employee. It’s clear with the recent salary adjustment both in private and public sector that if the Minister was to increase the tax free threshold beyond the proposed amount, a number of the employees will not be required to pay employee’s tax. Meanwhile, the Minister has increased some of the concessions such as values for capital allowances, some other income tax deductions etc by a factor of 8. This we compliment him, but if these same companies which the Minister has given concession are grown, the general populace must have disposal income to enable them to purchase goods and services of those companies.

The deemed motoring benefit is a notional figure, which is entered as an income item in the payroll for the purposes of computing PAYE only. It does not increase an employee’s net pay, but serves to increase the PAYE. The pay as you earn applicable on it must therefore be funded by the employee’s other income. For employees earning low salaries and afforded company cars, the motoring benefit can have a huge knock on effect on their net pay or possibly result in them getting into a negative net pay. If the parliament approve of this proposal, employees and employers will need to evaluate their options. The required salary upward reviews to avert negative net salaries or reduced salaries may be too high for some employers. If employers decide to raise salaries, to maintain profitability price of goods and services will have to be increased which may have an inflationary effect. Withdrawal of the motoring benefit may be an option, but this may be viewed by some employees as a breach of employer’s contractual obligation. Meanwhile the same values have implications in terms of VAT for employers that are registered for VAT. In terms of the law, the supply of a benefit to an employee, provided such benefit would be subject to VAT at 15% if it had been supplied in ordinary course of registered operator’s trade, is subject to VAT. The supply of motor vehicles to employees is considered to be a supply in the furtherance of the registered operator’s trade and the registered operator must therefore account for VAT on the value of motoring benefit as stated above. The rate of tax is the tax fraction (15/115). This is an additional cost to the employer.

It is in the spirit of cushioning workers already struggling with the high cost of living, the Minister may need to review downwards the proposed deemed motoring benefit figures. A gradual rise would be more ideal, starting with say 100%. A significant rise militates against the ease of doing business, making Zimbabwe an unfavourable investment destination. Also, raising the motoring benefit by a factor of 8 is too steep against income levels that cannot be raised by the same margin.

The Minister of Finance and Economic Development Professor Mthuli Ncube presented the Mid Term Fiscal Policy on the 1st of August 2019. Before the budget, I expected him to address the potential capital gains tax distortions arising from the conversion of United States balances into RTGS$ on a one-to one basis through SI33 and to deal with the form of currency for purposes of remitting taxes to the ZIMRA following the banning of foreign currency through SI142. Of these two issues, the Minister addressed the first issue but distortions still exist. With regard to the payment of taxes in foreign currency, he reinforced that taxes are to be paid in foreign currency on foreign currency transactions. This article seeks to provide a run-down of the changes specific to capital gains tax regime and highlight the remaining sticking issues of the proposed regime.   

Paying capital gains tax in foreign currency

The Minister retained the laws on payment of taxes in foreign currency notwithstanding the agenda to promote the Zimbabwe dollar as the sole legal tender in domestic transactions as articulated in SI142. Therefore when a specified asset is sold in foreign currency, capital gains tax is required to be paid in foreign currency. This is mentioned in the Finance Bill  which provides that “… it shall not be deemed for the purpose of the Capital Gains Tax Act [Chapter 23:01] that all transactions involving the sale or other disposal of a specified asset are in Zimbabwean currency, rather—….where any such transaction results in a capital gain being received by or accruing to or in favour of a person in whole or in part in a foreign currency, capital gains tax at the rate specified… shall be paid in foreign currency on the capital gain or on such portion of it that is equivalent to the portion of the total transaction denominated in foreign currency”. This is somehow repeated by s37 of the Finance Act which provides “where only part of the capital gains are received by or accrued to or in favour of a person in a foreign currency, the amounts of any tax due on both parts of such capital gains in terms of s38 and 39 shall be calculated separately and paid in the appropriate currency relative to each part”.  The separate computation as envisaged by s37 is that in a part foreign currency and part Zimbabwe dollar sale, one could possibly be required to pay capital gains tax in one currency whilst at the same time experiencing capital loss in the other currency, or when the overall position could have been a loss. This presents distortions, subjectivity and administrative complexity in the capital gains tax regime.

The new rates of capital gains tax

As expected the Minister addressed the distortionary effect brought about by SI33 of 2019 which provides among others that for accounting and other purposes assets and liabilities held prior to 22nd of February 2019 and valued and expressed in United States Dollar on 22nd of February 2019 shall be deemed to be values in RTGS dollars at par with United States Dollar. This has the effect of converting cost base of specified assets in United States to a weaker RTGS dollar on 1:1 basis, and thereafter restricted and yet the selling price of those assets could be inflated as it accords with the interbank rate resulting in an artificial capital gain.  In order to correct this anomaly, capital gains tax rate was reduced from 20% to 5% of capital gain. Capital gain is an amount resulting from deducting from the sale proceeds, sum of costs as provided for in the Capital Gains Tax Act (i.e. original cost, cost of improvement, 2.5% inflation allowance, selling expenses etc). Therefore, capital gains tax may be levied where there is none in real terms. Taking for example a person who bought a house in 2017 for US$100,000, (i.e. RTGS$100,000 because of SI33) and the property is sold now to a buyer who is willing to pay RTGS$450,000 (i.e. US$90,000 equivalent), capital gains tax will arise under the current tax regime when in real terms there is a capital loss. Meanwhile, the Minister has proposed a 5% of gross proceeds in respect of disposals or sales of specified assets made prior to the 24th of June 2019 where capital gains tax has not yet been assessed and paid.

The rates of capital gains withholding tax

The Minister also revised downwards the rate of capital gains withholding tax on sale of immovable property to 5% from the current 15%.  This is a welcome relief in terms of cashflow management to taxpayers. The rate of withholding tax on listed marketable securities is retained at 1% of the price at which the security was sold. It appears the Minister has omitted the capital gains withholding tax rate on the disposal of unlisted marketable securities and this has completely been removed from the Act.

Other changes

The Finance Bill proposes to exempt from capital gains tax a sale or disposal of any shares or other marketable securities to the Sovereign Wealth Fund established by the Sovereign Wealth Fund of Zimbabwe with effect from the 1st of January 2019. It further reviewed the threshold for assessed capital loss not to be carried forward from ZWL100 to ZWL 800 and exemption of marketable securities from capital gains tax when disposal has been made by a person who is 55 years or above; from ZWL1800 to ZWL14 400. Threshold of capital gains which shall not be subject to tax revised from ZWL50 to ZWL400.

In conclusion, the clean-up exercise was necessary and the Finance Bill attempted to do that, but the impact of SI33 cannot in all cases be eradicated. Cases where capital gains tax would be paid in future as the prices of properties go down will be many. Meanwhile Matrix Tax School will be hosting the Tax and Business Interface from the 9th to the 12th of October 2019 at Troutbeck Inn, Inyanga. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School. He writes in his personal capacity.

The rebirth of the Zimbabwe dollar through Statutory Instrument 142 of 2019 has seen a renewed interest in the exchange controls rules. The enforcement of these rules had been relaxed due to the multicurrency system that had been in place since February 2009. This article seeks to highlight some of the key exchange control rules to be observed in Zimbabwe.

Selling in foreign currency

The use of foreign currency in domestic transactions was outlawed by SI142 except in specified cases or when one is licenced by the Reserve Bank of Zimbabwe (RBZ). Sale of commodities in foreign currency in Zimbabwe without a licence to do so is a serious offence in terms of the Exchange Control Act [Chapter 22:05] with offender liable to a fine up to level fourteen (ZW$10,000) or 5 times the value of the commodity concerned, whichever is the higher. In the event that one sells or transacts in foreign currency, the relevant taxes from such income will still be required to be paid in foreign currency because the laws requiring payment of tax in foreign currency are still in place. Tax law does not care about the legal status of a transaction but follows a transaction. Meanwhile, operators of designated tourist facilities and tourist agents; hunting safari operators and providers of: a cellular telecommunication service; a fixed line telephone service; a postal service; an electronic mail service; an Internet service; an international transit service are designated as exporters for exchange control purposes. They must ensure that services/goods provided to foreign persons/entities are paid for in foreign currency which must be received in Zimbabwe within 90 days from the last day of the month in which services/goods were provided.

Cash on the person

Mere possession of foreign currency is not illegal. However, possession of currency exceeding US$10,000 by an individual is considered hoarding and is an offence in terms of theBank Use Promotion Act [Chapter 24:24]. Also, every trader, and parastatal shall, unless it has good cause for not doing so, deposit in an account with a financial institution no later than the close of normal business hours on the day following that on which the cash is received or on the next banking day which is surplus to its requirements or in excess of US$200, whichever is the lesser amount.

Export of Currency

The maximum amount of currency that can be taken out of Zimbabwe on the person or baggage of a person leaving Zimbabwe is a total of US$2,000 or its equivalence. Any currency in excess of the stipulated amount being exported without exchange control (RBZ) approval will be liable for seizure or detention by the Zimbabwe Revenue Authority (ZIMRA). This however does not apply to foreign currency which has been imported into Zimbabwe by a foreign resident and is being taken or sent out of Zimbabwe by that person on his person or his baggage. The non-resident person will have to show by way of the declaration they originally made of such currency when they entered Zimbabwe.  

Sale of properties by non-residents

The transfer of any funds out of Zimbabwe arising from the sale of immovable properties within Zimbabwe by a non-resident person/entity requires exchange control approval. Similarly, the transfer of funds arising out of the purchase of immovable property in Zimbabwe by a foreign resident requires exchange control approval and the application must be submitted to the RBZ through a banking institution.

Management and technical fees

The remittance of fees is allowed to the extent of up to 2 percent of the applicant’s annual turnover for the last financial year. The fees must be paid under a management, technical or administration agreement approved by the RBZ. The turnover must be confirmed by an auditor’s certificate from a reputable firm of auditors. The amount of any remittance to be done will be net of withholding taxes applicable (if any).


The remittance of royalties of up to 5% of a company’s net sales may be authorised, subject to the condition that the payer of the royalties is a business organisation; and the royalties are payable under an agreement approved by the Reserve Bank. Furthermore, the amount of the company’s net sales must be proved by an auditor’s certificate from a reputable firm of auditors.

Foreign loans

Every loan to be contracted outside Zimbabwe requires exchange control approval. The relevant provision reads in part: “… no Zimbabwean resident shall, outside Zimbabwe—(i) buy or borrow any foreign currency from any person if the transaction results in or is likely to result in a debt payable in or from Zimbabwe; or (ii) sell or lend any foreign currency to any person if the foreign currency originated from Zimbabwe or is the proceeds of any trade, business or other gainful occupation or activity carried on by him in Zimbabwe; … if— (A) the transaction results in or is likely to result in a debt payable in or from Zimbabwe…”. Upon maturity of the loan, the repayment will be done through formal banking channels subject to exchange control approval.

Dividend and capital repatriation

A company is permitted to remit dividends to foreign shareholders, up to 100 % of its net after-tax profits. An application for the remittance of a dividend must be submitted to the bank within 12 months from the end of the financial year, accompanied by a certified copy of the board resolution of the dividend declaration, audited financial statements for a final dividend and a pro-forma profit and loss account for an interim dividend, audited cash-flow statement confirming fund availability for paying dividend and an auditors’ certificate confirming that the dividend emanates from actual trading profits for the year concerned and not from retained earnings or capital profits. Capital can also be repatriated subject to payment of Capital Gains Tax (CGT) on disposal of shares. Whilst exchange controls have been in place for some time they will gain prominence going forward following the return by Zimbabwe to mono- currency in the form of Zimbabwe dollar. It is therefore advisable to examine the exchange control requirements as well as the attendant tax implications regarding any foreign currency or exchange controlled transactions in order to avoid unnecessary penalties that can arise from breaching the law.

On the 24th of June 2019 the government took a bold move of re-introducing the Zimbabwe dollar as the sole currency for domestic transactions, thereby technically banning the use of foreign currency in settling obligations within Zimbabwe, except for purposes of paying of duty and VAT upon importation of goods as well as paying airfares to airlines. This move is a culmination of a process which started in October 2018 when the government separated bank accounts for RTGS$ and Nostro FCA. In February 2019 it introduced the Zimbabwe dollar as a legal tender along with other foreign currencies and made it the functional currency for accounting and other purposes. Assets and liabilities held on 22 February 2019 were deemed converted from United States dollar to RTGS$ on 1:1 and to remain fixed thereafter. After 22 February 2019 conversion of United States to RTGS$ to be determined using the interbank rate of authorised dealers whose determination is on willing buyer willing seller basis. Enactments in United States were deemed expressed in RTGS$ on a 1:1, implying wherever there is United States dollar amount it should be read as RTGS$ amount on a 1:1 basis. These monetary developments however have not been complemented by fiscal developments which remain stuck in foreign currency as regards to payment of taxes for transactions made in foreign currency, as a result there are now tax challenges of transiting to the Zimbabwe dollar which the government needs to sort out in order to sanitize the monetary policy.

One such challenge is with regard to VAT on credit sales invoiced in foreign currency made before the 24th of June 2019, but whose settlement is made in Zimbabwe dollar thereafter. The payment of output tax is predicated on the time of supply rule, which provides that VAT is triggered when an invoice is issued, payment is made for the supply, goods are delivered, services are performed or when immovable property is registered in the deeds registry whichever occurs first. This therefore entails that output tax can be declared and remitted in foreign currency on credit sale which is settled in the Zimbabwe dollar because of changes brought about by SI142. The government will need to step in and declare how such matters should be dealt with. The credit and debit notes rules provided within the VAT Act do not seem sufficient to address this issue. The same transaction may have income tax implications because the law requires income tax to be paid in foreign currency when the sale is made in foreign currency. A taxpayer may therefore end up being required to pay income tax in foreign currency for a sale it invoiced in foreign currency, notwithstanding the fact that the debtor settled it in Zimbabwe dollar following the banning of foreign currency payments.  On the flip side, the government might lose foreign currency as a result of taxpayers claiming input tax on invoices issued in foreign currency but which after the 24th of June 2019 are settled in Zimbabwe dollar. The law allows a VAT registered operator to account for tax payable on invoice basis as long as the operator is in possession of an invoice meeting the requirements of a tax invoice and the claim is made within the tax period the operator is required to submit a tax return or 12 months whichever is the longer period. It is not necessary that the invoice should have been settled for the claim to be made.

The Minister of Finance would also need to review values of tax credits, certain capital expenditure for capital allowances purposes, prescribed donations etc when presenting his mid- term budget later this month. These values were eroded by inflation following conversion from United States dollar to RTGS$ on 1:1 basis and therefore no longer retain their status tax incentives to the taxpayers. Statutory instrument 33 provides that: “… every enactment in which an amount is expressed in United States dollars shall, on the and after effective date, be construed as reference to the RTGS dollar, at parity with the United States dollar, that is to say, at a one-to-one rate”. The same applies for employment tax tables which have resulted to most employees being pushed into high tax brackets.

Capital gains tax rules also need revision. This is because Statutory Instrument 33 which provides that opening balances of assets are valued and denominated in RTGS dollars at a rate of 1:1 with the United States dollar has created an onerous tax burden on taxpayers for assets acquired before 22 February 2019 and sold after this date. The cost base of those assets remains stuck in RTGS at 1:1 with USD whilst the selling price will be inflated as it accords with the interbank rate of exchange. The result is the creation of artificial RTGS$ capital gain when in terms of real value one would not have made any gain. A move to a flat tax rate for such assets would save taxpayers of heavy tax burden, whilst at the same time simplifying tax computation.

Finally the laws for payment of taxes in foreign currency in an economy where the Zimbabwe dollar is the sole legal tender for domestic transaction militates against certainty, simplicity and stability of a tax system. These tents constitute cornerstones of a good tax system which policy makers should always consider whenever introducing any tax policy. They are also the benchmarks by which taxpayers can assess the effectiveness of government in maintaining and improving tax systems. Complicated tax laws alienates investors as well as adding to the cost of doing business. Whereas, effective tax systems are a critical building block for increased domestic resources in developing countries such as Zimbabwe, essential for sustainable development and for promoting self-reliance, good governance, growth and stability. Tax transitionary rules which recognise Zimbabwe dollar as the sole currency for purposes of paying taxes are therefore necessary for purposes for migrating to the new currency and bringing confidence in the Zimbabwe dollar, short of which the business community will continue to have a high regard of foreign currency particularly the United States dollar which may derail the government’s move towards monetary sovereignty. This will also assist in resolving the administrative complexities and tax arbitrages associated with multicurrency system.

In my last week article, I mentioned that the paying taxes in foreign currency has been part of our law since the introduction of multi-currency in 2009 and that the ZIMRA as the administrator of the law is reaffirming this position. Now with the re-introduction of the Zimbabwean dollar through Statutory Instrument 142 and the abolition of the use of foreign currency in domestic transactions, it appears there is an end to this era. Before we quickly jump to this conclusion, we should put things into perspective. Firstly there are taxes on transactions in foreign currency arising before the 24th June 2019. Secondly there will be transactions in foreign currency because someone has disobeyed the law and thirdly transactions in foreign transaction because these will be international transactions. The ZIMRA has through its public notice issued on Friday the 28th of June 2019 gave guidance regarding the first part. It provided that “All taxes that were collected, received or accrued prior to SI 142 of 2019 are paid in terms of the provisions of the prevailing legislation. Tax returns and payments shall be prepared and submitted in the manner provided in the legislation and as guided by the Commissioner General of ZIMRA. The taxes should be paid in local currency and in foreign currency as provided in the legislation. This requirement applies to all tax heads without exception”. This article fully discusses these three scenarios, but should not be construed to be a legal opinion.    

Regarding transactions happening before 24th of June 2019 in foreign currency, SI 142 of 2019 which reads in part as follows is relevant: (1) Subject to section 3, with effect from the 24th June, 2019, the British pound, United States dollar, South African rand, Botswana pula and any other foreign currency whatsoever shall no longer be legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe..” (Underlined words own emphasis). The Cambridge dictionary defines transaction as “an occasion when someone buys or sells something, or when money is exchanged (underlining own emphasis) or the activity of buying or selling something; or the process of doing business”. The term exchange is defined in turn as “the act of giving or taking one thing in return for another” (Merriam-Webster online dictionary). It appears from these definitions the remitting of taxes to a tax authority is not a transaction.  The relevant transaction therefore is that between the taxpayer and its customer, employee etc. If such transaction was denominated in foreign currency before 24th of June 2019 tax, it appears liability for taxes arises in foreign currency. To buttress this point, taxes such VAT, PAYE and withholding taxes are “trust taxes”. They are collected and remitted to ZIMRA by the person who is not the ultimate payer but as an agent of the government. The agent has no transaction with the ZIMRA but duty bound to hand over the money he has collected. The doctrine of unjust enrichment refrain him from pocketing what is not his. It is also a common law principle that he cannot make any profit or acquire any benefit in the course and in the matter of his agency without the knowledge and consent of his principal. Where he uses property entrusted to him by the principal to make a profit for himself and without the principal’s consent is in breach of his duty not to make secret profit. Some people could still argue there is no unjust enrichment where the person has paid the equivalent of foreign currency in RTGS dollar using the interbank rate. This argument is difficult to sustain in light of the explicit tax laws which states payment of taxes on in foreign currency where transactions are in foreign currency and these laws are still in force.

Addressing the second category transactions i.e. transaction in foreign currency transactions against the spirit of SI142, it is a trite at law that tax follows a transaction regardless of its legal status. It was held in MP Finance Group CC v Commissioner, SARS, 69 SATC 141 that income “received by” a taxpayer from illegal gains will be taxable in the hands of the taxpayer. The English case of Commissioners of Inland Revenue v Aken 63 TC 395, [1990] STC 497 is also in support of this view. It held that; “…. if the activity is a trade, it is irrelevant for taxation purposes that it is illegal …I do not think that the word ‘‘trade’’ in itself has any connotation of unlawfulness. There may be lawful trade; there may be unlawful trade. But it is still trade”. The case of CIR v Delagoa Bay Cigarette Co Ltd 1918 TPD 39, also held that “the taxability of a receipt is not affected by the legality or illegality of the business through which it was derived.” Therefore it appears where a person has traded in foreign currency liabilities for taxes will arise in foreign currency, regardless of the fact he has breached the law.

In respect of sectors such tourism, mining etc where foreign transactions (international transactions) will be prevalent the laws for payment of taxes in foreign currency will continue to apply. Statutory Instrument 142 of 2019 is about banning foreign currency on domestic transactions by making the Zimbabwe dollar the sole legal tender. In conclusion, taxes with regard to transactions in foreign currency whether or not they arise legally or not appears required in foreign currency because the laws which requires taxes to be paid in foreign (section 4A of the Finance Act and s38 (4) (a) of the VAT Act) continues in existence. The ZIMRA has also confirmed this position regarding transactions occurring before 24th June 2019, which appears correct interpretation of the SI142. Taxpayers are therefore urged to comply with the ZIMRA directive in order to avoid penalties which may arise from not complying with the law.

Recently the Zimbabwe Revenue Authority (ZIMRA) through a public notice commanded taxpayers to pay provisional income tax (Quarterly Payment Dates; QPDs) in foreign currency when taxable income is earned, received or accrued in whole or partly in foreign currency. This is not news but an enforcement of the existing laws because the requirement to pay tax in foreign currency has been part of our fiscal statutes since February 2009 when the country adopted the multi-currency system. It has not been an issue until October 2018 when the Reserve Bank of Zimbabwe directed banks to separate bank accounts into RTGS FCA and Nostro FCA. ZIMRA followed suit in November 2018 by issuing a public notice requiring all taxpayers to account for tax in foreign currency in respect of income earned in foreign currency. In February 2019, the government abandoned the one to one (1:1) exchange rate between the United States Dollar and the RTGS/ Bond for the interbank exchange rate system. All assets and liabilities prior to 22 February 2019 were to be converted to RTGS dollars at the rate of 1:1. This article is not seeking to criticize the ZIMRA public notice but to highlight issues raised, the policies and their impact on businesses.   

The current systems promotes double dipping. As an example, when RTGS dollar is used as the functional currency for accounting and other purposes as contemplated under SI33 foreign currency exchange differences are bound to occur. These arise when monetary items are settled or when monetary items are translated at rates different from those obtaining when initially recognised or in previous financial statements. A gain is recognised as gross income in the tax return whilst foreign exchange loss is treated as a deductible expenditure. However only foreign exchange gain or loss of a revenue nature and realised are dealt with in this way, whilst capital nature or unrealised gains or loss have no tax implications. It is however my view that when the income tax is paid in foreign currency as contemplated, exchange differences should not exist for tax purposes because tax payment is in the currency of tax reporting, but the fact that the provisions which provides for the treatment of foreign exchange difference have not been outlawed there is no basis for excluding them in the tax return. Double dipping may therefore occur e.g. double taxation where foreign exchange gains are realised and double deduction where exchange losses are realised, when taxes have been accounted for in foreign currency.

Another problem with the current income tax regime is that it taxes capital or productive assets contrary to the spirit of the income tax system. It is the role of a capital gains tax system to levy tax on wealth on fixed properties not an income tax system. As it stands there is juridical double taxation because of application of these two regimes on the amounts. For instance when assets that ranked for capital allowances prior to 2019 are sold after 22nd of February 2019 in RTGS dollars at the prevailing interbank rate of exchange and to be set off against the cost of the asset in RTGS dollars at 1:1 with the United States dollars there may be a taxable recoupment notwithstanding the asset may have been sold at below income tax value in real terms. Another situation is in respect of capital allowances that are at lesser value in real terms for assets brought forward from 2018 because the cost base of the assets will be expressed in RTGS$ at 1:1 with USD. Not to mention also the assessed losses brought forward from 2018 which will be written off at an accelerated pace because they will be set off against sales in RTGS$ at the interbank rate of exchange. Taxing capital impairs the value of the business and reduces its potential to recapitalise as a result reducing the future supply of goods or services or may send companies out of business.

One of the key tents of a good tax system is that it must achieve tax neutrality, that is a good a tax system should not create incentives for firms or individuals to change their behavior—to invest more or less, to work more or less, to locate in one place rather than another, to employ more or less labor or more or less capital. This at the moment is questionable. For example the apportionment of tax into RTGS dollar and foreign currency components using the turnover figures as contemplated in the ZIMRA public notice indirectly attack this principle as it disregards the proportion of deductions where they can be disproportionate or be in a different pattern from that of turnover. One taxpayer may incur expenses predominantly in foreign currency while their turnover is received largely in RTGS$. This presents a distortion on the tax payable in RTGS and foreign currency.  The formula further complicates tax administration as taxpayer will have to bear the burden of converting amounts into foreign currency for purposes of complying with the laws.  A country’s income tax regime is a barometer of the business environment and may negatively or positively influence investment. For instance, where the rules and their application are nontransparent, overly complex or unpredictable this will add to the cost of the project, creates uncertainty and thereby discouraging investment. Furthermore, a system that leaves excessive administrative discretion in the hands of tax officials invites corruption and brings uncertainty to the business. Policy makers are therefore encouraged to ensure that their tax system imposes an acceptable tax burden that can be accurately determined, and which keeps tax compliance and tax administration costs in check. The current income tax regime falls short of these requirements as it contains a number of flaws when measured against Adam Smith’s good principles of tax system such as certainty, administrative efficiency, tax neutrality, simplicity etc. Simplifying the tax regime should be the priority when the Minister of Finance and Economic Development presents his midterm fiscal policy soon.


The 2019 Monetary Policy and its accompanying legislation abandoned the 1:1 parity rate of exchange between the bond note and the United States Dollar. Real Time Gross Settlement (RTGS) system balances expressed in the United States dollar immediately before the effective date, 22 February 2019 were taken to be opening balances in RTGS dollars at par with the United States dollar. At the same time, a new currency, the RTGS dollar was introduced. In addition, every amount expressed in United States dollars (USD) in any piece of legislation was deemed to be in RTGS on a rate of 1:1. And the conversion and translation of USD balances to RTGS has created foreign exchange gains and losses which have tax implications for taxpayers as more fully explained in this article.

Law and Interpretation

The Income Tax Act brings into tax, foreign exchange gains realized from trading, that is, from income of a revenue nature. Revenue nature exchange gains are those which arise from the sale of goods or services in the course of a taxpayer’s trade or on working capital items such as debtors, settlement of trade creditors, on bank deposits used in the day to day business activities of the taxpayer or on inventory (stock). If the receipts and accruals occur in different years of assessment, effect shall be given to the increase or reduction in the gross income in the year of assessment in which the amount was received. The foreign exchange gains taxed will be on translation of assets and not on conversion as conversion of assets is a transaction of a capital nature. Furthermore, the Income Tax Act provides that: “When, owing to a variation in the rate of exchange of currency between Zimbabwe and any other country, the amount actually paid in Zimbabwean currency differs from the amount of the liability that had been incurred prior to the variation in the rate of exchange— (i)  the amount to be deducted shall be the said amount actually paid in Zimbabwean currency (ii)  if the incurring of the liability and the payment therefor occur in different years of assessment, effect shall be given to the increase or reduction in the amount in the year of assessment in which the amount was paid.” The amount to be deducted is the amount actually paid in Zimbabwean currency to the extent that it differs from the amount of the liability that had been incurred prior to the variation in the rate of exchange. It is important to note that, whilst foreign exchange losses of a revenue nature are deductible, capital nature foreign exchange losses are capitalised.

The new monetary laws led to both conversion and translation of assets and liabilities. Conversion and Translation of assets and liabilities are intricately interwoven, yet distinct concepts. The conversion of an asset is when the asset is actually changed from one currency to another. The asset itself actually changes in that it actually changes in form. A conversion mimics the transaction that happens when one exchanges currency for another in a bureau de change. With translation of assets, on the other hand, the asset remains unchanged and it is only the basis of measurement that changes. For example, United States dollars kept in a safe can be translated to another currency for the purposes of reporting. This does not in essence change the value of the United States dollars kept in the safe as they remain the same in terms of their nature. In other words, the dollar bill itself remains the same, and does not change into a bill of another currency as with a conversion. Conversion does not create taxable profits, whilst translation does. Conversion does not give rise to trading activity and therefore should be presumed to be of a capital nature. On the other hand translation results from variation in exchange rate which is a consequence of trading activity.

The government through SI32 of 2019 introduced a new currency now known as the RTGS dollars. SI33 of 2019 further provides guidelines for the conversion of balances from the United States dollar to the RTGS$. To that end, companies are required to convert their US dollar valued assets and liabilities to RTGS dollars. The rate of conversion however, depends on when the assets were held by the company and at what point the liabilities were incurred. The provisions entails that the conversion of the monetary values of assets and liabilities denominated in US dollars to RTGS dollars will be done at a conversion rate of 1:1 with the United States dollars for assets and liabilities held before the 22nd of February 2019. This in general means that there are no foreign exchange gains or losses to be realized by the company if the conversion of the assets and liabilities is to be done at a rate of 1:1. There are exceptions to the 1:1 exchange rule namely (a) funds held in foreign currency designated accounts, otherwise known as “Nostro FCA accounts”, which shall continue to be designated in such foreign currencies; and (b) foreign loans and obligations denominated in any foreign currency, which shall continue to be payable in such foreign currency.


In conclusion, the realization of gains or losses depends on when the assets or liabilities were held by the company. If the assets and liabilities that were held before the 22nd of February 2019 valued and expressed in US dollars were to be converted to RTGS dollars, the rate of conversion would be at 1:1. Such conversion if done in excess of 1:1 USD to the RTGS will nevertheless remain capital in nature. For assets and liabilities valued and expressed in US dollars held after the 22nd of February 2019, contemplated for translation by the company, then the translation rate would be at a rate in excess of 1:1 with the US dollar. These will create taxable or deductible foreign exchange gain or loss, if they arise from working capital items and the settlement is done prior to year-end and non-taxable or nondeductible unrealised foreign exchange gain or loss, respectively if the assets and liabilities are still held at year end.  The same applies to amounts in Nostro accounts or short term denominated foreign currency loans. For long term loans and property, plant and equipment whether realised or unrealised the foreign exchange gain or loss does not give rise to taxable income or assessed loss.