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Author: Tax Matrix Team

Introduction

The tough economic environment is taking a toll on most businesses albeit revelations that at least one company liquidates each day. Some are warming up for closure whilst others continuously post losses. Losses are not bad for tax purposes but what is key is for a business to stay afloat and hoping that one day fortunes will turn. The tax law recognises that loss represents an expenditure that can be used to reduce one’s future taxable income and consequently the tax bill. In the taxman’s language such loss is referred to as assessed loss and refers to a situation where one’s deductible expenditure exceeds income. It can be carried forward to be deducted against taxable income in any subsequent year of assessment. Hence creating a tax holiday for the business until the assessed loss is fully utilised. It is this turn of fortune that many struggling are hoping for. A loss making business is often a target for acquisition by a prospering business. Getting to utilise assessed loss is however not easy, there are conditions stipulated within the law that must be met.

Limitation on carry forward of assessed loss

Our law provides for separate taxation of “persons” namely a “person” with a separate legal entity is separately taxed. That is, assessed loss is ring fenced to a taxpayer. It permits assessed loss to be carried forward and deductible against future taxable income of the same taxpayer for a maximum period of six years from end of year of assessment in which the assessed loss first occurred. Assessed loss incurred first is claimed first, i.e. on first in first out basis. A much better olive branch is extended to taxpayers engaged in mining operations as these are allowed to carry forward their assessed losses indefinitely. However there no provisions for carry back of an assessed loss; namely assessed loss cannot be used to reduce taxable income of earlier years.

Buying companies with assessed loss

Assessed loss is taxpayer specific but in rare circumstances the tax code has allowed assessed loss to be shared within a group of companies if it is as a result of a scheme of reconstruction. It provides that where there is a change in the shareholding of a company with assessed loss or which directly or indirectly controls any company with an assessed loss and the Commissioner is of the opinion that such change has been effected solely or mainly in pursuance of or in connection with any scheme for taking advantage of such assessed loss, no assessed loss incurred prior to that change shall be deductible.  In other words, the taxman can sanction inheritance of assessed loss of one company by another as long as they are in the same group unless the takeover or scheme’s main objective was to take advantage of assessed loss (see: CIR v Ocean Manufacturing Ltd 1990 (3) SA 610 (A), 52 SATC 15). A taxpayer must prove that the change in shareholding was not influenced by existence of assessed loss. In ITC 983, 25 SATC 55, a company engaged in clothing manufacture bought shares in a company also engaged in clothing manufacture got its inheritance of assessed loss approved after it was proved that the main purpose of buying the shares was to enable the purchasing company to obtain a productive manufacturing unit for purposes of supplementing its productive capacity. The story was different in New Urban Properties Ltd v SIR, 27 SATC 175 where shareholders in successful land dealing companies bought the shares of another land dealing company but which was hopelessly insolvent but with an enormous deficit and assessed loss. It was held that the obvious intention was to channel profits of the successful companies to the unsuccessful one and, thereby, take advantage of the assessed loss.

Assessed loss of a localised foreign company

Companies often set up a branch or permanent establishment (PE) when entering foreign markets. A branch or a PE is considered to be a taxpayer in Zimbabwe. A PE is an international term that refers to a fixed place of business or dependent agent of a foreign business situated in the host country. If such a business decides to incorporate under the Zimbabwean laws i.e. to become a Zimbabwean company it is permitted to inherit assessed loss of such a branch or PE.  Thus the law sanctions inheritance of assessed loss where a company formally incorporated outside Zimbabwe (non-resident company) and was carrying on its principal business within Zimbabwe is about to be wound up voluntarily in its country of incorporation for the purpose of the transfer of the whole of its business and property wherever situate to its successor, a Zimbabwean incorporated company. The new company should however have the same shareholders in the same proportion as the old company if the inheritance is to be sanctioned by the taxman.

A company converting into public business corporation or vice versa

A company incorporated under the Companies Act (Chapter 24:03) which is converted into a Private Business Corporation (PBC) or vice versa is permitted to carry forward assessed loss into the new entity unless the conversion has been motivated solely or mainly by the existence of an assessed loss.

Insolvent and assigned estates

A rehabilitated person and his/her insolvent estate are two different persons in the eyes of tax law. Therefore a person that has been declared insolvent or had his property or estate assigned for the benefit of creditors cannot carry forward his/her assessed loss. 

Ring fencing of assessed loss 

Our law operates separate capital gains tax and income tax systems .In other words capital loss is ring fenced to capital gains tax, meaning it cannot be set off against other tax heads. The same applies to assessed loss emanating from business, it can be offset against income from business of the taxpayer subject to the limitations stated above. Similarly a person in employment is prohibited from setting off his/her employment against business income or vice versa.

Conclusion

Your assessed loss today represents a tax treasure to be used in days of plenty. It’s important however to have in place plans for harvesting assessed loss such as new businesses initiatives that brings in income, deferring deductible expenditure, avoiding tax yields investment etc, bearing in mind that your assessed loss has 6 year life span. However, perpetual losses often get the taxman talking “why should a taxpayer remain in business when he continues making losses”. This often invites a tax audit for purposes of scrutinizing whether the assessed loss is genuine and not a result a tax avoidance scheme or operation. Judge Kudya in  CRS (PVT) LTD v the ZIMRA HH-728-17, FA 20/2014 said that the main objective of a private company is to make profit and when  content with the untenable situation and continues to make losses with no prospects of profit this an indication the company is engaged tax avoidance scheme or operation.

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Introduction

The law defines a benefit or advantage in relation to employment as the value of an advantage or benefit in respect of employment, service, office or other gainful occupation or in connection with the taking up or termination of employment, service, office or other gainful occupation. It implies anything that has saved an employee from taking out of his or her own pocket. Common employment benefits in Zimbabwe include housing, use of furniture, motor vehicle, loan, telephone or cellphone, domestic worker or gardener, security services, fuel coupons, school fees, passage benefit, medical cover, pension cover, holiday, airtime and entertainment allowance. A benefit does not however includes any such amount consumed, occupied, used or enjoyed for the benefit of employer business. Fringe benefits reduce expenses of employees and at times they are an agent for motivation. However some employers are not aware that they are supposed to be taxed if they are for the benefit of the employee or his/her family. Sometimes the reason for not declaring them is often due to conflict of interest. This is because personnel who are tasked with implementing the remuneration strategy are also employees who seek to maximize their earnings.  This article considers how some of these benefits are treated for tax purposes below:

Right of use of company car

Motor car benefit arises when an employee is granted the right of private use of an employer’s vehicle. Private usage includes travelling between home and place of work, the use of the vehicle during weekends and holidays. It does not matter that the vehicle is parked at the employee’s residence for the convenience of the employer. The benefit to the employee depends on the engine capacity of the vehicle granted to the employee. The practical consideration is that people such as sale representatives who take employer’s motor vehicles home would still be liable to tax on the motoring benefit notwithstanding the motor vehicle may be viewed a tool of trade.

Purchase of a car from employer

Where an employee acquires a motor vehicle from the employer or an associate of the employer, a taxable benefit arises if the market value of the vehicle at the point of acquisition by an employee exceeds the amount which the employee paid to the employer to acquire the vehicle. The market value of the car should be verifiable. The practical consideration is that the ZIMRA will require as evidence at least three quotations of the market value from reputable motor dealers. The benefit is exempt if the acquisition is by an employee who has attained an age of 55 years on the date of sale of the car to him/her.

Use of personal car at work

A taxable benefit arises when an employee receives an allowance in the form of repairs and maintenance, fuel or other cash allowance for using his/her car etc. Where the employee uses his/her car to deliver employer’s duties that part of the business mileage should be claimed using Automobile Association of Zimbabwe rates (AA rates). If the employee claims mileage allowance in respect of private errands this constitute taxable benefit. When instead an employer repairs or maintains an employee‘s personal vehicle as compensation for use on company business, cost of such repairs or maintenance must not exceed the mileage claim computed on the basis of AA rates. If it does exceeds the extra represents a taxable benefit.  

Occupation of an employer’s house

An employee who occupies quarters or a house belonging to or sponsored by an employer enjoys a taxable benefit.  The benefit is the open market rent reduced by any rent which the employee pays to the employer.   The practical consideration is that any person who occupies a company house including caretakers, because they have been saved from taking money out of their pockets the rentals, are subject to tax on the housing benefit.

Airtime or data use

Airtime or data paid to staff for private usage constitute a taxable benefit to the employee, but excluding that portion of data or airtime expended on employer’s business.  The practical consideration is that the employer must make an analysis of the airtime usage by the employee to have a clear picture of what proportion is taxable. The employer can thus utilise that analysis to bail out an employee from bearing high employment tax by creating an airtime policy document which clearly specifies the proportion of the airtime utilised for business purposes and that which is utilised for personal purposes by the employee. The business usage of the airtime or data should be proved or justified. In practice it is difficult to prove business usage unless the company has a system that ensures that cellphone usage is analysed for private and business usage and the private usage accounted through employees’ payroll.

Entertainment

Entertainment allowance in money or in kind given to an employee by an employer constitutes a taxable benefit to the employee, unless the benefit has been expended on the business of the employer. Entertainment is expended on business of employer when expended on or enjoyed with business clients. Entertainment means hospitality or amusement of any form and includes a banquet, a meal, refreshments of any kind and hospitable provisions.

Canteen meals or refreshments

Meals, refreshments or vouchers entitling an employee to a meal or refreshment provided by an employer at a subsidized price or for free, gives rise to a taxable benefit. No taxable benefit arise when an employee is required to work extended working hours or travelled out of town on employer’s business.

Concessionary loans

Where an employer or associated employer grants an employee a loan or credit, a taxable benefit arises if the interest rate so charged to the employee is below the statutory interest rate. The statutory rate is London Inter-Bank Offer Rate (LIBOR) plus 5%. Interest on loans for the purpose of the education or technical training or medical treatment of an employee, spouse or child is tax exempt. 

Conclusion

Omitting benefits from the payroll is disastrous. Should the Zimbabwe Revenue Authority pick up this omission they will penalize the employer. However the employer is empowered to recover the principal tax from the employee, but not penalty and interest. Managing fringe benefits therefore requires that an employer understands the intricacies of fringe benefits and establishes a fringe benefit policy which requires approval by ZIMRA.

Introduction

When running a business it is a requirement to keep certain records that document and explain all the transactions of the business. Records constitute the basis of financial and tax reporting. Not only is financial information important to the businessman but also to a bank that may have advanced funds to the business. The government needs financial information for taxes and statistical purposes.  Other stakeholders who have interest in the financial information of the business include employees, customers, creditors, the community, potential investors among others.  The records that should be kept should enable the business person to determine his income and expenditure. Some of them include receipts for supplies, deposit books, bank statements, invoices books, credit and debits notes, purchase orders, logbooks for car expenses wages records, including worker payment records, employment declarations etc. The tax law has prescribed that records must be kept for at least a period of 6 years from the date of its origination and must be in English language and should easily be accessible.  Records must be kept for tax purposes because the taxman uses them as proof that financial transactions really occurred and apparently the law imposes the burden of proof on the part of the taxpayer to prove that entries in tax returns submitted by the taxpayer are correct. 

Burden of proof in civil cases

The burden of proof refers to the degree of probability that must exist in order for a circumstance to form the basis of a tax assessment decision or a judgment. Unlike in criminal cases where the burden of proof is on the accuser, in civil cases the onus is on the accused. Tax, being a claim on the taxpayer’s property, constitutes a civil claim on the taxpayer’s property and the taxpayer must prove that on a balance of probabilities, the claim by the taxman is false. Thus in an appeal or objection a taxpayer who wishes to claim a deduction, exemption or rebate may be called upon by the Commissioner to support his/her claim. The court has no power to reverse or alter any decision of the Commissioner unless it is shown by the taxpayer that the decision is wrong. This position is in terms of s63 of the Income Tax Act (ITA), Chapter 23:06  which reads: “Burden of proof as to exemptions, deductions or abatements In any objection or appeal under this Act, the burden of proof that any amount is exempt from or not liable to the tax or is subject to any deduction in terms of this Act or credit, shall be upon the person claiming such exemption, non-liability, deduction or credit and upon the hearing of any appeal the court shall not reverse or alter any decision of the Commissioner unless it is shown by the appellant that the decision is wrong”. Similar provisions are contained in s 15 of the Fiscal Appeal Court Act [Chapter 23:05] and s 37 of the Value Added Tax Act [Chapter 23:12] for purposes of VAT liabilities.These provisions apply to both the courts and the tax authorities. Thus any decision should be based on the facts that seem more likely to have occurred. It is primarily the taxpayer who bears the responsibility of providing documentation, and one must base any decision on an entirely free evaluation of evidence. He must be able to substantiate certain elements of expenses to deduct them, prove entries, deductions and statements made in his tax returns.  If the taxpayer is unable to provide sufficient evidence for a tax matter imposed against him/her, the Commissioner cannot waive the case. The burden is on the taxpayer because it is the taxpayer who is burdened with the responsibility of keeping accounting records. Section 37B of the ITA and s57 of the VAT Act, Chapter 23:12 requires him to keep records and these have to be kept for a period of six years in English Language.

Discharging the burden of proof

Taxpayers must discharge the burden of proof by having the information and receipts (where needed). They should keep adequate records and have documentary evidence such as receipts, cancelled checks, or bills to support certain expenses. This means that it is the taxpayer who bears the duty to provide relevant information which he will use as proof of the actual transactions which took place. If the tax authorities find that there is no proper documentation during a tax assessment, it uses its own discretion even if it is above the real transactions that took place. The records should be adequate to support entries in the tax returns submitted to the ZIMRA.

Estimated assessments

Where records have not been kept or in the absence of documentary proof the Commissioner is entitled in terms of the law to raise an estimated assessment. Thus persons upon whom estimated assessments are raised are those who would have failed to submit returns, made false declarations, those about to leave the country without submitting returns as required by the law or those unable from any source to submit returns. The Commissioner is not however permitted to revise an assessment if it was made in accordance with the “practice generally prevailing at the date of assessment (Weare v the Commissioner for SARS (2005 (4) 488 SCA)). Estimated assessments are very punitive because they are often overstated. In addition they may also carry a 100% penalty and more often than not the Commissioner does not accept a revision of an estimated assessment to reduce tax liability. An estimated assessment does not relieve a taxpayer of his duty to settle tax liabilities in accordance with dates stipulated in the Act. Therefore interest on estimated tax liabilities is due from the establishment date not from the date an estimated assessment is raised. The establishment date is the date the tax was supposed to be paid.

Conclusion

In conclusion as a businessman you are advised to keep records of your transactions in order to avoid the wrath of the taxman. Estimated assessments which the taxman may raise on you if you have not kept records and have not been paying taxes may destroy your business which you have toiled for in order to be what it is today. The records must be stored in original form even if you keep electronic records. You will be committing an offence if you have not kept these records or to wilfully damage or destroy them. Whatever records you keep, it makes sense to organise and keep them in an orderly fashion. They should be easily accessible in order to respond promptly to the ZIMRA demands. Final such records must span a period of years to prove ZIMRA allegations. If an accounting entry cannot be supported ZIMRA will deem it not to have occurred and will seek to attribute tax and also charge penalty on the amount.

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Background

There is so much talk in both informal and formal forums of Zimbabwe being a multi- billion dollar economy through the small to medium enterprises. It is believed that not much has been done to formalise the informal sector to allow the collection of revenue from the SME’s, yet SMEs are strongly competing against the big companies for business. In the IMF working paper titled Shadow Economies Around the World: What Did We Learn Over the Last 20 Years? prepared by Leandro Medina and Friedrich Schneiderit was reported that Zimbabwe is number two in the world in size of the informal economy after Bolivia. With the shrinking economy, the big businesses have become overladen with taxes. It is opined that if the SMEs contributed their fair share of taxes there could be a lot of revenue that may well have been collected for the benefit of the fiscus and ultimately for the benefit of our country. Fiscal exclusion has also been a factor influencing the lack of formalization of the SMEs. There are tax obligations that must be fulfilled by every business that is registered for tax purposes and this includes the SMEs. These include income tax, withholding tax, PAYE, VAT and Presumptive tax. These obligations may be greater or lesser depending on the structuring of the business. Poor tax planning may be costly on compliance, administration and ultimately the general success of the business. This piece of writing aims to indicate the tax issues that may affect the SMEs and give recommendations on what can be done to improve compliance of SMEs.

There is compelling evidence on the ground on why the SMEs should heed the call to register and save their businesses. Firstly, free markets have been eradicated as evidenced by the rigorous clean up exercises to remove the vendors, the money changers amongst many other informal traders. Recently, Statutory Instrument 246 of 2018 was published in the extraordinary gazette which criminalises the informal trading of foreign currency, a move targeted at removal of informal trading in forex. In addition to the forgoing, the Minister in delivering his speech on the Monetary Policy intimated that: “… due to the increase in informalisation of the economy and huge increase in electronic and mobile phone-based financial transactions and RTGS transactions, there is need to expand the tax collection base and ensure that the tax collection points are aligned with electronic mobile payment transactions and RTGS system” This speech culminated into the recent revision of IMTT from 5 cents to 2 cents on the dollar value of transactions. This takes a big knock on the informal sole traders. The tax is however a lesser burden for formally registered persons with formal books of accounts since transactions such as transfer of money for purposes of paying remuneration are exempt from the 2% IMTT. A sole trader without proper books of accounts may not benefit from this exemption.  This tax is broad based and unavoidable by informal businesses. In my view, all these exercises are being undertaken to formalize the economy. SMEs have two choices, to either shape up or shape out!!

Furthermore, the existing laws are crafted in such a manner that they favour formalised institutions as opposed to informal institutions. In Zimbabwe all businesses are supposed to withhold 10% on payments made to other businesses without tax clearance certificates. Additionally, there is 10% withholding tax on importation of goods in the absence of a tax clearance. The taxes are payable by the seller and importer of goods respectively. For SMEs that have not formalised, they lose out on revenue that is withheld on contracts that they enter with other formal businesses in the absence of a tax clearance. The 10% withholding tax applies on turnover for lack of tax clearance. By virtue of formalising tax affairs, SMEs can enjoy exemption of the 10% withholding tax on contracts with other businesses. Even the laws governing the banks are crafted against the informal institutions. For bankable projects to be approved, these rely on proper books of accounts, cash flow projections and other formalities. The lack of books of accounts is a deterrent towards the approval of such loans. For bankable projects the banks would need proper books of accounts to be kept and the business to be compliant with the tax laws. Informal institutions do not qualify for these loans. To a great extent informal institutions do not enjoy the benefit and protection of the law by lack of formalisation. Incentives such as assessed losses, capital allowances and tax holidays and rebates cannot be enjoyed by informal institutions because of the lack of the relevant registrations. Informal institutions do not enjoy assessed losses which can be carried forward for six years. When making losses the law allows you to use such losses to reduce taxable income, until the losses are used up or expired in which case the company will not pay taxes to the fiscus. The reporting of such losses can be only done by a person or company who is formally registered for taxes.

From a commercial point of view, it is argued that big businesses do not trade with unstructured businesses without tax clearances. To participate in lucrative government tenders and other big tenders, it is a pre-requisite to have a tax clearance. A tax clearance implies formalisation, which entails that informal businesses cannot participate and are not considered at all. Also, foreign lucrative markets are also difficult to tap into without being formally structured. The export incentives do not apply to informal businesses. Big businesses are reluctant to trade with unstructured businesses on a strategic point of view. The perception is that unstructured businesses lack continuity therefore it may be difficult to establish long lasting business relationships with a business without a succession plan. If the owner dies, the business dies with the owner, a situation that most big businesses who create mutually beneficial strategic partnerships with other businesses consider before engaging in business ventures.

The dye towards formalisation has been cast. The technology to enforce this process is already in place. Electronic transactions are now being closely monitored through the Financial Intelligence Unit created by the amendment to the Money Laundering and Proceeds of Crime Act. Ecocash, telecash, one-money and other mobile money transfer services can easily be traced as they leave a paper trail. None compliance can easily be detected through the mobile transfers and other payment platforms. When non-compliance has been detected, the ramifications are very difficult to swallow. The law provides for backdating of tax registration and payment of taxes from the date the person was supposed to be tax registered. This comes along with 100% penalties and interest on late paid taxes not to mention the penalty that is attached on non-submission of returns. Section 56 and 77 of the Income Tax Act provide for the drastic measures of recovery of taxes. Section 56 provides for the personal liability of a representative taxpayer. This entails that the principals of informal institutions will be personally liable for taxes after the non-compliance is discovered. Additionally, section 77 provides for the legal action for the recovery of taxes, and also penalises a person who disposes property to avoid payment of tax. By implication, this entails that non-compliance will result in loss of property.  

With all this said, there is still time for informal institutions to formalise before being rejected by the system. The ZIMRA has the ongoing voluntary disclosure program which ends on the 31st of December 2018. Informal institutions should take advantage of this program and avert the inevitable day of reckoning when the ZIMRA finds out the tax non-compliance issues. Voluntary disclosure results in the automatic waiver on penalties which effectively mitigates the tax liability.

Conclusion

It is a misconception that to be registered for tax is translates to expenses. The reverse is actually true 10% withholding tax applies on turnover for lack of tax clearance, the business losses on tax opportunities such as claiming business losses when they occur and above all when the taxpayer is eventually caught the law provides for back dating of tax registration and payment of taxes from the date the person was supposed to be tax registered. In addition to the forgoing, there is 100% penalty and interest on late paid taxes not to mention the penalty that is attached for non-submission of returns. It is wise as a business owner or company executive to gain more understanding on how to go about being tax compliant to avoid missing out on business opportunities and being on the right position for growth.     

Introduction

Signing contracts is not just a matter of appending your signature on paper but a matter of life and death. Caveat subscriptor is a trite principle at law which is roughly translated as “signatory beware”. It entails that the signatory is bound by his signature and cannot deny existence of obligation included in the document he has signed.  The parties involved in a contract, the risk involved and the rights and responsibilities to be carried out under the contract, including dispute resolution mechanism, remedy clauses among others must be known before appending one’s signature. Besides the commercial disputes that can arise between the contracting parties, contracts are instruments which may invite unwanted taxes if poorly drafted. To the extent that contracts and reality or conduct are at variance the later prevails for tax purposes. Therefore contracts will only become worthless papers in the eyes of the taxman. It is important to be more diligent when signing contracts and engaging tax persons to analyse your contract before you sign. In addition, the contracts should be at arm’s length i.e. the agreement should be at fair market value especially for contracts between related parties. Arm’s length implies the contract terms are fairly reflective of the market conditions and are not constraint due to the relationship between the parties.

Non-arm’s length or abnormal contracts

Section 23 (1) of the Income Tax Act (ITA) Chapter 23:06 provides that ‘where any person carrying on a trade in Zimbabwe purchases any property from any other person at a price in excess of the fair market price, or where he sells any property at a price less than the fair market price the Commissioner may, determine the fair market price at which such purchase or sale shall be taken into his accounts or returns for assessment”. This was the subject of debate in Elite Wholesale (Rhodesia) (Pvt) Ltd v COT (1955) 20 SATC 33, a case that involved a low marked up sale transactions between associates. The Commissioner alleged that markup was low and increased it to 15% on cost. However he lost his case after failing to prove the basis for adjustment. The court held that “If the transaction is a perfectly innocent one, the mere fact that a reduction in income has resulted is not a sufficient justification for the exercise of the power. An occasion for its exercise arises when there is something about the transaction which indicates an intention to evade assessment or tax, something which shows a lack of good faith or the presence of ‘moral dishonesty in the taxpayer’s mind’”. Contracts entered with the sole or main purpose of avoiding or postponing can also be stripped of the value and reconstituted by the Commissioner in terms of s 98 of the ITA. The section allows him or her to make adjustment raising additional tax, plus penalty and interest. Literally section 98 is invoked where the Commissioner is of the view that transaction, operation or scheme entered into or carried out by the taxpayer has the effect of avoiding, reducing or postponing tax liability, and having regard to the circumstances under which it was entered into or carried out it was by means or manner which would not normally be employed in the entering into or carrying out of such a transaction etc. and as resulted created non-arm length rights or obligations.

Contracts between related parties

The prices exchanged by related parties are often not reflective of the market conditions. Some of  the transactions between related parties can be offering technical support services within group set ups; financial assistance in terms of  loans, guarantees and extended credit terms; intangible transactions for example the use of brand, know how, IP, royalties; making available equipment either for rental payments or no consideration. Transactions like these need careful consideration of tax issues involved in terms of transfer pricing. For accounting purposes there will not be any problem in terms of pricing as financial statements are prepared based on figures. When it comes to the taxman it will be a different issue. Some companies find themselves in a scenario whereby they trade with a company in which the controlling shareholding of the company is also part of the board of the company with which that company is transacting with and enter into abnormal contracts that are predicated at tax avoidance or evasion. Upon whiff of this sort of arrangement, the taxman immediately invokes the provisions of section 2A(1)of the ITA which provide that “where a person, other than an employee, acts in accordance with the requests of another person, whether or not the persons are in a business relationship and whether or not those requests are communicated to the first-mentioned person, both persons shall be treated as associates of each other for the purposes of this Act”. The effect of this is that taxpayers will be deemed associates and this triggers application of section 98B which deals with transactions of associates. The ramifications of this kind of arrangement is well captured in subsections (1) and (2) of section 98B which provide that: “(1)Where a person engages directly or indirectly in any transaction, with an associated person, the amount of taxable income derived by a person that engages in that transaction shall be consistent with the arm’s length principle,….(2) Any amount of income that would have accrued to either of the associated persons in a controlled transaction and been taxable in Zimbabwe, shall, in the absence of the arm’s length principle be included in the taxable income of either or both of them and be liable to be taxed accordingly”. In summary associated parties transactions must satisfy the arm’s length test as provided in section 98B as read with the 35th Schedule to the ITA. The Minister in his last week National Budget Speech emphasized transfer pricing policy document for associated enterprises.

Contracts with non-residents

Nonresidents often bargain for tax reduction incurred by them on the foreign lands and often bring about the clause all taxes of the country to be borne by the payee. The effect is that any underlying taxes thereof will be borne by the recipient contrary to the provisions of the 17th , 18th ,19th Schedule and s 15(2)(a) of the ITA. These taxes must be borne by the non-resident person, but because local payees hardly pay attention to these clauses or bargain for them they end up bearing the taxes. Taxes paid on behalf of the non-resident are deemed donations and disallowed for Income Tax for Income Tax purposes in terms of s15 (2) (a) of the ITA.

Conclusion

Although taxpayers have freedom of contract, they should give careful consideration to every little detail to avoid disputes with the taxman especially when drafting the terms that govern their contracts. Contracts are just not a signature on paper, they must be carefully read, understood and unfavorable clauses corrected.

Introduction

Last week on Thursday, the 13th of December 2018, the government published a revised Finance (No.3) Act, 2018  (“the Bill”) which adds a few tax measures whilst refining some of the proposals of the first draft and the National Budget Speech published on the 22nd of November 2018. But what is fascinating is the revised definition of imported services which is not good news for VAT registered taxpayers. If you are a VAT registered taxpayer brace up of a new tax, additional to the 2% IMTT. It is all about austerity for prosperity this season!

The new definition

The new term 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;”. It implies that any person who utilises or consumes in Zimbabwe imported services, whether not for private or business purposes, or whether or not a registered VAT operator, is deemed to be a recipient of such services.  The old law restricted the definition to such services imported and “utilized or consumed in Zimbabwe otherwise than for the purpose of making taxable supplies”. Therefore if one was to utilise or consume the imported services for use, consumption or supply for purposes of making taxable supplies (standard or zero rated supplies), which was usually the case with VAT registered taxpayers, these would not be deemed imported services. The revised bill changes all that and intends to widen the tax base to include services imported by registered operators. Although it is apparently difficult to enforce, individuals not in business are also liable to pay VAT upon importation of services by them.

Resident person

The recipient of the services must be a resident of Zimbabwe who acquires services from a foreign supplier or a supplier carrying on a business outside Zimbabwe. The term resident person is in terms of the law any “person, other than a company, who is ordinarily resident in Zimbabwe or a company which is incorporated in Zimbabwe. Any other person or company is deemed to be a resident of Zimbabwe to the extent that such person or company carries on in Zimbabwe any trade or other activity and has a fixed or permanent place in Zimbabwe relating to such trade or other activity.

VAT on imported services

VAT on imported services is paid by the resident person importer of services in terms of the law at the rate of 15% of the open market value of such services.  As stated above the the supplier of services must be a non-resident person or carrying on business outside Zimbabwe. It does not apply in cases where a non- resident person (including a company) operates a business in Zimbabwe or is VAT registered in Zimbabwe.  In Tax Court case (VAT 144 [2006] JOL 17138 (TC)) it was held that if a foreign supplier regularly and continuously renders services in a country, the foreign supplier is carrying on a trade in the country. It will be required to register and account for VAT itself and in such a case the recipient of the services is not liable for VAT on imported services.

Accounting for VAT

The recipient of the service must account for the VAT on imported services and pay the VAT to the ZIMRA within 30 days from the date of the foreign supplier’s invoice, or when payment is made, whichever is earlier. The importer should at the same time furnish the ZIMRA with a declaration, namely VAT return. The value on which the VAT is payable is the greater of the value of the consideration for the supply, or the open market value of the service.  

Exemptions

The law specifically exempt imported services which if they were being supplied in Zimbabwe would be either zero rated or exempted. An example is where one imports actuary services, medical services, financial guarantee, suretyship, educational service etc. These services are ordinarily exempt in terms of the law. To the extent that the services are utilised or consumed outside Zimbabwe by a resident, VAT charge shall not apply.   In other words, VAT on imported services apply to services which would ordinarily be subject to VAT at 15% had they been supplied by a supplier dealing in taxable supplies.

Other taxes on imported service

Imported services may also be subject to non-resident tax on fees (NRST) in terms of the Income Tax Act, Chapter 23:06. The law defines fees as any amount paid in respect of services of a managerial, consultative, administrative or technical in nature. Fees paid by a resident payer regardless of where the payment is effected from or the place the services are rendered, are therefore subject to NRST. The rate of tax is 15% of gross fees subject to any provision of tax treaty in existence between the resident person’s country of residence and Zimbabwe. A tax treaty may either reduce or eliminate the withholding tax liability and you are advised to consult the relevant tax treaty for details. The tax must be remitted to the ZIMRA within 10 days of date of invoices of services or actual payment of fees to a non-resident whichever occurs first, or within some other period approved by the Commissioner.  

Conclusion

In conclusion all services rendered by foreign suppliers to Zimbabwean recipients comprise imported services. It does not matter anymore whether the recipient uses or consumes the service in the course of making taxable supplies, but if the services are consumed outside Zimbabwe they are not considered to be imported services. Similarly, if the foreign supplier is required to register and account for VAT in Zimbabwe, the service is not an imported service. Thus the new law imposes an extra tax burden on VAT registered taxpayers. They must be geared up for the tax come 1 January 2019. It becomes important for them to evaluate the need of such services or where they are unavoidable evaluate the costing model. Note that local services procured from VAT registered taxpayer may be attractive in this instance because the operator will be entitled to reclaim input tax incurred if such services were acquired for use, consumption or supply for purposes of making taxable supplies.


Introduction

The agriculture sector largely influences the economic, social and political lives of the majority of people in Zimbabwe.  It is also the source of sustenance for most rural Zimbabwean. At commercial level, the sector produces export crops such as tobacco, cotton and horticulture products which bring in foreign currency and improves the balance of payment. It is one of the biggest employer in Zimbabwe and also the key to the success of downstream industries, among them the manufacturing industry. To resonate with this thinking the government recently introduced command agriculture in order to boost agricultural production and create employment. The fiscal regime also contains a number of incentives which are dotted across the revenue Acts some of which we discuss in more detail in this article.

Special deductions

Farmers enjoy special deductions in respect expenditure incurred by them on soil erosion prevention, water conservation works, clearing of land, sinking of boreholes and wells, aerial and geophysical surveys and fencing highlighted in paragraph 2 of the 7th Schedule to the Income Tax Act (Chapter 23:06). This expenditure would ordinary be treated as capital expenditure deductibility against the income of the farmer would be spread over a number of years. For farmers it’s allowable as deduction in one go in the year the expenditure is incurred whether or not the work is still uncompleted. In addition, the expenditure does not suffer tax recoupment on disposal.

Suspension of Duty

Companies in the agriculture sector are able to import capital equipment duty free in terms of SI 6 of 2016. Application is made to the Ministry of Agriculture via recommendation from the Ministry of Finance. Capital equipment is not to be sold or disposed of within five years from the date from which it entered under rebate, both VAT and Excise Duty shall immediately become due and payable. No sell or disposal of equipment imported under the duty suspension shall be made within 10 years from the date of entry without a written permission from the commissioner. Applying for duty rebate saves on excise duty and saved amounts can be channeled towards other farming projects.

Livestock farmers

Livestock farmers enjoy relief when it comes to enforced sale of livestock, disposal of livestock due to epidemic disease or drought. They may elect to equally spread income from disposal over 3 years and election is irrevocable. They also benefit from re-stocking allowance which is 50% allowance on cost of purchasing livestock in a year of assessment, subject to the farming not exceeding the carrying capacity of the land upon restocking.  The allowance is in addition to the cost of purchase of the livestock which is also allowable as a deduction. A farmer must possess livestock in a drought or epidemic stricken area. In addition the farmer may also elect to equally spread income from other farming operations over 3 years in the event that such income is less than enforced sale taxable income. The election is also irrevocable.

Tobacco Farmers Incentives

According to the June quarterly review report by the Reserve Bank of Zimbabwe “there was an increase in tobacco output which was triggered by to an increase in the number of growers, from below 100 000 farmers to more than 140 000 farmers in the current season.  As at 30th June 2018, cumulative tobacco sales amounted to 218.8 million kilograms, about 31% higher than the cumulative total of 167 million kilograms sold during the same period in 2017”. It is of my view that the proposal made to exclude tobacco farmers from producing a tax clearance certificate for purposes of 10% withholding tax on contracts in the 2018 National Budget may have been granted taking into account the output increase. The argument was that tobacco is a foreign currency earner and tobacco farmers are facing a lot of financial challenges such as the high cost of production, afforestation levy and other costs hence the need of scrapping of 10% withholding tax so as not to discourage the farming of the crop. Therefore a contract for the purchase of auction or contract tobacco in terms of which tobacco levy may be required to be withheld is not subject  to 10% withholding in terms of s80 of the Income Tax Act (Chapter 23:06). This is a tax advantage to the tobacco farmers over other taxpayers who may be required to produce tax clearance in the absence of which 10% withholding tax is applicable on their contracts.

Anchor Farmer Incentive

“Anchor Company” means a company that provides inputs, agronomic advice and marketing opportunities to a group of outgrower farmers and small or medium enterprises. “Outgrower farmer” means a farmer who is a party to a scheme or contract where under an anchor company supplies inputs, agronomic advice and marketing opportunities in return for the outgrower farmer selling or delivering the contract or scheme produce to the anchor company or other person designated by the scheme or contract.  Effective 1 January 2018 anchor companies are entitled to a deduction of expenditure of technical and support services incurred in assisting outgrower farmers plus 50% of such expenditure. A typical example of anchor and outgrower farming relationship is poultry contract farming.

VAT Zero rating of farming inputs

Farming inputs and equipment are also subject to VAT at 0% entitling the farmer to input tax claim on his inputs. Among the zero rated products animal feed, animal remedy, fertilizer, plants, seeds and pesticides. These have the effecting lowering cost of farming.

Conclusion

As a farmer, your cost of production may be lessened and the farming process made enjoyable if you have the adequate knowledge of tax incentives to take advantage of.

Introduction

The general design of the VAT system is that businesses with certain prescribed taxable turnover or supplies are required to levy and collect VAT on such supplies and to reclaim input tax incurred on their purchases. Where the VAT collected from their customers exceeds input tax, the result is a VAT payable to the ZIMRA and VAT refund when input tax for a tax period exceeds output tax. VAT refund is sanctioned by s 44 of the VAT Act, Chapter 23:11. Getting the VAT refund is one of the insurmountable tasks for businesses in almost every tax jurisdiction and Zimbabwe is not an exception. Tax authorities require to be reasonably assured that only genuine cases of refunds are made to taxpayers and often carry an audit of VAT refunds. The World Bank Group Flash Report (16th Edition): Doing Business 2019 Zimbabwe highlighted that it takes about 48.6 weeks for VAT to be processed and paid to an operator by the Zimbabwean Authority Revenue and about 75%-100% of the refunds are audited. The refund period allowed by the law is 30 days. Even in instances where taxpayers have supplied all the required documentation as requested by the authority for verification, delays are still experienced. Delayed refund creates cash flow problems for businesses. This piece of writing ventilates the law on VAT refunds and offers some tips to businesses on how to reduce the VAT refund cycle.

Law regulating refunds

Section 44 of the VAT Act provides for refund of excessive input tax i.e. input tax plus adjustments that exceeds output tax plus adjustments in any tax period as long as the claim is made within 6 years of the end of the relevant tax period. The refund should exceed the prescribed amount of US$60 and carried forward to the next period if less than this amount. Besides normal VAT refunds, other refunds may arise from additional tax, penalty or interest paid in excess of that required by the law or when an operator has been refunded less than the amount properly refundable to him.  A refund cannot be granted if the Commissioner is of the view that the refund of the amount will result in an unjust enrichment to the registered operator. This applies mainly to amounts erroneously collected from the operator’s customers which may be difficult to be channeled back to such customers. VAT refunds may also arise upon cancellation of the VAT registration and this shall be refunded in full. A refund can be used to prepay taxes or offset against other taxes due by the taxpayer to the ZIMRA. It may be set off against any amount of tax, interest or penalty levied under any Act of Parliament administered by the Commissioner; namely against VAT due, income tax, PAYE, capital gains tax, customs duty, excise duty and other withholding taxes, etc. due by the registered operator. An operator must write a letter instructing the Commissioner to effect the set off. The Commissioner has the powers to withhold the refund on the pretext of an outstanding return for any tax period, until such a return has been furnished.  The decision by the Commissioner to deny a refund, must be communicated to an operator through VAT 12 which must be delivered to the registered operator.

VAT audits

Generally the ZIMRA has been paying refunds after completion of the audit. The commonly cited reasons for refund rejection include outstanding returns, tax payments, defective returns (not properly completed), wrong physical address, no banking details supplied by the operator, among others. Taxpayers must also ensure they have e-filed an input tax schedule and maintain original tax invoices claimed as input tax as these are often required to complete refund audit. Other important documents are valid debit and credit notes. Input tax should be claimed on the basis of a valid tax invoice or fiscalised invoice with an electronic signature, which must be original copies. The ZIMRA officials may visit the operator’s premises as part of refund verification process and failure to locate operator can result in the refund being rejected or withheld.

Interest on delayed refunds

Interest is payable on delayed refunds. Section 20 of the VAT General Regulations, 2003 (SI273 of 2003) also provides for the ZIMRA to pay interest to a registered operator who has not been refunded within 30 days of the Commissioner receiving the tax return or the tax refund application. This does not however apply in cases where the delay is caused by the operator’s fault such as submitting incomplete or defective information in any material.  Under such circumstances, interest shall start to accrue from the date the registered operator rectifies the return and satisfies the Commissioner that the incompleteness or defectiveness thereof does not affect the amount of refund, or the date on which the Commissioner makes an assessment upon the registered operator reflecting the amount properly refundable, whichever occurs first. Interest is also not payable in situations where the Commissioner is prevented from determining the amount refundable due to inability to gain access to the registered operator’s books of accounts. The Commissioner has on reasonable time from the receipt of the tax return, made a written or verbal request to the registered operator to access such books and records. Under such circumstances the 30 day period of refund will be suspended from the date the letter is delivered or posted, by registered mail or verbal request is made until the date on which such access is granted.

Tips

In order to facilitate speedy processing of their refunds operators should note the following: All invoices must reflect correct VAT registration numbers for the supplier and receiver of goods and services – this will ensure that all invoices (inter alia) are correct and in order. Turnover as per VAT returns must match the one in the financial statements; variances may require explanation which may delay processing of the refund.  Maintain documents as evidence of proof of writing off bad debts where you have written back the VAT paid on bad debts. Keep documentary proof of zero-rating where you have supplied zero rated goods or services to be entitled to claim input otherwise the ZIMRA will raise a red flag. Submit returns regardless of whether there is no VAT liability and no VAT payment due, as this is a prerequisite to every registered operator.

Conclusion

It is a prerequisite for a VAT registered operator to keep up to date and authentic documentation because for one to get a refund there is need for supporting documents. You should approach professional accountants to handle your tax affairs and make sure you have complied with the VAT compliance requirements prescribed by the law and the standard of risk based refund, respectively.