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Author: Tax Matrix Team

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.