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MNEs and companies with associate transactions will be required for the first time in Zimbabwe to file Transfer Pricing returns. Disclosure is also required when taxpayer has transactions with tax havens i.e. low tax jurisdiction countries. The return is to be filed at the same time with the Income Tax Return (ITF12C) on the 31st of August 2020, being the new submission date for 2019 income tax returns following an extension granted by the government owing to COVID 19. 

The ZIMRA announced in March2020 that it has received assistance from the ATAF International Taxation team in coming up with an advance version of the transfer pricing return that taxpayers are directed to file with their annual self-assessment corporate income tax return for the year ended 31 December 2019. The return supplements the new transfer pricing reporting requirements Zimbabwe introduced in 2019.  The transfer pricing return must be completed by all taxpayers with international and/or domestic related party transactions. The information requested in the return will assist the Zimbabwe Revenue Authority (ZIMRA) to identify and assess potential risks to Zimbabwe’s tax base from abusive transfer pricing practices and ensure that ZIMRA focuses its resources on the highest risk cases. This will provide greater tax certainty and reduce compliance costs for complaint taxpayers in Zimbabwe (https://www.ataftax.org/zimbabwe-introduces-new-transfer-pricing-return-for-taxpayers).

Related party or associate transactions are those entered into with near relatives, between companies under the same control (affiliates or sister companies), a partner and fellow partner in a partnership, trustees with their trust or trustee and beneficiary (ies) etc. A company is deemed controlled by a person when that person alone or together with 1 or more associates or nominee controls the majority of the voting rights of the capital in the company whether directly or through one or more interposed companies, partnerships or trusts. Control is deemed also if the person alone or together with associates direct or indirect influence the policy or operation of the company. When you have engaged in the purchase or sale of goods or services, loan transactions, sale or leasing of intangibles, or intra group service agreement etc with your associate you are required to prepare the necessary Transfer Pricing Documentation regardless of transaction value.

Transfer pricing is not an exact science. Therefore, tax authorities can impose TP adjustment requiring taxpayers to have strong arguments that intra-group transaction prices were at arm’s length. Transfer pricing affects cash flow, investment decisions and performance indicators. The additional corporate tax imposed by the tax authorities will affect cashflow, investment decisions, certainty and profitability. Other consequences include adjustment for customs value – rejection of transfer prices declared by a company and impose different price levels. Transfer pricing can involve revenue or expense adjustments which may trigger double taxation especially where a corresponding adjustment has been denied to the counter party or by the other jurisdiction. Additional taxes in the form of withholding taxes and accompanying penalties will also arise.  Finance Act no 1 of 2019 has explicitly stated that 100% penalty will apply on additional tax arising from TP adjustments if there is evidence that the avoidance, reduction or postponement of the liability to tax was actuated by the use of fraud or evasion. In the event that there is lack of contemporaneous transfer pricing document to support the transaction giving rise to the amendment assessment despite absence of fraud or evasion, a 30% penalty level will apply on the assessed tax.  The same applies to a taxpayer who has not complied with transfer Pricing Guidelines. If the taxpayer has done all what it can including having in place Transfer Pricing documentation which comply with Transfer Pricing Guidelines and there is no fraud or evasion, but nonetheless a TP assessment is made by the ZIMRA, a reduced penalty level of 10% will apply on the shortfall tax.  Besides the penalties as aforesaid, tax default is subject to interest charge. A new interest regime which provides for 25% interest for any month or part thereof during which tax remains unpaid was gazetted through SI282 of 2019 to take effect from 1 January 2020.  This interest has not discriminated between foreign currency and ZWL$ taxes and may prove a heavy burden for the defaulting taxpayers. Whilst there is a leeway for the Commissioner General to adjust the penalty based on a taxpayer representations there is limited scope with regard to interest.  Interest is meant to compensate the fiscus for time value of money and the Commissioner General has no authority whatsoever to waive it except through an Act of Parliament. Other indirect penalties include damaging of business image. Where for some reason the Transfer Pricing documentation has not been prepared and is impractical to complete the exercise by the due date, it may be worth writing to the ZIMRA seeking for an extension of time. The letter for seeking extension can only be considered if done before the due date.  For those who have already prepared their TP policy documents, they must ensure that transactions as reflected in the tax returns pass the arm’s length test. If there is a divergence between transfers pricing policy document including underlying contracts and the financial records (accounts) it may be necessary to make adjustments to the income tax return before return submission.  Even if price, terms and conditions are similar to those of independent parties, TP documentation is still required because it is mandatory. Without TP documentation a taxpayer will not be able to evidence to ZIMRA that associate transactions are occurring at arm’s length. There are however practical challenges and other considerations for completion of return, adjustments and other matters underlying TP returns which require face to face discussion with an expert and you are urged to consult with your tax expert.

Companies tend to make prepayments because suppliers may insist on receiving payments before they make a supply. This is often a custom in the insurance industry, where they request for premiums before the insurer covers the insured against a risk. For the purposes of renting out commercial premises, licenses are often paid for in advance before granting right of use to the tenant. Prepayments can be made by customers who may want to benefit from discounts and economies of scale. Prepayments constitute a very popular expenditure for most entities, but most tax payers often wonder the tax status of these expenses, especially considering amendments done towards the tax status of prepayments in Zimbabwe. In this article we look at the tax status of prepayments in our legislation, highlighting amendments implemented.

Prior to 1 January 2018, there were no clear legislative rules dealing with prepaid expenses. Basically, the deductibility of prepayments was merely dependent on the general deduction rule. The rule allows for deduction of expenses that are made in the production of income or for the purposes of trade not being capital in nature.  This was the basis the ZIMRA used in determining the deductibility status of prepayment incurred by entities. This was necessary in determining whether expenditure meets the deduction criteria provided by the above legislation.

A prepayment would be tested to evaluate when the expenditure was actually incurred for the production of income and not just incurred. Prepayments of a revenue nature were deductible only if they had been incurred. Thus where money had been laid out without necessarily the existence of a liability to pay, the ZIMRA would insist that the taxpayer was under no legal obligation to effect the payment and would disallow it. The term incurred was defined in ITC 542, 13 SATC 116 to mean “an actual payment or an obligation undertaken”. In Sub-Nigel Ltd v CIR 15 (1948) SATC 381 (A) it was held that the Court is not concerned whether a particular item of expenditure produced any part of the income but with whether that item of expenditure was incurred for the purpose of earning income. Matters that have been mind boggling on prepayments was whether the prepayment was to be matched with actual income generated. The production of trade income derived from the definition of “gross income” does not limit such income to a particular year of assessment but encompasses the production of income in “any year of assessment”. This position is buttressed in the case of SZ v ZIMRA.

However, some payments like insurance premiums and license renewals, an insurance cover or licensing cannot commence until full payment has been received. Such an insurance cover or licensing may span into another financial year. An unconditional obligation to pay for premium arises prior to cover. Premium is due prior to cover. A policy will only be issued upon the insured paying the insurance premium, therefore the unconditional obligation to pay arises prior to cover. The court had an opportunity to deal with insurance premium in the case of DEB v ZIMRA but the court lumped up the concept together with that of prepayment of excise without actually dissecting how an insurance operates, which leaves the areas still subject to debate. Generally such expenditure is allowable as a deduction as long as it complied with the requirements of s15 (2) (a). Furthermore, it was the practice of the ZIMRA to disallow prepayments for goods and only to allow prepayments for services when a taxpayer is under contractual obligation to make the payment. This was regardless of the fact that all revenue nature amounts received in advance by a person would constitute gross in terms of section 8 (1) of the Income Tax Act. This meant that a taxpayer would include prepayments received in advance in its gross income in the year they are received and deduct prepayments paid for goods in advance in the following year.

With effect from 1 January 2018, the Finance Tax Act of 2018 clarified the position regarding prepayments. The new law provided for the apportionment of prepaid expenses in the determination of taxable income over the years of assessments in which the goods, services or benefits are used up. The amendment ensured expenditure in respect of income to be received or accrued in the future years of assessment is reported when income accrued or was received. This change aligned the Zimbabwean legislation in line with the South African practice and accounting practice. Meanwhile, a similar change was effected to income received in advance and this is no longer taxed in the year of receipt with effect from 1 January 2018 but in the year in which it relates.

In conclusion, our courts have reinstated that prepayments have always been disallowed. The coming in of the Finance Act amendment of 2018 gave clarity to the deductibility of prepayments by entities. This is  so because the new amendment aligned the treatment of the expense in accounting and tax terms, and this made it easier for tax payers who struggled with implementing tax rules, being more comfortable with the accounting rules. In essence, the International Accounting Standard number 1 (IAS 1) is the basis for a prepayment being recorded as a current asset in the period of payment, and being later on recognised as an expense when the obligation to pay the expense falls due. Hence no adjustment is needed for tax if a prepayment is not recognised as an expense in the year of payment.

Businesses are facing significant and unprecedented challenges caused by the COVID-19 pandemic and economic backlash. One of the main challenges is that both businesses and clients have not only fallen into debt but have defaulted payments and are currently unable to timeously settle their debts. Bad debts or irrecoverable debts are one of the expenses that have become so popular for many entities in the face of the above stated challenges.  In terms of the law bad debts written off can be deducted for income tax if they are due to the taxpayer, have been previously included in the taxpayer’s income of the current year or any of the previous year of assessment and are proven to the satisfaction of the Commissioner to be irrecoverable. In this article we focus primarily on the condition to prove to the Commissioner that the debt is irrecoverable.

As proof as a matter of fact that a debt is bad,the taxpayer is required to prove that he or she has exhausted all recovery measures and the amount is irrecoverable. The current practice is that all recovery measures must have been exhausted for the Commissioner to be satisfied that the debt is bad. The necessary measures should   include written summons, legal proceedings, and recovery actions following acquiring a judgement or civil imprisonment. These measures can be very costly considering that court proceedings are both, time and financially consuming. Given the current COVID 19 pandemic and lockdown restrictions that were imposed earlier this year, recovering debts through the courts has also become close to impossible and time consuming.  Accordingly, this approach by the Commissioner is becoming too burdensome and inconvenient for most taxpayers. Furthermore, the cost of recovery in some instances may far outweigh the debt that is being sought to be recovered. Joinder of parties may be impossible in some instances as the debtors are more often than not located in different parts of the country and which escalates the cost of recovery. However, no matter how small the debt may be, cumulatively, the debts may become very significant for them to be ignored despite cost of recovery being high.

The ZIMRA guidance through the Income Tax Handbook has not necessarily outlined procedures to be taken in proving the debt was irrecoverable. It only mentions a few bare minimum requirements for deductibility of a bad debt. One of the requirements is that it must be sufficient that the creditor has taken all reasonable steps to collect without success so this will constitute sufficient grounds for a claim.  The implication is that it is not essential that the taxpayer should have sued for the debt to become irrecoverable. The is evident in the case of BT (Pvt) Ltd v Zimbabwe Revenue Authority, 2014, deduction of bad debts was allowed because the taxpayer could not legally take RBZ to court on the basis that RBZ assets cannot be attached in pursuant of any court order. In some cases a creditor may not consider suing his debtor if, for example, he had good reason to believe that the debtor was a man of straw. Also, the debtor may not attempt to sue if he considered the costs of suing to be unbearable or to be more than the amount being perused after, making the purpose of the whole procedure logically meaningless.  

Ordinarily the mere fact that a debtor is insolvent, has died without leaving sufficient assets, or in the case of a company that is under judicial management or in liquidation with no sufficient assets from which to pay debts, is sufficient evidence that the debt is irrecoverable. But on the other side, the fact that a debtor is continuing to carry on business after declaration of being unable to meet his/her debt does not necessarily mean that he can meet his obligations and in circumstances such as these the creditors’ own knowledge of a debtor’s position may provide useful confirmation of the creditor’s claim.  This can also be used by the ZIMRA to make the necessary judgement on whether a bad debt claim is irrecoverable.

In conclusion, taxpayers are advised to carry out the necessary procedures needed if possible before claiming a bad debt expense. If the procedures cannot be carried out for any genuine justifiable reason, the grounds of this must be communicated to the ZIMRA so that it is satisfied that the bad debt claim was indeed unrecoverable.

The number of churches in Zimbabwe has recently increased over the past few years and their economic impact cannot be ignored hence the need to look into tax issues affecting churches. A significant number of church organizations in Zimbabwe are operating at large economic scales with income streamed from tithes and offerings. The question that stands to be answered is that if churches play an important role in the economy, how are they affected by tax? In this article we look at the different taxes affecting churches and those that don’t affect them.

In essence, the main streams of income ordinarily for a church are the church’s offerings, donations and tithes, which are exempt from income tax in terms of the Income Tax Act. This, however, does not exclusively mean that all other church activities will not be affected by tax, instead there are various situations where churches are required to pay tax. One of the situations is when a church carries trading activities that produce profits. Income tax is then chargeable on business profits as they are not income from a donation, a tithe or an offering. Such income is taxable if they are derived from, or deemed to be from a source within Zimbabwe. Another tax that greatly affects churches will be the employees’ tax (PAYE).

Churches are organizations that are run by a group of individuals employ individuals who ensure the organization keep running. In some instances individuals work on a voluntary basis, without getting paid, and in some cases, individuals receive salaries or benefits in exchange for their services. In cases where churches do pay remuneration to individuals for services delivered, be it in the form of salaries, wages or benefits, the respective churches become employers. Every person who becomes an employer is required to register for PAYE within 14 days of becoming an employer and will be required to deduct the correct PAYE every month according to the existing tax tables and remit it by the 10th of the following month. Any stipends given to, for instance, pastors constitutes remuneration and therefore subject to PAYE.

Another tax that can raise the question of whether it affects churches is Capital Gains Tax (CGT). CGT is payable on capital gains realized from the sale of specified assets (immovable property, shares and other securities). In relation to churches, CGT exempts the latter as in accordance with section 10 (a) of the CGT Act. Therefore a church is exempt from CGT in respect of any sale of specified assets by it. However, the exemption does not cover a situation where the church carries on a trade through a company or other statutory corporation and sells a specified asset through that company or statutory corporation.

Churches are exempt from income tax and CGT but they may be liable to Value Added Tax (VAT) if they qualify to register for the VAT. Entities and organizations may qualify to be registered for VAT if they undertake various trading activities and their annual turnover exceeds ZWL 1,000,000 per annum. On the other hand, since VAT is an indirect tax levied on goods and services, church organizations are not exempt from the payment of VAT when they purchase goods or services from their suppliers, the goods or services being subject to VAT (that is neither zero rated or exempt.) The VAT Act provides that churches are exempt from VAT for supply or manufacture of goods if at least 80% of the value such goods and services consists of donated goods. In the event that the church sells some of its ware, VAT is payable. VAT is chargeable on the qualifying church organizations at the rate 14.5% (the standard rate). VAT payable should be remitted to ZIMRA by the 25th of the following month.

A church is also not exempted from withholding taxes as they may be applicable. There are a number of Withholding Taxes chargeable in terms of the Income Tax Act. Examples are Non –Residents Tax on Fees, Non-Residents Tax on Royalties, Non-Residents Tax on Remittances and Withholding amounts payable under contracts. A church will be expected to withhold the WHT and remit it to ZIMRA in cases where a payment is made  to a non-resident of Zimbabwe, a resident of Zimbabwe etc. Withholding taxes are generally supposed to be remitted by the 10th of the following month after payment or a deemed payment is made. In general, tax plays an important role is nearly every entity operating in an economy. This applies to churches and other religious organizations. Although the latter are usually created for nonprofit making reasons, they are still greatly affected by various taxes as evidenced above. Hence it is necessary that every individual is well versed of the taxes affecting them to keep up with the tax environment surrounding them.

With the setting in of Covid-19 pandemic, a number of businesses throughout the globe are experiencing the toughest test of all times. Some have already succumbed to the pressure of the pandemic and have either closed or suspended operations, with others following suit. Others have entered into furlough or pay cut arrangements with their workers as a way of avoiding a permanent shutdown. We also witnessed Chief Executives of some companies giving up part of their salaries as way of saving their businesses from inevitable collapse. Locally, some companies negotiated for a 50% pay cut with their employees for the month of April 2020 and further pay cuts are currently being negotiated. The question that begs an answer is whether such salary waivers or cuts would concurrently reduce the tax bill. This article addresses this matter and offers solutions for avoiding unexpected tax bill that may emanate from these arrangements.

An employee who waives his/her earnings or receives a pay cut should do so wisely. If a waiver or pay cut is made after the earnings are received or accrued to him/her, tax will remain payable.  This is because gross income is recognised for income tax purposes when received by or accrued to a taxpayer, whichever occurs first. Any one of these occurring, the taxman will be entitled to his dues despite the income on which tax has become has not actual received by the taxpayer. An amount is received by the taxpayer when it is received by him or for his benefit. Simply put, this is when the amount has been deposited into his/her bank account or is at the person’s disposal. On the other hand, an amount accrues to a person when he/she becomes entitled to it notwithstanding the amount is yet to be received by him/her. In Lategan v CIR 1926 CPD 202 the court held that an amount accrues when the taxpayer’s right to claim the amount is not conditional on some other performance but only a time provision. In other words, the taxpayer should be able to sue for specific performance in a competent court in the event the debt remains unpaid. All conditions precedent should have been fulfilled and where income is conditional or contingent upon the happening of a future event an accrual is yet to be turned in money. Analogous to this, income that is pending the outcome of an event, for instance a collective bargaining or court outcome has the quality of income upon the happening of the future uncertain event i.e. the conclusion of the said event. 

Salary accrues at the point it is earned and the tax on that income is paid at that time. Richardson J in the case Hadlee and Sydney Bridge Nominees Ltd v C IR (1991) 13 NZTC 8,116 said that “In relation to employment income the whole PAYE structure proceeds on the premise that income of that kind is derived by the employee concerned… [t]he statutory scheme in that regard does not allow for the possibility of diversion of that income by means of any kind of antecedent arrangement before its derivation by the employee”. Therefore, whilst wages may be earned on a day to day basis, employees are typically entitled to receive their salaries on their contractual payment dates which will be when the tax charge arises. This means that an employee should not waive his/her salary or take pay a cut after the contractual payment date if he/she hopes to avoid tax on such salary. If an employee’s contractual payment date is the 28th of each month, any agreement to waive any part of the current month’s salary should be made by the 27th. Our view is in agreement with the Roman Dutch law doctrine of assignment of income which postulates that income can only be ceded or waived before it accrues. Accordingly, any reinvestment, accumulation or capitalisation of amount has no effect of avoiding tax liability on amount that has already accrued to a person prior to the happening of any of such events. In other words, a waiver of salary or pay cut that occurs after the amount has been received or accrued has no effect of setting aside the tax liability legally due. The employer should account for tax on such amount notwithstanding the subsequent assignment by an employee of the income to the employer.

A bonus or commission is deemed to accrue to an employee, when declared or paid whichever is the earlier. An employee who entertains the hope of avoiding tax on such bonus or commission should waive or assign it before such a bonus or commission has been declared. Contractual bonuses may (depending on how they are calculated) be determined by reference to a period, such as a company’s financial year. A detailed analysis of the terms of the bonus arrangement will always be required.

In conclusion one cannot waive his/her salary or bonus after it has been received or accrued to him/her without incurring a charge to employment tax (PAYE). It is not only important for one to make the right choice regarding the waiver date but to also support this decision with appropriate documentation. This because our tax law places the burden of proof on the taxpayer without which tax liability could still arise. Documentation is not only important for purposes of covering the tax issues but also forms the basis the individuals are waiving their entitlement and when this arrangement will end. A pay cut should be supported by a new letter of employment. Going forward employees and their masters should take care when structuring these arrangements in order to avoid the unwanted tax bill on a legally implemented scheme necessary for purposes of saving the business from collapse.

Employers are required to ensure that all their employees are tested for the COVID 19 virus before resuming operations. Private entities are charging a minimum of USD$25 for the tests. According to Statutory Instrument 99 of 2020, these are costs to be borne by the employer. Therefore, over and above monthly salaries and expenses to be incurred by businesses, employers still need to foot this expense if they wish to open during the partial lockdown. These costs are beyond reach of most employers especially small businesses. One of the frequently asked questions in light of this is whether or not test costs are tax deductible given their novice nature, a matter which we fully evaluate in this article.

The Income Tax Act provides that expenses incurred in the production of income or for the purposes of trade may be deducted against gross income. In the case of COT v Rendle it was held that an expense is incurred in the production of income if it is necessary for the performance of the business operation or if it is attached to the performance of the business operation by chance or closely connected to the performance of the business operation or if it is a bona fide expense incurred for the more efficient performance of business operations. A purposive interpretation of the law, in this instance, would support the deductibility of the cost of carrying out COVID 19 tests. The carrying out of COVID 19 tests is mandatory for every entity opening up during the lockdown thus making it necessary for the performance of business operations. This view is also supported by the case Port Elizabeth Electric Tramway v CIR which held that expenditure is incurred in the production of income if the act to which the expenditure is attached is performed for purposes of trade, and the expenditure is closely linked to the production of income. Employers are incurring costs of procuring sanitisers and masks for their employees, which all add up to a huge cost base and are also mandatory for the businesses to operate. Distinct from new licensing costs which are disallowed because they entitle acquisition of right, COVID test costs are closely linked to the production of income and are necessary for the performance of the business operation. They are more meant to protect the lives of employees from the Covid 19 virus whilst undertaking their duties. Accordingly, such costs can be safely deemed as expenditure incurred in the production of income hence can be deducted for income tax purposes.

There also VAT considerations to think of regarding COVID -19 induced expenditure. The VAT Act produces provides for the refund on input tax incurred by registered operators in respect goods or services acquired by them wholly for the purpose of consumption, use or supply in the course of making taxable supplies.  The crust matter is that there should be a direct link between the goods or services used and the taxable supply and not necessarily a sufficiently close relationship with the trade in the course of which the taxable supplies are made. Therefore if one can justify that the expenditure induced by COVID-19 is intended for use in the production of taxable i.e. standard or zero rated supplies then VAT will be claimable on such expenditure. As stated above, the expenditure is mandatory on the part of the employer and if such expenditure is not incurred then there will not be any to produce taxable supplies.  However for businesses that are VAT exempt or not registered for VAT, input tax incurred is a cost of doing business. They cannot claim the expenses for input tax purposes. Meanwhile VAT input tax is claimed where an operator has incurred the VAT. Therefore where no VAT was incurred there is nothing to claim. For instance SI 88 of 2020 has exempted or zero rated medical goods hence VAT cannot be claimed on the listed goods.

Apart from these costs, businesses are incurring losses from some of the restrictions of the lock down. The only modes of transport in operation are the ZUPCO buses, which are very limited and may not be able to efficiently ferry employees to their work places on time. In order to some circumvent these challenges, some employers have opted to have their employees work from home. We spoke in our previous article that home costs may be deductible if they are proved to be necessary for the carrying out of business and sufficient documentation is supplied. For employees that can work from home, employers may therefore weigh in on the cost implications thereof vis that of having employees work at the offices. Unfortunately, the costs of conveying employee from home to place of work, although deductible to the employer is taxable benefit to the employee. 

The Covid 19 pandemic has resulted in a lot of misfortunes for most entities. The arising of the costs associated to the Covid 19 pandemic are a burden for most companies. It is therefore necessary that businesses treasure the tax incentives and advantages available by deducting the allowable expenditures and fully utilising such incentives.

The Zimbabwean tax system has been impacted by currency changes introduced in February 2019 by Statutory Instrument 33 of 2019. In 2016 when the bond note was introduced as a surrogate currency it carried the same value as the United States Dollar. Indications that the economic was reeling from currency started kicking in November 2018 when the Minister gave a directive to banks to separate the RTGS Accounts from the Nostro Foreign Currency Accounts. This was immediately followed up by a monetary policy statement made on the 22nd of February 2019 in which a new currency known as the RTGS dollars was introduced. In terms of this policy, balances that were previously denominated as United States dollars were now RTGS dollars for as long as the money was not held in the Nostro FCA when the separation was declared. Further to that, the monetary policy declared that all bank balances where to convert to RTGS dollars at 1:1 whilst an interbank market would be introduced after the conversion of those balances. The monetary statement was followed up with more robust legal instruments, Statutory Instruments 32 and 33 of 2019 which cemented the forgoing provisions. In the month of March, an interbank market was opened and it began at an opening exchange rate of US1: RTGS$2.5.

Sometime in July 2019, after the introduction of the interbank rate of exchange and conversion of bank balances of taxpayers, the RBZ then assumed the legacy foreign debts of some corporates in accordance to Circular 8 of 2019. The funds which the RBZ assumed were blocked funds which related to external obligations that could not be remitted between January 2016 and February 2019. The debt was assumed on condition that the corporates would surrender their RTGS balances at 1:1 with their foreign obligations. The assumption of the debt by RBZ occurred months after the promulgation of Statutory Instrument 33 of 2019. The interbank rate of exchange had been introduced which had an opening exchange rate of 1:2.5. Therefore, the result is that the debt was actually assumed by the RBZ at a lower rate than what was prevailing at the time.

In books of accounts gains are realised by virtue of the assumed debt by RBZ in that the liability that would have been paid by the corporate, had the RBZ not assumed the debt, would have been more and would fluctuate with the movements in the interbank rate of exchange. However, it is not clear whether the debt assumption by RBZ amounts to a debt forgiveness contemplated for taxation in terms of section 8(1) (k) of the Income Tax Act. Is the creditor precluded from demanding payment from the debtor simply because the RBZ has assumed that debt?

This question brings to the fore the concepts of transfer of obligations in contract law. Cession, novation and delegation are the common methods in which contractual rights are transferred. The assumption of the RBZ debt may not necessarily be considered to be a cession. The concept of cession is normally associated with the transfer of rights and not the transfer of obligations. In this instance the debtor, that is, the corporate whose debt has been assumed by the RBZ does not hold any rights that can be ceded to RBZ, but actually has an obligation. At best the assumption of foreign debt by RBZ may be considered to be a delegation.  It requires the agreement of the all parties concerned that a third party be substituted for the original debtor and the later become discharged from the obligation of the debtor. Therefore, the RBZ, debtor and offshore creditor must have an agreement that absolves the original debtor and delegating the RBZ as the debtor. When the forgoing occurs, the creditor cannot sue the original debtor. However, in this instance, it cannot be said that a delegation has taken place. The agreement between the debtor and the RBZ is independent of the creditor and it appears the creditor may still be able to sue the debtor as he has not been released from the debt. Taking into cogniscence of the forgoing, it then becomes difficult to fully conclude that a benefit has been derived by the taxpayer through a concession made by the creditor. However, creditors may well be amenable to the assumption of the debt by RBZ because a debt held by a state remains enforceable and more secure as compared to being held by the taxpayer. A taxpayer may become liquidated but the state can never be liquidated and the debt does not prescribe. Therefore, creditors may well be agreeable to the arrangement. However, for tax purposes, until and unless it has been proven that the creditor is actually in agreement with the assumption of the debt, then it cannot be said that there is a benefit that has been derived from a concession from the creditor because the creditor has not given the concession. It is actually the RBZ that has given the concession, therefore, to impute tax on the concession given by RBZ on the debt would be overstretching the application of the provision. If the legislature intended to include debt assumption by a third party and not the actual creditor, then it would have been included in the provision. If the debt assumption was structured in consultation with the offshore creditor, then it may be said that a delegation has taken place. Because there is no participation from the creditor in the assumption of the debt by the RBZ, the benefit derived therefrom remains out of scope for ZIMRA and therefore cannot be brought into gross income.

The acquisition of a motor vehicle by an employee from employer at below market value of the vehicle represents a taxable benefit for to the employee. The taxable benefit to the employee is the difference between the market value of the motor vehicle at the time of sell to the employee and the cost at which the employee acquired the motor vehicle. In determining the market value of the vehicle the Commissioner will have regard to the valuation from a valuer prescribed by him in Gazette or motor dealers. It is advisable to obtain at least 3 quotations or valuations from reputable dealers and use the highest of the 3 to avoid disagreements with ZIMRA. This value must be measured against other quotations obtained from different reputable dealers for the value to be accepted. These quotations are required in terms of the law to be kept for at least six years. This is because the taxpayer has the burden of proof in terms of the law in the event of the Zimbabwe Revenue Authority tax audit. Meanwhile, if the employee is of the age of 55 or above, the benefit will be tax exempted, i.e. no tax liability arises on the benefit.  The identification of such person is also a record which should be kept in terms of the law as burden of proof that the motor vehicle was sold to a person who qualified for the exemption.

The consequence of this is that the benefit accruing to the employee through the disposal of the vehicle to him or her at less than market value is a taxable benefit in terms of s8 (1) (f) of the Income Tax Act (Chapter 23:06) which brings into gross income of an employee an advantage he/she receives as a consequence of services rendered. For some employees, this benefit may be out of their reach if their salaries have not been adjusted in line with inflation. This is further compounded by the effect of inflation which will cause the market value of the motor vehicle to be at higher nominal value. Although they may get the motor vehicle at concessionary value from the employer, they may have difficulties in financing the tax emanating from such a concession. The tax should be remitted to the Zimbabwe Revenue Authority by the 10th of the month following the month of sale of motor vehicle to the employee. It is this short lead period that complicates matters.  Additionally, the higher nominal value of the motor vehicle will push the tax bracket of the employee into a higher tax bracket and this can further compound the situation for the employee. Whilst there are different options available to employees such as taking a loan to purchase the motor vehicle, this still results in a taxable benefit. If the loan or advance is for free or is below LIBOR plus 5% (albeit a cheaper option because of low interest rate), the benefit is deemed to accrue to an employee and will be processed through the payroll. If the employer pays the tax on behalf of the employee, a concept known as the grossing up, this represents another taxable benefit in terms of the law. In the final analysis, these options may result in indebtedness by employee to employer just for purposes of funding the tax. This is unavoidable largely because of the employment tax tables which have remained fixed since the day they were announced despite the run-away inflation. Therefore a sale of motor vehicle to an employee is currently constrained by the tax burden on the discount due to stagnant tax tables. This impair values and the employee’s capacity to pay the tax accruing on the benefit.

Meanwhile, grossing up poses a challenge for public sector entities. The law makes a provision for the recovery of employee’s tax which is assessed on the public sector entity or an association from the employees and management of such public entity. Where the Commissioner has made an assessment of employee’s tax which the entity has failed to collect and that tax is then paid by the public entity but failed to be recovered from the employees, the Commissioner shall be deemed to be the employer for the purposes of recovering the tax from the employees. Therefore, if a public sector entity grosses up, the Commissioner will still recover the tax on tax from the employee. In short the grossing up in public sector entities is prohibited.

In conclusion, the disposal of the motor vehicle to the employee, will result in the benefit being out of reach for many if the key fundamentals are not addressed. The tax tables must be adjusted regularly in line with inflation. This is not the only item affected by the stagnant employment tax tables. When tax rates are not changed regularly everybody is involuntarily pushed into higher tax brackets especially where they receive earnings or amounts which are market linked. The Minister of Finance should consider quarterly review of employment tax tables to cushion employees from heft taxes.

Prior to 2019, only persons who were not VAT registered operators and those consuming or utilising imported services to produce exempt supplies would bear the burden of VAT on imported services. This changed with effect from 1 January 2019 when the government extended the tax burden to all importers of services notwithstanding some may be VAT registered operators. The Finance Act 3 of 2019, has restored the position prior to January 2019 by ensuring VAT registered operators do not suffer the burden of VAT on imported services. Therefore VAT on services imported by registered operators and utilised, consumed or used imported services in the production of non-taxable supplies is reclaimable. At issue is the mechanism for reclaiming this VAT by registered operators and this is the subject matter of discussion.

The Finance Act no 3 of 2019 amends the definition of input tax to include VAT on imported services (VIS). It also amended the section of the VAT Act which deals with claiming of input tax, to allow the claiming of VAT incurred on services imported by registered operator if such services are utilised, consumed or used wholly for the purpose of consumption, use or supply in the course of making taxable supplies. To the extent the services are acquired by the registered operator partly in the production of taxable supplies and some other purpose the only part of VAT on imported services to be claimed is that which relates to production of taxable supplies. The basis of apportionment should be fair and reasonable and in this case it should be based on the invoice value of the imported services.   

The law requires that the registered operator to be in possession of an invoice and to have paid the tax to the ZIMRA to qualify for the input tax claim. The payment should be made to the ZIMRA within 30 days of time of supply of the imported services. The time of supply is defined by the date of the invoice or the date the supplier of the services is paid, whichever comes first. The mechanics however are that the operator will declare the VIS on the VAT 7 or 9 return and remit this tax to the ZIMRA before he can claim it as deduction. This creates financial implication for the operator due to deferral of input tax claim until the VIS is fully paid to the ZIMRA. Registered operators should note further that VIS is payable within the 30 days of time of supply whereas input tax can be claimed any time after the VIS has been paid to the ZIMRA. There is no limit as to how far in the future it can be claimed because the claim is made on the basis of an invoice as opposed to a tax invoice whose life span for purposes of the claim should not exceed 12 months from the date of the tax invoice. The amendment by the Finance Act no 3 of 2019 has therefore reinstated the position of registered operators prior to 1 January 2019 except that it comes with some administrative burden and cashflow implications of having to declare and pay VIS first to the ZIMRA before a claim can be made. Before 1 January 2019, registered operators did not have to declare and pay VIS to the extent the services were utilised or consumed by them in the production of taxable supplies.

The new law creates an administrative and cashflow burden on the part of the registered operators of having to pay the VAT first to ZIMRA before they can make the claim. This adds to the cost of doing business for the registered operators, let alone the cashflow implication compared to the position that existed prior 1 January 20219.  Companies need working capital to survive the current economic onslaught. Any leakages would worsen the situation for the already struggling companies.  Additionally. Zimbabwe is the only country in the world that made registered operator to pay VIS, which was the case in 2019 and even now it among the few countries that requires VIS to be paid and then claimed later. These features are unique throughout the world and actually place our businesses at less competitive edge compared their counter parties. This could impact on our exports. The country needs foreign currency and growth in production and anything short of this does not tell a good story of the country. Besides, the claim may prompt investigation of taxpayers’ affairs by the ZIMRA from time to time, resulting in management time spent on defending tax issues. The Minister should consider restoring position of prior to 1 January 2019 or allow concurrent claiming and declaration of VIS on the same return for the sake of easy of doing business and promoting business growth.

As indicated in one of our previous articles, a decrease or increase in VAT rate triggers a variation in the time of supply rules in order to accommodate pipeline transactions. Such rules supersede the normal time of supply rules. Goods will be deemed supplied (provided) when they are delivered, in the case of services when they are rendered and for supplies such as rental agreements (operating lease) etc supply takes place when the recipient takes possession/ occupation thereof. Therefore if delivery of goods or possession/ occupation of property took place before the date of change in tax rate, the supply will be levied to tax based on the rate before change (old VAT rate). Where this has occurred after the rate change, the new rate applies, unless the payment or invoice has already been issued against the supply.  We further indicated that for some transactions both rates would be applied and that even after 1 January 2020 registered operators will have to keep both rates in their system to deal with some reversing transactions.  Examples of transactions where both rates would be applied are services, rental, construction etc contracts whose performance began before the rate change and ends after the rate change. The supply will be apportioned according to the time of performance with part of the supply subject to the old rate and the other part based on the new rate.  Cognisant to the administrative difficulties emanating from the variation in the rate, the Zimbabwe Revenue Authority issued Public Notice No 9 of 2020 to provide guidance for the filing of returns by operators in Category A. The public notice has directed them to file two returns manually to avoid mixing the tax rates. However nothing has been stated of errors in application of wrong rates. We guess there was no need because taxpayers are expected to be vigilant and secondly there are rules within the VAT Act to handle variation in the value of supply. This is the subject of this article as fully explained below:

Despite the announcement by the Minister of  Finance of the rate change as early as the second week of November 2019, some suppliers may find themselves caught up in the mix and may apply the old rate on transactions on which the 14.5% rate should be applied or may fail to apply the transitional rules correctly. The question that stands to be addressed is, what happens when a supplier is caught up in the dilemma of mixing VAT rates? The integrity of the VAT system is based on documentation of which the primary document is the tax invoice. This is the document that originates transactions. The secondary documents are the credit and debit notes and their purpose mainly is to vary transactions made through the tax invoice. Journals have no place in the VAT system.  Therefore where the tax charged on the tax invoice is different from the actual tax chargeable, an adjustment by way of a debit or credit note is required without having to cancel the original tax invoice. These documents are meant to alter the original consideration agreed upon for a past taxable supply, after the tax invoice has already been issued. They are used when a supply is cancelled, the nature of that supply has been fundamentally varied or altered; the previously agreed consideration for that supply has been altered by agreement with the recipient, the goods or services or part of the goods or services supplied have been returned to the supplier etc.Therefore to deal with incorrect application of the VAT rates, registered operators should make use of credit and debit notes which are basically mechanisms for dealing with errors on original invoices. The registered operator should issue a credit note to the buyer where it incorrectly charged 15% instead of 14.5%. This has the effect of reducing the supplier’s output tax and increase the buyer’s input tax. Where the reverse occurs, the seller should issue to the buyer a debit note in order to charge extra VAT required. A debit note to reduce the value of the supply can also be issued from the buyer’s end. These documents should be tax compliant. Features of compliant credit or debit note includes the name, address and registration number of the registered operator and that of the recipient, the date on which the credit/debit note was issued; either the amount by which the value of the said supply shown on the tax invoice has been reduced or increased and the amount of the excess tax; or either the amount of the excess tax or a statement that the reduction includes an amount of tax and the rate of the tax included; a brief explanation of the circumstances giving rise to the issuing of the credit note; information sufficient to identify the transaction to which the credit/debit note refers.

However, it is difficult to apply credit or debit note in the case of closed transactions, i.e. over the counter transactions or where the buyer is not traceable. The complication is that a credit or debit note cannot be issued to a non-existent buyer.  One of the key attributes of the VAT system is that it is not meant to create unjust enrichment. By this we mean, a supplier who has collected VAT from customers at higher rate cannot keep it to himself/herself. He or she should remit the money to the fiscus as it is. Where on the other hand, a registered operator has charged a transaction to tax at a lower rate, this becomes a compliance issue. He must apply the correct rate and remit out of his own pocket the extra VAT required, in which case the operator should issue a debit note. In a nutshell, some suppliers who are caught in the mix of applying a wrong rate should seek refuge in the tax compliant credit or debit note. Where these cannot be utilised they have to forward the VAT overcharged to the fiscus because the VAT system is not meant to create unjust enrichment and if for some reason VAT was under charged the correct tax must be paid otherwise there will be a compliant gap which may result in penalties and interest.