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Access to healthcare is provided for as a right in terms of our law and there are different ways this right can be realised. Employees incur medical costs which are resultantly strenuous on their income which has already been reduced by other various taxes thus prejudicing them from accessing healthcare services. This burden can also be lessened contributions made by the employer. To reduce the cost to employees and employers, the government has provided tax incentives on medical expenses and medical contributions as a progressive measure in the realisation of the right of access to health care as enshrined in the Constitution of Zimbabwe. Healthcare costs are incurred by everyone at some point in their lives hence the tax incentives reduce costs of receiving healthcare services. These tax incentives come in the form of tax exemptions, credits and deductions. Tax credits and exemptions are granted to employees, whilst tax deductions are granted to employers as fully explained below. There are two main classes of medical costs namely medical expenses (cost of drugs, treatment and invalid appliances) and medical contributions which are the focus of this article.  

Medical expenses that are recognised by the fiscus are comprised of hospitalization cost, treatment costs, drugs and expenditure on invalid appliances.  Cost of invalid appliance covers expenditure on purchase, hire, repair, modification or maintenance of an invalid appliance or fitting which are for use by a taxpayer or his spouse or any child by reason of his or her mental or physical defect or disability.  Where the employer has paid for these costs on behalf of the employee, he/she obtains a tax deduction in the computation of its income. To the employee, the amount paid by the employer represent a fringe benefit however the law exempts from tax this benefit in the hands of the employee. On the other hand, an employee gets 50% tax credit in respect of medical expenses incurred by him/her for himself or herself, his/her spouse or child. Only expenditure paid in respect of prescribed drugs qualify for the tax credit. The employee should forward the original invoice of the incurred expenditure, which has not been recovered from any source to the employer to facilitate the claiming of the credit. The bill will be entered in the payroll and the employee’s payable tax will be reduced by 50% of that bill.

Turning to medical contributions. These can be made by the employer on behalf of the employee, or the employee can contribute or pay for them out of his/her own funds.  Medical contributions are defined as payments made to various medical aid societies to cover medical expenses of employees or their close relatives and dependents. When an employer makes medical contributions for its employees, the benefit gained by the employee is exempted from PAYE. These expenses are deductible to the employer when computing income tax on profits. Where the medical contributions are paid to an unapproved medical aid society the employee will be taxed on the benefit and the employer would not be granted the deduction in respect of those medical contributions. The law requires medical aid societies to be approved annually by the Commissioner for both employer and employee to have the fiscal benefits as aforesaid. This makes contributions made to unapproved funds such as in-house medical schemes or foreign medical aid society not qualifying for tax credit and non-deductible. The Commissioner approves a medical aid society or scheme if he is satisfied that it is a permanent society or a scheme established for the purpose of providing benefits for its members and their dependents in respect of expenditure incurred on medical, dental or optical treatment, including treatment prescribed by a medical or dental practitioner, the provision of drugs for medical, dental or optical purposes, the provision of medical, surgical, dental or optical appliances or the provision of ambulance services.

Medical contributions made by an employee using his own funds qualify for 50% tax credit provided they consist of contributions made to an approved medical aid society. Non-residents are disqualified from claiming medical expenses, except medical contributions made to a medical aid society. Where the taxpayer is deceased and the estate has made any payment of medical expenses those expenses should be claimed in the person’s pre-death period of assessment.

In a nutshell, tax incentives on medical costs of employees is a way of promoting employees’ access to healthcare by the government. Both employers and employees are urged to take advantage of these incentives. They should fully understand the tax implications of the medical costs thereof as this enable them to minimise their respective tax bills and structure the remuneration efficiently, which may result in increased productivity. 

The returning students rebate on importation of motor vehicle has over the years enabled returning students to afford to buy and import motor vehicles into Zimbabwe at a reasonable cost. Whilst the rebate has been beneficial to returning students and residents, the rebate has been subjected to abuse by third parties importing vehicles duty-free. This abuse has resulted in the government losing out potential revenue to these 3rd parties and has now reacted by putting a cap on the value of motor vehicles which can be imported by returning students duty free. This cap is fixed at US$5000.00. If a student imports a motor vehicle exceeding this value he/she will forego the rebate and pay the full duty on the imported vehicle. This article unpacks some of the conditions that students should meet to qualify for this duty rebate.

A returning student is a person who has previously resided in Zimbabwe and returns to Zimbabwe after having completed a course of study. He or she should be above the age of 16years and should have resided outside Zimbabwe for a period of not less than 2 years. The time of arrival is critical in determining whether or not the student qualifies for the rebate and this can only be ascertained from the returning student. This is the first occasion of entering Zimbabwe by the student after successfully completing the course of study. Upon arrival at any entry point, immigration officers will ask the returning student if he or she wishes to claim the returning student status. If the students wishes to claim returning students status, the immigration officer will stamp his/her passport with RR which indicates that he or she is a returning resident. The stamp determines the student’s first occasion of entry and will determine whether or not the student can claim the motor vehicle rebate.  If the student does not import the vehicle on first occasion as aforesaid he or she forgoes the duty rebate. In practice, the ZIMRA will request the returning student to produce academic transcripts, certificates or any other evidence to prove that he or she has successfully completed studies. The rebate is therefore not available to returning students who have not completed their studies for whatever reason. The vehicle must be in physical existence and fully paid for by the returning resident before the time of his arrival. Therefore if one purchases the motor vehicle after his return he or she may miss the opportunity to get the duty rebate, unless one did not declare that he has returned for good as fully stated in Goba v ZIMRA & Another (HC 4561/12) [2015]. The rebate only applies to the importation of one motor vehicle by the returning student within a period of four years.  The imported vehicle may not be disposed in any manner by the returning student for a period of up to 24 months from the date of entry. In the event that the returning student wishes to dispose the imported motor vehicle within the first 24 months, he or she will be required to obtain written permission from the Commissioner. If the student disposes the vehicle within the first 24 months he or she will be exempted from paying duty from the time he used the vehicle up to the time of disposal. In this instance duty will be apportioned from the time he disposed the vehicle up to the 24th month.  Where the returning student subsequently departs from Zimbabwe after getting the rebate, he or she will be required to pay duty he should have paid at the time of entry of the vehicle.  The duty free facility for returning students is inclusive of VAT. Thus, in the event of disposal of the vehicle or the returning student leaving the country for a period exceeding 6 months and above from time of arrival, the retuning student will be required to pay duty and VAT which he or she had been previously exempted from the time of entry.

In a nutshell, the cap on the rebate on importation of motor vehicles by returning residents is the government’s way of saying that students are not deemed to afford expensive and luxury vehicles hence there should be a cap on the expected maximum value of motor vehicles they can import. The measure is meant to curb abuse by third parties who are not intended beneficiaries of this rebate. However, this move will result in an increase in the importation of second-hand motor vehicles which may pose environmental impacts such as emissions.

Traditionally, driving a company car has always been regarded as being cost efficient to an employee because the employee will only have to suffer the tax element of the benefit whilst the acquisition, repairs and maintenance, fuelling, insurance, licensing etc costs are all borne by the employer. Furthermore, being able to use a company vehicle provides an employee with greater transport flexibility and helps them avoid the need to rely on public transportation. However, the recent increase in motoring benefits through Finance Act no 3 of 2019 and cost of running the motor vehicle is making both employees and employers reconsider whether the motoring benefit is still cost efficient. Nevertheless, a company car remains a cheaper option to an employee. Our law has made it clear that anything granted to the employee that saves him from an out of pocket expense is deemed a taxable benefit. Where an employee uses a company motor vehicle for private business or uses company accommodation at no cost, such benefits are deemed taxable because the employee is saved from expenses such as paying rentals and transport costs. The benefit is not restricted to use but extends to acquisition of such assets as houses and motor vehicles from the employer. The focus in this article is the possible disposal of motor vehicles in light of these developments and the associated taxes thereof.

The current economic environment has not made it easy for both the employer and the employee to enjoy the traditional benefit of use of company vehicles. For some employees, the recent increase in motoring benefits has resulted in them being in an unfortunate predicament where their salaries and wages have not been increased by the same proportion as the motoring benefits such that their net earnings are being eroded by the tax applicable on the motoring benefit. Employers are the most affected by the use of company vehicles because the running and maintenance expenses, such as licences, fuel and insurance have also since increased and they are also required to pay extra taxes in the form VAT on motoring benefit. As a result some employers are opting to dispose their existing fleet to employees so as to cut down on costs.

It is apparent that use of company vehicles brings insurmountable convenience to both the employer and the employee despite the recent motoring benefit cost increases that have been triggered by the Finance Act No. 3. To the employer the company car can be used as motivation tool, allows employees to come early and stay extend their working hours, which can result in increased productivity. The benefits to the employee include flexibility, prestige and cost efficiency among other conveniences. .

The disposal of existing fleet to employees has tax consequences depending on whether the employee acquires the vehicle through cash settlement or a loan.  Where the employee makes a cash settlement the benefit to the employee would be the difference between the market value and actual sale value for the particular vehicle. The market value should be obtained from motor vehicle dealers recognised by the Commissioner General.  Although not specifically provided for in terms of our law, it has become standard practice for the ZIMRA to require three quotations of the market value and to use the highest market value when determining tax payable in the sale of a motor vehicle by the employer.  Employers will be required to present these quotations when the ZIMRA conducts its audit. In terms of our law employers should retain documents for a period of six (6) years. In the event that the employer fails to present these quotations, the ZIMRA is empowered in terms of the law to make an estimate of the market value.  

Where the employee is offered an option to pay for the purchase price over a long time, this may result in taxable benefit. The option will be regarded as a loan advance to the employee. If the loan or advance is for free or is below LIBOR plus 5%, the benefit is deemed to accrue to an employee and will be processed through the payroll. 

Elderly persons who are 55 years of age and above can buy motor vehicles from their employer and no tax is charged. This is another class of persons to whom employers may sell their fleet to and minimise costs on motor vehicle benefits. Notably, employees who are 55 years and above are not restricted to enjoy this benefit when they leave their place of employment, instead they can enjoy the benefit whilst they are still employed. 

In the event that the employee decides to use his vehicle on the business of the employer, such use does not attract tax to the extent the business mileage shall be recovered by employee using the automobile association of Zimbabwe rates (AA rates). Any expenses borne by the employer on the vehicle of the employee, including payment for employees’ private mileage constitutes a taxable benefit to the employee which should be processed through payroll.

In a nutshell, employers are left with little option but to sell their fleet to employees so that they do not incur the high maintenance and running costs that come with providing company cars to employees. On the other hand employees can enter into financing arrangements to buy motor vehicles from their employers and avoid the current predicament whereby motoring benefits are now higher and resulting in negative net salaries.

The government reduced the VAT rate from 15% to 14.5% with effect from 1 January 2020. Whilst this is a welcome move to the tax paying community, it inherently triggers transitional issues crossing over to the new rate. Accounting systems must be configured in order to accommodate the new order. The fact that VAT rate change has not been experienced in the recent times means that some taxpayers may experience challenges crossing over to the new rate.  The aim of this article, is to provide a brief overview of some of the challenges that may be encountered by VAT registered operators as a result of this change as fully explained below.

A bit of some background, VAT liability is triggered in Zimbabwe by either the general or specific rules of time of supply, collectively known as the “ordinary rules of time of supply”. The general rule of time of supply dictates that VAT liability is triggered on the date an invoice is issued by the supplier, the payment is received for supply, of delivery of goods, of taking possession of immoveable goods and of performance of services, whichever occurs first. Specific rules of time of supply are applicable to specific transactions among them lease agreements, construction contracts, instalment credit agreements, lay-bye sales etc. They vary the general rule of time of supply to accommodate other trigger points such as the date the payment for the supply becomes due, date the agreement is terminated etc.  The third category of time of supply rules applies for purposes of dealing with transitional issues whenever there is an increase or decrease in VAT rate. This is the subject of discussion in this article following VAT reduction from 15% to 14.5% with effect from 1 January 2020.

According to the transitional rules, goods are deemed supplied (provided) when they are delivered and in the case of rental agreement (operation lease) when the recipient takes possession/ occupation thereof. This means that VAT liability may be triggered by the delivery or occupation/possession thereof, despite none of the ordinary time of supply rules has taken place. Therefore if delivery of goods or possession/ occupation took place before 1 January 2020, then the old VAT rate of 15% will be applied. On the other hand, if delivery or possession took place after 1 January 2020, new rate applies, unless the ordinary rules of time of supply occurred before this date.

Furthermore, with regards to specified items VAT rate may not necessarily be confined to one rate, instead the rate may vary according to the time of supply. With regards to specified items such as service, operating leases (rental agreements) or construction, manufacturing, repair etc contracts, if performance began and ended before 31 December 2019, the old rate of 15% will be applied. If, however, performance began in 2019 and ended or ends in 2020, the supply will be apportioned according to the time performance was done. Part of the supply will be subject to the old rate and the other part based on the new rate. The Act has not stated how apportionment shall be done except to say that the basis of apportionment should be fair and reasonable.

The two rates will also be required to be kept for some time in order to deal with reversing transactions e.g credit or debits notes issued after 1 January 2020 for supplies made at 15%, settlement and volume discounts, bad debts written off and recovered etc.

With regard to input tax claim, a registered operator is entitled to deduct input tax equal to the tax charged to him on goods or services acquired for purposes of its trade that makes taxable supplies. The transitional rules do not change this principle: the rate at which the operator claims input tax will therefore depend on the rate at which its suppliers levied VAT on the supplies. However, invoices issued at the incorrect rate and subsequently corrected by suppliers may pose a challenge to operators who claimed input tax in respect of such invoices. It is therefore possible that the ZIMRA may reject some of the claims if no sufficient documentation is available.

Besides the legislative implications outlined above there are other transitional issues brought about as a result of the decrease in VAT rate. Particularly, entities need time to update their systems and procedures to properly implement the VAT rate change. There is need to train relevant personnel handling tax issues and properly configure systems that cater for both the old and new rates in order to ensure a smooth transition. Thus, the change in VAT rate will have a major administrative impact such as changes to accounting systems, including considering new tax codes, changes to tax invoices, debit and credit notes, changes to product labelling and price lists etc.   

In conclusion taxpayers should watch transactions such as operating lease, contracts providing for periodic payments, construction, manufacturing, repair etc contracts these are affected by transitional rules which may entail application of the old rate or of both rates. Therefore even after 1 January 2020, the old rate of 15% may still be applicable. In addition they should review all existing contracts that provide for ongoing or periodic supplies of goods and/or services for the implications of the VAT rate change


The concept of interest on late paid taxes is found in most civilised communities as it reflects the interest which would have accrued to the State had the correct amount of tax been paid at the right time. It compensates the State of the opportunity cost of money and in an inflationary environment, the opportunity cost plus loss of monetary value. With this in mind, the Minister of Finance and Economic Development Prof Mthuli Ncube has issued several Statutory Instruments whose effect is to increase interest rate on tax due and refunds across most tax heads as fully explained below. The SIs were published in the government gazette of 31st of December 2019 and immediately revoked the old interest rate of 10% per annum. 

Customs and Excise Duty

The Customs and Excise Act imposes interest on unpaid duty where goods have been released from customs control or are found to be liable to seizure because they were smuggled. The new rate of interest has been fixed at 25% of the duty for any month or part thereof during which the duty remains unpaid. However, it only becomes payable after the first 30 days of the date of release from customs control of goods on which duty was not paid. In other words the government has granted a grace period of 30 days from the date goods are released from customs control. The Commissioner General may suspend the payment of interest as a result of an incomplete or defective return whereupon he is satisfied that such incompleteness or defect was not due to any negligence or intent to evade the payment of duty on the part of the person responsible for paying the duty. The taxpayer has 30 days from date of notification to him by the Commissioner General to resubmit correct returns. Meanwhile refunds from ZIMRA are also subject to interest at the same rate if not made within 30 days of the date duty subject to refund was paid, unless the overpayment was due to an incomplete or defective declaration and taxpayer has been advised of this by the Commissioner within that period.

Capital Gains Tax

Late paid capital gains tax is subject to interest and this has been increased to 25% for any month or part thereof during which tax remains unpaid provided it shall only become payable after the first 30 days of the date the tax became due. This gives a grace period of 30 days from the date capital gains tax becomes due. The interest is suspended where, as a result of incomplete or defective return submitted, the Commissioner General is satisfied that such incompleteness or defect was not due to any negligence or intent to evade the payment of tax on the part of the taxpayer. A taxpayer has 30 days from the date of notification by ZIMRA of defective or incomplete return to correct and resubmit the return. Interest on delayed capital gains tax refunds has also been fixed at the same rate. Refunds are delayed if not paid within 30 days of the date capital gains tax was paid, unless the overpayment was due to an incomplete or defective return which has been notified to the taxpayer by the ZIMRA.

Income Tax Act

Similarly late paid employees’ tax, provisional tax (QPDs), 10% withholding tax, non-resident shareholders tax, resident shareholders tax, non-resident tax on fees, non-resident tax on remittances, non-resident tax on royalties, property insurance commission etc attract interest. The new interest is 25% of tax due for any month or part thereof during which tax remains unpaid. The same interest rate applies on reduced assessments and refunds that are delayed by the Commissioner General. Refunds are deemed delayed if they are not paid to the taxpayer within 30 days of the date of receipt of return by the Commissioner General (CG) unless this was as a result of submission of incomplete or defective return which has been brought to the attention of the taxpayer. The interest will start to accrue after 30 days from the date fresh returns are submitted.

Value Added Tax

Generally VAT is due on or before the 25th of the month following the end of the tax period. If taxpayer fails to meet the deadline he/she will be charged both interest and penalty. The new law revises upwards the interest to 25% of the VAT due for any month or part thereof. The same rate shall also apply to VAT refunds. However, the Commissioner General is not liable to pay interest if it emanates from defective or incomplete returns and shall only start to run after 30 days of resubmission of the corrected returns. In conclusion interest will be computed based on old rates up to 31st of December 2019 and new rates thereafter. For instance a tax debt which accrued prior to 31st of December 2019 but remains outstanding in full or in part after this date will be subject to old rate up to 31 December 2019 and new rate after this date. The fact that the interest rate is per month or any part of a month thereof signifies a higher annualised interest rate of at least 300%. This is by far more than the current penalty rate of up to 100%.  A taxpayer that pays its tax late could therefore be found paying the tax due plus 4 times that tax inclusive of both penalty and interest. This a serious message from the government against late payment of tax. Taxpayers should take heed and pay their taxes on time in order avoid such cost. Interest is a non-negotiable (are not subject to waiver) debt due to the State.  Further, the fact that the Minister has not ring-fenced the new rate to Zimbabwe dollar taxes makes the interest unbearable for persons liable to pay their taxes in foreign currency. We urge the Minister to revisit this and ring fence the new rate to Zimbabwe dollar tax debts.

At the beginning of 2019 the government extended the VAT on imported services burden to persons who are registered operators to the extent such persons use the imported services to produce taxable supplies. Prior to 2019, only persons who were not VAT registered and those consuming or utilising imported services to produce exemption exempt would bear the VAT on imported services. Barely 12 months later the Minister of Finance Honourable Professor Mthuli Ncube seeks to repeal the same law. As he seeks to return to the law as held prior 1 January 2019 through the back door. The law proposing this amendment is contained in the Finance Bill no 3 of 2019 which passed its second reading on the 17th of December 2019 and now being moved to the third reading. This change is the main focus of this article, as fully explained in detail below.

As alluded to above, the laws on imported services as they applied prior to 1 January 2019 affected only persons who utilised, consumed or used imported services in the production of non-taxable supplies. Non-taxable supplies refers to supplies which are VAT exempt or which are outside the VAT scope. Essentially organisations such as banks, insurance companies, pension funds, educational institutions, medical aid societies, registered operators to the extent they produced exemption supplies, individuals importing services for personal consumption etc were the bearer of the VAT on imported services. The playing field shifted on 1 January 2019 to include services imported by registered operators were such services are also used to produce taxable supplies. This is because the definition of imported services was changed to refer to “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.” This new definition entails that the recipient of the services must be a resident of Zimbabwe who acquires services from a non-Zimbabwean resident or from a Zimbabwean supplier who carries on business outside Zimbabwe and such services are utilized or consumed in Zimbabwe. Therefore any person who imports services as defined, is required to account for VAT on imported services. The Finance Bill no 3 of 2019 is not proposing any change to repeal this position. Everybody who imports services, unless such services are the type which would be zero rated or exempted if the supplier had been a resident of Zimbabwe, should self-assess and pay VAT on the imported services to the ZIMRA within 30 days of time of supply of the imported services. Time of supply is defined by the date of the invoice or the date the supplier of the services is paid, whichever comes first.

So what has changed? The Finance Bill no 3 of 2019 which will become law once gazetted, possibly to commence on 1 January 2020 is proposing an input tax claim for registered operators to the extent they have utilised, consumed or used the imported services in the production of taxable. It seeks to achieve this by proposing an amendment to the definition of input tax to include imported services. Secondly, by amending section 15 (2) of the VAT Act to allow claiming of VAT incurred on imported services. The services concerned should have been acquired by a registered operator 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 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. A registered operator needs to be in possession of an invoice and should have paid the tax to the ZIMRA to qualify for the input tax claim. The invoice is not in the strict sense a tax invoice. In essence registered operators will be allowed to recover VAT on imported services with effect from 1 January 2020 which they would have incurred and paid to the ZIMRA. The effect is that the impact of VAT on imported services payable by the registered operator will be reduced by the refund to the extent the imported services are utilised, used or consumed in the production of taxable supplies. This means that the Minister would have turned the full circle if the proposed change is signed into law. This was the law prior to 1 January 2019 with the only noticeable change being that a registered operator will first declare and pay VAT on imported services for him to be allowed to make the claim.  

Whilst the new law will provide relief to registered operators, a position which existed prior to 1 January 2019, albeit this is coming at an administrative cost compared to the previous law. Improving the regulatory environment and reducing cost of paying taxes are among the topical issues to facilitate the easy of doing business in Zimbabwe. It appears the manner in which the proposed change will be administered will add to 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 and the Minister should heed the call for a rescue package for job creation and survival of companies. Any leakages would worsen the situation for the already struggling companies. The proposed change also challenges the permanency of the government policies for planning and sustainability purposes. No matter a policy is for the benefit of the business community it should have a reasonable shelf life for it to bear fruits. In the first place policies should be well thought out before they are introduced.  

In conclusion, despite there being no relief in 2019 for registered operators supplying standard rated and zero-rated supplies, 2020 brings good news to this group of operators as they can now claim VAT they paid on importation of services. However this has not been conveniently drafted because the relief comes at a cost. The operator must pay the tax, complete and file returns and then claim the VAT back.

Intangible assets are a crucial aspect for multinational enterprises for they represent a significant proportion of value in the balance sheets of these enterprises. Their lack of physical existence and high mobility makes them susceptible to transfer pricing risk especially in transactions involving their sale or licensing between associated enterprises. For these reasons most revenue authorities are ranking
them high on the list of items used by multinational enterprises in profit
shifting.  In order to mitigate this risk, the Organisation of Economic Cooperation Development (OECD) in their Transfer Pricing Guidelines for Multinational and Administrators 2017 has established a transfer pricing
framework for intangibles that ensures appropriate allocation of profits
associated with the use or transfer of intangibles. The legal ownership of intangibles is no longer regarded as the determining factor for one to be entitled to profits accruing from transactions involving the use or transfer of intangibles. It has to be ascertained that the legal owner assumed all risks associated with the development, enhancement, maintenance, protection or exploitation of the intangibles. This is commonly known as the DEMPE function and it seeks to ensure that profits associated with the transfer pricing of intangibles are appropriately allocated in accordance with value creation in
accordance with  OECD’s approach. Accordingly, revenue authorities have an interest in the significance of various functions and their
relevance to the determination of the allocation of profits among different entities that contribute to the creation and exploitation of intangible assets as opposed to allocating profits on the basis of the title held by a person in the intangible asset.

Where an entity is the legal owner of an intangible asset and its associated enterprise contributes to the value of that intangible asset, the entity will be obliged to fully compensate such associated enterprise on an arm’s length basis. It will be compensated for the functions performed, assets contributed and risks assumed in order for the entity, as the legal owner of the intangible property, to retain all rights to the profits associated with the exploitation of the intangible property. This, therefore entails that profit retention is not solely based on legal ownership but economic ownership as well. The economic ownership is determined by the person’s contributions towards the DEMPE functions of the intangible assets.  The OCED in its BEPS final report stated that:
While determining legal ownership and contractual arrangements is an important first step in the analysis, these determinations are separate and distinct from the question of remuneration….The return ultimately retained by or attributed to the legal owner depends upon the functions it performs, the assets it uses, and the risks it assumes, and upon the contributions made by other MNE group members through their functions
performed, assets used, and risks assumed…. It is therefore necessary to
determine, by means of a functional analysis, which member(s) perform and exercise control over development, enhancement, maintenance, protection, and exploitation functions, which member(s) provide funding and other assets, and which member(s) assume the various risks associated with the Intangible.”

Accordingly, emphasis is now placed on economic ownership more than legal ownership of the intangible assets. If the legal owner of intangible property wants to retain profits that flow from the exploitation of such intangible property he/she should equally contribute to the value thereof. The OECD Guidelines on Transfer Pricing are relevant for the purposes of interpreting transfer pricing laws in Zimbabwe. Accordingly, entities that legally own intangible assets should be reminiscent of the recent developments mentioned above pertaining the DEMPE concept.

Whilst emphasis is placed on development, enhancement, maintenance, protection and exploitation of the intangible property, the legal owner may outsource some of its functions. The OECD Guidelines, however, outline that payment of an “important function” of the intangible that has been outsourced by the legal owner to a related party shall be in accordance with the appropriate share of the returns derived from exploitation of the intangible. It follows therefore that a legal owner of an intangible property risks losing profits if he or she outsources its important functions to a member of the group.

Regarding application of the arms-length principle to the exploitation of intangibles, the legal owner is also obliged to have financial capacity to assume risks associated with the development, enhancement, maintenance, protection and exploitation of the intangible. The legal owner is also entitled to claim all profits if he or she or it bears responsibility for costs incurred in the event that risk materialises.

In conclusion, entities should be cognisant of the recent development of transfer pricing guidelines, particularly for intangible assets. Legal ownership alone does not entail entitlement to all profits. There is need for the legal owner to contribute to the development, enhancement, maintenance, protection or exploitation of the intangible asset. Profit is now interlinked with assumption of risk and contribution to the aforesaid aspects. With this in mind entities will also need to evaluate whether the licensing fees they pay to legal owners of the intangible are at arm’s length especially where they are also performing functions, use assets and assumes risks to the marketing of the intangible e.g the brand. If the marketing efforts done by the payee of the licensing fees are the determining factor in the success of the brand, then it can be argued that the licensing fees paid to the legal owner of the intangible property is a donation. Taxpayers are advised to arrange their affairs to ensure they do not end up having disputes with tax authorities. In so doing they should reconsider their transactions involving sale or licensing of intangible assets in light of these developments.

The government introduced transfer pricing legislation on 1 January 2016 in order to regulate transactions involving members of the same group (subsidiaries and associates) within Zimbabwe or across the border. The rules require these transactions to be conducted at arm’s-length. A transaction is deemed to be at arm’s length if its price is similar to the one charged between independent enterprises in similar circumstances. Transactions that are under the spot light include the sale of tangible goods, provision of services, licensing of intangible and financial transactions. However, the focus of this article are financial transactions (intra-group loans). There are no specific rules for testing whether financial transactions are at arm’s length, in fact the general rules for testing arm’s length would apply. We fully explain the methodology for testing arm’s length financial transaction below:

The two components that are important in testing whether a loan or financial transaction is at arm’s length are the interest rate and the quantum of the loan. The interest rate refers to the charge the borrower is willing to pay for the funds advanced to it and this should be comparable between related parties versus that chargeable between independent parties in similar circumstances. The rate should incorporate the compensation required by the lender for the use of his money known as the base rate (risk free interest) and the premium chargeable by the lender for the risk of default imposed on the borrower of not paying payback the loan.  The risk free interest is the rate applicable when lending to the government or State because the chances for a government or State defaulting on loan obligations are next to nothing.  This rate depends largely on the currency of the loan, its tenure, the date the loan is made and whether the interest rate if fixed or floating rate. The relevant currency is that of the lender and the longer the term the higher the interest rate to compensate for the long use of money.  The risk premium is meant to compensate the lender for probability of the borrower defaulting on his/her loan. The key considerations are the creditworthiness of the borrower and the macro environment.  The borrower can bargain for a better risk premium if he has security, collateral, asset backing, interest cover, comfort letters, cashflow, covenants, guarantees, good track record, good business project etc.  The macro economic environment is also a key input in coming up with the risk premium. In a volatile environment such as that of Zimbabwe lenders would charge high interest rate because the risk of borrowers defaulting is very high and would to be compensated for taking this risk. Nevertheless, government may through the central bank regulate interest rate, again this a key input for both risk free interest and risk premium interest.  It is therefore expected that in commercial transactions between private players, the interest rate should exceed the base rate because some level of default will always exist.  Therefore as starting point, in fixing the interest rate for financial transactions related parties should consider the base since independent lenders to independent borrowers are more than willing to charge interest rate in excess of that charged to governments or States.   

Before concluding on this subject matter, whether or not a financial transaction is at arm’s length regard must have been made to quantum of the loan versus the capacity of the borrower. Any commercial lender would want to determine whether a prospective borrower is thinly capitalised, because this might indicate the capacity of the borrower to pay the debt. It is necessary to determine how much the borrower could have borrowed on a stand-alone basis. In testing this, the comparability factors for testing the credit worthiness of the borrower should be considered in order to determine how much debt would be appropriate and viable for the borrower if it were an independent company. Meanwhile, Zimbabwe has thin capitalisation rules for regulating intra group loans which provides for a debt to equity ratio of 3:1. Interest charge on excessive debt is disallowed when computing income tax. Although these rules are not transfer pricing rules per se, they constitute a key consideration in evaluating the capacity of the borrower to repay the loan.

In summary, related parties must consider factors highlighted in this document when fixing interest rate on intra group loan in order to stay within the arm’s length range. The interest rate and the quantum of the loan should be comparable to those in transactions between independent parties.  The analysis should be undertaken from both the lender’s and the borrower’s perspective. A two-sided analysis involves a review of risks borne by the lender when lending monies and requires consideration of the cost of obtaining these funds by the borrower. The analysis must also take into consideration the debt capacity of the borrower. A debt capacity analysis ascertains how much debt the borrower can service without defaulting on its obligations. This is important because any excess debt undertaken by the borrower will be considered at non-arm’s length, and interest deductions on that part of the debt could be denied for tax purposes. This analysis is generally undertaken by analyzing the liquidity and solvency ratios of the borrower. In light of the harsh penalties imposed by the government for failing to comply with the transfer pricing laws, related parties must exercise care when fixing the interest rate on intra group loans. Excessive interest could lead to non-deductible interest expense, double taxation, penalties or other more serious sanctions imposed on them by the government. On the other hand inadequate interest charge may result in the ZIMRA imputing income on the lender which action has almost the same implication as the charging of excessive interest rate.

Company cars have long been seen as a valuable perk because of the flexibility, prestige and convenience they provide to employees. The flexibility comes about because employees are able to embark on private travel; and prestige arises from travelling in personal cars as opposed to using public transport. However, the potential tax implications are rather less appealing because the use of company cars is regarded as a taxable benefit to the employee in terms of the law. The envisaged use includes travelling between home and place of work or vice versa or other personal errands of employees.  Choosing a more luxurious car can prove very expensive and disastrous to an employee because the bigger the car the more the taxable benefit. Thus the applicable tax depends on one’s earnings and the engine capacity of the car. Simply put, high earners driving expensive cars will pay the most.  Whilst the employee’s salary may remain fixed, higher taxes may be payable if one opts for a car with higher engine capacity. The recent announcement by the Minister of Finance and Economic Development, Professor Mthuli Ncube through the National Budget Speech of the new motoring of benefits commencing 1 January 2020 is a clear testimony. For instance, for a lower engine capacity of up to 1500cc and a higher engine capacity of above 3000cc the annual taxable benefit will be ZWL$54,000 and ZWL$144,000 respectively. Although the Minister has maintained the value of the taxable benefit this year compared to last year in real terms, the figures in Zimbabwe dollar are shocking and beyond reach for many since salaries and wages in functional currency have not been increased by that margin.  The implication is that some employees may give up company cars or are likely to go home with negative net pay. We do not envisage some employers affording to increase employees’ earnings to cater for the increase in motoring benefits. This is not the only scary point concerning luxury cars in Zimbabwe as discussed below.

The increase in motoring benefit as aforesaid has spill over effects on employers who are VAT registered operators. The motoring benefit is a deemed supply for VAT purposes. The employer will therefore be required to declare VAT based on the new values. This therefore adds to the cost of doing business in the hands of companies that are VAT registered as they will be required to foot more in terms of VAT on motoring benefit. Furthermore, Statutory Instrument 33 of 2019 declared that all values previously expressed in United States Dollar are converted to Zimbabwe dollar on 1:1 basis with effect from the 22nd of February 2019. This means that the cost base for tax purposes of amounts previously expressed in United States dollar remained fixed in absolute terms despite low purchasing power. This is also confirmed by s2 of the Finance Act no. 2 of 2019 which pronounced that values, figures or symbols contained in the Revenue Acts wherever stated as Untied States Dollar should be read Zimbabwean dollar, values, symbols or amounts. In this case the value for passenger motor vehicles (luxury cars) for purposes of claiming capital allowances was previously fixed at US$10,000 and this value was not changed and accordingly it now reads ZWL$10,000. In real terms the value has tumbled following increase in the foreign exchange rate, the Zimbabwe dollar to the United States dollar. Companies are therefore eligible to claim less capital allowances on luxury cars compared to last year and in actual fact; the capital allowances have become worthless as a tax incentive.

As if this is not enough the government has also restricted the value of duty free importation of luxury vehicles for returning residence to US$5000. Accordingly, returning residents who import motor vehicles in excess of this threshold will be required to pay import duty based on the stipulated rates.  This literally means that the government is banning the free importation of luxury vehicles. It is only making room for cheaper vehicles.

Last year the government introduced the law which designated certain products to be imported and duty paid for in foreign currency. Among this list are luxury motor vehicles. The implication is that importation of luxury motor vehicles now costs more considering that the Zimbabwe Dollar is not at par with the foreign currency charged for duty and they are now beyond the reach of many citizens.

In a nutshell the use of luxury cars is becoming unbearable to both employees and employers. This is further compounded by the rising motor vehicle running costs such as the cost of fuel. We envisage the number of drivers to fall as the luxury car taxes go up. Going forward more people are expected to use public transport under these circumstances. It is no longer cost effective to use luxury cars from both the perspective of employer and employee. Invariably the use of luxury cars has a negative impact on the fiscus in terms of importation bill (in terms of current deficit), the environmental and social impacts. That is; use of more cars may result in increased air pollution, traffic accidents, congestion and noise. Nevertheless; people may find it difficult to report for duty at work unless if a reliable, affordable and efficient transport system is in place. The government initiative on Zimbabwe Passenger Company (ZUPCO) needs upgrading through introducing reliable and efficient passenger trains especially in areas where we already have the railway system.

Restrictive covenants or agreements are often agreements entered into between the employers and top echelon, e.g. chief executives, directors, executive managers etc whereupon the employer pays an employee an amount in return for the latter agreeing not to compete with the employer on termination of employment.  The agreement may also take the form of a legal contract between a buyer and a seller of a business. Whichever form it takes the seller or the employee is restrained from engaging in a similar business or taking up employment within a specified geographical area and/or within a specified period of time. Of concern is how these payments are treated for income tax purposes from both the payer and the recipient perspectives.

To the payer of restraint of trade, the test for the deductibility is embodied in s15 (2) (a) of the Income Tax Act. The section stipulates that expenditure or losses are deducted if they are incurred in the production of income or for the purposes of trade of the taxpayer, except to the extent to which they are expenditure or losses of a capital nature. Of relevance to our discussion is whether a payment of restraint of trade is capital in nature or not, because as it fully appears the expenditure is incurred in the pursuance of trade or in the production of income. There is no definitive definition of capital nature expenditure. However it is widely accepted in the accounting profession that capital nature expenditure includes the cost of acquiring fixed assets, share capital or capital employed in business, an income-producing unit, goodwill, intellectual property (software, patents, trademarks etc.), and cost of improving or enhancing any of these items plus related expenses. By accepting a restraint of trade contract the payee (seller or employee) agrees to impair his/her future income production capacity, whilst the buyer or employer will be protecting his/her future business or income from being diminished. In other words the contract is meant to protect the future downsize risk of the buyer or employer, alternatively it impairs the employee or seller’s future income. For these reasons restraint of trade payments are viewed as capital nature. This is further confirmed by the decision in Tuck v CIR 1988 (3) SA 819 (A) which stated that a payment in consideration for agreeing to a restraint of trade is a receipt of a capital nature.  The payer of restraint of trade is therefore barred from deducting it in his/her income tax return, only recurrent or revenue expenditure is tax deductible.    

To the recipient, the concept of gross income excludes capital nature income. As alluded above a restraint of trade payment is capital in nature. It is therefore non-taxable to the recipient. In other words, where a person’s right to freely trade is restricted and the person is paid for that restriction, the payment is akin to compensation for loss or sterilization of a fixed asset. The recipient by means of such covenant surrenders a portion of his/her income-earning capacity in return for a payment of money. He is parting with a capital asset and the payment is of a capital nature which is excluded from gross income as propounded in the case of Taeuber & Corssen (Pty) Ltd v SIR, 1975 (3) SA 649 (A) (37 SATC 129).

Meanwhile, the ZIMRA may seek to discredit a contract in restraint of trade on the basis that it is a disguised agreement “to compensate the employee for services rendered/to be rendered and to retain such services of the employee”, that is, it is not a genuine restraint of trade contract.  In testing whether the restraint of trade is genuine or not the courts have applied some tests, among them; whether the recipient in fact surrendered a right of a capital nature i.e. there must be the sterilization of the recipient’s right to freely trade in some manner. Additionally, the recipient must be in a position to cause a loss to the payer’s business in the event that the restraint acts are not observed. The threat should emanate from the nature and scope of the recipient’s involvement with the payer. If no danger of such prejudice exists, the payment may be considered for tax purposes as additional income for services rendered or for services which are to be rendered and will be subject to tax.  The employer must be able to prove that it has a legitimate interest in imposing a restraint, and that the restraint is no wider than reasonably necessary. For example a restraint of trade cannot be as to the whole world or for an indefinite period. It must be reasonable geographically (in radius) and in duration. For example a restraint of trade in respect of a business in Harare cannot be regarded as genuine where it restrains the opening of business of a similar nature for instance in Lusaka. It was alluded to in Automotive Tooling Systems (Pty) Ltd v SJ Wilkens [2006] 128 (RSA) that a restraint of trade agreement is not legally enforceable unless it intends to protect an employer’s proprietary interests and that an agreement that merely seeks to prevent an erstwhile employee from utilising the skills and knowledge learned on the job in the service of someone else is not legally enforceable. In CSARS vs. McRae 64 SATC 1, 2001, lump sum payments were made by employer to employee in terms of certain Stock Unit Plan aimed at providing employees who make an important contribution to the company’s success before their retirement. The plan also restrained employees from going into competition with their employer on retirement or termination of employment. In deciding whether the payments were made in respect of services rendered or in respect of restraint, or both, the court held that the agreement contained element of both service and restraint and apportioned on the basis of 50% each.

In conclusion, the contracting parties should carefully examine the contracts they enter into. Clear words have to be used in the crafting of contracts. This will enable ease of characterisation of payments that will be made in terms of such contracts on whether it will be a payment for service or restraint of trade. This is critical due to the different tax implications they present to both the payer and the recipient. The fact that an amount is not a genuine restraint of trade (thus taxable to the employee) does not automatically follow that it will then be allowed as a deduction to the payer. In other words, the treatment of restraint of trade payment for employees’ tax does influence the revenue authority’s treatment of expenditure for income tax purposes in the hands of the payer (employer). It may be prudent to have your consultant look at the tax implications of your contract before signing.