Declare your wealth or face tax consequences

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A voluntary disclosure programme (VDP) is a mechanism frequently used by governments to encourage individuals and businesses to come forward and reveal their income and assets without fear of being penalised, imprisoned, or otherwise punished. It may be used to mitigate the negative consequences of “moral hazard” and “adverse selection.” It increases the confidence of external investors in management by lowering the agency’s costs. This article focuses on the most recent voluntary disclosure program published by the Commissioner General of the Zimbabwe Revenue Authority in Public Notice 55 of 2023.

The Commissioner General is encouraging all persons, individuals, and corporations to review their business or personal affairs and make voluntary disclosures if there is any income omitted from tax returns submitted or if the taxpayer has not complied with any tax obligations. The goal is to encourage voluntary compliance, which will improve smooth corporate operations and/or social life continuity in the absence of ZIMRA disturbances.The candidates of the voluntary disclosure as outlined in the public notice include: persons who have constructed houses that cost USD100,000 or more,  persons who have traded or are trading in gold or other minerals, owners of luxury motor vehicle of value of at least USD150,000,  owners of private jets or lessors of private jets,  middlemen or agents of goods manufactured in Zimbabwe, transport operators and taxi operators and individuals or companies who have constructed buildings with a value of at least USD100,000 or more. The public notice further provides that any person who has earned any income, through business/trade, which is subject to tax should ensure that taxes due are paid. Value Added Tax, Income Tax, Capital Gains Tax, and Pay As You Earn would be among the taxes covered. In order to make a voluntary disclosure, taxpayers must furnish schedules describing the overdue taxes, complete the outstanding returns, and pay the tax due, or engage ZIMRA to make payment arrangements. However, voluntary disclosure does not exempt taxpayers from paying interest, which remains taxable to the amount authorized by law. Where full and complete declarations are made, the Commissioner shall give proper attention to fines liable. The submission of a full voluntary disclosure shall not trigger an audit. Applicants are expected to shall the voluntary disclosures within 30 days from the 31st of August 2023, after the stipulated timeframe the window will expire.

Authentic tax reporting and prompt payment of tax dues are the cornerstones of a voluntary disclosure to avoid penalties, fines, and incarceration. The following are the benefits of making a voluntary disclosure under the voluntary disclosure program: penalties, civil penalties, fines, and additional tax will be waived in full; outstanding tax debts are paid on agreed payment terms; businesses are free from the burden of non-compliance, so there is no need to play hide and seek; they will have access to tax clearances certificates for compliant taxpayers and business managers and owners can focus on running their businesses thereby reducing costs of compliance and applicants are assured that information voluntarily disclosed shall not trigger an audit, investigation or prosecution. After a voluntary disclosure a taxpayer should adhere to the terms of the contract made with the revenue authority, if one fringes the agreement made it shall be considered as a breach and the voluntary disclosure benefits shall be declared null and void. The benefits will be withdrawn by the revenue authority without seeking alternative payment arrangements.

Taxpayers are encouraged to ensure that any imbalance in their tax affairs have been addressed. We expect the ZIMRA to be harsher after 30 days when it conducts major tax audits to uncover tax evasion or unreported taxes. In practice, voluntary declarations must be honest in order to be exempt from fines and interest. Taxpayers should consequently conduct a full examination of their affairs before proceeding, and this should be done with the assistance of a tax expert. One can posit that; Zimra administration should have granted more time than the current 30-day window period in this regard so as to give taxpayers time to track their records and also consult tax agents.  Furthermore, the Commissioner General should have been more conciliatory in terms of penalty waiver. It is unclear whether it will be completely waived or partly waived. Without this assurance, there may be no incentive for voluntary disclosure as taxpayers will be worried of the repercussions of calling a spade. It is also critical that the relief provided by the VDP be fair and not reward individuals or corporations looking for a way to avoid taxes as this will disturb those that are compliant in their tax payments. To be fair to everyone, the revenue authority should grant greater assistance to persons who are correcting an accidental error than those who actively evaded paying their taxes only to use the VDP.

To put it briefly, voluntary disclosure should be treated seriously for a variety of reasons. First, the statement comes soon after the end of general elections, and second, there has been an extraordinary increase in informal sector commerce, which has fostered revenue leakages, which the country is attempting to fix in order to increase the tax base.

Whether employees are required to file income tax returns.

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An employee is a person who performs services for an entity under the direction and control of that entity for remuneration. In terms of the law every employer should withhold employees’ tax from all remuneration paid or payable to an employee who renders services in Zimbabwe during a tax year even if the employee is not a resident of Zimbabwe. Zimbabwe uses a system called final deduction system (FDS) for taxation of individuals in employment. The final deduction system implies that an employer has the responsibility to compute the tax due on his/her employees and in so far as the person receiving employment income throughout the year from one employer, such person will not be required to submit a return to ZIMRA for assessment. The tax that the employer deducts is deemed final. However, in certain circumstances an individual may be expected to submit additional self-assessments to ZIMRA. These circumstances include but not limited to when an individual has been employed by more than one employer in one year of assessment, left employment during the year or received pension as fully explained below herein.

If an individual has worked for two different employers during a tax year, it is possible that both employers may not have deducted the correct amount of tax from their salary. This can lead to under or overpayment of tax. The Zimbabwean tax system is based on the principle of adding together all sources of income of a taxpayer into a single sum and applying a progressive tax rate table to determine the final tax liability of the taxpayer on assessment. A progressive tax rate system means that the more income is earned, the higher is the marginal tax rate and more tax is paid on assessment. By deducting PAYE every month, the employer is assisting a taxpayer to pay his or her tax liability, determined on assessment, in advance. When only one employer is involved, the total PAYE deducted monthly should be equal to the tax liability on assessment. Typically, this should result in no extra tax due on assessment. However, where more than one employer is involved, each of them deducts the correct amount of PAYE on only the salary they each pay. When all the sources of income are added together, and the correct tax rate is applied this may result in an additional amount of tax being paid on assessment. In such cases, it is necessary for the employee to submit a separate tax assessment to ensure that their overall tax liability is calculated accurately.

When someone leaves their employment during a tax year, their tax liability may change. It is possible that they might be due a tax refund or have additional tax obligations. This is particularly so because PAYE is calculated by determining the tax on a projected income for the year (called the annual equivalent) and then de-annualising the tax to determine the tax payable for the month. Technically, at any point in an assessment year, computation of PAYE is based on an annual projected figure of what would be the total annual earnings over 12 months based on the current remuneration levels. When one has to leave their job during the year, this will mean the projections over 12 months are no longer applicable hence filing a separate assessment allows individuals to reconcile their tax situation accurately and make any necessary adjustments.

If an individual has received a pension during the year in addition to their regular employment income, it is likely that their tax obligations will be more complex. Pension income is often taxed at different rates and might also impact other tax liabilities. Filing a separate assessment ensures that all income sources are considered correctly, minimizing the chances of any under or overpayment of tax.

 

In these scenarios, employees should be proactive and submit a separate assessment named the ITF1.  Persons in receipt of income which solely consists of remuneration which has been subjected to employees’ tax (PAYE) are not required to furnish income tax returns. Exceptions include those who left employment during the course of the year, received income from more than one source or changed employers during the course of the year. ITF1 is the return for employment income to be completed by individuals on employment income. If the same individual is also receiving income from trade, investment or profession, the person will be required to complete another return called the IFT1A. Both these returns resemble a final assessment of one’s tax affairs where necessary. Just as with the final assessment for corporates, the ITF12C and ITF12C2, the ITF1 and ITF1A should also be submitted by the 30th of April of the year preceding the year being assessed. In addition, to the income tax assessment requirements, individuals need not forget the same obligations apply where they have disposed of specified assets for which Capital Gains Tax (CGT) is applicable. It is important to be aware of these requirements to avoid potential penalties or incorrect taxation.

Income Tax Obligations of individuals in employment

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An employee is a person who performs services for an entity under the direction and control of that entity for remuneration. Employees are levied tax in terms of the13th Schedule to the Income Tax Act (ITA). Employee’s tax on remuneration should be deducted by an employer. Every employer should withhold employees’ tax from all remuneration paid or payable to an employee who renders services in Zimbabwe during a tax year even if the employee is not a resident of Zimbabwe. Zimbabwe uses a system called final deduction system (FDS) for taxation of individuals in employment. The final deduction system implies that an employer has the responsibility to compute the tax due on his/her employees and in so far as the person receiving employment income throughout the year from one employer, such person will not be required to submit a return to ZIMRA for assessment. This is a PAYE final assessment system / final deduction system and requires no further assessment thereafter. The tax that the employer deducts is deemed final. However, in certain circumstances an individual may be expected to submit additional self-assessments to ZIMRA.

Individuals should be aware that in certain circumstances, they may be required to submit a supplemental evaluation or a separate assessment rather than relying exclusively on the Pay As You Earn (PAYE) system. This particularly applies when an individual has been employed by more than one employer in one year of assessment, left employment during the year or received pension as discussed below herein.

If an individual has worked for two different employers during a tax year, it is possible that both employers may not have deducted the correct amount of tax from their salary. This can lead to under or overpayment of tax. The Zimbabwean tax system is based on the principle of adding together all sources of income of a taxpayer into a single sum and applying a progressive tax rate table to determine the final tax liability of the taxpayer on assessment. A progressive tax rate system means that the more income is earned, the higher is the marginal tax rate and more tax is paid on assessment. By deducting PAYE every month, the employer is assisting a taxpayer to pay his or her tax liability, determined on assessment, in advance. When only one employer is involved, the total PAYE deducted monthly should be equal to the tax liability on assessment. Typically, this should result in no extra tax due on assessment. However, where more than one employer is involved, each of them deducts the correct amount of PAYE on only the salary they each pay. When all the sources of income are added together and the correct tax rate is applied this may result in an additional amount of tax or the vice versa to be paid on assessment. In such cases, it is necessary for the employee to submit a separate tax assessment to ensure that their overall tax liability is calculated accurately.

When someone leaves their employment during a tax year, their tax liability may change. It is possible that they might be due a tax refund or have additional tax obligations. This is particularly so because PAYE is calculated by determining the tax on a projected income for the year (called the annual equivalent) and then de-annualising the tax to determine the tax payable for the month. Technically, at any point in an assessment year, computation of PAYE is based on an annual projected figure of what would be the total annual earnings over 12 months based on the current remuneration levels. When one has to leave their job during the year, this will mean the projections over 12 months are no longer applicable hence filing a separate assessment allows individuals to reconcile their tax situation accurately and make any necessary adjustments.

If an individual has received a pension during the year in addition to their regular employment income, it is likely that their tax obligations will be more complex. Pension income is often taxed at different rates and might also impact other tax liabilities. Filing a separate assessment ensures that all income sources are considered correctly, minimizing the chances of any under or overpayment of tax.

 

In these scenarios, employees should be proactive and submit a separate assessment named the ITF1.  Persons in receipt of income which solely consists of remuneration which has been subjected to employees’ tax (PAYE) are not required to furnish income tax returns. Exceptions include those who left employment during the course of the year, received income from more than one source or changed employers during the course of the year. ITF1 is the return for employment income to be completed by individuals on employment income. If the same individual is also receiving income from trade, investment or profession, the person will be required to complete another return called the IFT1A. Both these returns resemble a final assessment of one’s tax affairs where necessary. Just as with the final assessment for corporates, the ITF12C and ITF12C2, the ITF1 and ITF1A should also be submitted by the 30th of April of the year preceding the year being assessed. In addition, to the income tax assessment requirements, individuals need not forget the same obligations apply where they have disposed of specified assets for which Capital Gains Tax (CGT) is applicable. It is important to be aware of these requirements to avoid potential penalties or incorrect taxation.

Taxpayers’ agents now required to register to practice.

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Tax professionals have long been a crucial aspect of every country fiscal regulation and compliance. The role of tax professionals cannot be undermined, they are an important cog in the tax ecosystem. For the proper functioning of a tax system taxpayers need to be advised and because of the complexity and intricacies of the tax law it is certainly difficult for taxpayers to discharge tax obligations on their own. Besides this, the tax offices open doors to taxpayers who are illiterate, low-income, or elderly and these need to be assisted. The balance must however be struck between having people who should be allowed to assist as agents and their profession standing because the danger of not regulating is that those mandated with the roles of agents may inflict more harm to the society than good due to self-interest. Thus, an important function of the regulation of tax advisors is to help strike an appropriate balance between loyalty to the system and loyalty to the client.  It ensures that taxpayers and the revenue authorities are protected from unscrupulous members of the society who may masquerade as professional experts, yet they lack they the necessary qualification or professional standing. 

To this end, the recent gazettion by the government of the law which will regulate the taxpayers’ agents is a huge milestone in the development of our tax system. For many years, tax agents have been a mix of individuals from registered professional bodies such as lawyers, accountants, and economists with a significant number of them being nonregulated individuals who were not governed by any institutional regulations or oversight. Because of the lack of regulation, an environment of unskilled and unqualified persons attracted poor-quality advice with no repercussion. With the coming of the new law which requires tax agents to meet stricter requirements hence attracting higher standards when providing services to clients, there is hope but not guarantee that bad apples will be unearthed within our tax system. Why we speak of hope is because regulation on its own without necessary surveillance and strict examination does not guarantee good ethical conduct or tax morality, otherwise the tax practice will remain a market of lemons where one can enter and exit at will even with a high school certificate. The Public Accountants Auditors Body (PAAB), the Revenue Authorities and the examination bodies have therefore roles to play.

In terms of the law, all tax agents are required to register with the Commissioner General of the Zimbabwe Revenue Authority as the licensing authority. To be registered, an individual must belong to or be subject to the jurisdiction of a professional body, and have completed a course in basic bookkeeping principles, or have one year of relevant experience in the field of accountancy or taxation and have no record of criminal convictions in any court of law. In the case of a company or partnership or trust; a certified copy of its constitutive documents should be produced; all executive directors and partners, managers and employees who will be authorised to act on behalf of the tax agent must be registered as a tax agent. The Zimbabwe Revenue Authority will handle the registration process through the Commissioner or his designee. The registration process must be initiated by submitting Form DTF 190 to any Zimbabwe Revenue Authority office. ZIMRA will react to the application within 30 days, either approving and advancing with licensing or denying it and explaining giving reasons why. If a person is dissatisfied with ZIMRA’s decision, he or she may file an appeal under Section 10 of the Revenue Authority Act. If a practicing certificate is obtained, it is valid for two years and must be renewed 30 days before it expires. During practice, if a person violates the law or the laws of practice, such as engaging in fraud or theft, among other things, the license can be revoked or cancelled. ZIMRA has been given the authority to operate as the general institution in charge of agents in Zimbabwe. The Act was declared in effect 13 (thirteen) days after publication, making an effective date of July 20, 2023.

Many regards being recognized by the state as a regulated profession as the dividing line between being a self-declared career and a ‘real’ profession. Tax agents serve an essential public interest by advising taxpayers on how to comply with their legal duties; representing the tax affairs and determining the tax obligations, the state has an interest in cultivating and safeguarding this position. Tax consultants, on the other hand, vary from tax officials in that their primary devotion is to their customer. One key function of tax a regulation is to assist in striking an appropriate balance between loyalty to the system and loyalty to the customer.

Regulation also aims to protect clients from unethical or inept tax agents. The state’s regulatory involvement in this area is comparable to that in other areas of consumer protection. Governments regulate a significant amount of business activity to ensure that the public interest is served. Transactions between experts and consumers are one example. Consumer protection can be conceived of as professional regulation.

As much as regulating is a brilliant idea there are some critical issues that have to be addressed for example supply vs demand. The supply of potential professionals is unavoidably reduced when a profession is regulated by entrance requirements. A general equilibrium between supply and demand should always be maintained whenever a service sector is regulated. Therefore, it is crucial to determine in advance how many persons can be admitted to the profession immediately or within a short period of time given the laws envisioned in any proposal to regulate a professional service like tax advice. The value of the supply of tax consultants will be largely based on the experience and education requirements set forth in the legislation. The equilibrium between supply and demand for tax services could be significantly impacted by flexible transitional solutions.

On the demand side, an analysis of what types of professions will be required by what types of taxpayers should be conducted. For example, there is a significant difference in qualification requirements between a tax lawyer capable of handling complex cases in court and a person capable of preparing simple returns for small rural businesses. The demand for tax consultants will be determined by factors such as the development of the economy and the legal system, as well as the requirements imposed on taxpayers (how many people are required to submit returns). On the supply side, the availability of appropriate training is expected to be done thoroughly as this might be a stabling block.

In summation, the new regulation serves to help improve service quality across the entire sector while promoting professionalism among its members thereby helping build trust between taxpayers, tax advisors & authorities thus improving compliance rate significantly over time.

A drift to the law of payment of taxes in foreign currency

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Operating in a multicurrency environment is a hectic experience, fiscal and monetary policy measures keep getting revised and improved in a bid to stabilize the economy. The need for the policy maker to keep engaging with its citizens is also exasperated when the economy is charactersised by hyperinflation. During the preceding two months, we have seen the government working tirelessly putting in place measures to stabilize the economy. Key to the measures was the promotion of use of local currency. On the 23rd of June 2023 we saw a drift rules of payment of taxes in foreign currency through a press statement titled, “Promotion of use of local currency in the economy – Payment of taxes in Zimbabwean Dollars”.

To promote the use of the Zimbabwean dollar, the Ministry of Finance and Economic Development stated that corporate tax payments will be paid in local currency. According to the Treasury, the government noticed that recent policy actions targeted at stabilizing the economy resulted in better currency stability and overall pricing of goods and services. To encourage the usage of the Zimbabwean dollar, the Ministry announced that for the June 2023 Quarterly Payment Date, taxpayers will be expected to settle 50% of the foreign currency part of their business tax obligations in local currency. However, where the law allows it, taxpayers must satisfy their tax liabilities entirely in local currency. The government will not accept foreign currency payments for the proportion of corporate income tax owed in local currency and other taxes payable in local currency. Corporates were also strongly prohibited from engaging in parallel market transactions for tax payments as this would attract standard penalties. Taxpayers were also warned on late payments as this will attract vigorous penalties. The government is committed to pursuing further currency reforms in order to promote long-term price stability. Taxpayers who do not have enough Zimbabwe dollars to meet their local currency tax obligations ware encouraged to contact the Reserve Bank of Zimbabwe through their banks to arrange for the sale of their United States Dollars holdings to obtain the necessary Zimbabwe dollars. Lastly, the Minister stated in the press statement that the Government is committed to continuing the currency reforms that have enabled the economy to be competitive and will continue to fine-tune the foreign currency markets in order to achieve lasting price stability.

Arising concerns

The press statement was presented late, and some tax-compliant taxpayers had already paid for their QPDs. Companies are concerned about their standing, especially at what would be the consequences if the public statement is to be later promulgated into a statutory instrument with a retrospective application. Another key question is whether the press statement is legally enforceable on taxpayers in its current state? Public announcements attempt to provide rules, instructions, and recommendations on tax payment. Without a statutory instrument on the matter, the announcement remains such at law. However, taxpayers must be cautious when deciding the extend to which they can choose noncompliance with the press statement. There are chances of the press statement being promulgated as a statutory instrument with retrospective application. One can allude that the government has been kind and patient enough to taxpayers as they could have straight away made the clauses binding law not taking into cognisance the impacts of the provisions to the taxpayers’ businesses.

The public statement further alludes to the need for taxpayers to approach the Reserve bank should they have inadequate Zimbabwe dollars to meet their tax obligations. A reminder is also given through the same public statement for taxpayers to desist from engaging in parallel market transactions.  Though this may appear as if the central bank has merely abandoned the provisions of section 37AA and has relegated its responsibility to the tax paying community in a bid to promote the use of ours; the Zimbabwean currency it is important to realise that the government is attempting to do good, and without the taxpayers’ help, this would be impossible. The Zimbabwean currency has recently gained value as a result of such reforms thus a good cause.

Zimbabwe’s tax landscape, like that of any other developing country, is riddled with loopholes here and there. However, the taxman and the government are working hard to close the loopholes. Just like any other developing country the Zimbabwe tax landscape continues to be characterized with loopholes here and there. However, the taxman and the government are doing their best to amend the gaps. Section 37AA brought about complexity in payment of taxes in foreign currency. Most taxpayers are yet to fully grasp the dictionary of section 37AA and plan their tax affairs accordingly and to a greater extent the taxman has tried to be lenient. A call for a new provision changing the same subject of tax payment in foreign currency will sting even more because it will pile another unresolved concern on top of another. However, lawmakers are without a doubt reasonable people, and if any critical problems develop as a result of the provision, the lawmaker will give reasonable answers through their officials, as they have always done.

In conclusion, operating in a multicurrency calls for agility in adopting expected changes to the environment and that is why the government has made efforts to stabilize the economy. While the press statements with measures to stabilize the economy may have appeared numerous, they have proved to be necessary pieces as evidenced by the narrowed margin between the official and parallel rate of exchange. Before we jump to conclusions and say too much, let us accept the announcement as a guide for what is to come and completely prepare ourselves so that when the time comes, we are all ready to embark.

Interpretation of Fiscal Statutes

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Zimbabwe has gone through different phases of transition in terms of monetary and fiscal policies.  The present multi-currency system that prevails at the moment has its origins dating back to 2009.With time we saw SI 142 of 2019 which detected that the USD was pegged at 1:1 with the ZWL coming into play and a lot of people in the labour market were found on the wrong side of the law, some due to failure to interpret the law accordingly and others ignorance. The payment of renumeration in United States Dollars attracts payment of taxes in the same currency however, a number of taxpayers did not understand this directive as they persisted to try and pay their taxes to ZIMRA using ZWL on the basis that it is one to one.

One would concur with the assertion that with the amendments of our fiscal laws time and again in Zimbabwe, the financial updates through regulations by the Minister of Finance and Economic Developments and press statements, there is need for every taxpayer to be equipped with law interpretation and understand the legislator’s intention so that one is not found on the wrong side of the law.

Tax legislation is an important source of law in issues affecting taxpayers; hence, every court dealing with a tax matter spends the majority of its time applying legislative provisions to the situations before it. However, before a court can do so, it must first determine the interpretation of the relevant statutory provision. A court must apply statutory interpretation rules in order to determine the meaning of a specific legislative provision. Statutory interpretation rules are methodologies used to establish the meaning of legislative provisions. The goal of these methodologies and principles is to aid courts in determining the meaning of a specific piece of legislative provision, often known as the “intention of the legislature. The article at hand seeks to offer readers a summary of how definitions are derived for fiscal laws.

In Zimbabwe interpretation of law is guided by the Interpretation Act (Chapter 1:01). This piece of legislation provides meanings and definitions which must be utilized when interpreting any item of law unless another meaning is specifically stated or implied in that legislation. For example, the Interpretation Act states that the term ‘month’ refers to a calendar month. Thus, if a statute requires that legal action be brought within seven months, that implies within seven calendar months of the end of the month in which the right to file the action originated. Tax legislations e.g., the Value Added Tax (Vat) Act and the Income Tax Act (ITA) usually give definitions as to the meaning of certain specific words to be used in their application. These contain a section, section 2, which has definitions of terms.

However, the same word or provision may also be defined elsewhere in the statute, for instance, in the ITA, definitions can also be found at the beginning of each of the Schedules of the Act. Definitions given in the Act are critical where one seeks to interpret certain words used in the Act. It should be emphasized, however, that a statutory definition does not always apply in all circumstances where the specified word or words appear in the Act. If a defined term or expression is employed in a context where the specific definition is inapplicable or absurd, it should be interpreted according to its ordinary meaning.

The general approach to statutory interpretation also applies to fiscal statutes. Steyn J, the then president of the Orange Free State Special Court (Income Tax Appeal), stated in ITC 1384 (1983) 43 SATC 95 that “fiscal statutes are not a privileged category of legislation and must be approached and dealt with in the same manner as other statutes. “The most important rule of statutory interpretation is that terms in a statute must be given their usual and natural meaning. Lord Cairn also alleged the same approach in the case of Partington v Attorney General 21 LT 370 at 375.The same was buttressed in the case of Sunfresh (Private) Limited t/a Bulembi Safaris v Zimbabwe Revenue Authority HB 78-04 where the court used  literal approach to explain the words “fees” and “payer”. Taxpayers when using the literal or ordinary approach, should also take cognisance of the use of the words “must”, “might”, “shall”, “will”, “have to” the list goes on, such words’ ordinary meaning gives a clue to assess whether something is mandatory or not.

Important rules in Statutory Interpretation

Rules of interpretation, often known as Canons of Interpretation, are guiding sticks used by courts to determine the intent of the law maker, or at the very least the meaning of terms employed in a statute. To realize how fiscal law is interpreted by the courts, it is necessary to understand the application of the basic meaning and application of the canons of interpretation. These include;  the ordinary/ Grammatical Meaning Rule, the Golden Rule, Ejusdem generis, Expressio unius est exclusio alterius, In pari materia , Rule against surplusage, contemporanea exposition,Noscitur a sociis, the Contra fiscum rule and Preremptory and Directory provisions the list is not exhaustive it goes on.

In summation, when faced with a case in hand that involves the law and interpretation which a company is failing to locate or agree to, it is wise to approach tax advisory firms for an opinion or recruit a legal expert in the company that will be responsible for that area. With fiscal law amendments and change seen in Zimbabwe time and again, it is of paramount importance to interpret the law accordingly so as to stay consistent with the lawmaker’s intention.

Contracts are more than just a signature on paper

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Contracts are an important aspect of taxation because they help guarantee that all parties involved in a transaction understand the terms and circumstances. Contracts can be used to outline both parties’ rights and obligations, establish payment arrangements, describe tax liabilities, stipulate how disputes will be settled if necessary. A contract in place before any transaction between two or more parties reduces uncertainty about expectations from each side while also provides legal protection for those involved if something goes wrong during contract term. When it comes to signing of contracts, the ancient adage “cavet subscriptor” is quite significant. Aside from economic problems that may emerge between the contracting parties, contracts are tools that, if improperly structured, might bring unwelcome taxes (tax penalties and interest). Where contracts and reality or behaviour differ, the latter prevails for tax purposes, and contracts become worthless paperwork in the eyes of the taxman. To that end, taxpayers are requested to be more cautious when signing contracts and to engage taxpayers in advance rather than as an afterthought, lest it be a case of closing the barn door after the horses have run.

Contract signing is more than just signing your name on paper; one must pay close attention to detail. A trite legal principle that loosely translates as “signatory beware” is caveat subscriptor. It implies documents must be thoroughly reviewed and understood in terms of their legal and fiscal implications before signing. Many times, businesses get into agreements with other parties without fully comprehending the consequences. In rare cases, a taxpayer may enter into an arrangement without fully understanding its tax ramifications. This frequently leads in the taxpayer being subject to penalties and interest. When entering into a contract, it should be at arm’s length, which means that the agreement should be at fair market value, regardless of whether the parties are related or unrelated. This means that, in terms of pricing, the negotiated charges should be at market rate, and the terms should not be bent in favour of either party just because of their relationship. Section 23 (1) of the Income Tax Act states that “where any person carrying on a trade in Zimbabwe purchases any property, whether movable or immovable, from any other person at a price greater than the fair market price, or where he sells any property, whether movable or immovable, to any other person at a price less than the fair market price, the Commissioner may, for the purpose of determining the taxable income or assessed loss establish the fair market price at which such acquisition or transaction shall be accounted for or returned for assessment.” This is buttressed by the case of: Elite Wholesale (Rhodesia) (Pvt) Ltd v COT (1955) 20 SATC 33 where court alleged that “if the transaction is perfectly innocent, if it is not fictitious or colorable, the mere fact that income has been reduced is not a sufficient justification for the exercise of the power…”. When there is something about the transaction that indicates a desire… to escape assessment or tax, something that shows a lack of good faith or the presence of (citing precedents), moral dishonesty in the taxpayer’s mind,’ it becomes an occasion for its application. Section 98 of the Act further empowers the Commissioner to rebuild contracts or refuse to enforce the provisions of a contract that he believes was written solely for the purpose of tax avoidance. The Commissioner will rebuild the contract in any way he considers suitable to prevent that avoidance. As such when taxpayers go on the other side of the road they find themselves in situations where they are obligated to pay taxes that they did not expect to pay. Contracts must be written with not only business commitments in mind, but also with tax obligations in mind.

In cases of contracts involving related parties when corporations get into agreements, they frequently undercharge or overcharge each other when comparison is done on transactions involving unrelated parties. Offering technical support services within group setups; financial assistance in the form of loans, guarantees, and extended credit terms; intangible transactions such as the use of brand, know-how, intellectual property and making available equipment for rental payments are examples of transactions between related parties. These types of transactions necessitate thorough examination because of the tax problems involved in terms of transfer pricing. Contracts must be structured with tax requirements as well as commercial commitments in mind. These types of transactions need a full assessment of the tax issues associated with them. Some businesses find themselves in a situation where they deal with a corporation whose controlling shareholding is also on the board of the company with which they are transacting, and they enter into unusual arrangements based on tax avoidance or evasion. When the taxman detects this type of agreement, he promptly invokes the provisions of section 2A(1) of the Income Tax Act. When section 2A is activated, the following section to be applied is section 98B, which deals with associate transactions. The consequences of such an arrangement are effectively represented in subsections (1) and (2) of section 98B thus penalties which could have been avoided.

Contracts with non-residents

Certain clauses in contracts with non-residents must be avoided by taxpayers. Non-residents frequently bargain for tax reductions on foreign lands and frequently bring about the provision “all taxes of the country to be borne by the payee.” This is a highly problematic clause since it places the tax burden on the payee, despite the fact that rules such as the 17th Schedule expressly say that non-resident tax on fees is the non-resident’s responsibility. Unfortunately, because taxpayers do not understand the terms of the contract, they are forced to gross up (pay tax on customers’ behalf) in order to comply with tax obligations.

Although businesses enjoy contract freedom, they should pay close attention to every detail to prevent problems with the taxman, especially when establishing the provisions that govern their contracts. When organizations enter into contracts, transfer price rules must be followed, and transfer pricing documents must be provided as a reference. A corporation should identify its associated parties and ensure that all transactions are conducted at arm’s length. When creating contracts, it is preferable to consult with a lawyer and a tax expert to ensure that all of the implications of the contract are clearly put out. In terms of agreements, multinationals, group corporations, family managed firms, and companies that entangle business transactions with their linked counterparts should be on the lookout. In a nutshell avoid excessive fines and interest by signing where the pricing is correct and the terms and conditions are fairly drafted.

Zimbabwe pouring cold water on cryptocurrency. A prudent move or a strategy to buy time

by with No Comment Tax News

In order to foster economic recovery and development there is need to have serious players and embrace innovation. Without ignoring the fact that not every innovation is beneficial to the growth of the economy,  there is need to embrace it with caution. An outright technophobia is however an impediment to growth. With the prevailing liquidity crisis, some traders have resorted to virtual currencies to facilitate payments. This piece of writing is targeted at unfolding the mystic persona of cryptocurrency including the tax effect in Zimbabwe thereof.

A cryptocurrency is a digital virtual currency that uses very strong cryptography for security. A cryptograph is a sort of coded message. Cryptocurrency is thus difficult to counterfeit because of this security feature. The security features are not hack proof, consequently there are risks associated with trading in this currency which are worth knowing about. Cryptocurrency advocates canvass the use of this currency because of its anonymity, but we consider this feature to be a con and not necessarily a pro. The anonymity nature of the transactions makes the trade a haven for criminal activity such as money laundering and tax evasion. Due to the fact that cryptocurrency is virtual and does not have a central repository or storage, its digital balance could easily be wiped out by a computer crash if the backup copy of the holdings does not exist. There has been a lot of scepticism with this form of currency in many jurisdictions. The legal status of cryptocurrency is at variance from one country to the other. Others have legitimized the use and trade in cryptocurrency whilst others have banned or restricted its use. For those that have allowed or legitimized the currency, they have classified it differently in their jurisdiction for example as property or financial instruments. Others have banned the handling of cryptocurrency by financial institutions whist others have only illegalised the currency in respect of buying goods.

Arguably, the most appealing feature of cryptocurrency is that it is not issued by any central authority, rendering it in theory immune to government interference or manipulation. The most popular crypto currency is Bitcoin which was launched in 2009. There were over 17 million bitcoins in circulation, which have a total market value of over $US 140 billion as at May 2018.The benefits of cryptocurrency include but are not limited to: making it easier to transfer funds between parties in a transaction; minimal processing fees in transfer of funds in comparison to most financial institutions for wire transfers. For a nation like Zimbabwe, this is a sensible alternative method of payment for imports given the scarcity of foreign currency. Like any online technology, the obvious drawback is the risk of hacking.

In Zimbabwe, the Reserve Bank of Zimbabwe (RBZ) banned all financial institutions from accepting cryptocurrency as collateral, opening accounts of exchanges dealing with cryptocurrency; transfer or receipt of money in relation to purchase or sale of virtual currencies. From a tax perspective, it is a very prudent move by RBZ. The legal framework governing the collection of revenue in the trade of virtual currencies has not been set up yet. The anonymity nature of the transactions makes traders out of reach from the taxman. This is a particularly dangerous position for the fiscus because there is no way of keeping track of the transactions performed. The only way in which the taxman can know about how much income a taxpayer has made from the trade in virtual currencies is through full disclosure by the taxpayer. The major strength or allure of the virtual currency is the anonymity nature of the transaction.

Although the move by the RBZ was a sensible one, it was done hurriedly without proper thought of the legal consequences of the action. At the face of it, the RBZ had violated the administrative principle of audi alterem partem which places a responsibility on the Authority to listen to both sides of the story before passing on law. It could be that they wanted to buy time to allow them to formulate policy to govern the trade in cryptocurrency. The Reserve Bank simply had no law to stand on regarding the ban. The ban was just imposed without following proper administrative procedure. The void in the law regarding cryptocurrency leaves the country exposed to the vagaries of tax evasion and the consequent loss of revenue. It is critical for the legislature to quickly make law that either governs the trade or bans the trade in cryptocurrency.

There is a general lack of understanding of this virtual currency amongst many people, the world over. It can be deduced that the stance taken by the central bank is that of caution. In the United States of America, an arguably leading economy in the world, through its revenue authority, the Internal Revenue Service (IRS) ruled that virtual currency would be treated as property for tax purposes. This means that virtual currency would be subject to capital gains tax. Perhaps, Zimbabwe could pick a leaf from the way the Americans handle the virtual currency.

Our legislature must see this as an opportunity to collect revenue, perhaps by learning more of the currency and the technology, and then formulate a policy that is in tandem with the prevailing economic conditions of Zimbabwe. This obviously takes time as this is not a well understood trade and technology. There must however be a balance between open mindedness and caution given the high risk of scammers that roam the internet jungle on a daily basis.

Transfer Pricing Documentation in a nutshell

by with No Comment Tax News

With effect from January 1, 2016, the government adopted transfer pricing legislation. A variety of provisions addressing transactions between associates were included in the transfer pricing legislation. The main stipulation of transfer pricing laws and regulations is that between associates or related parties must be fair and represent the same conditions as would if transactions were done by unrelated parties.  According to the arm’s length concept, parties should charge each other the same price for a given commodity whether they are linked or not. The legal requirements for the documentation that associated individuals must maintain has remained a murky area that has not been made clear by the legislation. The Income Tax (Transfer Pricing Documentation) Regulations, 2019, which have been gazetted by the government through SI 109 of 2019 require every taxpayer to keep documentation confirming that the terms of their transactions with related parties for the applicable tax year are consistent with the arm’s length principle. The regulations, which are the subject of this article, went into effect on May 10, 2019.

Transfer pricing is the price charged for the transfer of property, goods, or services between associated entities. The OECD TP Guidelines define “TP” as “the prices at which an enterprise transfers physical goods and intangibles or provides services to associated enterprises”.

Many jurisdictions require contemporaneous documentation as part of their transfer pricing laws. Documentation is considered contemporaneous if it is in place on the filing date of the statutory tax return. Each taxpayer should try to calculate transfer prices for tax purposes in line with the arm’s length principle, using information that is reasonably accessible at the time of the transaction. Thus, a taxpayer should normally assess whether its transfer pricing is suitable for tax reasons before establishing the pricing and should validate the arm’s length character of its financial performance when completing its tax return. The use of OECD Transfer Pricing Guidelines, OECD Model Tax Convention, UN Transfer Pricing Guidelines, the Income Tax Act, SI 109 of 2019 and the Finance Act Number 2 of 2015 inclusively has been seen handy in providing all the necessary information on TP. The new legislation, SI 109 of 2019 gives detailed documentation requirements as follows:

Documentation must include an overview of the taxpayer’s business operations (history, recent evolution and general overview of the relevant markets of reference) and organizational chart (details of business units or departments and organizational structure). A description of the corporate organizational structure of the group that the taxpayer is a member (including details of all group members, their legal form, and their shareholding percentages) and the group’s operational structure (including a general description of the role that each of the group members carries out with respect to the group’s activities, as relevant to the controlled transactions);description of the controlled transaction(s), including analysis of the comparability factors specified in  the Income Tax Act on the selection of most appropriate transfer pricing methods, and, where relevant, the selection of the tested party and the financial indicator. Selection of the transfer pricing method is confined to Comparable Uncontrolled Price, Resale Price Method, Cost Plus Method, Transactional Profit Split Method and Transactional Net Margin Method.

Comparability analysis follows and it includes; a description of the process undertaken to identify comparable uncontrolled transactions; an explanation of the basis for the rejection of any potential internal comparable uncontrolled transactions (where applicable); a description of the comparable uncontrolled transactions; analysis of comparability of the controlled transactions and the comparable uncontrolled transactions and, details and explanation of any comparability adjustments made; details of any industry analysis, economic analysis, budgets or projections relied on; details of any advance pricing agreements or similar arrangements in other countries that are applicable to the controlled transactions; a conclusion as to the consistency of the conditions of the controlled transactions with the arm’s length principle, including details of any adjustment made to ensure compliance; and any other information that may have a material impact on the determination of the taxpayer’s compliance with the arm’s length principle with respect to the controlled transactions.

Meanwhile, because it focuses on domestic transactions, our TP rules are out of step with the rest of the globe. Imposing transfer pricing legislation on domestic transactions incurs administrative costs and creates problems. To begin with, there is anti-tax avoidance legislation that existed prior to transfer pricing legislation, and this legislation grants the Commissioner broad powers to adjust prices or income where the parties’ transactions, arrangements, or operations are found to be inconsistent with the arm’s length principle or not reflective of market prices. The second concern is that domestic transactions are taking place in a country that has the same tax rate which in turn does not give a permanent tax advantage to taxpayers. Thirdly, transfer pricing documentation is prohibitively expensive to generate, particularly for small and medium-sized firms, who account for the vast majority of taxpayers in Zimbabwe.

Further, the new transfer pricing laws did not identify revenue or transaction value or taxpayer revenue criteria above which transfer pricing paperwork would be required. As a result, all taxpayers who conduct transactions with associates are required to retain contemporaneous transfer price evidence.

The Commissioner may seek documentation at any time, and if so, it must be submitted within seven (7) days after the day the request is issued in English. Taxpayers involved in connected transactions should consequently create and submit transfer pricing documents to avoid fines. However, the authorities may need to reconsider the necessity for transfer pricing evidence in domestic transactions, as it may be prohibitively expensive for SMEs to obtain transfer pricing documentation. Meanwhile, if the authorities maintain transfer pricing laws on domestic transactions, thresholds for documentation retention should be established.

In conclusion, transfer pricing documentation is an important part of doing business in Zimbabwe. It helps to ensure that multinational companies are paying the correct amount of taxes and it also allows for better compliance with international accounting standards. Transfer pricing documentations plays an essential role in helping businesses meet both national and international regulatory obligations while also providing them assurance against potential penalties arising from incorrect filing procedures resulting inn inaccurate computation off taxable incomes.

Hybrid payroll could be fueling inflation

by with No Comment Tax News

In the past the computation and declaration of PAYE was not an issue because the bond notes and the United States dollars were treated on a 1:1 basis and it also did not matter the currency of tax payment to the ZIMRA. In the advent of the promulgation of regulations governing monetary issues namely statutory instruments 32 and 33 of 2019, it has become difficult dealing with payroll issues especially in cases where earnings are both in RTGS dollars (RTGS$) and in foreign currency. An issue for concern is the hybrid payroll triggered by the use of multicurrency as it could be one of the reasons for the surge in the inflation rate. The article will dissect and ventilate the prognosis of hybrid payroll as a conduit for inflation and how employers could ameliorate the situation for the betterment of the employees and economy.

In essence, paying employees blended income results in USD tax tables being used. This is done by converting the ZWL component of gross income, deductions and deductions to USD equivalent using the official interbank rate of exchange and adding these to the actual USD earnings for the employee. USD tax tables are then applied to the combined USD earnings for determination of PAYE. However, the resultant PAYE should be remitted to the ZIMRA in proportion to currency of earnings. Where earnings are 100% in local currency, ZWL tax tables are used. If an employee receives any other foreign currencies other than USD, the amount is converted at cross rate to USD on the date the remuneration accrues to him. The fact that the official rate of exchange always trails the parallel market rate (normally at 50%) and the two rates keep moving there has a need to adjust the ZWL$ earnings to maintain purchasing power.

Effectively, this conversion of the ZWL earnings to USD at the official rate results in a higher USD earnings (artificial USD earnings) which pushes most employees in a higher USD tax bracket judging by the way the parallel market is currently surging and the need by employers to retain their staff. The cost of employment has become unbearable especially when the objective is to retain staff. A vicious cycle of chasing purchasing power by both employees and employers is one of the many factors also feeding the inflationary environment obtaining in our economy. While the foregoing suggests dollarizing, i.e., paying 100% of earnings in USD, it is obviously a non-sustainable option for most employers as the economy does not have much of the sought after USD in circulation.  The alternative of paying 100% ZWL earnings does not help either since the ZWL$ tax tables have remained stagnant from the time they were introduced (1 January 2023) till now. In terms of the current ZWL$ tax tables a maximum of 40% applies on earnings of ZWL$1,000,000 per month, an equivalent to at most USD1,000 per month based on the official exchange rate (and half that amount if parallel rate is applied). Technically paying employees 100% ZWL$ earnings pushes most of them into the maximum rate of 40% + 3% AIDS.

Consequently, employees are being overtaxed when payroll is in multicurrency and most companies are battling to retain their staff.  It may be worthwhile for employers, depending on their ability to generate foreign currency, to pay a greater proportion of employment costs in foreign currency to cushion both the companies and employees. The more the foreign currency the less artificial USD earnings resulting in lower PAYE, but employers must also be prepared to send a greater proportion of the tax to ZIMRA in foreign currency. Additionally, they should also consider maximizing nontaxable benefits to employees for example paying 100% medical aid cover, pay airtime and data for employees (70% of this is regarded for business use in line with Finance Act 7 of 2021 therefore nontaxable), pay 100% pension contribution among other benefits on behalf of employees to cushion them and reduce employment costs. An appeal is made to the Minister of Finance to widen the USD tax tables to  a position similar to the position obtaining prior to SI 33 of 2019 by setting the minimum tax threshold and highest rate of 40% at USD250 and USD5,000 per month, respectively instead of the current USD100 and USD3,000 per month respectively. This may be one way of curbing inflation and stabilizing the economy.  Advocating for the adjustment of the ZWL$ tax tables is not a solution as more transactions are now being made in foreign currency as confirmed by the Minister of Finance in his recent public announcement “Measures To Stabilize The Exchange Rate and Macro Economy” where he stated that total foreign currency receipts are expected to top USD13 billion this year. 

In conclusion, the multicurrency regime has put both employers and employees in a state of hysteria because the employers though it makes sense to pay 100% USD salaries, have limited capacity to do so in most circumstances and on the other hand hybrid payroll prejudices the employees due to the high volatile rates which wipes out the ZWL component of the salary. A continuation of hybrid payroll is the harbinger and perpetrator of the skyrocketing rates of inflation which show no signs of abating as they choke the livelihood out of employees who are relegated to the peripheries of penury. It is trite to compound that a juxtaposed hypothetical solution could be reached when both employees and employers renegade and reach a compromise in terms of matters of the payroll as it could benefit both as the adage says” with a heart wide open there is no obstacle we cannot overcome”.