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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.

Due to technological developments, intangible properties have become a huge component of most companies’ statement of financial position. The body of accountancy recognises them as capital expenditure because they have a probable future inflow of economic benefits. They are an identifiable non-monetary asset without physical substance. The Organisation of Economic Cooperation Development in their Transfer Pricing Guidelines for Multinational and Administrators 2017 version have classified them into marketing and trading intangibles. Marketing intangible assets are comprised of brands, trademarks, trade names, customer relationships and copyrights. On the other hand, trading intangibles include assets, patents, and products designs, manufacturing warehouse and supplier relationships. Whichever the case may be, for accounting purposes, intangible assets are capital items. Their acquisition or development cost is capitalised for accounting purposes after meeting the recognition criteria stipulated by International Accounting Standards 38 and written off over their useful life provided they have a definite useful life.  The tax fraternity also recognises them as capital items not qualifying for deduction in the computation of income tax. The fact that intangible asset is treated as capital asset does not automatically make it qualify for capital allowances. Only expenditure on acquisition or development of computer software qualifies for capital allowance as fully explained in this article.

Computer software as per the Income Tax Act (Chapter 23:06) definition meansany set of machine-readable instructions that directs a computer’s processor to perform specific operations”.  The claiming of capital allowances on computer software is a recent development following from the case of D Bank Ltd v ZIMRA (FA 06/13) [2015] ZWHHC 135. In this case, D Bank sought to claim it as an operating expenditure qualifying for full deduction in the year it was incurred. The court dismissed the claim arguing that the expenditure was capital in nature and a prohibited deduction in terms of the law.  It was also barred from capital allowances because the expenditure had not been classified as expenditure qualifying for purposes of capital allowances. In view of the importance and growing size of this expenditure in financial institutions and Information Technology companies, the government amended the law to correct the anomaly with effect from 1 January 2015. It amended the definition of “article” in the 4th Schedule of the Income Tax Act (Chapter 23:06) to include tangible or intangible property in the form of computer software that is acquired, developed to or used by a taxpayer for the purposes of his or her trade, otherwise than as trading stock. The effect was to grant capital allowance on computer software expenditure incurred by any taxpayer deriving income from trade and investment, except for mining entities with effect from 1 January 2015. A trader, other than a miner can therefore choose either to claim Special Initial Allowances or wear & tear on computer software expenditure. Special Initial Allowance is an investment allowance which is claimed over a period of four or three years, for big businesses and Small to Medium Enterprises respectively. Where one has opted for wear and tear instead of SIA, the claim is equal to 10% per annum on the written value of expenditure on computer software regardless of size of the business.

While this was a welcome relief for persons deriving income from trade and investment, mining entities have been secluded from enjoying the benefit. The Minister of Finance and Economic Development, Prof. Mthuli Ncube in his 2020 National Budget Speech has however proposed to correct this imbalance by extending capital allowances on expenditure incurred by persons earning income from mining operations on acquisition and development of computer expenses with effect from 1 January 2019. Thus, tangible or intangible property in the form of computer software that is acquired, developed or used by the tax payer in connection with its mining operations and has been classified as capital expenditure for purposes of claiming capital redemption allowance.

Whether or not a taxpayer is a mining entity or not, the provision for capital allowances will not be applied on computer software acquired or developed for resale or sale. The expenditure will be treated as cost of goods or inventory of the taxpayer in the determination of taxable income. Meanwhile licence fees or royalties on computer software is neither tax deductible nor treated as capital expenditure ranking for capital allowances except annual and renewal fees. These are treated as deductible expenses in the computation of income tax.

Any person paying licensee fees (royalties) to a non-resident person, whether or not they are once off or renewal fees, is required to deduct non- resident tax on royalties at 15% of the royalties. A lower rate may apply if the non-resident licensor is a resident of a country that has concluded a tax treaty with Zimbabwe. Value added tax (VAT) on imported services is also applicable. This is an obligation of the resident person importing the services and is levied at the rate of 15% of the open market or invoice value of the imported services.

In conclusion taxpayers should be mindful of penalties and interest that may arise from incorrect deduction of expenditure on computer software acquired or developed by them for use in their business. The tax benefit arising from this expenditure can only arise from claiming capital allowances on this expenditure. To correct the imbalances, miners would also be getting capital redemption allowances on computer software expenditure acquired or developed for use in their trade come 1 January 2020.

Non-executive directors play a key role in good corporate decision-making hence the importance of engaging honest and experienced non-executive directors despite the size or status of an entity. They can make valuable contributions in determining corporate strategy and provide guidance on achieving strategic goals and the allocation of corporate resources to support strategic plans. The independence, objectivity and business acumen of non-executive directors compliment the detailed knowledge and experience of executive management. They are responsible for managing the affairs of a company through board meetings. There are however, concerns regarding the current tax regime of non-executive directors. Their effective tax rate is higher compared to their compatriots in business. Unlike companies; independent contractors etc; non-executive directors hardly have expenses attached to board fees hence they are taxed on gross fees.  The Minister has moved in to address this anomaly through pronouncement made in the Finance Bill number 3 of 2019 and with effect from 1 January 2020 non-executive directors will be relieved of the onerous burden and are possibly one of the biggest winners of 2020 National Budget. These measures are fully explained below.

The current law stipulates that non-executive directors are subject to 20% withholding tax on their fees. The tax is deducted and remitted to the ZIMRA by the company paying the fees. The director will then receive a withholding tax certificate as evidence that the tax has been deducted and paid over to ZIMRA. He/she will then be required to compute income tax and pay Quarterly Payments Dates (QPDs) as and when they fall due. Just like any other person in business, the director will file an income tax return after the year end. The QPDs and the final income tax are both based on 25.75%  tax rate from which the director will  be entitled to offset against this tax liability the withholding tax deducted by the company at source. The government has now scrapped the 25.75% tax on non-executive directors’ fees together with the requirement to pay QPDs and income tax, as well as filing of income tax return. The 20% withholding tax deducted by the company has been made a final tax thus simplifying the tax rules; and reducing the effective tax rate and the administrative burden for the non-executive directors.

Additionally in terms of the existing laws, a non-executive director not in possession of a valid tax clearance certificate suffers an additional 10% withholding tax on his payment. This means that a corporate which pays fees to a non-executive director not in possession of a valid tax clearance (IFT263) is required to deduct 10% withholding tax in addition to the 20% withholding tax on the non-executive directors’ fees. With effect from 1 January 2020, this is no longer a requirement. The government has exempted non-executive directors from the requirement to avail their tax clearance to corporate bodies paying them directors’ fees. This is a huge relief for non-executive directors considering that under the current tax regime the company would potentially deduct 30% for a non-executive director not in possession of a valid tax clearance certificate.  

It is important to note that, whilst the non-executive directors have been offered relief, if they receive anything over and above their fees which would be in the nature of remuneration normally given to employees they risk being treated as employees and the possibility of paying higher tax under such circumstances. Thus there are risks regarding the emergence of hybrid payments (e.g retainer fees, fuel allowance, home security services, accommodation, cellphone etc) made to non-executives over and above or as substitute to board fees and sitting allowances. In summary, non-executive directors are often conflicted when it comes to tax matters because of lack of tax knowledge. Apparently some non-executive directors are aware of the tax rules but know that if proper tax rules were to be applied by the “book” this would result in reduced earnings. Unfortunately for companies and non-executive directors ZIMRA is aware of these practices and is intensifying tax audits on payments made by companies to their non-executive directors to uncover any form of non-compliance.

Although the 20% withholding tax on non-executive director’s fees has been made a final tax, the non-executive directors are not relieved of the VAT implications of the fees in case the fees alone or together with his or her other business income exceeds VAT registration threshold. In such a case, the director will be liable to pay and file VAT returns. Meanwhile, the Minister through his 2020 National Budget Speech has declared the VAT registration threshold to be reviewed upwards to ZWL1 000,000 with effect from 1 January 2020.

In conclusion, non-executive directors are one of the biggest winners of the 2020 National Budget. Come next year, they will not be required to pay income tax and file returns since 20% withholding tax has been declared to be the final tax. In addition, they have been relieved from withholding tax on contracts for lack of tax clearance although the general practice for most appointments to such positions is that one must have a tax clearance. Meanwhile, payment of hybrid fees still exposes non-executive directors to tax risk of being classified as employees. Non-compliance with tax obligations relating to the payment of fees to NEDs may damage a company’s reputation for good governance and risk management. On the part of NEDs, integrity could also be questionable if one receives unauthorized board fees such as hybrid fees alluded to above; hence payment of tax is also a moral obligation.

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.

The Minister of Finance and Economic Development Professor Mthuli Ncube presented the Mid Term Fiscal Policy on the 1st of August 2019. Before the budget, I expected him to address the potential capital gains tax distortions arising from the conversion of United States balances into RTGS$ on a one-to one basis through SI33 and to deal with the form of currency for purposes of remitting taxes to the ZIMRA following the banning of foreign currency through SI142. Of these two issues, the Minister addressed the first issue but distortions still exist. With regard to the payment of taxes in foreign currency, he reinforced that taxes are to be paid in foreign currency on foreign currency transactions. This article seeks to provide a run-down of the changes specific to capital gains tax regime and highlight the remaining sticking issues of the proposed regime.   

Paying capital gains tax in foreign currency

The Minister retained the laws on payment of taxes in foreign currency notwithstanding the agenda to promote the Zimbabwe dollar as the sole legal tender in domestic transactions as articulated in SI142. Therefore when a specified asset is sold in foreign currency, capital gains tax is required to be paid in foreign currency. This is mentioned in the Finance Bill  which provides that “… it shall not be deemed for the purpose of the Capital Gains Tax Act [Chapter 23:01] that all transactions involving the sale or other disposal of a specified asset are in Zimbabwean currency, rather—….where any such transaction results in a capital gain being received by or accruing to or in favour of a person in whole or in part in a foreign currency, capital gains tax at the rate specified… shall be paid in foreign currency on the capital gain or on such portion of it that is equivalent to the portion of the total transaction denominated in foreign currency”. This is somehow repeated by s37 of the Finance Act which provides “where only part of the capital gains are received by or accrued to or in favour of a person in a foreign currency, the amounts of any tax due on both parts of such capital gains in terms of s38 and 39 shall be calculated separately and paid in the appropriate currency relative to each part”.  The separate computation as envisaged by s37 is that in a part foreign currency and part Zimbabwe dollar sale, one could possibly be required to pay capital gains tax in one currency whilst at the same time experiencing capital loss in the other currency, or when the overall position could have been a loss. This presents distortions, subjectivity and administrative complexity in the capital gains tax regime.

The new rates of capital gains tax

As expected the Minister addressed the distortionary effect brought about by SI33 of 2019 which provides among others that for accounting and other purposes assets and liabilities held prior to 22nd of February 2019 and valued and expressed in United States Dollar on 22nd of February 2019 shall be deemed to be values in RTGS dollars at par with United States Dollar. This has the effect of converting cost base of specified assets in United States to a weaker RTGS dollar on 1:1 basis, and thereafter restricted and yet the selling price of those assets could be inflated as it accords with the interbank rate resulting in an artificial capital gain.  In order to correct this anomaly, capital gains tax rate was reduced from 20% to 5% of capital gain. Capital gain is an amount resulting from deducting from the sale proceeds, sum of costs as provided for in the Capital Gains Tax Act (i.e. original cost, cost of improvement, 2.5% inflation allowance, selling expenses etc). Therefore, capital gains tax may be levied where there is none in real terms. Taking for example a person who bought a house in 2017 for US$100,000, (i.e. RTGS$100,000 because of SI33) and the property is sold now to a buyer who is willing to pay RTGS$450,000 (i.e. US$90,000 equivalent), capital gains tax will arise under the current tax regime when in real terms there is a capital loss. Meanwhile, the Minister has proposed a 5% of gross proceeds in respect of disposals or sales of specified assets made prior to the 24th of June 2019 where capital gains tax has not yet been assessed and paid.

The rates of capital gains withholding tax

The Minister also revised downwards the rate of capital gains withholding tax on sale of immovable property to 5% from the current 15%.  This is a welcome relief in terms of cashflow management to taxpayers. The rate of withholding tax on listed marketable securities is retained at 1% of the price at which the security was sold. It appears the Minister has omitted the capital gains withholding tax rate on the disposal of unlisted marketable securities and this has completely been removed from the Act.

Other changes

The Finance Bill proposes to exempt from capital gains tax a sale or disposal of any shares or other marketable securities to the Sovereign Wealth Fund established by the Sovereign Wealth Fund of Zimbabwe with effect from the 1st of January 2019. It further reviewed the threshold for assessed capital loss not to be carried forward from ZWL100 to ZWL 800 and exemption of marketable securities from capital gains tax when disposal has been made by a person who is 55 years or above; from ZWL1800 to ZWL14 400. Threshold of capital gains which shall not be subject to tax revised from ZWL50 to ZWL400.

In conclusion, the clean-up exercise was necessary and the Finance Bill attempted to do that, but the impact of SI33 cannot in all cases be eradicated. Cases where capital gains tax would be paid in future as the prices of properties go down will be many. Meanwhile Matrix Tax School will be hosting the Tax and Business Interface from the 9th to the 12th of October 2019 at Troutbeck Inn, Inyanga. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School. He writes in his personal capacity.

On the 24th of June 2019 the government took a bold move of re-introducing the Zimbabwe dollar as the sole currency for domestic transactions, thereby technically banning the use of foreign currency in settling obligations within Zimbabwe, except for purposes of paying of duty and VAT upon importation of goods as well as paying airfares to airlines. This move is a culmination of a process which started in October 2018 when the government separated bank accounts for RTGS$ and Nostro FCA. In February 2019 it introduced the Zimbabwe dollar as a legal tender along with other foreign currencies and made it the functional currency for accounting and other purposes. Assets and liabilities held on 22 February 2019 were deemed converted from United States dollar to RTGS$ on 1:1 and to remain fixed thereafter. After 22 February 2019 conversion of United States to RTGS$ to be determined using the interbank rate of authorised dealers whose determination is on willing buyer willing seller basis. Enactments in United States were deemed expressed in RTGS$ on a 1:1, implying wherever there is United States dollar amount it should be read as RTGS$ amount on a 1:1 basis. These monetary developments however have not been complemented by fiscal developments which remain stuck in foreign currency as regards to payment of taxes for transactions made in foreign currency, as a result there are now tax challenges of transiting to the Zimbabwe dollar which the government needs to sort out in order to sanitize the monetary policy.

One such challenge is with regard to VAT on credit sales invoiced in foreign currency made before the 24th of June 2019, but whose settlement is made in Zimbabwe dollar thereafter. The payment of output tax is predicated on the time of supply rule, which provides that VAT is triggered when an invoice is issued, payment is made for the supply, goods are delivered, services are performed or when immovable property is registered in the deeds registry whichever occurs first. This therefore entails that output tax can be declared and remitted in foreign currency on credit sale which is settled in the Zimbabwe dollar because of changes brought about by SI142. The government will need to step in and declare how such matters should be dealt with. The credit and debit notes rules provided within the VAT Act do not seem sufficient to address this issue. The same transaction may have income tax implications because the law requires income tax to be paid in foreign currency when the sale is made in foreign currency. A taxpayer may therefore end up being required to pay income tax in foreign currency for a sale it invoiced in foreign currency, notwithstanding the fact that the debtor settled it in Zimbabwe dollar following the banning of foreign currency payments.  On the flip side, the government might lose foreign currency as a result of taxpayers claiming input tax on invoices issued in foreign currency but which after the 24th of June 2019 are settled in Zimbabwe dollar. The law allows a VAT registered operator to account for tax payable on invoice basis as long as the operator is in possession of an invoice meeting the requirements of a tax invoice and the claim is made within the tax period the operator is required to submit a tax return or 12 months whichever is the longer period. It is not necessary that the invoice should have been settled for the claim to be made.

The Minister of Finance would also need to review values of tax credits, certain capital expenditure for capital allowances purposes, prescribed donations etc when presenting his mid- term budget later this month. These values were eroded by inflation following conversion from United States dollar to RTGS$ on 1:1 basis and therefore no longer retain their status tax incentives to the taxpayers. Statutory instrument 33 provides that: “… every enactment in which an amount is expressed in United States dollars shall, on the and after effective date, be construed as reference to the RTGS dollar, at parity with the United States dollar, that is to say, at a one-to-one rate”. The same applies for employment tax tables which have resulted to most employees being pushed into high tax brackets.

Capital gains tax rules also need revision. This is because Statutory Instrument 33 which provides that opening balances of assets are valued and denominated in RTGS dollars at a rate of 1:1 with the United States dollar has created an onerous tax burden on taxpayers for assets acquired before 22 February 2019 and sold after this date. The cost base of those assets remains stuck in RTGS at 1:1 with USD whilst the selling price will be inflated as it accords with the interbank rate of exchange. The result is the creation of artificial RTGS$ capital gain when in terms of real value one would not have made any gain. A move to a flat tax rate for such assets would save taxpayers of heavy tax burden, whilst at the same time simplifying tax computation.

Finally the laws for payment of taxes in foreign currency in an economy where the Zimbabwe dollar is the sole legal tender for domestic transaction militates against certainty, simplicity and stability of a tax system. These tents constitute cornerstones of a good tax system which policy makers should always consider whenever introducing any tax policy. They are also the benchmarks by which taxpayers can assess the effectiveness of government in maintaining and improving tax systems. Complicated tax laws alienates investors as well as adding to the cost of doing business. Whereas, effective tax systems are a critical building block for increased domestic resources in developing countries such as Zimbabwe, essential for sustainable development and for promoting self-reliance, good governance, growth and stability. Tax transitionary rules which recognise Zimbabwe dollar as the sole currency for purposes of paying taxes are therefore necessary for purposes for migrating to the new currency and bringing confidence in the Zimbabwe dollar, short of which the business community will continue to have a high regard of foreign currency particularly the United States dollar which may derail the government’s move towards monetary sovereignty. This will also assist in resolving the administrative complexities and tax arbitrages associated with multicurrency system.

In my last week article, I mentioned that the paying taxes in foreign currency has been part of our law since the introduction of multi-currency in 2009 and that the ZIMRA as the administrator of the law is reaffirming this position. Now with the re-introduction of the Zimbabwean dollar through Statutory Instrument 142 and the abolition of the use of foreign currency in domestic transactions, it appears there is an end to this era. Before we quickly jump to this conclusion, we should put things into perspective. Firstly there are taxes on transactions in foreign currency arising before the 24th June 2019. Secondly there will be transactions in foreign currency because someone has disobeyed the law and thirdly transactions in foreign transaction because these will be international transactions. The ZIMRA has through its public notice issued on Friday the 28th of June 2019 gave guidance regarding the first part. It provided that “All taxes that were collected, received or accrued prior to SI 142 of 2019 are paid in terms of the provisions of the prevailing legislation. Tax returns and payments shall be prepared and submitted in the manner provided in the legislation and as guided by the Commissioner General of ZIMRA. The taxes should be paid in local currency and in foreign currency as provided in the legislation. This requirement applies to all tax heads without exception”. This article fully discusses these three scenarios, but should not be construed to be a legal opinion.    

Regarding transactions happening before 24th of June 2019 in foreign currency, SI 142 of 2019 which reads in part as follows is relevant: (1) Subject to section 3, with effect from the 24th June, 2019, the British pound, United States dollar, South African rand, Botswana pula and any other foreign currency whatsoever shall no longer be legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe..” (Underlined words own emphasis). The Cambridge dictionary defines transaction as “an occasion when someone buys or sells something, or when money is exchanged (underlining own emphasis) or the activity of buying or selling something; or the process of doing business”. The term exchange is defined in turn as “the act of giving or taking one thing in return for another” (Merriam-Webster online dictionary). It appears from these definitions the remitting of taxes to a tax authority is not a transaction.  The relevant transaction therefore is that between the taxpayer and its customer, employee etc. If such transaction was denominated in foreign currency before 24th of June 2019 tax, it appears liability for taxes arises in foreign currency. To buttress this point, taxes such VAT, PAYE and withholding taxes are “trust taxes”. They are collected and remitted to ZIMRA by the person who is not the ultimate payer but as an agent of the government. The agent has no transaction with the ZIMRA but duty bound to hand over the money he has collected. The doctrine of unjust enrichment refrain him from pocketing what is not his. It is also a common law principle that he cannot make any profit or acquire any benefit in the course and in the matter of his agency without the knowledge and consent of his principal. Where he uses property entrusted to him by the principal to make a profit for himself and without the principal’s consent is in breach of his duty not to make secret profit. Some people could still argue there is no unjust enrichment where the person has paid the equivalent of foreign currency in RTGS dollar using the interbank rate. This argument is difficult to sustain in light of the explicit tax laws which states payment of taxes on in foreign currency where transactions are in foreign currency and these laws are still in force.

Addressing the second category transactions i.e. transaction in foreign currency transactions against the spirit of SI142, it is a trite at law that tax follows a transaction regardless of its legal status. It was held in MP Finance Group CC v Commissioner, SARS, 69 SATC 141 that income “received by” a taxpayer from illegal gains will be taxable in the hands of the taxpayer. The English case of Commissioners of Inland Revenue v Aken 63 TC 395, [1990] STC 497 is also in support of this view. It held that; “…. if the activity is a trade, it is irrelevant for taxation purposes that it is illegal …I do not think that the word ‘‘trade’’ in itself has any connotation of unlawfulness. There may be lawful trade; there may be unlawful trade. But it is still trade”. The case of CIR v Delagoa Bay Cigarette Co Ltd 1918 TPD 39, also held that “the taxability of a receipt is not affected by the legality or illegality of the business through which it was derived.” Therefore it appears where a person has traded in foreign currency liabilities for taxes will arise in foreign currency, regardless of the fact he has breached the law.

In respect of sectors such tourism, mining etc where foreign transactions (international transactions) will be prevalent the laws for payment of taxes in foreign currency will continue to apply. Statutory Instrument 142 of 2019 is about banning foreign currency on domestic transactions by making the Zimbabwe dollar the sole legal tender. In conclusion, taxes with regard to transactions in foreign currency whether or not they arise legally or not appears required in foreign currency because the laws which requires taxes to be paid in foreign (section 4A of the Finance Act and s38 (4) (a) of the VAT Act) continues in existence. The ZIMRA has also confirmed this position regarding transactions occurring before 24th June 2019, which appears correct interpretation of the SI142. Taxpayers are therefore urged to comply with the ZIMRA directive in order to avoid penalties which may arise from not complying with the law.

Recently the Zimbabwe Revenue Authority (ZIMRA) through a public notice commanded taxpayers to pay provisional income tax (Quarterly Payment Dates; QPDs) in foreign currency when taxable income is earned, received or accrued in whole or partly in foreign currency. This is not news but an enforcement of the existing laws because the requirement to pay tax in foreign currency has been part of our fiscal statutes since February 2009 when the country adopted the multi-currency system. It has not been an issue until October 2018 when the Reserve Bank of Zimbabwe directed banks to separate bank accounts into RTGS FCA and Nostro FCA. ZIMRA followed suit in November 2018 by issuing a public notice requiring all taxpayers to account for tax in foreign currency in respect of income earned in foreign currency. In February 2019, the government abandoned the one to one (1:1) exchange rate between the United States Dollar and the RTGS/ Bond for the interbank exchange rate system. All assets and liabilities prior to 22 February 2019 were to be converted to RTGS dollars at the rate of 1:1. This article is not seeking to criticize the ZIMRA public notice but to highlight issues raised, the policies and their impact on businesses.   

The current systems promotes double dipping. As an example, when RTGS dollar is used as the functional currency for accounting and other purposes as contemplated under SI33 foreign currency exchange differences are bound to occur. These arise when monetary items are settled or when monetary items are translated at rates different from those obtaining when initially recognised or in previous financial statements. A gain is recognised as gross income in the tax return whilst foreign exchange loss is treated as a deductible expenditure. However only foreign exchange gain or loss of a revenue nature and realised are dealt with in this way, whilst capital nature or unrealised gains or loss have no tax implications. It is however my view that when the income tax is paid in foreign currency as contemplated, exchange differences should not exist for tax purposes because tax payment is in the currency of tax reporting, but the fact that the provisions which provides for the treatment of foreign exchange difference have not been outlawed there is no basis for excluding them in the tax return. Double dipping may therefore occur e.g. double taxation where foreign exchange gains are realised and double deduction where exchange losses are realised, when taxes have been accounted for in foreign currency.

Another problem with the current income tax regime is that it taxes capital or productive assets contrary to the spirit of the income tax system. It is the role of a capital gains tax system to levy tax on wealth on fixed properties not an income tax system. As it stands there is juridical double taxation because of application of these two regimes on the amounts. For instance when assets that ranked for capital allowances prior to 2019 are sold after 22nd of February 2019 in RTGS dollars at the prevailing interbank rate of exchange and to be set off against the cost of the asset in RTGS dollars at 1:1 with the United States dollars there may be a taxable recoupment notwithstanding the asset may have been sold at below income tax value in real terms. Another situation is in respect of capital allowances that are at lesser value in real terms for assets brought forward from 2018 because the cost base of the assets will be expressed in RTGS$ at 1:1 with USD. Not to mention also the assessed losses brought forward from 2018 which will be written off at an accelerated pace because they will be set off against sales in RTGS$ at the interbank rate of exchange. Taxing capital impairs the value of the business and reduces its potential to recapitalise as a result reducing the future supply of goods or services or may send companies out of business.

One of the key tents of a good tax system is that it must achieve tax neutrality, that is a good a tax system should not create incentives for firms or individuals to change their behavior—to invest more or less, to work more or less, to locate in one place rather than another, to employ more or less labor or more or less capital. This at the moment is questionable. For example the apportionment of tax into RTGS dollar and foreign currency components using the turnover figures as contemplated in the ZIMRA public notice indirectly attack this principle as it disregards the proportion of deductions where they can be disproportionate or be in a different pattern from that of turnover. One taxpayer may incur expenses predominantly in foreign currency while their turnover is received largely in RTGS$. This presents a distortion on the tax payable in RTGS and foreign currency.  The formula further complicates tax administration as taxpayer will have to bear the burden of converting amounts into foreign currency for purposes of complying with the laws.  A country’s income tax regime is a barometer of the business environment and may negatively or positively influence investment. For instance, where the rules and their application are nontransparent, overly complex or unpredictable this will add to the cost of the project, creates uncertainty and thereby discouraging investment. Furthermore, a system that leaves excessive administrative discretion in the hands of tax officials invites corruption and brings uncertainty to the business. Policy makers are therefore encouraged to ensure that their tax system imposes an acceptable tax burden that can be accurately determined, and which keeps tax compliance and tax administration costs in check. The current income tax regime falls short of these requirements as it contains a number of flaws when measured against Adam Smith’s good principles of tax system such as certainty, administrative efficiency, tax neutrality, simplicity etc. Simplifying the tax regime should be the priority when the Minister of Finance and Economic Development presents his midterm fiscal policy soon.


The 2019 Monetary Policy and its accompanying legislation abandoned the 1:1 parity rate of exchange between the bond note and the United States Dollar. Real Time Gross Settlement (RTGS) system balances expressed in the United States dollar immediately before the effective date, 22 February 2019 were taken to be opening balances in RTGS dollars at par with the United States dollar. At the same time, a new currency, the RTGS dollar was introduced. In addition, every amount expressed in United States dollars (USD) in any piece of legislation was deemed to be in RTGS on a rate of 1:1. And the conversion and translation of USD balances to RTGS has created foreign exchange gains and losses which have tax implications for taxpayers as more fully explained in this article.

Law and Interpretation

The Income Tax Act brings into tax, foreign exchange gains realized from trading, that is, from income of a revenue nature. Revenue nature exchange gains are those which arise from the sale of goods or services in the course of a taxpayer’s trade or on working capital items such as debtors, settlement of trade creditors, on bank deposits used in the day to day business activities of the taxpayer or on inventory (stock). If the receipts and accruals occur in different years of assessment, effect shall be given to the increase or reduction in the gross income in the year of assessment in which the amount was received. The foreign exchange gains taxed will be on translation of assets and not on conversion as conversion of assets is a transaction of a capital nature. Furthermore, the Income Tax Act provides that: “When, owing to a variation in the rate of exchange of currency between Zimbabwe and any other country, the amount actually paid in Zimbabwean currency differs from the amount of the liability that had been incurred prior to the variation in the rate of exchange— (i)  the amount to be deducted shall be the said amount actually paid in Zimbabwean currency (ii)  if the incurring of the liability and the payment therefor occur in different years of assessment, effect shall be given to the increase or reduction in the amount in the year of assessment in which the amount was paid.” The amount to be deducted is the amount actually paid in Zimbabwean currency to the extent that it differs from the amount of the liability that had been incurred prior to the variation in the rate of exchange. It is important to note that, whilst foreign exchange losses of a revenue nature are deductible, capital nature foreign exchange losses are capitalised.

The new monetary laws led to both conversion and translation of assets and liabilities. Conversion and Translation of assets and liabilities are intricately interwoven, yet distinct concepts. The conversion of an asset is when the asset is actually changed from one currency to another. The asset itself actually changes in that it actually changes in form. A conversion mimics the transaction that happens when one exchanges currency for another in a bureau de change. With translation of assets, on the other hand, the asset remains unchanged and it is only the basis of measurement that changes. For example, United States dollars kept in a safe can be translated to another currency for the purposes of reporting. This does not in essence change the value of the United States dollars kept in the safe as they remain the same in terms of their nature. In other words, the dollar bill itself remains the same, and does not change into a bill of another currency as with a conversion. Conversion does not create taxable profits, whilst translation does. Conversion does not give rise to trading activity and therefore should be presumed to be of a capital nature. On the other hand translation results from variation in exchange rate which is a consequence of trading activity.

The government through SI32 of 2019 introduced a new currency now known as the RTGS dollars. SI33 of 2019 further provides guidelines for the conversion of balances from the United States dollar to the RTGS$. To that end, companies are required to convert their US dollar valued assets and liabilities to RTGS dollars. The rate of conversion however, depends on when the assets were held by the company and at what point the liabilities were incurred. The provisions entails that the conversion of the monetary values of assets and liabilities denominated in US dollars to RTGS dollars will be done at a conversion rate of 1:1 with the United States dollars for assets and liabilities held before the 22nd of February 2019. This in general means that there are no foreign exchange gains or losses to be realized by the company if the conversion of the assets and liabilities is to be done at a rate of 1:1. There are exceptions to the 1:1 exchange rule namely (a) funds held in foreign currency designated accounts, otherwise known as “Nostro FCA accounts”, which shall continue to be designated in such foreign currencies; and (b) foreign loans and obligations denominated in any foreign currency, which shall continue to be payable in such foreign currency.


In conclusion, the realization of gains or losses depends on when the assets or liabilities were held by the company. If the assets and liabilities that were held before the 22nd of February 2019 valued and expressed in US dollars were to be converted to RTGS dollars, the rate of conversion would be at 1:1. Such conversion if done in excess of 1:1 USD to the RTGS will nevertheless remain capital in nature. For assets and liabilities valued and expressed in US dollars held after the 22nd of February 2019, contemplated for translation by the company, then the translation rate would be at a rate in excess of 1:1 with the US dollar. These will create taxable or deductible foreign exchange gain or loss, if they arise from working capital items and the settlement is done prior to year-end and non-taxable or nondeductible unrealised foreign exchange gain or loss, respectively if the assets and liabilities are still held at year end.  The same applies to amounts in Nostro accounts or short term denominated foreign currency loans. For long term loans and property, plant and equipment whether realised or unrealised the foreign exchange gain or loss does not give rise to taxable income or assessed loss.


With the shrinking economy, the big businesses have become overladen with taxes. It is opined that if the SMEs contributed their fair share of taxes there could be a lot of revenue that may well have been collected for the benefit of the fiscus and ultimately for the benefit of the country. Fiscal exclusion has also been a factor influencing the lack of formalization of the SMEs. Depending on the type of registration undertaken by SME’s there are tax obligations that must be fulfilled by every business that is registered for tax purposes and this includes the SMEs. These include income tax, withholding tax, PAYE, VAT and Presumptive tax. These obligations may be greater or lesser depending on the structuring of the business. This piece of writing aims to indicate the tax issues that may affect the SMEs.

The Tax Benefits

In Zimbabwe 10% withholding tax is deducted on local businesses to business sales (B2B) upon payment to a supplier without a valid tax clearance certificate. By virtue of formalising tax affairs, SMEs can enjoy exemption of the 10% withholding tax on contracts with other businesses. In addition, it is now a prerequisite for most business transactions. SMEs relationships with big businesses is unavoidable sometimes. A valid tax clearance is one of the documentation required in order to participate in most tenders, including government tenders. Therefore if you do not have a valid tax clearance you will not only suffer withholding tax on payments from customers but you could also lose business opportunities. Further qualification for duty rebates and other import incentives are also linked to possession of a valid tax clearance. By regularizing your tax affairs, you will be entitled to claim expenses that you incur in your business.

Special Initial Allowance

SMEs even have a better capital allowance regime compared to big companies which write off capital assets against their income to reduce tax payable over three years at 50% in the first year then 25% wear and tear in the second and third year compared to 4 years of 25% per annum. SMEs do not enjoy assessed losses which can be carried forward for six years. When making losses the law allows you to use such losses to reduce taxable income, until the losses are used up or expires the company will not pay taxes to the fiscus. The reporting of such losses can be only done by a person or company who is formally registered for taxes.

Monthly payment of provisional tax

The income Tax Act provides for payment of provisional income tax in advance on a quarterly basis. And the quarterly payments are done in instalments of 10%; 25% 30% and 35% of the provisional income tax for each of the quarters of the year. The Income Tax Act provides that the Commissioner-General may, “on application by a taxpayer who qualifies as a “small or medium enterprise”, permit such taxpayer to pay provisional income tax on a monthly basis, that is, one month at a time in advance.” This facility is quite favourable and can allow for working capital management flexibility on the part of SMEs given that for most of them, their business models are quite different from those of large enterprises.

Lower rate of mining royalties

The sale of specified minerals by miners to the buying agents attract a deduction of tax at rates that vary depending on the mineral being sold. Payments to small scale gold miners, popularly known as “gold panners” or “makorokoza” for gold deliveries are deducted mining royalties at a lower rate of 3% as compared to the general rate of 5% applicable to other enterprises. The small scale gold miner should be classifiable as a “micro-enterprise” in terms of the mining and quarrying sector of the economy per the SMEs Act.

Access to funding

For SMEs to enjoy funding and fiscal inclusion, they must formalise their businesses. Formalisation of the SMEs opens up the access to funding and the protection of the law. Banks and financial institutions are more likely to fund formal businesses as opposed to informal businesses. For this they would proper books of accounts to be kept and the business to be compliant with the tax laws. Therefore a formalized SME that shows good organisation and a good business track record is more likely to get the much needed funding to expand the business as opposed to an informal one. A brilliant business idea may fail to grow because of lack of funding. Formalisation can bridge this gap.


The recent revision of Intermediated Money Transfer Tax (IMTT) from 5 cents to 2 cents on the dollar value of transactions soar and takes a big knock on persons. The tax is however less burden for formally registered persons with formal books of accounts since transactions such as transfer of money for purposes of paying remuneration are exempt from the 2% IMTT.  This tax is broad based and unavoidable by informal business. The Minister of Finance in his preamble to the introduction of this tax he stressed the target for this tax was largely those trading in the informal.


Formal SME’s that keep proper books of accounts, furnish tax returns and pay taxes are not subject to presumptive tax subject to them being in possession of a valid tax clearance. Informal SME’s on the other hand are liable to pay presumptive tax. It is a misconception that to be registered for tax is expensive. The reverse is actually true. Withholding tax applies on turnover for lack of tax clearance, the business losses on tax opportunities such as claiming business losses when they occur and above all when the taxpayer is eventually caught the law provides for back dating of tax registration and payment of taxes from the date the person was supposed to be tax registered. This comes along with stiff penalties and interest on late paid taxes and returns. It is wise as a business owner or company executive to gain more understanding on how to go about being tax compliant to avoid missing out on business opportunities and being on the right position for growth.