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The promulgation of Statutory Instrument 33 of 2019 will forever be remembered in the history of tax as one of legislative instruments that complicated, inter alia, taxation in Zimbabwe. Since its inception, there has been a couple of other legislative instruments which, when interpreted left both the regulator and the taxpayer at odds in terms of interpretation thereof. The transition from a multicurrency system to a mono-currency in 2019 was adopted through introduction of SI 142 which prohibited the use of foreign currency. However, operators continued to trade in foreign currency but remitted taxes in Zimbabwean Dollar. In light of the laws of payment of taxes in foreign currency introduced in 2009, the fiscus has significantly been prejudiced because on the one hand the exchange rate plummeted whilst the United States Dollar remained stagnant. This explains the reason the ZIMRA and the Reserve Bank of Zimbabwe (RBZ) has been calling upon business to declare their taxes in currency of trade and make voluntary disclosure for omissions. We explain in more detail the implications of the ZIMRA’s call for voluntary disclosure by business. 

Formal businesses should heed the call from ZIMRA to voluntarily disclose for a number of reasons. There are largely two tax heads which are at the centre of controversy around payment of taxes in foreign currency namely income tax and VAT. However, VAT is not of a wide implication because it only affects registered operators and not producers of zero rated and exempt supplies. However, income tax affects everyone in trade. In practice, income taxes (QPDs) do not carry penalties as long as they remain provisional taxes. Therefore, in principle the risk for the business community on income tax is the interest chargeable on the QPDs understated by a margin of error more than 10%. This is the risk that applies to the period covered by the voluntary disclosure. However, after the return has been filed and ZIMRA discovers understatement additional tax equal to 100% of the income tax due would apply in addition to the interest chargeable. Therefore, the call on income tax is for the business to avoid errors being discovered by the ZIMRA so as to avoid the additional tax as aforesaid.

With regards to VAT, most of the returns for the period covered by the voluntary disclosure have already been filed and are with the ZIMRA. Accordingly, any amendment thereof whether by the ZIMRA or taxpayer will trigger both penalty and interest. This makes a strong case for participating in the on going voluntary disclosure and hopefully the ZIMRA will show lenience in order to avoid the risk of penalty and interest. Although interest is mandatory and cannot be waived by the Commissioner, section 72 of the Income Tax Act empowers the Commissioner to waive interest on understated QPDs upon submission by the taxpayer. We have also seen in the past, interest and penalty being waived under two previous tax amnesties. There may also be reasonable grounds to justify a waiver of penalties and interest because of the impact to the business as a result of Covid 19 and other economic factors. Furthermore, the payment of taxes in foreign currency is of a national interest, which various stakeholders including the Minister of Finance closely follow the events as they unfold. Hence the Minister of Finance may want to use the carrot and stick approach in dealing with the matter. On one hand showing lenience to businesses that have honestly and truthfully made a voluntary disclosure by promulgating a statutory instrument empowering the Commissioner to waive both penalty and interest in full for non-payment of taxes in foreign currency. During our recently held Matrix Tax Forum, the Minister of Finance showed some significant signals to support the business during this period Covid 19. On the other hand the authorities may impose stiff penalties on errant taxpayers and this may include cancellation of trading licences, imposition of heavy penalties, naming and shaming of errant taxpayers. The intention to do so has already been indicated through the joint RBZ and ZIMRA press conference. Furthermore there has been significant surveillance of taxpayers’ activities by both the monetary and fiscal authorities in the recent times. We have seen the RBZ clamping down on retail pharmacies with the Director of one pharmacy being hauled before the court for failing to comply with a foreign currency disclosure order issued by the RBZ.  It is therefore difficult for formal businesses to hide.

In a nutshell, whilst laws for payment of taxes in foreign currency create uncertainty and shows preference by the government of foreign currency, these have been in place since 2009. What the business can only do is to lobby for their removal in order to ensure certainty and ease tax administration. As it stands these laws are currently adding to the cost of doing business and discourage investment in Zimbabwe. Taxpayers should brace the call by the ZIMRA to voluntarily disclose their tax statuses and declare all foreign currency income before they face the wrath of law. Apart from simply complying with the law, the taxpayer stands to lose more should an audit be carried out and they be penalised for incorrectly declaring their foreign currency income.

The Finance Act is one of the most crucial pieces of legislation in Zimbabwe as it guides businesses and the economy at large. Taxpayers look forward to the announcement of the Fiscal Budget and consequently the Finance Bill as it normally brings changes that affect them in their order of doing business. With the setting in of Covid 19, the Finance Bill 2020 has been stalled due to Parliament having to halt its sittings more frequently. The law-making process as envisaged in section 131 of the Constitution has up to 9 stages and this means it may take a bit of time before the Finance Bill is passed into law. One of the challenges this has brought to the business arena is whether or not to adopt the new tax rates or to use the old rates given that the Bill has not yet been passed into law. The ZIMRA recently published Public Notice 52 advising taxpayers to adopt the tax tables provided for in terms of the Finance Bill.

The Finance Bill, 2020 proposes to raise tax free threshold to ZWL$5,000 p.m and top rate of 40% for amounts exceeding ZWL$100,000 per month. It also proposes two assessment years 1 January 2020 to 31 July 2020 and 1 August 2020 to 31 December 2020. The implication is that for 2020 two ITF16s will be filed. Although the ZIMRA has announced so, legally speaking the Finance Bill is not yet law and neither is Public Notice by the ZIMRA. The law-making process is provided for in terms of s131 of the Constitution of Zimbabwe and legislative provisions only come into force upon being gazetted. There are, however, practical considerations involved in the ZIMRA’s stance of adopting the rates as provided for in terms of the Finance Bill.  For Instance, the PAYE tax tables are for the benefit of the taxpayer.

Adoption of the new employment tax tables for the month of August to December as published by ZIMRA automatically entails acceptance of two tax years of assessment for 2020. Then ITF 16 which was due for submission on the 31st of August must have been submitted taking into account the two years of assessment provided in the Finance Bill still to be gazetted. It is trite at law that one may not approbate and reprobate. Once an acquiescence is made to the status quo, either expressly, or by some unequivocal act wholly inconsistent with an intention to contest it, one cannot change his position when it suits them. It is a principle known as peremption which is aptly described by Mullins J in National Union of Metalworkers of SA and Others v Fast Freeze held inter alia that: “Peremption is an example of the well-known principle that one may not approbate and reprobate, or, to use colloquial expressions, blow hot or cold, or have one’s cake and eat it. Peremption also includes elements of the principles of waiver and estoppel.”  This entails that taxpayers are bound by the tax tables and regulations attached thereto they used in filing the August return. However, one may argue that the contra fiscum rule may potentially be adopted in order to interpret the law in favour of the taxpayer. The legislature is burdened with the responsibility to make laws and taxpayers must not be punished for the legislature’s drag in providing the laws. On this basis a taxpayer cannot be penalised if they do not adopt provisions which are not in their best interests.

There are, however, likely to be penal measures attached to using the old tax tables, despite not having been outlawed by a gazzetted law. Taxpayers face the risk of being penalised should they rely on using the tax tables arguing legality thereof. The adoption of the tax tables entails an automatic adoption of associated provisions. It bars the taxpayer from denying the application of the other provisions on submission of ITF 16. The drawback however is that it may cause unnecessary legal debate which may result in the taxpayer ultimately losing in terms of penalties and interest given the time frame it takes to resolve a tax dispute. Nonetheless we foresee a situation in which the laws will be backdated to the 1st of August which are the intended dates for these laws to come into effect. Accordingly, despite not yet being passed into, taxpayers are better of abiding the ZIMRA Public Notice in order to avoid disputes in future.

The COVID-19 restrictions affect many people and businesses and could raise tax issues, especially in cross-border situations where employees are unable to physically perform their duties in their country of employment. These issues may have an impact on double taxation agreements. Recognizing this, the Organisation for Economic Cooperation and Development (OECD) Secretariat has issued guidance on several tax issues arising from the COVID-19 crisis.

In general, a state cannot tax profits of an enterprise of another state unless that enterprise carries on its business through a permanent establishment situated therein. As a result of the current COVID-19 crisis businesses may be concerned that their employees will create a PE for them in another jurisdiction because of a change in working location, which would trigger new filing obligations and tax obligations.  A PE must have a certain degree of permanency and be at the disposal of an enterprise to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. In the guidance the position is taken that an employee who, because of the extraordinary nature of the COVID-19 crisis stays at home to work remotely should not create a PE for the business / employer to the extent that it does not become the new norm over time. This is, either because such activity lacks sufficient degree of permanency or continuity or because the enterprise has no access or control over the home office (and the enterprise in normal circumstances provides an office which is available to its employees).

Linked to this is whether the employee temporarily working from home for a non-resident employer could qualify as a dependent agent PE. Although the activities of an employee may create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise, OCED has stated that its unlikely that the employee who, only temporarily and forced by governmental measures works from home could be considered to ‘habitually’ conclude contracts in his home state on behalf of the enterprise. It stressed a PE should be considered to exist only where the relevant activities have a certain degree of permanency and are not purely temporary or transitory. However if the employee was already habitually concluding contracts on behalf of the enterprise in his home state COVID-19 crisis would not exempt him/her. A building site or construction or installation project of an enterprise in another state will in general constitute a permanent establishment only if it lasts longer than a certain period (under the OECD Model more than 12 months). According to the OECD Secretariat, the duration of a temporary interruption of activities on those sites or projects due to the COVID-19 crisis should be included in determining the time those sites or projects last, and therefore will affect the determination whether a construction site constitutes a PE.

The COVID-19 crisis may raise concern about a potential change in the “place of effective management” of a company (for example because of inability to travel of chief executive officers and other senior executives). According to the guidance, it is however unlikely that the COVID-19 crisis will create any changes to an entity’s residency under a tax treaty, in essence because all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis. The measures to mitigate the economic impact of the COVID-19 crisis may contain stimulus packages adopted by governments (e.g wage subsidies to employers) to keep employees on a company’s payroll. According to the issued guidance by the OECD Secretariat, these payments should in a cross-border situation be attributable to the place where the employment used to be exercised. The guidance further makes clear that a change of place where cross-border workers exercise their employment may also affect the application of the special provisions in some bilateral treaties that deal with the situation of cross-border workers, and that may contain limits on the number of days that a worker may work outside the jurisdiction he or she regularly works. A question not specifically addressed by the OECD Secretariat is whether the COVID-19 crisis may have an impact on the “183-days rule”. Income of an employee working in another state should not be taxable in the source state if (amongst others) the employee is not present in that state for more than 183 days in any twelve-month period. Travel restrictions due to the COVID-19 virus, may potentially have an impact on the 183-days rule and taxing rights between jurisdictions. Finally, the guidance addresses the impact of the COVID-19 crisis on the residence status of individuals. Issues could arise when individuals are, for example, stranded in a host country due to travel restrictions or temporarily return to their previous home country. It is, according to the guidance, however unlikely that in these specific temporarily and extraordinary circumstances, the COVID-19 crisis will affect the treaty residence position of the individuals.

The guidelines issued by the OECD Secretariat are only persuasive in as far as they cover the generalised tax implications of the treaties of any nationalities.  In view thereof, although not a member of the OECD, Zimbabwe may adopt these guidelines given the novelty nature of COVID 19 and lack of laws addressing the COVID 19 situation.

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

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

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

Transfer pricing is not an exact science. Therefore, tax authorities can impose TP adjustment requiring taxpayers to have strong arguments that intra-group transaction prices were at arm’s length. Transfer pricing affects cash flow, investment decisions and performance indicators. The additional corporate tax imposed by the tax authorities will affect cashflow, investment decisions, certainty and profitability. Other consequences include adjustment for customs value – rejection of transfer prices declared by a company and impose different price levels. Transfer pricing can involve revenue or expense adjustments which may trigger double taxation especially where a corresponding adjustment has been denied to the counter party or by the other jurisdiction. Additional taxes in the form of withholding taxes and accompanying penalties will also arise.  Finance Act no 1 of 2019 has explicitly stated that 100% penalty will apply on additional tax arising from TP adjustments if there is evidence that the avoidance, reduction or postponement of the liability to tax was actuated by the use of fraud or evasion. In the event that there is lack of contemporaneous transfer pricing document to support the transaction giving rise to the amendment assessment despite absence of fraud or evasion, a 30% penalty level will apply on the assessed tax.  The same applies to a taxpayer who has not complied with transfer Pricing Guidelines. If the taxpayer has done all what it can including having in place Transfer Pricing documentation which comply with Transfer Pricing Guidelines and there is no fraud or evasion, but nonetheless a TP assessment is made by the ZIMRA, a reduced penalty level of 10% will apply on the shortfall tax.  Besides the penalties as aforesaid, tax default is subject to interest charge. A new interest regime which provides for 25% interest for any month or part thereof during which tax remains unpaid was gazetted through SI282 of 2019 to take effect from 1 January 2020.  This interest has not discriminated between foreign currency and ZWL$ taxes and may prove a heavy burden for the defaulting taxpayers. Whilst there is a leeway for the Commissioner General to adjust the penalty based on a taxpayer representations there is limited scope with regard to interest.  Interest is meant to compensate the fiscus for time value of money and the Commissioner General has no authority whatsoever to waive it except through an Act of Parliament. Other indirect penalties include damaging of business image.

Where for some reason the Transfer Pricing documentation has not been prepared and is impractical to complete the exercise by the due date, it may be worth writing to the ZIMRA seeking for an extension of time. The letter for seeking extension can only be considered if done before the due date.  For those who have already prepared their TP policy documents, they must ensure that transactions as reflected in the tax returns pass the arm’s length test. If there is a divergence between transfers pricing policy document including underlying contracts and the financial records (accounts) it may be necessary to make adjustments to the income tax return before return submission.  Even if price, terms and conditions are similar to those of independent parties, TP documentation is still required because it is mandatory. Without TP documentation a taxpayer will not be able to evidence to ZIMRA that associate transactions are occurring at arm’s length. There are however practical challenges and other considerations for completion of return, adjustments and other matters underlying TP returns which require face to face discussion with an expert and you are urged to consult with your tax expert.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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