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Introduction

A furious Tropical Cyclone Idai has claimed the lives in Chimanimani and Chipinge in Manicaland Province. Others are still missing and frantic efforts are being made to rescue the stranded. The cyclone has left a trail of destruction on roads, bridges and homes making rescue efforts a herculean task. It is in times like these that donations towards a humanitarian effort are called upon. It is on this background that we implore the business sector to donate towards the affected in Manicaland. Steve Maraboli said “A kind gesture can reach a wound that only compassion can heal”. Social responsibility is an ethical theory that an entity or individual; has an obligation to act to the benefit of society at large and is more evidently required for the affected people in Manicaland. To fulfill social responsibility duty, most business people are generous enough to give donations to various other institutions, sometimes as a way of enhancing brand awareness (marketing tool) and in some instances as a sign of humanity. Making a donation is a good gesture but the fiscus may not be prepared to be a partner in some of these good causes. The Manicaland disaster is a befitting occasion for the fiscus to actively participate in this good cause. The tax implications on donations are ventilated in this article to put you at ease in as far as the taxes on such acts of kindness are concerned.      

Social welfare and humanitarian donations

Any amount paid to the Destitute Homeless Persons Rehabilitation Fund, being a fund established by the Ministry of Finance to alleviate the condition of destitute homeless persons is deductible up to a maximum of US$50 000 in a year of assessment. This entails that excess of US$50 000 paid to this fund will be disallowed for deduction. The Destitute Homeless Persons Rehabilitation Fund is the kind of fund designated for assistance of the victims of the cyclone Idai. However, any amount paid by the taxpayer during the year of assessment, without any consideration whatsoever, to a charitable trust administered by the Minister responsible for social welfare; or the Minister responsible for health is allowable as a deduction. There is no limit as to the amount that a taxpayer can claim in respect of this donation.

Other deductible donations

Medical related donation

The fiscus recognises amounts paid during the year of assessment, without any consideration, to the State or to a fund approved by the Minister of Health for the purchase of medical equipment, construction, extension or maintenance or the procurement of drugs, including anti-retroviral drugs, to be used in a hospital operated by the State, a local authority or a religious organisation. The deduction in this category should not exceed US$100,000 in a year of assessment.

Educational related donation

Also recognised are amounts paid during the year of assessment, without any consideration, to the State or to a fund approved by Minister of Education for the purchase of educational equipment or, the construction, extension or maintenance of school or the procurement of books or other educational materials to be used in a school operated by the State, a local authority or a religious organisation. The allowable donation in this category should nevertheless not exceed US$100,000 in a year of assessment.   

Research related donation

In order to promote research and development the government has provided for a deduction of any amount paid by the taxpayer during the year of assessment, without any consideration whatsoever, to a research institution approved by the Minister responsible for higher or tertiary education. The maximum deduction allowable to a taxpayer in a year of assessment is US$100,000.

Infrastructure related donation

Any amount paid by the taxpayer during the year of assessment to a Public Private Partnership Fund. The maximum deduction in a year of assessment is US$50,000. The amount paid at the request of a local authority up to a maximum of US$50,000 in year of assessment and approved by the Minister of Local Government for the construction or maintenance of any building, road, sanitation works, water works, public works or any other utility, amenity or infrastructure works, which should be under the management or owned by a local authority is also income tax deductible.

Bursary and scholarships

The law also recognizes deduction of payments made by the taxpayer during the year of assessment, without any consideration whatsoever to the National Scholarship Fund and the National Bursary Fund that have been approved.

Disallowed Donations

Some donations are disallowed because they do not satisfy “in the production of income” condition. Therefore clear gratuitous payments such as political, church or social clubs donations are disallowed when computing income tax liability of a person.

Conclusion

Donations made to organisations which carry out public service activities are usually tax deductible in most countries, and Zimbabwe is not an exception. It should also be borne in mind by taxpayers that, donations can also only be income tax deductible if they are made to an approved organisations. Therefore taxpayers should understand that whenever they want to make a donation, they should consider that the income tax deductibility of the donation is being used as a marketing tool and not necessarily for the sake of humanity. Failure to take this into account can result in them having to bear an expenditure which will be disallowed by the Revenue Authority as a deduction, eventually resulting in a loss of funds which cannot be recovered. Let us remember our brothers and sisters in Manicaland who are bearing the wrath of Tropical Cyclone Idai.

Introduction

A key principle in running a successful business is the maintenance of proper business records of income and expenditure. This enables owner(s) not only be able to read into the performance of the business but also the commercial and regulatory environments dictate this as a good practice. Aligned to this, is a principle recognizing a company as a separate person altogether from its owners. This very act of separating the business from its owners is often a challenge in small business environment and often rated one of the factors leading to the demise of such businesses. A small business environment is mainly characterised by a mixture of business and personal transactions. Separate accounting enables the business owner to get a good view of the business performance and to properly comply with their various statutory obligations amongst them payment of taxes.

Tax demands for separation of finances

There are compelling reasons to be proactive about distinguishing between business and personal finances. Tax implications are foremost. The tax authority allows business owners to claim deductions for business-related expenses supported by proper documentation. If your business is audited, the tax authority will look closely at each expense to verify that it is indeed related to the regular operation of the business. When there is no clear paper trail in terms of what the expenses were for, or how you paid for them, it becomes more difficult to validate the deduction resulting in the ZIMRA raising an assessment against the company which will include penalties and interest. Every business transaction has tax implications and in terms of the tax laws, every person who carries on a trade is obliged to account for tax in respect of the income they generate from the trade. If there is no separation between business and private finances, it is difficult to distinguish between the transactions relating to each aspect. As a consequence, it will become difficult to determine the correct tax to be declared and paid to the taxman. Because a business is allowed to claim only business-related expenses that are supported by proper documentation it is in the best interest of the business to separate these expenses. Small businesses should be proactive about this and should make sure they keep the supporting documentation (invoices, receipts, etc.) for their business expenses because the burden of proof lies on them. They are required to prove that their business expenses are legitimate failing to do so they will be penalised. Meanwhile expenses for travelling between home and place of work or vice versa are regarded as private expenses and owners for instance are not permitted by the tax law to deduct fuel and other motor vehicle running expenses associated with travels or journeys.

Other commercial demands for separating finances

Besides the regulatory demands, absence of proper accounting systems may lead to many problems which include theft of stock and funds which may go unnoticed over a long period of time. A business without records is like a car running without engine oil, it will definitely come to a halt. It may be difficult to ascertain whether the business is making any profits or to take corrective action when things are not as planned. A separation is also important when considering owner liability for debts. This underlines the principle of limited liability in limited companies where creditors are not allowed to attach personal assets of shareholders in the event of the company unable to pay its debts. However when there is no clear distinction between business and personal finances, creditors can claim your personal assets to satisfy a debt. For instance the ZIMRA is permitted to recover unpaid tax from the shareholders or directors who have transferred any amount or asset from which tax has become due to themselves or a relation with the intention of avoiding paying tax. Targeted transactions include drawings of shareholders to pay for personal expenses, expropriation of company assets, physically transfer of assets or amounts that are not supported by paper work etc. Tax recovery measures often employed by the taxman include garnishing of bank accounts, filing an order for liquidation or sequestration order, property attachment, imprisonment etc. Bankers to advance loans require accounting books records and are sceptical of accounts containing personal expenses of directors or owners.

Pay yourself a salary

Owners running their business on a day to day basis are more likely than not to deep their hands in the company till as justification for their remuneration if they not on payroll. When you are thinking about your business expenses, one of the easiest items to overlook is your own salary. If you are not allocating funds for your own salary, your books do not accurately reflect the health of your company, since your expenses are missing a large cost, namely you. Without factoring in all expenses, you won’t know if you need to raise prices, market more, cut costs or make other adjustments that will help your company succeed. Besides, how are you expected to pay your bills such as your living expenses, fuel to travel to work, school fees for your children among other domestic and private expenses. These must be paid from your salary or savings and not from funds of the company. A company is a separate person from you and has its own expenses to pay including your salary.

Conclusion

Running a business requires discipline often exhibited by owners staying away from the company till. They should have separate bank/mobile money accounts for personal transactions and for business transactions. A business may have a positive cash flow while having no profit if the cash comes from sources other than income, such as when an owner puts in his/her own money or if he/she takes out a loan. These types of transactions are not income but rather liability or equity transactions. Conversely, a business can have negative cash flows while having a large profit if the owners take cash out of the business (drawings) to pay personal expenses or use it to make investments or loans to others. These types of cash out transactions to meet private expenses have to be accounted properly, mixing transactions result in incorrect tax liability.  Under-declaration of tax is a serious offence in terms of the tax laws and attracts hefty penalties and interest on the part of the taxpayer.

Our MTU is issued monthly and disseminates information about tax developments locally, within the region and beyond for the ensuing month. It tracks and analyses local and relevant international tax developments to enable readers to stay up to date with changes in the tax world. The content comprises of changes in tax and other business related laws, court decisions, announcements and interpretations that bring relevancy to the business environment.  They also identify and examine all relevant publications and ZIMRA’s interpretations of these decisions as well as the institutional application of new legislation or rulings.  In summary they are meant to help you:

  • Identify new tax planning opportunities.
  • Keep you updated with all changes in the tax world.
  • Keep you aware of current ZIMRA interpretations.
  • Recognise pitfalls many professionals miss.
  • Minimise compliance errors and offer practical and effective tax solutions.

What’s Included?

  • A Monthly Tax Update detailing the most critical Tax Updates.
  • Ability to search over 4 years of past articles.

Highlights

Introduction

Most businesses in Zimbabwe are saddled with debts emanating from supply of goods, services and money. In order to lessen the debt burden, some may work out a debt settlement arrangement with their creditors or lenders, such that any portion of the debt reduced by the settlement is considered discharged or forgiven without the debtor having to offer anything in return, or offering something less in value than the debt outstanding. When that happens, the debtor cannot just go off the hook and enjoy the relief in peace without the taxman following him/her especially where the debtor previously enjoyed an income tax deduction of the amount being now waived or written off. There are income tax implications to content with. This article therefore seeks to examine and analyze the income tax consequences arising from the concession granted by, or compromise or arrangement made with a creditor, with the effect of writing off the debts or waiving the right a creditor may have on the taxpayer.

Accounting for Concessions

The Zimbabwe tax legislation makes provisions specifically for the accounting of concessions for income tax purposes. It brings to tax the amount or value of any benefit received by or advanced to a taxpayer as a result of any concession, compromise or arrangement given by or made with a creditor. Such concessions may include discounts, refunds, rebates, write offs or waivers from a creditor. A condition which will have to be satisfied before such an amount is brought to tax is that it should have been claimed as a deduction for income tax purposes either in the current or prior years.  In ITC 1634 (1997) 60 SATC 235 (T) it was held that when amounts are reduced or liabilities are extinguished in the course of carrying on business there is a deemed benefit constituting gross income. This is so because, when the expenditure was accounted for in the first place, it would have reduced the taxable income. Therefore it implies that if a taxpayer‘s liability has been reduced due to a concession or arrangement by a creditor, the waived amount of the liability should be added back to the gross income and included to the taxpayer’s gross income and taxed accordingly. The same position is obtaining in South Africa. Its tax legislation defines it as any arrangement in terms of which any term or condition in respect of a debt is changed or waived or any obligation is traded, whether by means of substituting a new contract in place of an old one. Otherwise, for the obligation in terms of which that debt is owed or a debt owed by a company is settled, directly or indirectly by being converted to or exchanged for shares in that company, or applying the proceeds from shares issued by that company. In South African courts, it was held that when amounts are reduced or liabilities are extinguished in the course of carrying on business there is a deemed benefit constituting gross income. This is so because, when the expenditure was accounted for in the first place, it would have reduced the taxable income

Concessions not limited to revenue expenditure

In instances where a concession is granted for assets ranking for capital allowances, the same principle applies hence the taxable benefit shall be the aforesaid allowances. On that same note, a taxpayer who buys an asset on which he then claims capital allowances on, derives a taxable benefit on those capital allowances should the loan which was used to acquire or construct the asset be subsequently written off by the creditor. The same applies in an instance where a debtor’s loan which was used to finance raw materials or deductible expenses is forgiven by the creditor. South African tax legislation holds the same position as the Zimbabwean tax legislation when dealing with concessions for income tax purposes. Basing on the decision made in the Commissioner for Inland Revenue v Datakor Engineering (Proprietary) Limited, 60 SATC 503 case, it can be drawn that a benefit would also arise upon the conversion of interest bearing debt into share capital. There is therefore the need to include such a benefit in the gross income of the taxpayer so that it will be taxed accordingly.

Exempt transactions

It should however be noted that in Zimbabwe gross income does not include a concession which arises as a result of involuntary winding up of a company by the court because of its inability to pay debts, a taxpayer being declared insolvent or assigned his property or estate for the benefit of creditors or the estate of the taxpayer having been vested in the Corporation. It implies therefore that a concession or benefit from a creditor arising when a company is voluntarily wound up, dissolved by reason of expiration of period or dissolved by reason of a reduction of the number of members below or upon occurrence of event, constitute gross income of the taxpayer.

Compliance Issues

Failure to add back the waived or extinguished expenditure will then result in under declared income thus this may attract penalties and interest for it will be deemed as tax evasion. The taxpayer is then obliged to add back the expenditure to his or her gross income so that the correct picture of the taxable income can be painted.

Conclusion

It can be concluded that both Zimbabwe and South Africa bring the concessions into gross income of taxpayers. Therefore in order for taxpayers to avoid crossing paths with the tax authority, there is need for them to account for every form of benefit that may arise as a result of waiver or extinguishing of expenditure that has once been claimed for income tax purposes. Failure to correct the situation by adding back the expenditure to the gross income can prove to be costly for the taxpayer since it is viewed as tax evasion which can attract penalties and interest, and above all prosecution. Taxpayers should therefore be cognizant of the tax status of the transactions they enter into lest they get caught unawares by the taxman.

Introduction

One of the most innovative and business minded groups are today’s religious organisations. Rather than waiting for donations and offerings, churches and religious organisations are coming up with income generating streams to sustain themselves and fulfill the mandate of preaching the word. Some have ventured into farming, having wedding venues, lodges, transport hiring, bookstores, educational institutions, hospitals, just to mention but a few. Such initiatives generate revenue for the church away from the traditional sources and often cause today’s church to competing with the private sector for tenders. It cannot be over emphasized that a church plays an important role in a society. Without its effort, in providing for an improved and civil society, the society will be much poorer. For this reason most tax jurisdictions exempt churches from income tax. However, some have questioned the rationale of exempting commercial enterprises or activities of religious groups and are of the view that churches involved in such activities must be taxed so as to achieve tax neutrality amongst investors. This piece of writing is about the tax status of the Zimbabwean church.  

Income Tax on business profits

Income tax is payable by persons engaged in trade and investment activities. A trade is generally taken to be an activity, a business, occupation or anything carried on or pursued for purposes of producing income. Although not conclusive in itself profit motive is often one of the objectives of undertaking a trade, and often a missing link in the activities of a church or religious organisation. For this reason receipts and accruals of church or religious organizations are exempt from income tax only to the extent of donations, tithes, offerings or other contributions by its members. However if a church decides to cross the line and enters into ventures often undertaken by entrepreneurs they become liable to income tax. The law therefore taxes the receipts or accruals that are receipts and accruals of income from trade or investment carried on by or on behalf of the church or religious organisation.

Employees’ Tax (PAYE)

A church or religious organisation is regarded as an employer if any of its workers including the pastor earns at least US$300 per month (US$350 per month from 1 January 2019). It should therefore register as an employer within 14 days of engaging any such person and deduct PAYE from the remuneration paid to the employees. A church is liable to PAYE on remuneration, stipend or any benefit accruing to its employees including pastors. This includes gifts from the congregation. Gifts made to a minister during his/her ministry for example at Christmas or on special occasions must be treated as additional stipend and be dealt with through the PAYE system. Thus, amounts paid to pastors as stipends constitute income for services rendered subject to PAYE rules. An ex gratia gift made in token of the esteem in which the pastor or minister has been held by members of the fellowship is non-taxable. A mere gratuity or testimonial given to the minister or pastor especially after he ceases to be one cannot be brought to tax otherwise these items cannot be said to be received by virtue of him being the holder of office. Ministers in training (formerly known as student ministers) are appointed to serve a church whilst also undertaking training at a theological college as a ‘congregation-based student. It is customary for them to receive an appropriate level of stipend which should be taxed through the PAYE system. If they are provided also with fringe benefits, for instance, accommodation (whether church-owned or leased) there is no reason why these should not be taxed.

Value Added Tax (VAT)

Churches or religious organisations should register for VAT if the total value of taxable supplies made in the period of twelve months exceeds $60, 000. They are not exempt from the payment of VAT when they purchase goods or services which are subject to VAT. A supply by an association not for gain or a welfare organisation of any goods or services which it receives as a donation is an exempt supply according to s11 (b) of the VAT Act which states that the supply by any association not for gain of any donated goods or services or any other goods made or manufactured by such association if at least 80% of the value of the materials used in making or manufacturing such other goods consists of donated goods”. The exemption also applies in a case where the organisation sells goods which it has manufactured if at least 80% of the value of the supply consists of donated goods or services. Therefore associations not for gain and welfare organisations do not declare output tax on any donations received by them in the furtherance of their stated aims and objectives. However, the organisation will be liable for output tax if any so-called “donation” is conditional upon some form of reciprocity in the form of a supply of goods or services (identifiable direct valuable benefit) by the association to the “donor” or a relative or other connected person in relation to the donor. In such cases, the payment received is viewed as being a consideration for a taxable supply made by the organisation.  Donated goods or services  refers to “goods or services which are donated to an association not for gain and are intended for use in the carrying on or carrying out of the purposes of that association

Withholding Taxes

The religious organisations are supposed to withhold 10% when making payments to suppliers without a tax clearance. There are other withholding taxes which may affect religious organisations such as non-residents tax on fees, non-residents tax on royalties, non-residents tax on remittances and withholding amounts payable under contracts.

Conclusion

Religious organisations should keep proper books of accounts, register for tax purposes and submit required returns for their business ventures just like anyone else. Some might label their activities as for giving back or for non-profit but this should not be done as a way of avoiding tax. With doors for voluntary disclosure still open till 31 December 2018, as a religious organisation or a church, utilize the opportunity to put your tax affairs in order and come clean. It is wise to engage tax experts who will advise you on tax issues.  

Background

Most employees are conscious about the deductions and net pay each month end. Despite such behaviour, they do not realise their net pays could be more had they claimed tax credits afforded to them in terms of the tax law. A tax credit is an amount that taxpayers can subtract from taxes owed to the government. The Finance Act (Chapter 23:04) provides for medical expense, disability, elderly and blind credits. They are granted to individuals, whether in employment or receiving trade and investment income. A person must have the ability to pay income tax to qualify for tax credits. This article focuses on medical expenses credit because we all get sick at some point. Although living and personal expenses are disregarded for tax purposes, the claiming of medical expenses deviates from this general rule. Its deduction is an international trend and is seen as a necessary expense to maintain the productive capability of the taxpayer and a production cost rather than a discretionary expense. In Zimbabwe, medical expenses credit is deductible from the tax liability of a taxpayer at the rate of one dollar for every two dollars paid (50% of cost incurred). 

Definition of medical expenses

Medical expenses are defined as essentially covering hospitalisation, treatment , ambulance , drugs and medicine costs supplied on the prescription of a medical or dental practitioner, services rendered by a medical or dental practitioner, boarding costs at hospital, nursing home, clinic, etc., cost of invalid appliances and medical contributions paid to a medical aid society.  Ambulance cost must be for an actual ambulance and not a vehicle that was conveniently used as an ambulance for that specific time.  In JF Campbell v Commissioner of Taxes J 189 an ambulance was defined, as “a vehicle or conveyance for the transportation of the sick to a place of treatment”. An invalid appliance or fitting refers to a wheelchair or any mechanically propelled vehicle specially designed and constructed for the carriage of one person suffering from a physical defect or disability or any artificial limb, leg callipers or crutch or any special fitting for the modification or adaptation of a motor vehicle, bed, bathroom or toilet to enable its use by a person suffering from a physical defect or disability including spectacles or contact lenses. The claimable cost is for purchasing, hiring, repairing, modifying or maintaining an invalid appliance or fitting.  

Medical Aid Society                              

Section 2(1) of the Income Tax Act defines a ‘medical aid society by reference to section 13(2) of the Income Tax Act. In essence a medical aid society is defined as any society or scheme which is approved by Commissioner subject to limitations or conditions determined by him if he is satisfied that it is a bona fide permanent scheme established for providing benefits to its members and dependents in respect of expenditure incurred on medical, dental, optical treatment, including prescribed treatment by a medical practitioner, drugs and the provision of medical, surgical, dental, or optical appliances and the provision of ambulance services. By implication contributions made by persons to unapproved funds or schemes are disqualified. 

Non-resident are not entitled to medical expense credit

A taxpayer who qualifies for a medical expense must be one who was ordinarily resident in Zimbabwe during the period of assessment. The definition “ordinarily resident” is found in the common law interpretation derived from previously decided cases. Cohen v CIR 13 SATC 362 defines an ordinary residence as “a person’s ordinary residence was the country to which he would naturally and as a matter of course return from his wanderings…” In the case of Levene v IRC 1928 it was held that: “if it is part of a person’s ordinary regular course of life to live in a particular place with a degree of permanence, the person must be regarded as being ordinarily resident”. In Soldier v COT 1943 SR the court in pronouncing ordinary residence held that: “the place of residence must be settled and certain, not temporary and casual”. A non-resident person is nevertheless entitled to claim credit in respect of contributions made to a medical aid society. 

Taxpayer must incur expenditure

Medical expenses must be incurred by a taxpayer in respect of himself/herself, spouse or any of his/her minor child. A minor child refers to a child under 18 years. A spouse excludes a separated person under a judicial order or written agreement or living apart from his/her wife or husband and unmaintained spouse or wife in polygamous marriage (other than the first wife). In ITC 1189 (1973) 35 SATC 155(R), living apart was construed to be separation by reason of some matrimonial discord other than for temporary reasons of an economic nature. Thus, marital status enables one to utilise the credit of his/her spouse who is unable to use it because of no sufficient tax from which to claim the tax credit. Where medical expense has been recovered from elsewhere or refunded to the person, credit is not granted. Only shortfalls and medical bills that have been borne by the taxpayer qualify.

Medical expenses of deceased

The provisions in respect of deductibility of medical expenses extend to a deceased’s estate. A tax credit in respect of medical expenses incurred before the death of the deceased shall be claimed in the tax period before the death of the deceased, even if the expenditure is settled by death of the person.

Conclusion

Employees should submit sufficient evidence to the Human Resources department/payroll administrator or personnel tasked with the responsibility of calculating and remitting the correct PAYE to ZIMRA. The documents should be in their original form i.e original invoices or receipts and retained by the employer for at least 6 years. It is a punishable offence in terms of the law to falsely claim medical expenses. This can result in penalties and in some instances prosecution for criminal charges. Next time you incur medical expenses be aware that the government pays half of that bill. Nevertheless maintaining health lifestyle carries even more weight than claiming a tax credit.

The much awaited Finance Act No 1 of 2019 was gazetted in a Government Gazette Extraordinary dated 20th February 2019, but almost all its clauses have been back dated to take effect from the 1st of January 2019. The Act ratifies Statutory Instrument 205 of 2018 which revised intermediated money transfer tax from 5 cents per transaction to 2 cents per transaction value, revises VAT on imported service rules, introduces the law on payment of VAT in currency of trade, provides for the payment of income tax in Zimbabwe by non-resident broadcasters and suppliers of e-commerce products etc. In this article we cherry pick and demystify some of the contents of the Finance Act no. 1 of 2019. 

Payment of VAT in foreign currency   

The new law provides for remitting VAT in foreign currency to the Zimbabwe Revenue Authority (ZIMRA) for taxpayers trading in foreign currency, or in either legal tender or foreign currency where the person has traded in legal tender that is not foreign currency. A “legal tender other than foreign currency” means bond notes and coins, or money paid by means of an electronic transfer of funds through an account (other than a nostro foreign currency account) with a banking institution; (means bond notes and coins, or RTGS). Whereas “nostro foreign currency account” means any account designated in terms of Exchange Control Directive RT/120 of 2018, held with a financial institution in Zimbabwe, in which money in the form of foreign currency is deposited from offshore or domestic sources. There are penalty implications for not remitting VAT in foreign currency as stipulated of equal to the amount of tax payable (100%) in the foreign currency plus other miscellaneous penalties.

VAT on imported services

VAT registered operators should brace up for new VAT on imported services because the Finance Act has changed the definition of imported services to make it apply to all importers of services. The implication is that any person who imports services and consume them in Zimbabwe is liable to 15% VAT on imported services no matter what the services have been used for. However services that are ordinarily exempted or zero rated if the supplier was ordinarily resident are outside the scope of VAT on imported services.  This presents a major shift from the current rules where only imported services which are used or consumed in the production of non-taxable supplies are subject to 15% VAT on imported services.  VAT registered operators were therefore exempted from this tax as long they used the services to produce taxable supplies, which is no longer the case now. Additionally, such services may also be subject to non-resident tax on fees or royalties in terms of the Income Tax Act whose general rate is 15%, subject to exemption or reduced rate which may apply in terms of double taxation agreement standing between Zimbabwe and the non-resident’s country of residence.

Time of supply rules expanded 

Output VAT is generally triggered when an invoice is issued by the supplier or recipient upon the supply of goods or services or when any payment of consideration is received by the supplier upon supply of goods or services, whichever occurs first.  This has been amended to include the time goods are delivered or services are made available to the recipient. It entails that movables supplied in the absence of an invoice will be deemed to be supplied at the time they are dispatched and for immovable goods, when the recipient takes possession and for services, at the time the services are performed.  Therefore taxpayers who have neither issued an invoice nor received any payment for the supply cannot avoid output tax if they have delivered movable goods, let out possession of immovable property or performed services.

Intermediated Money Transfer Tax (IMTT)

The Statutory Instrument (SI) 205 of 2018 which revised the rate of tax on transfer of money mediated by a financial institution from 5 cents per transaction to 2 cents per value of transaction with effect from the 13th of October 2018 has been confirmed.  The effect of this provision is that the nullity in the law previously made through S I 205 of 2018 is sort of regularised through the enactment of this provision. The effect is that whatever IMTT that was collected since October 2018, albeit without sufficient legal authority to do so is ratified.  Meanwhile this tax has been disallowed as a deduction for income tax purposes. However, the provision of the deductibility of IMTT is silent on the commencement date. All the other provisions are clear in so far as their commencement of operation into law is concerned. In terms of section 132 of the Constitution “an Act of parliament comes into operation at the beginning of the day on which it is published in the Gazette, or at the beginning of any other day that may be specified in the Act or some other enactment.” Given the silence of the provision on the disallowance of the IMTT as a deduction on the commencement of the provision, it appears that the provision will commence beginning the 20th of February 2019 which is when the Finance Act 1 of 2019 was gazetted. Furthermore, there are number of exemptions which you will need to consult your tax advisor for detail.

Penalties for violation transfer pricing rules

Multinational companies and local entities engaged in intercompany transactions should brace up for penalties for violating transfer pricing rules. A 100% penalty on the shortfall tax is levied for deliberately avoiding, reducing, postponing or evading tax through use of transfer pricing. Taxpayers who have not kept contemporaneous transfer pricing documentation to support the transaction giving rise to the amended assessment there is 30% penalty on the shortfall tax and the same penalty if a taxpayer has not complied with transfer pricing guidelines. In the absence of fraud or tax evasion and the taxpayer has kept contemporaneous transfer pricing documentation and complied with transfer pricing guidelines, but nevertheless there is understatement of tax, a penalty of 10% of understated tax applies.

Non-resident suppliers of satellite broadcasting and e-commerce services 

With effect from 1 January 2019, satellite broadcasting and e-commerce platform service providers domiciled outside Zimbabwe who receives or accrues income from persons resident in Zimbabwe for services rendered in Zimbabwe shall be liable to tax in Zimbabwe if they receive revenues in excess of $500 000,00) in any year of assessment. The income shall be taxed at a flat rate of 5% without deduction of expenses from such income.

Directors of wound companies liable to tax debts

Directors of companies that are wound up voluntarily or deliberately put into liquidation with the intention of avoiding tax are made jointly and severally personally liable for tax debts of those companies if such directors open a similar entity under the same directorship operating the same business or if the whole or a substantial part of the old company  business and property wherever situate is transferred to another company or entity which will be or has been formed, incorporated or registered under any law.  It does not matter that some of the directors did not join to form or start new companies or no longer act in similar positions. 

Conclusion

Besides widening the tax base, the current Finance Act is putting screws on tax administration through imposing stiff penalties for failing to comply with the law. It is also unique in that the government has expressed its preference to be paid in foreign currency and we wait to see how this inter play with the recent pronouncements made by the Governor of Reserve Bank of Zimbabwe, Dr John Mangudya in his Monetary Policy Statement.

Introduction

Employers endeavor to remunerate their employees to motivate them to work harder by giving them employment benefits in addition to cash pay. The benefits may include  occupation of company house, right of use company motor vehicle, cellphone, security services, fuel coupons, school fees, passage benefit, medical cover, holiday allowance, entertainment, clothing allowance among others. Unknown to some employers is that when they are VAT registered and grant fringe benefits to their employees there are PAYE and VAT implications. The law defines a fringe benefit as an amount equal to the value of an advantage or benefit in respect of employment, service, office or other gainful occupation or in connection with the taking up or termination of employment. Fringes benefits are taxable in the eyes of the law. Under income tax, a benefit is part of earnings of an employee and hence it is subject to employee’s tax. The same benefits may have VAT implications and this what we unpack in this article.

Benefits subject to VAT

The VAT Act outlines the circumstances under which the provision of benefits in kind to employees must be characterized as constituting a taxable supply for a consideration. In this context, employee benefits in kind are defined as goods and services provided by employers to their employees in the framework of a contract of employment and/or under conditions that are not necessarily at arm’s length. It implies that when employers give fringe benefits to their employees, these are deemed to consist of a supply of goods or services and hence are viewed as a supply of goods or services made by a registered operator in the course of a trade carried on by him. Examples of supplies (fringe benefits) on which output tax must be accounted for include; the right of use by an employee of employer motor vehicle, the supply directly or in directly of security benefit, the cost of non-business local travel by air (air ticket for an employee a holiday or personal business) etc.

Excluded fringe benefits

VAT is inapplicable where a benefit has come about as a result of any supply of goods or services which is ordinarily exempt or zero-rated supply in terms of the VAT Act or a supply of entertainment. Additionally, if a benefit arises in the course of making exempt supplies by a person, namely supplies made by non VAT registered employers such as banks, insurance companies, registered educational institutions etc, no VAT is payable. For example a supply by any of these entities of a motor vehicle to an employee is not subject to VAT. The provision of a fringe benefit not constituting either goods or services is also not subject to VAT e.g. the granting of cash benefit. As a matter of emphasis, VAT on fringe benefits is collected only when an employer is registered for VAT, subject to exceptions stated above. The fringe benefits which are exempt in terms of the law include the supply of accommodation, the provision of free or subsidised loan, the supply of educational services, provision of fuel and fuel products other than gas, cost of travel by road or rail etc.  Supplies  which are deemed to be entertainment include the provision of canteen services, subscriptions for DSTV and subscriptions to golf clubs, free or subsidised meals, gym subscriptions etc. excluding professional subscriptions. Entertainment is defined in the VAT Act as “the provision of any food, beverages, accommodation, entertainment, amusement, recreation or hospitality of any kind by a registered operator whether directly or indirectly to anyone in connection with a trade carried on by him”.

Amount on which VAT is chargeable 

It is important to note that the taxation of fringe benefits under the VAT Act derives its values from the Income Tax Act. Therefore the consideration for the supply of fringe benefits for purposes of VAT Act is determined in accordance with provisions set out in the Income Tax Act. The Income Tax Act stipulates that value of fringe benefits other than a payment by way of an allowance, shall be determined in the case of right of use of accommodation (board or quarters) by reference to open market rental of the accommodation and the cost to the employer for any other benefit. The cost to the employer is the amount of any expense incurred by the employer in connection with the provision of the benefit. This is what the employer has paid or incurred in order to provide the benefit to the employee. The Income Tax Act also provides specific valuation rules for certain benefits like the right of use of employer motor vehicle which is based on the engine capacity of the motor vehicle granted. The fringe benefits are deemed VAT inclusive and in order to compute output tax employers must multiply the consideration for the supply by the tax fraction (15/115). 

Conclusion

In conclusion it is important to keep in mind that VAT is designed as a tax on final consumption, regardless of the manner in which final consumers acquire the goods or services. Hence the reason for charging VAT on fringe benefits supplied to employees by their employers. But some of the fringe benefits are disqualified from being subject to VAT by certain reasons as stated above. Failure to take this into consideration can result in the understatement of the VAT returns which then attracts penalties from the Zimbabwe Revenue Authority. This will thus have a negative impact on the business. Failure to also consider the exemption of some fringe benefits from VAT can result in the overstatement of VAT and this can pose an unnecessary tax burden on the taxpayer. Employers should reconcile the PAYROLL and VAT returns for the fringe benefits that are taxable, the two records must be the same in so far as the consideration for the supply is concerned.

Introduction

The 2019 National Budget presented by the Minister of Finance and Economic Development Honourable Mthuli Ncube on the 22nd November 2018 contains a lot of pertinent issues that require unpacking. Firstly there are alternative views regarding application of intermediated money transfer tax on point of sale transactions (POS), whether the government is correct in demanding payment of tax in foreign currency in light of the law that provides that the bond notes and coins are at par with the United States Dollar, how to prepare and file tax returns when one is trading in multiple currencies, among other issues. This article however is about clause 5 of the Finance Bill 2019: “the taxation of non-resident satellite broadcasting and e-commerce service providers.” It provides that a satellite broadcasting and e-commerce platform service provider domiciled outside Zimbabwe will be subject to income tax in Zimbabwe to the extent that its income is received from persons resident in Zimbabwe for services rendered in Zimbabwe, commencing 1 January 2019.  This appears an extra tax burden for resident consumers of such services because non-resident suppliers of satellite broadcasting and e-commerce services are likely to pass on the tax. The article further unpacks the proposal, discusses the VAT rules and international development regarding the same matter.

The new tax measure

Non-resident satellite broadcasting

The law is amended to strengthen the taxation in Zimbabwe of a satellite broadcasting service domiciled outside Zimbabwe providing television or radio services to subscribers in Zimbabwe. A “Satellite broadcasting service” is defined in clause 5 of the draft Finance Bill 2019 as “a service which by means of a satellite (whether or not in combination with cable optical fibre or any other means of delivery) delivers television or radio programmes to persons having equipment appropriate for receiving that service.” This proposal is meantto also impose a compliance burden on the part of the non-resident satellite broadcasting service providers. It must be pointed out that these suppliers are already captured by s 12(4) (b) of the Income Tax Act Chapter 23:06 which  deems income to be from a Zimbabwean source if it is receivableby person by virtue of the use in Zimbabwe of or the grant of permission to use in Zimbabwe, or the imparting of or the undertaking to impart any knowledge directly or indirectly connected with the use in Zimbabwe of—(b) any motion picture film or television film or any sound recording or advertising matter used or intended to be used in connection with such film” , a position the recent High Court case MA Limited vs. ZIMRA HH 316-16  has also confirmed. The court ruled that MA as the agent in Zimbabwe of foreign producer of satellite broadcasting service was certainly the one authorized to use the motion picture films and television films in Zimbabwe by the producers of these items and not the subscribers, and therefore liable to income tax on the subscriptions paid by the Zimbabwean subscribers.   

Electronic commerce platform

Foreign suppliers of electronically supplied products (e.g. downloaded music, games, books, and software etc.) are not spared either. The Minister has proposed that amount receivable by or on behalf of an electronic commerce platform domiciled outside Zimbabwe from persons resident in Zimbabwe in respect of the provision or delivery of goods or services to such residents shall also be subject to income tax in Zimbabwe. Clause 5 of the draft Finance Bill 2019 defines “electronic commerce platform” as “a service which by the use of a telecommunications service or electronic means (and whether mediated by computers, mobile telephones or other devices) sells and delivers goods and services to customers”. Broadly this will cover incomes such as roaming fees, international connection, VOIPs (voice over internet protocols), OTTs (over the top services), music and software downloads etc. of a non-resident.

Administration of tax

Administratively a satellite broadcasting service provider or electronic commerce platform with certain sales threshold (not specified yet) will be under an obligation to appoint a public officer in Zimbabwe or an agent responsible for its income tax obligation in Zimbabwe. Such public officer or agent shall on behalf of the non-resident be required to register for income tax and settle its income tax liability on a quarterly basis in advance of year end as follows: 25 March- 10%; 25 June – 25%; 25 September – 30% and 20 December – 35%. Additionally, to file income tax return by the 30th of April following the December year end. For purposes of repatriating the income to the non-resident, a public officer or agent must avail a valid tax clearance to the authorized forex dealer in terms of the Exchange Control Act as evidence of complying with the income tax rules.

VAT rules on the same

Non-resident suppliers of satellite broadcasting and e-commerce platform with no fixed place of business in Zimbabwe are under no obligation to declare and pay VAT in Zimbabwe. This obligation is placed on the Zimbabwean recipient of the imported services. Imported services are defined in s2 (1) of the VAT Act as “…..a supply of services that is made by a supplier who is resident or carries on business outside Zimbabwe to a recipient who is a resident of Zimbabwe to the extent that such services are utilized or consumed in Zimbabwe otherwise than for the purpose of making taxable supplies”.. It implies services supplied by a foreign supplier and used by a resident person to produce exempted or other non-taxable supplies e.g. services imported by Banks, insurance companies, pension funds, schools, private individuals etc. Enforcing compliance amongst private individuals has been one of the biggest challenge of this tax.

International developments

The tax challenges of e-commerce is a matter which the world is currently seized with. The matter was identified by the G20 and OCED  as one of the causes of  Base Erosion and Profit Shifting (BEPS), leading to the 2015 BEPS Action 1 Report. The Finance Ministers of the G20, through the Inclusive Framework on BEPS then tasked OCED to deliver an interim report on the implications of digitalisation for taxation. The report was delivered in April 2018 and endorsed by more than 110 members of the Inclusive Framework. Unfortunately they did not agree on the recommendations made resulting in the committee asked to work on the project with the goal of producing an interim and final reports in 2019 and 2020, respectively. Some countries however have since adopted some of the interim measures in the form of an excise tax and withholding tax on the supply of certain e-services within their jurisdiction.

Conclusion

The new measure seeks to widen the tax base but the Minister must be wary of the potential double taxation of cross border e-services contrary to provision of the Melbourne Treaty of 1988 to which Zimbabwe is a party to. Neverthess non-resident suppliers of the e-services ought to familiarise themselves with the new law in order to avoid high penalties associated with non-compliance with the tax laws particularly with Zimbabwe as it is leading amongst high penalty jurisdictions.

Introduction

People often sell their homes in order to upgrade, obtain cash to pay off debts or start a business, upon divorce in order to satisfy the terms of a property sharing order, when they migrate to another country, etc. Whatever the reason, there may be capital gains tax upon such a disposal or sale. Capital gains tax is chargeable and collected in terms of the Capital Gains Tax Act (Chapter 23:01) on sale or disposal of marketable securities, immovable properties and certain intangible properties (collectively known as “specified assets”). An immovable property includes land, dam, road, a building (of any kind) or structure with foundations in the soil. A marketable security is any security, stock, debenture, share or any other interest capable of being sold in a share market or exchange. Movable assets, like cars, plant and machinery, equipment, boats are not subject to capital gains tax. The property should be situated in Zimbabwe to attract capital gains tax and in respect of marketable securities, the person must be carrying on his investment activities in Zimbabwe.

Computation of capital gain tax liability

The key information for determining gain or loss is the gross capital amount and the cost base. Gross capital amount is the proceeds received from sale or disposal the specified asset. It includes money or other debts assumed as part of the sale. Gross capital amount can also arise from donation, redemption/maturity of specified assets, compensation for expropriated property, involuntary disposal such as sale by the court to recover a debt, cession or transfer of rights in condominium property etc. If a home is foreclosed or repossessed or one receives a compensation for damaged or destroyed specified assets the law deems a sale in respect of the specified asset. If one contracts to have a house built on land owned by him/her, the basis is the cost of the land plus the amount it cost to complete the house and if otherwise one uses other means. This amount includes the cost of labour and materials, or the amounts paid to the contractor, and any architect’s fees, building permit charges, utility meter and connection charges, and legal fees directly connected with building the home. If the acquisition was through inheritance, cost basis is equal to the value established in the estate of the deceased. Inflation allowance is granted on cost acquisition/construction and cost of improving the asset.  The tax is levied on the gain at the rate of 20% for a home acquired or constructed by the seller after 1st of February 2009 and at 5% of the proceeds if acquired or constructed prior to this date.

Records of the home’s purchase price or construction cost, cost of improvements, additions, and other items that affect the cost base of the home should be kept. The records are required to prove the costs to ZIMRA. Title deeds and receipts for expenditure incurred on the house can be lodged with the bank or lawyer for safe keeping.

Minimising capital gains on sale of your home 

Rollover relief when you replace your main home

A PPR is one’s sole or main residence (main home), land which he/she owns or an undeveloped stand. One should have been staying in that house prior to its sale throughout the period owned or for at least 4 years. Any other shorter period is acceptable especially when one was denied occupation of the house because of work commitments or other similar circumstances.

The law allows one to defer capital gain tax accruing on sale of the main home if one reinvests the proceeds of sale to purchase or construct another home or purchase a residential stand in Zimbabwe. If one has more than one home, only the sale of the main home qualifies for rollover relief. If the home is used for business it ceases to qualify as the main home, but if used for both purposes one has to apportion the capital gain for rollover purposes. If the home is registered in the company name the rollover relief is not applicable since the owner of the property is the company.

Sale of principal private residence by an elderly person

If one is 55 years old or above, the law exempts him or her from capital gains tax on disposal of his or her main home.   

Spouse and Children

If one sales or transfers the home to the spouse, or former spouse incident to divorce, one generally has no gain or loss, even if one were to receive cash or other consideration for the home. If one owned the home jointly with a spouse and transferred interest in the home to a spouse or former spouse incident to divorce, the same rule applies. A marriage certificate is a prerequisite to qualify for the benefit. However a disposal of the home or any other specified asset to one’s child, capital gains tax applies.

Estate duty

Capital gains tax and estate duty do not interact on the same asset. A specified asset that is sold, realized or distributed by the executor of a deceased estate of a specified asset forming part of such estate is exempt from capital gains tax. However estate duty tax is applicable.

Trusts

Property held in a trust does not form part of the estate of a deceased person. A trust never dies; it continues in perpetuity and therefore is never liable to pay estate duty.  A trust can also save the person on executors fees, stamp duty, or conveyance fees, that could be payable by the estate or heirs. Thus, assets that are transferred into a trust before death are protected from estate duty as long as the donor survives the donation by 5 years. However, a donation of specified asset made to a trust is subject to capital gains tax. In order to avoid both capital gains tax and estate duty one may consider purchasing a property out of a trust.

Conclusion

It is often misleading to think that selling a house is just about exchanging money with title deeds. The excitement, emotions and expectations can blind people from reality. In fact there is more to this than what meets the eye. A valuation has to be sought on of the property, property agent fees, legal fees for change of ownership on the part of the buyer and even capital gains tax is not excluded in this transaction. The capital gains tax however depends on who you are selling to and when. Not knowing that properties are subject to capital gains tax can disappoint the seller as you can either gain or lose money from the transaction. Also the source of disappointment can be your failure to keep records resulting in your gain being overstated. So next time you sell your house you are now aware of the dos and don’ts.