Introduction
The 2019 Monetary Policy and its accompanying legislation abandoned the 1:1 parity rate of exchange between the bond note and the United States Dollar. Real Time Gross Settlement (RTGS) system balances expressed in the United States dollar immediately before the effective date, 22 February 2019 were taken to be opening balances in RTGS dollars at par with the United States dollar. At the same time, a new currency, the RTGS dollar was introduced. In addition, every amount expressed in United States dollars (USD) in any piece of legislation was deemed to be in RTGS on a rate of 1:1. And the conversion and translation of USD balances to RTGS has created foreign exchange gains and losses which have tax implications for taxpayers as more fully explained in this article.
Law and Interpretation
The Income Tax Act brings into tax, foreign exchange gains realized from trading, that is, from income of a revenue nature. Revenue nature exchange gains are those which arise from the sale of goods or services in the course of a taxpayer’s trade or on working capital items such as debtors, settlement of trade creditors, on bank deposits used in the day to day business activities of the taxpayer or on inventory (stock). If the receipts and accruals occur in different years of assessment, effect shall be given to the increase or reduction in the gross income in the year of assessment in which the amount was received. The foreign exchange gains taxed will be on translation of assets and not on conversion as conversion of assets is a transaction of a capital nature. Furthermore, the Income Tax Act provides that: “When, owing to a variation in the rate of exchange of currency between Zimbabwe and any other country, the amount actually paid in Zimbabwean currency differs from the amount of the liability that had been incurred prior to the variation in the rate of exchange— (i) the amount to be deducted shall be the said amount actually paid in Zimbabwean currency (ii) if the incurring of the liability and the payment therefor occur in different years of assessment, effect shall be given to the increase or reduction in the amount in the year of assessment in which the amount was paid.” The amount to be deducted is the amount actually paid in Zimbabwean currency to the extent that it differs from the amount of the liability that had been incurred prior to the variation in the rate of exchange. It is important to note that, whilst foreign exchange losses of a revenue nature are deductible, capital nature foreign exchange losses are capitalised.
The new monetary laws led to both conversion and translation of assets and liabilities. Conversion and Translation of assets and liabilities are intricately interwoven, yet distinct concepts. The conversion of an asset is when the asset is actually changed from one currency to another. The asset itself actually changes in that it actually changes in form. A conversion mimics the transaction that happens when one exchanges currency for another in a bureau de change. With translation of assets, on the other hand, the asset remains unchanged and it is only the basis of measurement that changes. For example, United States dollars kept in a safe can be translated to another currency for the purposes of reporting. This does not in essence change the value of the United States dollars kept in the safe as they remain the same in terms of their nature. In other words, the dollar bill itself remains the same, and does not change into a bill of another currency as with a conversion. Conversion does not create taxable profits, whilst translation does. Conversion does not give rise to trading activity and therefore should be presumed to be of a capital nature. On the other hand translation results from variation in exchange rate which is a consequence of trading activity.
The government through SI32 of 2019 introduced a new currency now known as the RTGS dollars. SI33 of 2019 further provides guidelines for the conversion of balances from the United States dollar to the RTGS$. To that end, companies are required to convert their US dollar valued assets and liabilities to RTGS dollars. The rate of conversion however, depends on when the assets were held by the company and at what point the liabilities were incurred. The provisions entails that the conversion of the monetary values of assets and liabilities denominated in US dollars to RTGS dollars will be done at a conversion rate of 1:1 with the United States dollars for assets and liabilities held before the 22nd of February 2019. This in general means that there are no foreign exchange gains or losses to be realized by the company if the conversion of the assets and liabilities is to be done at a rate of 1:1. There are exceptions to the 1:1 exchange rule namely (a) funds held in foreign currency designated accounts, otherwise known as “Nostro FCA accounts”, which shall continue to be designated in such foreign currencies; and (b) foreign loans and obligations denominated in any foreign currency, which shall continue to be payable in such foreign currency.
Conclusion
In conclusion, the realization of gains or losses depends on when the assets or liabilities were held by the company. If the assets and liabilities that were held before the 22nd of February 2019 valued and expressed in US dollars were to be converted to RTGS dollars, the rate of conversion would be at 1:1. Such conversion if done in excess of 1:1 USD to the RTGS will nevertheless remain capital in nature. For assets and liabilities valued and expressed in US dollars held after the 22nd of February 2019, contemplated for translation by the company, then the translation rate would be at a rate in excess of 1:1 with the US dollar. These will create taxable or deductible foreign exchange gain or loss, if they arise from working capital items and the settlement is done prior to year-end and non-taxable or nondeductible unrealised foreign exchange gain or loss, respectively if the assets and liabilities are still held at year end. The same applies to amounts in Nostro accounts or short term denominated foreign currency loans. For long term loans and property, plant and equipment whether realised or unrealised the foreign exchange gain or loss does not give rise to taxable income or assessed loss.