Introduction
Many a times, Zimbabwean residents seek and import the services of non-residents. The services are oftenly wide in range. They include computer software services, machinery repairs and maintenance, legal, actuarial amongst others. As its name suggests, VAT on imported services is payable on the importation of services. With effect from 1 January 2019, imported services was redefined as a result every resident who imports services is required to account for and pay VAT on imported services to ZIMRA. Prior to this date, VAT on imported services would only be paid by Zimbabwean residents who would have imported services to make exempt supplies.
What is Imported Services?
Imported services means a supply of services that is made by a supplier who is not resident in Zimbabwe or carries on business outside Zimbabwe to a recipient who is a resident of Zimbabwe to the extent that such services are utilised or consumed in Zimbabwe. The services should be rendered by a supplier who is not resident in Zimbabwe to a resident of Zimbabwe. Such services should be utilised or consumed in Zimbabwe. The previous law defined imported services in terms of them being consumed in the making of non-taxable supplies in Zimbabwe. In essence VAT on imported services is now accounted whether one is making taxable and non-taxable supplies. The VAT on imported services is not claimed as input tax. It is therefore an additional cost to business or to the importer. Because imported services are an export from the supplier’s country, they ordinarily would be charged with VAT at the rate of zero percent (zero-rated). This means that imported services, without VAT would be ordinarily cheaper than locally provided services since the local services would be having VAT charged on them. VAT on imported services is a reverse charge of VAT that is meant to remove an unfair advantage of imported services over services provided by locals. It is paid by the recipient (resident) of the services.
When is VAT on Imported Services paid to ZIMRA?
VAT on Imported services should be paid to ZIMRA within thirty (30) days from the time of supply. The time of supply is the earlier of invoice or payment. This means that the accrual point for this tax is the time that an invoice is received from the foreign supplier or any payment in respect of the imported services is made to the foreign supplier whichever occurs first. The value upon which the tax is computed is the consideration or open market value of the supply, whichever is greater. The tax is accounted for at the standard rate 15 percent. For example, if a local company XYZ hires a foreign lawyer from South African, to handle their court case and the lawyer invoices them US$12 000, VAT to be paid by XYZ to ZIMRA would be US$12 000 x 15% = US$1,800.
Is VAT in Imported Services Paid in Foreign Currency?
The law – section 38 (4) of the VAT Act provides that where a registered operator— (a) receives payment of any amount of tax in foreign currency in respect of the supply of goods or services, that operator shall pay that amount to the Commissioner in foreign currency; (b) imports or is deemed in terms of section 12(1) to have imported goods into Zimbabwe, that operator shall pay any tax thereon to the Commissioner in foreign currency. Furthermore, a recent amendment inserting section 38 (4a) provides that for the purposes of subsection (4) (cited above) — (a) if the price for the taxable supplies in question is paid for in a foreign currency, then the registered operator shall pay the amount of the tax to the Commissioner in that foreign currency. The above provisions are quite clear on the circumstances in which VAT should be accounted for in foreign currency. VAT is required to be accounted for in foreign currency when registered operator receives payment in foreign currency or when he imports goods into Zimbabwe. The goods in respect of which VAT should be accounted for in foreign currency would be those specified in terms of SI 252A of 2018 requiring import duty in foreign currency. This therefore suggests that it is not a requirement of the law to account for VAT on imported services in foreign currency.
Exclusions from VAT on Imported Services
VAT on imported services does not apply on zero-rated or exempt services (locally). That is to say, all zero-rated or exempt services will not attract VAT on imported services if they are imported by a resident. Such services include medical services, financial services, educational services etc. In other words, VAT on imported services applies to services which would ordinarily be subject to VAT at standard rate (15%) had they been supplied by a supplier dealing in taxable supplies locally.
Withholding Tax on Imported Services
It is important to bear in mind that imported services may also attract other taxes, particularly withholding tax. The withholding tax is known as Non-Resident Tax on Fees (NRTF). Fees as defined means any amount from a source within Zimbabwe payable in respect of any services of a technical, managerial, administrative or consultative nature. There are a number of exclusions from fees in respect of which NRTF should not be deducted. The NRTF rate is 15% of gross fees and is withheld from the payment to a non-resident. It should be remitted to the ZIMRA within 10 days from the date of payment of the fees. However the presence of a tax treaty between Zimbabwe and the country in which the foreigner resides can lower or eliminate this withholding tax.
Conclusion
Every resident is now obliged to pay VAT on imported services should they consume services rendered by a non-resident in Zimbabwe. Failure to pay this tax attracts stiff penalties from ZIMRA. Every business therefore has to evaluate the carefully every foreign payment that it makes in respect of services for such payments can have tax implications in more ways than one, being VAT on imported services, withholding tax or both.