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Brain gain: Tax reform tightrope

ZIMBABWE’s talent pipelines have been leaking for some time now. In the global war for talent Zimbabwe has been a net loser. The recently concluded government action plan recognises the need to bring back exiled skills. However, an innovative national talent strategy is necessary to support any national economic recovery strategy.

The single most-important catalyst to woo our exported talent is re-engineering and repositioning Brand Zimbabwe as an attractive human capital investment destination. Brand Zimbabwe refers to the perceptions held about Zimbabwe concerning the quality of our economic, political and social spaces. Once these brand spaces begin to attract positive perceptions, organisations will be able to piggy-back on a revitalised Brand Zimbabwe, attracting and retaining premium talent. From the perception bundle, we pull out employment taxation for interrogation.
The general perception that Zimbabwe is a high tax country needs to be addressed as part of the country’s re-branding exercise.

January 2010 saw Zimbabwe’s Finance ministry introducing a new employee-tax regime, which saw the highest taxation rate dropping from the 40% to the 30% region. At the beginning of February we undertook a comparative study on employee-tax differences for selected Sadc countries. We compared the new taxation regime at the time it came into effect with the then obtaining taxation regimes in South Africa and Botswana. From a human capital perspective the Zimbabwe-South-Africa-Botswana talent markets are merged and thus attraction and retention strategies for premium skills cannot ignore the Sadc “regional village”.

The current taxation structures in force in Zimbabwe were used as a comparison base. Exhibit 1 compares the effective employee income tax levels of the Zimbabwean employee when placed into equivalent taxable income brackets in Botswana and South Africa.
Reference levels 6, 7 and 8 are of central interest. These represent the middle income levels where we expect to find critical skills, arguably the key drivers in an organisation. References level 6, 7 and 8 represent monthly taxable incomes of US$1 000, US$1 500 and US$2 000 respectively. An employee in Zimbabwe with a taxable income of US$1 000 would be effectively taxed at 19%. This represents almost three times the tax level in Botswana and South Africa. For every dollar of taxable income of US$1 500 in Zimbabwe 23 cents goes to the tax collector while 11 cents is what the revenue collectors in Botswana and South Africa demand, that is, half of what the Zimbabwean worker would have to cede to the state.

It is also interesting to note that at the low income levels represented by Reference Levels 1,2,3,4 and 5 there is an even greater disparity than for the middle level incomes. The upper limit of Zimbabwe’s second income tax bracket is US$500. This will not be taxed in South Africa. In Botswana US$360 is not taxed while in Zimbabwe this taxable amount would attract a tax of 14, 5%. Relatively, Zimbabwe’s peers in this cohort have less disposable incomes. For Zimbabwe’s economy, this represents forfeited spending power to fuel consumer spending. This income group also comprises our once formidable middle class. The middle class is normally a country’s key driver of consumer spending. This underlines the gravity of the challenges we have to overcome in our bid to seal our leaking national talent pipelines. A dead middle class equals a dead economy.

The employee tax portrait painted thus far provides a poser for Finance minister Biti. Fellow columnist, Eric Bloch, has eloquently argued in his column for a case to lower taxation to match or better employee taxation levels obtaining in the region. From the canvas we have been just looking at the noble move towards parity needs to be phased, in sympathy with improvements in economic performance. This is necessary in order not to strangle the fiscus. Biti is to decide whether or not to use the fiscus as collateral damage to increase workers’ disposable incomes.
One option Biti might consider is introducing a renewable tax exemption on a scarce skills or retention allowance, allowing organisations to off-set any regional tax differences. To be eligible, organisations will be required to submit a business case for consideration by the Exchequer.
Policies for taxation of benefits are equally important. For instance, whereas Zimbabwe uses engine capacity to determine taxable car benefit, SA and Botswana use car value.

In moving towards regional tax parity, exchange rate risk needs to take into account both currency and Purchasing Power Parity rates. The US dollar, from the time we carried out our study has since strengthened marginally against the rand and the pula, in nominal terms, that is, without taking into account changes in inflation.  In nominal terms, the Zimbabwean employee appears to have gotten the better of their peers in SA and Botswana.
However, in real terms, this might not be the case, given the recent pilgrimage of Zimbabwe’s inflation towards the shrines of economic meltdown of yesteryear. This scenario clearly illustrates the need for a holistic approach to the Zimbabwean recovery process. Inflation, a purchasing power-eating monster can render competitive tax regimes ineffective in attracting and retaining must-have skills.
Assuming the dollar regime will be with us for some time, our assumptions about the direction the dollar will take in the near and long-term will be critical in determining the levels at which our employee tax levels should settle. If we assume the dollar exchange value will claw back to its pre-recession levels of greater than US: ZAR= 0,125 then dollar salaries will, in nominal terms improve by at least 6% in comparison with SA and Botswana. To preserve real value, inflation would have to match or better SA and Botswana.

Although Exhibit 1 shows that after Reference Level 17 Zimbabwe’s effective tax rate becomes marginally lower than that of South Africa, it has no practical significance in that these levels represent extremely high salaries that only a few Zimbabweans can realistically earn. For example Reference Level 17 represents a taxable monthly income of US$11 000.
To entice our exported premium talent, it will take more than just the pull of nostalgia and the moral suasion of khumbula ekhaya or dzoka uyamwe.
To get a copy of our full report on employee tax regional differences email brett.chulu@consultant.com.

By Brett Chulu

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