ZIMBABWE will move to a residence -based tax system from the current source principle, implying that tax payers ordinarily resident in Zimbabwe will now be liable for tax on all their income, including income earned outside Zimbabwe.
The new tax regime, which was unveiled through the Income Tax Bill gazetted last week, will also facilitate the collection of taxes due to other countries with which Zimbabwe has double taxation agreements. It will come into effect in the 2013 fiscal year.
According to the Bill, certain foreign sourced-income earned by a person resident in Zimbabwe will be deemed to be from a Zimbabwean source.
The provisions are likely to especially affect income of a passive nature, such as interest earned on foreign bonds, bank accounts, as well as dividend income from shares held in foreign entities.
Chapter II of the Bill also defines what is meant by a resident and temporarily resident individual, a resident company, a resident trust, a resident partnership and a non-resident person.
Other countries that use the residence-based tax system include the USA, South Africa and Australia.
Analysts say the new tax law will allow for a wider tax net as the number of eligible taxpayers will increase. This will in turn increase potential government revenues.
They say collection will be difficult and it will be a challenge to get people to declare their foreign income-earning assets. However, the more controversial question will be on determining which individuals have a strong enough connection with Zimbabwe to be classified as tax payers under the new system.
The Bill makes a clearer distinction between the different types of income, such as employment income, business income (previously called income from trade) and property income.
It also clarifies that all tax-deductible expenses can only be those of a technical nature closely related to the production of the income in question and those that are tax expenditures. This will change the method of calculating taxable income.
The measures are aimed at tax payers who were deducting all manner of expenses incurred, irrespective of whether these were as a direct result of the income-generating activity.
Under the new proposed method, the taxpayer’s income will be segregated according to whether it is from employment, business or property. This is done to clarify the eligibility of certain types of income for specified deductions, allowances and exemptions.
In order to expand the tax base, the Bill seeks to restrict allowable deductions to those expenses incurred in the production of income only.
This will eliminate deductions of expenses not directly linked to the production of income, albeit such expenses may otherwise have been incurred for the purposes of trade. The Special Court for Income Tax Appeals will be abolished while the Fiscal Appeal Court, which will now become the appellate court of first instance for income tax appeals, will be retained.
The Bill will generally update and modernise outdated terms to take account of contemporary developments in the field of income taxation such as the changeover to the accrual basis of accounting.
The Income Tax Bill will repeal and replace the Income Tax Act (23:06) which was first enacted in 1967.