BUSINESSES need to understand the dynamics of taxes as they apply to international contracts so as to ensure due compliance with the law, particularly where taxation on technical fees is concerned, a commercial lawyer, Alex Majachani, has said.
His contribution becomes the latest on the current debate on Zimbabwe’s taxation regime, following the gazetting of the Income Tax Bill late last year. If the Bill becomes law, one of the primary changes to the tax regime will be a shift from source-based taxation to residency-based taxation.
“Two issues arise with regards to technical fees payable to foreigners for tax purposes. The first one relates to the responsibility for payment of tax, and second, to the applicable rate for international payments,” Majachani told the Zimbabwe Independent this week.
He said the Income Tax Act (Chapter 23:06) provides that a payer of fees is responsible for payment of taxes. One can ascertain who the payer is from the wording of the agreement that gave rise to payment of fees. Based on this, a company, trust or other organisation would be required to withhold tax in respect of fees paid to a non-resident.
Agents receiving fees on behalf of their foreign principals in Zimbabwe might also become liable to withhold the tax where payer has not done so. This would be the case where the agent is ordinarily responsible for that function on behalf of the payer of fees.
Majachani observed that in terms of such international contracts, many local businesses were caught flat-footed, particularly as relating to payment of taxes on technical, managerial and administrative services. He said in terms of Zimbabwean tax law, any amount from a source within Zimbabwe payable in respect of any such services fell under the ambit of technical fees. Fees were also deemed to be sourced in Zimbabwe where the payer was ordinarily resident in Zimbabwe.
“Any organisation or business concern may find itself having to import services of a technical, administrative or managerial nature from a foreigner. This usually occurs where machinery, apparatus or a process requires specialised support from the manufacturer, promoter or dealer who is based outside Zimbabwe,” he pointed out.
He said in this regard, the service providers concerned would normally charge fees for work covering technical or consultancy services ancillary to the enjoyment of the property for which a royalty is received, or for technical knowledge, experience, skill, know-how or processes, or the development and transfer of a technical plan or technical design.
Majachani noted that fees for technical services payable to a non-resident person were subject to a withholding tax –– Non Resident Tax on Fees (NRTF) at 15%. The fees may, however, be lowered or exempted through operation of a double tax treaty/agreement (DTA) between Zimbabwe and another country.
“In reality, a DTA may offer reduced rates of withholding taxes on technical fees –– the majority of Zimbabwe’s signed DTAs restrict the rate to 10% or less. It is therefore important to consult the relevant DTAs before any remission of foreign payment is done,” Majachani said.
He said in the case of Zimbabwe’s DTA with South Africa, for example, the treaty did not specifically deal with fees, as such they would fall under industrial and commercial profits. Where the profits (fees) were derived from carrying on a business through a permanent establishment (PE), then such profits were wholly taxable in Zimbabwe at 25% plus a 3% aids levy of the tax due.
A PE is a fixed place of business which generally gives rise to income or value added tax liability in Zimbabwe. In line with the above, income from a PE in Zimbabwe would then not be subject to any withholding tax. Majachani said in certain instances where the operations were not through a permanent establishment in Zimbabwe, such income might be exclusively taxed in the other territory. For example, according to the DTA with South Africa, the whole amount is taxed in South Africa.