Understanding the tax implications of the recently presented budget by Finance minister Patrick Chinamasa is paramount as it can help a taxpayer achieving tax efficiencies.
Daniel Ngwira,Chartered Accountant
In understanding the implications, it is important to express two important terms regarding taxation: tax evasion and tax avoidance. Tax evasion entails any action to evade tax by illegal means. This includes suppressing information and submitting false information. On the other hand, tax avoidance entails use of the tax regime to one’s own tax advantage through legitimate schemes or loopholes that minimise one’s tax liabilities. In the United Kingdom, Her Majesty’s Revenue and Customs obliges a taxpayer to disclose details of the scheme which a taxpayer would use to avoid tax.
In recognising that Zimbabwe is now dominated by small and medium enterprises (SMEs), the minister proposes relief for SMEs in that those which qualify for value-added tax (VAT) registration on the basis of their gross turnover exceeding US$60 000 per annum, can now register without worrying about the enormous backdated taxes and penalties that may be triggered by the decision to register. This entails that there be a waiver on the requirement to account for output tax from the deemed date of qualification for registration.
This reprieve has a window period of six months from January 2017 and it only applies to SMEs whose turnover does not go beyond US$240 000 per annum, provided registration for VAT is voluntary over that period. This move could help expand more use for SMEs services and goods as the established corporate would be able to claim input VAT.
This has also been extended to provisional tax where SMEs that voluntarily register will only need to account for provisional tax during the first year of registration on the due date of the fourth quarterly payment dates with an option to account for tax on a monthly basis. Again this is on condition of voluntary registration. Any SME compelled to register cannot benefit from the incentives. It is important to note that generally the tax authorities do not reward compelled compliance.
Taking into account the difficulties currently faced by the informal sector as well as the low levels of compliance regarding presumptive taxes, a downward revision has been proposed. Further, the payment frequency will be reduced from quarterly to monthly. Some of the reductions are as high as 50%
For the wine distillers, excise duty on imported raw wine will be suspended for a year with effect from January 2017. The minister proposed a ring-fenced facility of 30 000 litres of raw wine for approved manufacturers. The effect of this measure is to improve competitiveness of the local manufacturers of wine. At the moment, raw wine is charged excise duty on importation. As a final processed product, it further attracts duty at wholesale price. Thus locally processed wine is subject to double taxation whereas imported wine is taxed once at point of importation.
In addition, the minister noted that most of the fiscal devices which were acquired in 2010 were now outdated, prompting the need for the acquisition of advanced fiscal devices. Of the 10 suppliers licensed to supply fiscalised devices, only six were still in business, thereby creating a supply bottleneck. Additional suppliers will be licensed to augment the current service providers.
As 90% of the category C operators who acquired fiscal devices are resisting connection to the Zimbabwe Revenue Authority (Zimra) server, thereby undermining the tax authority’s ability to monitor vatable transactions real time, non-compliant operators will not be issued with tax compliance certificates. This will come with a withholding tax of 10% on gross sales with effect from January 2017.
The budget proposes to expand the definition of specified assets to include income generated from the sale of prescribed property regardless of whether it is tangible or intangible. This definition will include such intangible assets as trademarks, patents and brands as opposed to the previous definition which included immovable property or any marketable securities such as equity, debentures and bonds which can be traded. By expanding the definition, it entails that the tax base for capital gains tax purposes has been widened.
For companies who build houses as part of corporate social responsibility and then donate them to local authorities or community trusts, there is something to smile about. Current tax rules deem the transfer of ownership as a sale.
Consequently, capital gains tax liabilities based on fair value arise. This discourages such transfers of ownership as the cost is higher as a result of the gains tax that becomes due and payable. To encourage private sector participation in the provision of housing, transfers or donations to local authorities, employee share ownership schemes and community trusts will be exempted from gains tax beginning January 2017.
It will no longer be possible to use associate companies to manage tax liabilities as the limit on tax deductible expenditure will now apply to them in the same way as it does on subsidiaries or local branches of foreign companies. General administration and management fees between associated companies will now be subject to a formula-based limit. Thus the opportunity for shifting profits to lower tax jurisdictions has been curtailed.
Further, the minister proposed a thin capitalisation rule of debt-to-equity ratio of 3:1. This entails that any interest in excess of the rule will be deemed dividend and therefore it will not be tax deductible. This limits the opportunities of limiting tax liabilities through the use of debt. To put things into perspective, it should be noted that any interest on loans used to generate income for the business is allowed as a deduction against taxable income, thereby reducing the tax liabilities.
This presents companies with an opportunity to tilt their capital structures to more debt than equity. Botswana has the same rule of 3:1 for foreign-controlled resident companies. The effect is that any interest paid on that part of the debt that exceeds the ratio is disallowed as a deduction. On capital structuring, it is paramount to consider this rule for tax purposes.
On another matter, it was noted that whereas services offered by traditional financial institutions are VAT exempt, technology-based solutions are vatable, thereby creating an uneven playing field as well as increasing the cost of service accessibility by the consumer. The minister expects this benefit to be passed onto the consumer through fee reductions. This will be an important test for such businesses as the nation waits to see their sincerity in passing on the benefit to the consumer.
Non-resident directors have not been left out of the tax jamboree. Currently their fees are subject to double taxation in that the income is subject to 20% withholding tax while at the same time it is liable to non-residents tax. The tax rules will be amended to exempt board fees accruing to non-executive directors from a non-residents tax.
To ensure ethical conduct, there is a proposal to strengthen the regulation of tax consultants. This follows revelations that some tax consultants have been engaged in unethical behaviour which helps clients suppress their tax liabilities. The proposal is to extend the authority of the commissioner-general to report any unethical conduct by a practitioner to their association.
Among other factors, for one to be a Zimra-registered tax practitioner, minimum educational qualifications will be set. Before engaging a tax consultant, it is important to do a due diligence on them. At a minimum, they should meet the requirement set by Zimra.
To reduce the incidence of motor vehicles under Temporary Import Permits being sold on the local market with no revenue accruing to Zimra, the minister proposed to reduce the maximum period under which the commissioner-general may permit temporary importation by visitors and residents living abroad from 12 months to three months.
In addition, Zimra will be mandated to develop a system that links motor vehicles issued with Temporary Import Permits to the Central Vehicle Registry and the Zimbabwe National Roads Administration. This seamless end-to-end system will make it impossible for motor vehicles under TIPs to be registered. This would significantly reduce losses by the fiscus.
Following the massive corruption allegations revealed at Zimra at commissioner-general level a few months ago, the minister is now proposing to limit the tenure of the commissioner-general from being open ended to a maximum of two five-year terms. Other commissioners’ terms will also limited to three four-year terms.
Overall, it can be noted that the minister made efforts to streamline the country’s taxation by removing some burdens on the taxpayer. There were notable instances where the minister removed double taxation, while at the same time there are instances where the minister saw opportunities for expanding the tax base. The effort to incorporate the SMEs into the mainstream tax system is a major highlight which should be embraced.
Only information dissemination and education by Zimra can help SMEs clinch this to their advantage and that of the greater Zimbabwe.
Ngwira is a chartered accountant, former bank treasurer and former university lecturer. He holds finance and business qualifications. — email@example.com, +267 73 113 161.