In Zimbabwe, insurance businesses must navigate and comply with many tax obligations. Among these several tax obligations is the property and insurance commission tax in respect of commission paid to freelance agents or brokers. This tax creates unintended consequences in that the tax liability rests with the person who does not hold any money in their hands or who does not make any “payment” to another.
The property and insurance tax provisions align with the law, which requires that every employer deducts pay-as-you-earn on remuneration to any employee. The term remuneration does not include amounts paid to independent contractors, including freelance agents as defined in the law. Freelance agents involve players in the insurance industry such as insurance brokers and agents who receive commissions from the insurer after they refer policyholders. However, payments to a dependent or working insurance agent for acts done by him on behalf of a registered insurer are considered as remuneration. Thus, taxpayers should distinguish the nature of the relationship with third parties such as insurance agents to determine their income tax and PAYE liability.
To force freelance agents and brokers to be tax compliant, a 20% withholding tax applies on commissions paid to them by insurers. Insurers must withhold this tax from payments made to freelance agents and brokers, and subsequently pay it to the Zimbabwe Revenue Authority by the 10th of the following month. Additionally, insurers must submit a withholding tax return for the tax payment by the same deadline. The tax must be paid in the currency of the transaction or payment. Furthermore, insurers are obliged to provide agents and brokers with a withholding tax certificate upon request. An important consideration is the liability that arises when an insurer pays a commission to the freelance agent or broker. This liability lies with both the insurer and the freelance agent in terms of the law, with the insurer having the liability to pay penalties and interest for failing to withhold the insurance tax commission. However, there is leeway to negotiate full penalty remission in terms of the law. Whilst the architecture of this tax is set up in such a way that the recovery of the tax is to be on the insurer, the fact that the tax remains that of the broker or agent makes the penalty in those circumstances unjustified because the insurer has no control over the compliance of the broker or agent who receives the premiums and pays to the insurer the remainder after removing their commission.
Circumstances arise in which the freelance agent, who is a broker, has withheld the commission before remitting the policy amount to the insurer. This makes it impossible for the insurer to withhold the insurance commission tax as required by the Act. The Act has not taken into consideration that the normal business arrangement is that the insurance broker negotiates insurance business for the insurer, receives funds from the policyholders, and then withholds commission payments from those amounts and pays over the premium amount to the insurer. Thus, the requirement of the Act does not capture the business reality of the insurance industry increasing the burden of compliance on insurance companies. Ideally, and also as part of not promoting unjust enrichment, the tax liability and accompanying penalties must shift to the freelance agents and brokers who have withheld their full commission and paid the net premiums to the insurers.
The insurance commission tax is bound to affect the cash flows of the insurance businesses in that they have to comply with provisions that are impossible to comply with after having paid no commission to insurance brokers. Thus, although the insurance commission tax was introduced with the noble intention to ensure that freelance agents complied with the tax laws, its implementation does not capture business realities. The cost is passed on to insurers through penalties and interest.
Tax policy reformation is required to correct this anomaly as part of streamlining compliance procedures and administrative burdens on insurance companies.