Tougher VAT deferment Rules looming

by with No Comment News

In a significant move to tighten tax regulations, Zimbabwe’s Finance Ministry has proposed amendments to the regulations governing the deferment of Value Added Tax (VAT). These changes introduce new penalties aimed at ensuring that businesses and individuals promptly adhere to their tax obligations, reduce tax evasion, and enhance revenue collection.

The proposal introduces two key penalties. First, taxpayers who fail to pay deferred VAT by the set deadline will lose the privilege of future deferments. The same applies to operators who have previously failed to honour their VAT obligations on deferred taxes. Second, taxpayers who default on any taxes under specific legislation, including the Capital Gains Tax Act, Customs and Excise Act, Income Tax Act, and VAT Act, will also be barred from future VAT deferments. The Finance Ministry has emphasized that no further tax concessions will be granted to operators who have previously defaulted on their VAT obligations, including taxes due on other tax heads. This move is intended to enforce punctuality among beneficiaries of the VAT deferment facility, ensuring that revenue is safeguarded, and tax compliance is maintained across all sectors. The proposals further require applications for VAT deferment to be accompanied by a statement from the Commissioner-General of the Zimbabwe Revenue Authority (ZIMRA) confirming the operator’s compliance with their tax obligations. This may necessitate a tax audit before the granting of deferment. A Tax Clearance Certificate alone will not be accepted as sufficient evidence of compliance.

Currently, the deferment incentive is granted to businesses in sectors such as mining, manufacturing, medical, and agriculture in respect of plant and machinery importation for their own use, supported by letters from the Minister of Finance and the relevant line ministry. The deferment period is fixed at a maximum of 180 days, with a minimum capital goods value of US$1,000,000. In response, the Minister has proposed extending the deferment period to up to two years for operators in the manufacturing sector and up to three years for operators in the mining sector. This focus on mining and manufacturing acknowledges the capital-intensive nature of these sectors, where large-scale investments require substantial upfront costs and longer timelines before equipment becomes operational. These extended periods are designed to align with the unique financial cycles of these industries, which often differ from other sectors that might feel excluded from such benefits.

However, the US$1,000,000 threshold, while targeting significant investments, also restricts access for many businesses, particularly SMEs. This high barrier may render the deferment facility more theoretical than practical for smaller players, potentially stifling growth in industries where smaller capital investments are more common.

For businesses, these regulations will require stricter adherence to tax deadlines to avoid losing deferment privileges, which could impact cash flow management. Companies may need to enhance their financial planning and internal controls to ensure compliance. While this could pose challenges, especially for small and medium-sized enterprises (SMEs), the measures are intended to create a level playing field by eliminating advantages for those evading taxes. These proposed VAT penalties are a crucial step toward strengthening tax compliance and enhancing the efficiency of Zimbabwe’s tax system. While there may be short-term challenges for businesses, the long-term impact on the economy is expected to be positive.

New VAT Exemptions on Livestock Products

by with No Comment Uncategorized

In a significant move aimed at bolstering economic growth and improving the affordability of essential goods, Zimbabwe has announced substantial reforms to its Value Added Tax (VAT) system, exempting certain products from VAT effective 1 August 2024. This article explores the details of this shift, explaining the intricacies of moving from standard-rated to exempt goods, the motivations behind the change, and its anticipated economic impacts.

Zimbabwe’s VAT system categorizes goods into three types: standard-rated, zero-rated, and exempt. Standard-rated supplies carry a VAT rate of 15%, allowing businesses to claim VAT on their inputs. Zero-rated supplies are taxed at 0%, enabling businesses to reclaim VAT on their inputs. This category traditionally includes essential goods like basic food items and necessities for disabled persons. Exempt supplies do not attract VAT, and businesses are not required to register for VAT or claim input tax, often resulting in higher final prices for consumers as the costs are passed on.

Minister of Finance, Economic Development, and Investment Promotion, Professor Mthuli Ncube, has proposed VAT exemptions for live animals (cattle, pigs, goats, and sheep), bovine semen, poultry meat, and kapenta starting 1 August 2024. Previously, the supply of live animals was zero-rated until 1 January 2024, when it became standard-rated under Statutory Instrument 15 of 2024. This SI also moved day-old chicks, sheep, and goat meats from exempt to standard-rated. It also exempted most farming inputs like animal feed, remedies, fertilizers, and pesticides. With the new proposal, inputs and live animal sales will be VAT exempt, while meat products will remain standard-rated.

The primary objective of exempting these livestock products from VAT is to make meat more affordable for consumers and promote formal business practices. The change addresses the mismatch created by SI 15 of 2024, which exempted agricultural inputs from VAT while standard-rating the final products. By exempting the output of livestock farmers, the direct tax burden on consumers is removed, potentially reducing prices if businesses adjust their pricing strategies accordingly. Additionally, this shift eliminates the compliance and administrative burdens associated with standard-rating, such as VAT registration and tax return submissions, which can be costly and cumbersome for small and medium-sized enterprises.

The proposed VAT exemptions may lead to a short-term decrease in government revenue from these items. However, the government anticipates that economic stimulation and increased consumption resulting from lower prices will offset this loss over time. Reduced costs of essential goods can drive growth in related sectors, creating a multiplier effect throughout the economy.

From a business perspective, capital goods used in producing the newly exempt products will no longer be deemed used in trade, altering their VAT status. This change would typically trigger output VAT to recoup previously claimed input tax, but such adjustment is not required when driven by government policy. Businesses that cease to produce taxable supplies may need to deregister for VAT, creating an involuntary supply and resulting in VAT due on fixed assets previously used in taxable supplies.

The Minister’s proposal lightens the VAT burden on consumers and aims to restore order within the formal livestock value chain. However, inequalities persist, such as the omission of eggs from the exempt product list, creating disparities and VAT administration issues for farmers producing both chickens and eggs. With eggs remaining standard-rated while poultry meat is exempt, the government should consider extending the same VAT exemption to egg sales to mitigate these complications and further reduce the tax burden on consumers.

Your Tax Obligation When Working for a Foreign-Based Employer

by with No Comment News

The digitalisation of work, accelerated by the COVID-19 pandemic, has enabled people to work globally, often for foreign-based employers while residing in their home countries. This shift offers numerous advantages, such as access to a diverse talent pool and potential cost reductions for employers. However, it also introduces complex tax implications for employees residing in Zimbabwe. This article provides an overview of the tax obligations for such employees, emphasising compliance with local laws to avoid legal issues and ensure fiscal contributions to the national economy.

Zimbabwe employs a source-based tax system, stipulating that taxes are due on income earned from activities conducted within its borders. This system is underpinned by the principle established in the tax case of CIR v Lever Brothers and Unilever Ltd, which establishes that the source of income is tied to the location and cause of income generation. For employees in Zimbabwe working this means any income earned for services rendered locally is subject to taxation by the Zimbabwe Revenue Authority (ZIMRA) despite the residence status of the employer.

For compliance, both resident and non-resident employers must register with ZIMRA within 14 days of employing someone above the tax-free threshold. Non-resident employers are further required to appoint a resident representative to handle Pay As You Earn (PAYE) obligations. If a foreign employer fails to register, the responsibility to ensure tax compliance falls on the employee, who must then file a tax return and directly pay the taxes due to ZIMRA. This process is crucial in preventing tax evasion and ensuring that income generated within Zimbabwe contributes to national revenue.7 

The enforcement of these tax obligations is strengthened by stringent banking regulations such the requirement of proof of the source of funds among other requirements. These measures are designed to curb money laundering and ensure comprehensive tax compliance, crucial for maintaining financial transparency. The implementation of these regulations has significant implications for both businesses and the economy. Foreign employers must navigate these local tax laws and administrative duties, potentially increasing operational burdens but crucial for legal compliance and smooth business operations. For the Zimbabwean economy, rigorous enforcement of tax laws ensures a fair tax system and equitable contribution to national revenues, which are vital for public services and infrastructure development.

 

In conclusion, the global shift towards remote work requires employees in Zimbabwe working for foreign-based employers to diligently comply with local tax laws. Understanding and adhering to these obligations not only avoids legal repercussions but also supports Zimbabwe’s economic stability and development. Both employees and employers must be well-informed about these regulations to ensure seamless financial transactions and contributions to the country’s fiscal health.

VAT on Imported Services

by with No Comment News

The Value Added Tax (VAT) on Imported Services (VIS) in Zimbabwe ensures that services procured from non-resident persons and persons operating their business outside Zimbabwe and consumed by residents are taxed similarly to those supplied by local providers. This article explores the background, relevant laws, detailed VAT regulations, and the impact of VIS on businesses and the economy.

VIS applies to services imported into Zimbabwe and consumed or utilised by residents. The standard VAT rate is 15%. The tax obligation arises upon the earliest of three events: issuance of an invoice, payment to the non-resident provider, or completion of the service. Taxpayers must remit the tax by the 25th of the month following the supply, and they may reclaim VIS if the services contribute directly to taxable supplies. VAT on imported services may be paid in local currency.

The value of imported services is either the consideration paid or the open market value, whichever is greater. The ZIMRA typically applies 15% on the consideration. Barter or donation is valued at the open market value, and a supply for no consideration has nil value unless between connected persons. Meanwhile, imported services similar those ordinarily zero-rated or exempted by local suppliers are exempted from VAT for instance actuary, insurance, medical services, financial guarantee, or suretyship. 

Reclaiming VIS involves complex documentation and compliance requirements. Taxpayers can offset the tax paid against their VAT liabilities if the imported services are used directly in the production of taxable supplies.

The requirement to remit VAT by the 25th of the following month creates a strict timeline for compliance. Businesses must ensure they have the necessary funds and documentation to meet this deadline, failing which they may face penalties and interest charges. The option to pay VIS in local currency provides flexibility, particularly for businesses that may not have easy access to foreign currency.

 

In conclusion, implementing VIS has significant implications for businesses, particularly those that frequently engage with international service providers. While the ability to reclaim VIS offers some relief, the requirement to prepay the tax can strain cash flows, especially for small and medium-sized enterprises (SMEs) lacking financial resources. Complex conditions for claiming VAT refunds pose additional challenges, requiring detailed records and stringent documentation to reclaim VIS successfully. This administrative burden can be particularly onerous for smaller enterprises, lacking the capacity to manage these processes effectively.

VAT implications of Non-Profit Making Organisations

by with No Comment Uncategorized

The VAT status of non-profit making organisations is a nuanced aspect of tax law that requires careful consideration and understanding. While these organisations often benefit from income tax exemptions due to their non-profit nature, the rules around Value Added Tax (VAT) are slightly different. This article explores the specific exemptions, the practical complexities of these rules and the broader economic impact on non-profit organisations.

Under the Zimbabwean VAT laws, certain supplies made by non-profits are exempt from VAT. This includes the provision of goods or services received as donations, or when non-profit organisations sell goods, they have produced, provided these goods consist of at least 80% of the donated materials. The VAT Act clearly stipulates that VAT applies to any supply made in exchange for a consideration (i.e., payment), irrespective of whether the transaction yields a profit.

However, complexities arise with how these rules apply in practice. For instance, if a non-profit organisation receives donated goods and uses them to produce new items for sale, the resulting products are VAT-exempt only if the original donations constitute at least 80% of their value. This provision enables non-profits to utilise donations without the burden of VAT on such transactions. The landmark case of Law Society of Zimbabwe v ZIMRA clarified that certain fees charged by non-profit organisations, such as subscriptions and professional development fees, were VAT exempt because they were considered products of donated goods or services. This case highlighted that the VAT exemption applies to income deemed as donations, not to income from activities generating a supply for consideration.

The key takeaway for non-profits in Zimbabwe is the critical need to distinguish between income derived from straightforward donations and income from activities that involve a supply for consideration. From an operational perspective, these VAT rules demand rigorous accounting and administrative practices from non-profits to ensure compliance and avoid potential tax liabilities. This diligence helps in maintaining fiscal responsibility and supports the integrity of the VAT system, ensuring that non-profits contributing to commercial activities pay their fair share of tax.

Moreover, the broader economic impact of these VAT provisions supports the sustainability of non-profits. By exempting VAT on donations and related activities, non-profits can channel more resources into their core missions such as community services, support for vulnerable groups, or other social welfare initiatives. Yet, by imposing VAT on commercial activities, the laws ensure these organisations contribute to the national revenue, maintaining a balanced approach that benefits both the economy and the societal goals of non-profits.

In conclusion, the VAT status of non-profit making organisations in Zimbabwe is governed by specific laws that differentiate between donations and supplies for consideration. While donations and activities involving substantial donated goods are VAT exempt, any supply made for consideration is subject to VAT, regardless of profitability. Non-profits must navigate these rules carefully to comply with VAT obligations and maximise their impact. Understanding these nuances ensures that non-profits can operate effectively, contributing to social welfare while adhering to tax regulations.

The New Face of Income Tax Computation

by with No Comment News

The introduction of Section 37AA of the Income Tax Act (ITA) through Finance Act No. 8 of 2022, and the mandate to lodge income tax returns via the Tax and Revenue Management System (TARMS) in Zimbabwean dollars (ZiG), has significantly transformed the landscape of income tax computation in Zimbabwe. This transformation presents both new challenges and complexities, requiring a deep understanding from taxpayers about the implications of these changes. This article explores these changes, clarifies the legislation, and analyses its impact on businesses and the broader economy.

Section 37AA of the ITA mandates taxpayers who earn any portion of their income from trade or investments in foreign currencies to file a separate return in foreign currency. This provision further requires the splitting and allocation of deductions and allowances between returns filed in local and foreign currencies, based on an income ratio. To facilitate computation of income ratio currencies are converted to a common denominator using the average auction rate for the year. The transition from Zimbabwean dollars (ZWL) to  ZiG requires an extension of the income tax computation template to show the conversion of the ZWL return into ZiG. The ZIMRA Public Notice 41 provides guidance on the exchange rate to use for converting ZWL returns to ZiG. The expected format for the 2023 tax return reflects these changes, including income statements in ZWL and USD, and the corresponding tax computations in ZiG. 

This dual reporting requirement ensures that taxable income is accurately reflected in the currency in which it was earned, enhancing fairness and consistency in tax computations. It underscores the importance of accurate record-keeping and precise currency conversions. The tax computation process has shifted to begin with the identification of gross income directly from records in their original currency, moving away from the traditional net profit before tax. Taxpayers must now extract gross income from their records, strip away any exemptions, determine the income ratio, and apply this ratio to their reported deductions and allowances, which must be submitted separately for each currency.

These new mandates introduce complexities that significantly raise the risk of non-compliance, especially for small businesses. Companies are compelled to modify their accounting systems to accurately record all transactions in both local and foreign currencies. This requirement for detailed record-keeping and precise currency conversions can pose substantial challenges, particularly for entities lacking in resources or expertise. The complexity inherent in these new reporting standards could potentially escalate operational costs, as businesses might need to engage tax professionals to navigate the new requirements.

From an economic perspective, while the dual reporting mechanism aims to increase tax accuracy and transparency, reflecting the true scope of economic activities and income of taxpayers, it may pose increased administrative burden on businesses, particularly for small and medium-sized enterprises (SMEs) with limited resources.

In conclusion, the changes introduced by Section 37AA of the ITA and the requirement to lodge income returns in TARMS in ZiG represent a significant shift in the income tax computation landscape. While these changes aim to improve tax accuracy and transparency, they also introduce new complexities and challenges for taxpayers. Meticulous planning, detailed record-keeping, and possibly expert guidance are now more crucial than ever to navigate this new tax landscape effectively.

Schemes of Reconstruction and Capital Gains Tax

by with No Comment News

In Zimbabwe’s dynamic corporate finance sphere, schemes of reconstruction serve as vital mechanisms, particularly in an environment marked by frequent and impactful economic transformations. These schemes, which include mergers, takeovers, consolidations, and conversions, provide structured pathways for businesses to optimize operations and strategic alignment while minimizing tax burdens. Specific provisions within Zimbabwe’s Capital Gains Tax (CGT) legislation provide clear guidelines and tax reliefs, encouraging and supporting such transformations for both local and foreign companies. This article delves into the intricacies of these tax provisions, explaining their mechanisms, beneficiaries, and contextual conditions, giving companies insight on how to leverage tax laws for enhanced corporate structuring and financial health.

Firstly, the CGT laws provides a beneficial pathway to non-resident companies operating in Zimbabwe through branches or permanent establishments in converting into Zimbabwean incorporated entities. This provision permits the transfer of specified assets to the new local company at base cost, thereby avoiding capital gains tax. To qualify, companies must elect this option before submitting their CGT return. For example, a foreign manufacturing firm could localize by incorporating in Zimbabwe and transferring its plant’s assets tax-free, enhancing investment appeal by reducing fiscal barriers.

The CGT legislation also facilitates tax-free transfers of specified assets between related companies, aiding corporate restructuring. Assets transferred at base cost within the corporate group allow for efficient reorganization, promoting strategic consolidation and realignment without tax consequences. For example, Company A could transfer technology to Company B within the same corporate group, optimizing asset utilization without immediate tax implications.

Yet a similar relief is when a company converts into or from Private Business Corporations (PBCs) or vice versa. This result in deferring of capital gains tax on involved assets, enhancing financial flexibility. To benefit, the company or PBC must elect this option before filing their capital gains tax return. Assets must remain within the corporate entity until sold externally to qualify for this deferment. An example is a software development company transitioning to a PBC, which can use its existing assets without incurring immediate capital gains tax, thereby offering flexibility and financial relief. This provision supports companies in adapting to evolving economic and regulatory conditions.

The capital gains tax legislation also enables a tax-efficient “share-for-share transaction,” crucial for corporate restructuring. This provision allows companies to reorganize ownership by exchanging securities without monetary consideration and without incurring immediate capital gains tax. To qualify for tax relief, transfers must be part of an approved reconstruction scheme, such as a merger or consolidation. Companies must elect this option before filing their capital gains tax return. This strategy supports corporate objectives such as operational consolidation or preparation for acquisitions by realigning business operations without incurring capital gains taxes. For instance, Company X, with underutilized patents, can exchange them for shares with Company Y, enhancing asset utilization across the corporate group without immediate tax implications.

The Act also offers a unique approach to managing capital gains tax in spousal transactions, enabling tax deferment or elimination on specified asset transfers. This provision holds critical importance for financial planning and asset management within marriages. Transfers between spouses, whether joint or individual, are valued at the base cost, thus avoiding immediate capital gain or loss recognition. This facilitates tax-free asset reorganization within marriages. However, to benefit, spouses must elect this provision during tax filing and maintain it while married. The tax implications may shift significantly during divorce, yet the relief can still apply if transfers comply with divorce settlement requirements. For instance, spouses exchanging assets such as a painting for a stock portfolio at base costs can diversify holdings without incurring additional taxes, offering flexibility in asset management. This provision supports financial adjustments and equitable asset distribution during and after marriages.

Securing approval from the Zimbabwe Revenue Authority (ZIMRA) is crucial for realizing tax reliefs associated with schemes of reconstruction. Compliance with documentation and procedural requirements ensures the smooth implementation of restructuring activities, safeguarding the interests of companies and preventing disputes or delays. Understanding and navigating Zimbabwe’s schemes of reconstruction and associated tax provisions are essential for businesses undergoing significant restructuring. These mechanisms, supported by ZIMRA’s approval, contribute to business growth, strategic realignment, and economic efficiency in a regulatory-friendly environment.

Independent Contractors from a taxman’s perspective

by with No Comment News

An independent contractor is a person or entity contracted to perform services for another entity as a non-employee, which offers a higher degree of autonomy than traditional employment. Contractors decide their own work hours, methods, and often juggle multiple clients. They shoulder their own business expenses and must supply their own tools and resources. As non-employees, independent contractors do not enjoy employee benefits such as health insurance, paid leave, or workers’ compensation. The legal obligations they face, especially concerning taxes, are distinct; they must pay income tax on their earnings and often need to make quarterly estimated tax payments. If their annual earnings exceed thresholds of USD 40,000, they must also register for and pay Value Added Tax (VAT), adding significant administrative responsibilities to maintain meticulous financial records. 

The distinction between an independent contractor and an employee is crucial and is analyzed under various legislative frameworks such as the Income Tax Act, the Labour Act, and common law criteria. The Income Tax Act specifies that an independent contractor conducts their trade independently, not being economically dependent on the payer, including roles such as labour brokers and freelance agents. They manage their tax obligations through Quarterly Declarations (QDs) and pay VAT when turnover surpasses USD 40,000, emphasizing the need for them to maintain comprehensive records of their financial transactions.

The Labour Act focuses on the relationship dynamics, defining an ’employee’ as someone economically dependent on their employer, typically not applicable to independent contractors. However, there are exceptions based on the degree of investment or risk assumed by the hiring entity. The act emphasizes the level of control and dependency; substantial control by the hiring party suggests an employment relationship, whereas significant autonomy suggests an independent contractor status.

Common law introduces tests such as the supervision and control test, the organizational test, and the financial risk test to assess this status. These tests examine the authority over work execution, integration into business operations, and the financial risks borne by the worker. A comprehensive approach often employed is the multiple or dominant impression test, which considers all factors to determine the overarching relationship nature.

When engaging an independent contractor, it’s essential to structure contracts and documentation clearly to avoid legal ambiguities, particularly concerning tax and employment laws. A well-crafted contract should clarify that the contractor is not an employee and specify the responsibilities, deliverables, and payment terms. It is critical to avoid language implying employment and instead highlight the independent nature of the contractor’s work. Contractors should provide proof of their business status, such as a business licence or professional indemnity insurance, to substantiate their independence. Maintaining records of all communications and ensuring invoices are issued for services can reinforce the business-to-business relationship, crucial for tax purposes.

Freelance agents, such as insurance brokers or real estate negotiators, operate under specific regulations that set them apart from other contractors, often representing multiple clients enhancing their independent status. These agents are subject to distinct tax requirements, including a 20% withholding tax deducted from their gross commissions, which must be remitted to the relevant tax authority by the 10th day of the following month along with a specific tax return form. They also manage their income tax through Quarterly Provisional Tax Declarations, similar to other independent contractors. Freelance agents receive a certificate from the payer indicating the commission amount and tax withheld, enabling them to claim a tax credit when filing annual returns. To ensure compliance and uphold their independent status, freelance agents must maintain thorough records of all transactions, commissions, and taxes paid. They should also possess all necessary licenses and insurances for legal operation, regularly updating contracts to accurately reflect the nature of their work relationship and mitigate potential legal and tax complications.

Understanding the nuances between independent contractors and employees is vital for both parties involved. This clarity helps maximize the benefits of flexibility and potential tax advantages inherent in independent contracting, ensuring compliance and avoiding misclassification and the associated liabilities. For businesses, diligent contract structuring and adherence to legal standards are essential, while contractors must effectively manage their tax obligations and maintain their entrepreneurial independence to thrive in this dynamic working landscape.

Aligning Tax Laws with IFRS 17: Implications for Insurance Sector

by with No Comment News

IFRS 17, issued in May 2017, replaces IFRS 4, governing accounting for insurance contracts from 1 January 2023. It shifts from a premium-centric to a service delivery and risk release model, aiming for a more accurate reflection of insurer performance and revenue recognition timing. It further standardizes reporting with expected value and current value measurement principles, enhancing transparency, comparability, and consistency. IFRS 17 introduces significant changes, including the Premium Allocation Approach (PAA) and the Contractual Service Margin (CSM). The PAA simplifies accounting for contracts that meet specific criteria by spreading the expected premium revenue over the coverage period. Meanwhile, the CSM represents unearned profit in an insurance contract and is recognized in the income statement as obligations are fulfilled, aligning profit recognition with insurance coverage.

This transition represents a significant overhaul of accounting practices for insurance contracts, with substantial implications for tax reporting. Without adjustments to tax laws, insurers will need to align accounts prepared using IFRS 17 with current tax reporting, potentially involving complex reconciliations and adjustments to tax liabilities. Continuing under IFRS 4 may avoid these complexities but would require maintaining dual reporting systems. For example, under current tax laws, short-term insurance is taxed on an adjusted cash basis, where premiums and incomes such as reinsurance commissions and investment returns are recorded when received. Reinsurance premiums are deducted when paid, and claims when incurred, while technical reserves, except for unexpired risk reserves, are not allowed as income tax deductions. These elements are typically accessible from the accounting records, except for technical reserves, which are actuarially determined. However, using IFRS 17, which relies heavily on actuarial calculations and shifts focus from premium receipt to service delivery, may challenge this approach and potentially erode trust from tax authorities in the short to medium term. This standard method of tax computation might be difficult to maintain with accounts prepared under IFRS 17, possibly leading to distrust from tax authorities in the short to medium term.

Many key elements in the financial statements under IFRS 17, such as insurance services revenue, reinsurance services revenue, and insurance contract liabilities and receivables, are largely calculated by actuaries. The shift in source and terminology under IFRS 17 complicates tax assessments and assimilation, as it focuses on delivering insurance services rather than just receiving premiums. This change could shift the timing of revenue recognition, significantly diverging from current tax treatments under the ITA, which align more closely with cash flows and premium receipts. Further, IFRS 17’s immediate recognition of losses could potentially reduce taxable income, presenting further challenges for tax authorities. It is vital to amend the ITA to align tax deductions with the financial recognition of these losses, to prevent mismatches in tax reporting and financial accounting.

As the insurance industry prepares for the implementation of IFRS 17, it is imperative to consider specific amendments to the Income Tax Act (ITA) to ensure that tax legislation keeps pace with these significant changes in accounting standards. This alignment will ensure that Zimbabwe’s tax laws meet global financial reporting and taxation standards, enhancing the country’s appeal to international investors and ensuring consistent financial reporting for insurance companies. These amendments will eliminate ambiguity, minimize potential tax disputes, and lead to more predictable and equitable tax outcomes. Clarifying the law will help stakeholders understand their tax duties and the basis for their calculations, simplifying compliance and minimizing conflicts. More importantly, adjustments to the ITA should allow for the deferral of taxation on the Contractual Service Margin (CSM) until profits are actually realized, aligning tax obligations with actual earnings rather than anticipated profits. This ensures taxation reflects the actual economic activities rather than expected future profits. A further suggestion is that, losses should be immediately deductible for tax purposes. This would reflect their true economic impact and aid insurers in effective risk management.

In conclusion, the introduction of IFRS 17 represents a watershed moment for the insurance industry, necessitating significant adjustments in both accounting and taxation practices. Aligning the Income Tax Act with these new standards, ensures competitiveness, transparency, and financial stability within the Zimbabwe insurance sector. It is essential for policymakers and industry stakeholders to engage collaboratively to enact these changes, ensuring that the transition not only meets international standards but also supports the local market’s unique needs and conditions.

Input Tax and Fiscalisation.

by with No Comment News

The concept of input tax serves as a critical mechanism for tax recovery by businesses engaged in the production of taxable supplies. Input tax is defined as the VAT incurred by a registered operator when acquiring or importing goods and services used in business operations that generate taxable outputs. The eligibility to claim back this tax is contingent on strict adherence to regulatory requirements, including possessing a proper fiscal tax invoice. For businesses, understanding and effectively managing input tax is essential for optimizing tax liability and ensuring compliance with tax laws. Furthermore, the introduction of fiscalisation processes has significantly enhanced the administration of VAT, ensuring that input tax claims are accurate and verifiable. The focus of this article is on input tax and fiscalisation.

Input tax represents a crucial component of the VAT system for registered operators. It includes several forms of tax paid or payable which are recoverable under specific conditions: first, tax on supplies where input tax includes the VAT charged by a supplier on goods or services delivered to a registered operator. Second, tax on importation also encompasses VAT paid by the registered operator on the importation of goods into the country. Third notional input tax is a distinctive component applicable in situations involving second-hand goods acquired from unregistered operators. It is calculated as the VAT fraction (typically 15/115) of the purchase price or the open market value but is capped at the amount of stamp duty that would have been payable. This aspect of input tax addresses the acquisition of fixed property, ensuring that VAT principles are maintained even in transactions outside the regular supply chain. Additionally, fixed property under this provision includes more than just land and buildings; it extends to shares or units that confer a right or interest in the use of immovable property, including time-sharing schemes.

There are conditions for claiming input tax that are crucial to ensure compliance and proper management of tax liabilities for businesses. Firstly, the claiming of input tax is predicated on the goods or services being acquired for the purpose of consumption, use, or supply in the course or furtherance of making taxable supplies. The goods or services must directly contribute to the business activities that generate taxable revenue. If they are used to make both taxable and exempt supplies, the input tax must be apportioned accordingly. Only the portion of the tax attributable to the taxable supplies can be claimed. Only VAT-registered operators are eligible to claim input tax.  Secondly, a fiscal tax invoice compliant with the specifications of section 20(4) of the VAT Act is necessary to support any input tax claim. It serves as proof of the VAT paid and the nature of the transaction. Thirdly, registered operators must maintain detailed records of all transactions affecting their input tax claims to support audits and verifications by tax authorities. Jurisprudence has established that there must be a direct and immediate link between the expense incurred and the taxable supplies produced. This criterion was highlighted in several court cases, such as BLP Group V CCE, where the courts emphasized that the purpose of the expenditure directly influences eligibility for input tax claims. The intention behind the expenditure, including future plans or potential benefits, does not justify an input tax deduction unless it directly impacts the taxable operations currently being undertaken.

Fiscalisation represents a significant advancement in the administration of value-added tax (VAT), particularly in enhancing compliance and streamlining the process of claiming input tax. In Zimbabwe, the Fiscalisation Data Management System (FDMS) has been implemented to modernize and improve the interaction between taxpayers and the tax authority (ZIMRA). The FDMS is designed to integrate seamlessly with existing hardware fiscal devices at points of sale and to introduce virtual fiscalisation solutions, which are essential in the digital age. This system is part of a broader strategy to modernize tax administration, leveraging technology to improve accuracy and efficiency. The system requires that all fiscal devices be connected and compatible with the FDMS. This ensures that every transaction is recorded in real time, providing ZIMRA with immediate access to sales data, which is crucial for tax assessment and compliance checks. Taxpayers are mandated to upgrade their existing hardware to ensure compatibility with the FDMS. This includes ensuring that fiscal tax invoices issued are compliant with the system’s requirements, such as including QR codes and authentication codes that can be verified through the Taxpayers must also work with approved suppliers to ensure that their fiscal devices meet the system’s specifications.

By automating the recording and reporting of sales data, FDMS reduces human error and increases the efficiency of tax collection. This system also speeds up the process of verifying input tax claims, making it easier for businesses to comply with tax regulations and for ZIMRA to process refunds.  The system’s real-time tracking capabilities make it harder for businesses to underreport sales or evade taxes. Increased transparency and the ability to cross-reference data help ZIMRA detect and prevent tax fraud more effectively. FDMS offers self-service facilities for taxpayers, approved suppliers, and manufacturers of fiscal devices. This accessibility improves user experience and supports better service delivery by ZIMRA.  The introduction of virtual solutions addresses the challenges posed by physical fiscal devices, such as maintenance and connectivity issues. These solutions also offer flexibility and scalability for businesses, adapting to various operational sizes and needs. The FDMS is a step towards a more digitized, efficient, and transparent tax system. As businesses and the economy continue to evolve, systems like FDMS will need to adapt to new challenges and technologies to maintain their effectiveness and relevance. The implementation of FDMS in Zimbabwe exemplifies a proactive approach to fiscal policy and administration, aiming to align tax processes with international best practices and the digital era’s demands.

In conclusion, input tax and fiscalisation are integral to a functional and fair VAT system. They not only facilitate the proper calculation and recovery of taxes but also bolster the government’s efforts in enhancing fiscal transparency and accountability. As the digital landscape evolves, systems like FDMS will continue to be pivotal in adapting to new challenges, ensuring that the VAT system remains robust and responsive to the needs of a dynamic economy.