Unpacking the types of valued added tax supplies

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Value-added Tax (VAT) legislation and its regulations presents a unique interpretation challenge because of its intricate system of classifications of goods and services. A correct classification is essential in managing VAT compliance and for enhancing shareholder value. The  article, therefore, explain these categories, highlighting their roles and implications within the VAT framework.

According to the VAT laws  there are certain goods and services which are charged a tax if they are provided by a registered operator, are imported items or auctioned goods. The rate of tax for goods and services is 15% for standard rated and 0% for zero-rated supplies, while others such as basic food items are exempted. For one to charge VAT,  he/she must register for VAT and becomes a registered operator. As part of its trade, a registered operator will charge VAT if it supplies goods and services on or after 1 January 2004. Registration is mandatory where the value of taxable supplies is beyond the USD25 000 threshold, and this was USD60 000 in 2023. This means small businesses will have to register for VAT and will also  have to absorb the costs of registering for VAT and may be forced to absorb the costs of compliance themselves.  

It is not just the lowering of the VAT threshold which will bring additional costs and challenges for small business owners. The VAT system is generally complex and has additional administration requiring registration on the Tax and Revenue Management System (TaRMS), a new tax administration system introduced by the Zimbabwe Revenue Authority. 

Further, business owners must understand the different categories mentioned above. For instance, the zero-rating category is reserved for supplies that, while taxable are deemed crucial enough to warrant relief from the actual VAT charge. The essence of zero rating lies in its eligibility criteria. A supply must inherently be capable of being standard rated to qualify for zero rating. This is a critical distinction, especially for goods that are exempt; if they are to be exported, they cannot be zero-rated, as their local supply would not have attracted VAT in the first place.

Business that supplies zero-rated goods or services are required to register for VAT, a step that entitles them to reclaim input tax on purchases or expenses incurred in producing these zero-rated supplies. This ensures that while no VAT is charged on the final product or service, the business can recover the VAT on its inputs, reducing its overall tax burden. A critical aspect of zero rating is the necessity for robust documentary evidence. The business must maintain comprehensive records to support the zero-rating of their supplies. This documentation is essential for tax compliance and audits, ensuring that the zero rate is applied correctly and that businesses can substantiate their claims for input tax deductions.

The VAT landscape further complicates with the concept of exempt supplies. Exempt supplies are subject to Vat at input level,  meaning VAT is charged on manufacturer items and not the final sale, and importantly, businesses making exempt supplies cannot reclaim input VAT on their expenses related to these supplies. The distinction between zero-rated and exempt supplies has profound implications for businesses. Those dealing exclusively in exempt supplies are not required to register for VAT, a condition that might seem beneficial at first glance. However, the inability to reclaim input VAT means that the costs associated with exempt supplies can be higher, potentially impacting pricing strategies and profitability.

The VAT Act specifies the conditions under which supplies are considered exempt. This classification not only affects the tax obligations of businesses but also influences their operational and financial strategies. The inability to recover input VAT on exempt supplies necessitates careful planning and management, particularly for businesses that operate with a mix of taxable and exempt supplies. The decision to classify certain goods and services as exempt reflects policy choices aimed at achieving specific economic or social objectives. However, it also places a burden on businesses that supply these goods or services, as they must absorb the VAT on their inputs, potentially affecting their competitive positioning and pricing strategies.

Standard-rated supplies represent the default VAT category, attracting the standard rate of 15%. This category encompasses the broadest range of goods and services, with businesses engaged in standard-rated supplies entitled to reclaim input VAT. This entitlement facilitates a more straightforward flow of tax through the supply chain, from production to final consumption. The ability to reclaim input tax ensures that VAT is a tax on consumption rather than production, preventing the cascading effect of taxes through the supply chain.

In conclusion zero-rating offers the most consumer-friendly outcome, exempt supplies favour shareholders through cost distribution, while standard-rated supplies balance the interests of the government and the broader economy. The strategic classification of goods and services within these categories reflects policy objectives, economic considerations, and the desire to balance tax revenue generation with economic growth and social welfare. Understanding these classifications helps demystify the VAT system, offering insights into its role in shaping economic behaviour and policy outcomes.

Zimbabwe’s Special Capital Gains Tax on Mining Titles

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Zimbabwe, with its rich mineral resources, has long relied on the mining sector as a cornerstone of its economy. Recognising the potential of mining for national development, the government has introduced a special capital gains tax on entities which acquire or transfer mining title and interest. This article unpacks the special capital gains tax, providing clarity on its mechanisms, implications, and the practicality of its application.

With effect from 1 January 2024, a special capital gains tax was introduced when an entity acquires or transfers a mining title or interest. In this case, an entity is defined in the relevant provisions to include foreign entities and individuals, locally incorporated subsidiaries of foreign companies, entities such as trusts, syndicates, or joint ventures domiciled outside Zimbabwe etc. In summary, the  entity in question should have an international element either through ownership or through offshore structures.

The new tax is on the value of the transaction as opposed to the “gain” from the transaction when one acquires or transfers a mining title or interest. Ordinarily, in terms of the law, capital gains tax is chargeable where there is a gain realized from the sale or deemed disposal of a specified asset which is from a source within Zimbabwe.  As it stands, the special capital gains tax applies on mining titles, which may also be subject to capital gain tax, but the difference is that special capital gains tax is payable by the buyer whereas capital gains tax is tax payable by the seller.

In addition to the above, the tax on the value of the transaction, is applicable in circumstances where the mining title was disposed of within ten years from the date the special capital gains tax became effective on 1 January 2024. This brings within the scope of the tax, mining title disposals which happened from 1 January 2014 to present and post 1 January 2024 transactions. This is off course an administrative burden to entities who in the past 10 years transferred mining title. Practically, these funds obtained in the last ten years would have been depleted by now. Further, the retrospective application of this law, although well-meaning, fails to take into consideration that commercial transactions are governed by contracts in which such matters relating to liability of taxes, would have been included as provisions guiding the parties. Many would not have drafted contracts with the special capital gains tax in mind.  

The special capital gains tax on the transfer of mining titles has far-reaching implications, both for the mining sector and the broader Zimbabwean economy. On one hand, for mining companies and entities involved in the transfer of mining titles, the tax introduces additional financial considerations. The significant tax rate can affect the profitability of transactions, potentially influencing decisions related to acquisitions, disposals, and investments in mining projects. Companies must now factor in the cost of the tax when negotiating transactions, which could lead to more cautious investment strategies or a re-evaluation of asset portfolios. On the other hand, the requirement for formal approval to qualify for the reduced tax rate encourages entities to engage more proactively with regulatory authorities, promoting a more transparent and regulated sector. While the tax can lead to increased administrative burdens, it also offers an opportunity for entities to align more closely with national regulations and standards.

For entities, it is important to determine who is liable for the special capital gains tax to guide parties in their obligation for past and future transactions. The transferee (buyer) is liable to pay the tax and in the event of default by the transferee, the owner of the mining title becomes liable. Without express contractual terms on tax liability in the contracts governing the transfer of the mining title, liability for the special capital gains tax may be a litigious matter. A transferee may default and without qualification, the owner of the mining title prior to the transfer becomes liable.

The standard rate for the tax is set at 20% of the transaction’s value, a figure that reflects the government’s intention to claim a significant share of the profits from these high-value assets. However, a reduced rate of 5% is applicable if the transfer receives the necessary approval from relevant authorities. This incentivizes entities to seek formal approval for their transactions, again promoting transparency and compliance in the mining sector. The implementation of the special capital gains tax is a complex process, involving various compliance and payment conditions. Understanding these details is crucial for entities involved in the mining sector, as it affects their strategic planning and financial outcomes.

The law stipulates clear deadlines for the payment of the tax, catering to different scenarios. Payment is due on 1 April 2024 for transfers within the ten years leading up to 1 January 2024. ). For all other transactions happening on or after 1 January 2024, the tax must be paid within thirty days of the transaction’s conclusion. To accommodate various circumstances that might affect the ability to pay on time, the legislation allows for extensions and staggered payments. The Commissioner-General has the authority to extend the payment deadline by up to six months or to approve a payment plan. This flexibility is crucial for ensuring that the tax does not unduly burden entities, especially for entities involved in large or several transactions. Compliance with the special capital gains tax is mandatory, with stringent measures in place for non-compliance. The failure to pay the tax can lead to legal and financial repercussions, including the invalidation of mining title transfers or denied registration.

In conclusion, the special capital gains tax on the acquisition and transfer of mining titles is a bold step by the Zimbabwean government to ensure that the nation benefits more substantially from its mineral resources. While the tax has the potential to generate significant revenue and promote a more regulated and transparent mining sector, its success will depend on careful implementation, effective enforcement, and the ability to balance revenue generation with investment attraction. As Zimbabwe continues to navigate its economic challenges, the special capital gains tax represents an important element of its broader strategy to harness the mining sector for national development.

Unpacking the new wealth tax in Zimbabwe 

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In Zimbabwe, the topic of taxation often brings complex jargon and detailed legal frameworks that can be challenging to navigate for the average person. One such area is the 1% Wealth Tax introduced through Finance Act 13 of 2023 with effect from 1 January 2024. This article unpacks who is affected by this tax,  the role of city councils in its administration and other practical considerations.

 

At its core, the Wealth Tax is a form of taxation levied on the value of a dwelling other than one’s principal private residence. The term “dwelling” signifies a home, place of residence, domicile, or abode by natural persons such as houses, apartments, and condos. The premises should be used by natural persons and display physical characteristics demonstrating its suitability for, and capabilities of, being occupied as a residence or place where people live. In other words, the building, or any part of it should be used wholly or mainly for the purpose of residential accommodation. The fact that the dwelling should be a building, premises, structure, or any other place signifies a fixed place of abode or a specific location. This scopes out mobile houses such as caravans and houseboats. Commercial establishments such as hotels, motels, inns, boarding houses, nursing homes, camping sites, hostels or similar establishments are excluded.

 

Some grey areas exist regarding status of houses in the ownership of companies, unincorporated bodies, and trusts. It appears from our reading of the law that only houses owned by natural persons are within the scope of wealth tax. We quote part of the Finance 13 of 2023 as follows “(2) There shall be charged, levied and collected throughout Zimbabwe for the benefit of the Consolidated Revenue Fund a Wealth Tax paid by the owner of any taxable dwelling, that is to say any dwelling that is not his or her principal private dwelling” Underlined words our own emphasis.  For this reason, we are inclined to conclude that wealth tax only applies to dwellings owned by natural persons.

 

Regarding buildings for use as students’ accommodation, it appears this may be included in the definition of a dwelling even if the contractual arrangement is between the institution and the owner of the property. In a nutshell, the two determining factors is the owner of the property and the use of the property regardless of the contractual arrangement. The registration status with city council as commercial or domestic property may assist but may not be the only deciding factor in determining whether a property is a taxable dwelling.

 

Not all dwellings are subject to wealth tax. The target are second homes, which are dwellings not used as owner’s principal private residence with a value of more than USD250,000. The tax is calculated at a rate of one percent of such value but may not exceed USD50,000 in a year of assessment.

 

The responsibility of collecting and remitting the Wealth Tax falls upon local council of the area the dwelling is located. The tax is collected by the local council on the first instance paying property rates by the person to the local authority. The local or city council plays a pivotal role in this process, utilizing the general valuation roll to determine the taxable value of dwellings within their jurisdiction. The General Valuation Roll is essentially a comprehensive list or register of properties situated within the boundaries of a given local authority. It is compiled for rating purposes and includes details such as the location, size, and value of each property. The lifespan of a Valuation Roll ranges from three to ten years but can be extended by a further five years with Ministerial consent.  The Valuation Section, typically under the Department of the Chamber Secretary and led by the City Valuer, undertakes the task of valuing properties. This valuation covers a wide range of purposes, including rating, insurance, leasing, acquisition, and sale of council properties. Additionally, it involves estimating building costs and conducting inspections to ensure compliance with sale conditions of council stands.

  

Understanding the calculation, the maximum liability, and the role of local councils in the collection and remittance of this tax is essential for property owners. With local councils leveraging the general valuation roll for accurate property assessments, this system ensures a fair and efficient approach to taxing wealth in the form of real estate. For property owners and potential investors, grasping these fundamentals is the first step towards navigating Zimbabwe’s property tax landscape effectively.

Zimbabwe’s VAT Reform: Balancing Revenue Growth with Consumer Affordability

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Zimbabwe recently embarked on a significant journey to revamp its tax structure, bringing considerable changes to its Value Added Tax (VAT) system. This decision, aiming to streamline the tax process, has led to a notable shift from the zero-rated category of VAT to a tax-exempt system for certain goods. Goods and services fall into three categories in the VAT Act. They can be either standard rated, zero-rated or exempt goods and services. With the zero-rate, goods and services are subject to a tax rate of 0% whereas with exempt goods and services, they are not subject to tax at all. This shift to move certain goods from zero-rated to exempt is not just a change in numbers or categories; it’s a move that directly affects businesses and consumers, influencing the cost of living and the economic landscape of the nation.

In the past, Zimbabwe’s tax system included a special category called ‘zero-rated items’ which had essential goods such as basic food items or necessities for the disabled. Though these goods were part of the taxable bracket, the actual tax imposed on them was zero percent. This reclassification from zero-rated to the exempt category potentially leads to price increases as the exempt category does not allow producers to claim input tax which makes products expensive for the consumer. Essentially, if goods are exempt from taxes, the cost of supplying their goods and services is passed on to the consumer. In the zero-rated category of basic goods,  businesses dealing in these goods can claim back any tax they had paid on their inputs, ensuring that the final price for consumers remains low. The zero-rating is designed to keep essential goods affordable. But it isn’t without its complexities, requiring businesses to adhere to strict documentation and regulations.

On the other side of the spectrum there are standard-rated items. These goods and services carry the standard VAT rate. Businesses dealing in these could also claim back their input tax, but the final products carry the added weight of the standard VAT, making them more expensive than their zero-rated counterparts.

The transition from zero-rated to exempt goods has set off a ripple of changes. For the average person, it means adjusting to new prices as products are now exempt, yet the products remain expensive as a result of the failure of producers to claim their input tax. The selling price of basic food items or other services increases. For families, this means recalibrating household budgets to accommodate these changes, especially when it comes to basic goods and services. For businesses, it’s a mixed bag. While they cannot claim input tax credits for the exempt goods and services, they are also facing a market that is sensitive to price changes and characterised by high levels of poverty and inequality. Businesses must rethink their pricing strategies, ensuring they remain attractive to consumers while adjusting to the new tax requirements.

The path to implementing these changes hasn’t been without its hiccups. Rumours and misinformation about the new tax policies have circulated, causing confusion and uncertainty. The government, through the Ministry of Finance, Economic Development, and Investment Promotion, has stepped in to clarify these misunderstandings, reinforcing the importance of accurate and transparent communication in such significant transitions.

But why this shift in the tax structure? One of the core reasons is the government’s intent to bolster its revenue streams. Aligning VAT rates with regional standards opens up potential for increased tax collection, crucial for funding public services and other development initiatives. It is a delicate balance, though. The government has to ensure that while it increases its revenue, it doesn’t place undue pressure on its citizens, especially in a time when global economies are navigating through uncertainties.

As Zimbabwe navigates this new tax terrain, the impact on everyday life, market dynamics, and the nation’s economic pulse is unfolding. Consumers are adapting, potentially reshaping market demands based on the new pricing structures. Businesses are recalibrating, aligning their strategies with the ever evolving tax landscape. And at the heart of it all is a government striving to strike a balance—a balance that ensures fiscal growth while safeguarding the economic well-being of its people.

These changes in the VAT system in Zimbabwe are more than a tax reform; it’s a testament to the nation’s commitment to fostering a stable, prosperous, and self-sufficient future. It’s a step towards modernizing economic structures, harmonizing with regional practices, and setting the stage for a sustainable economic journey. As the nation adapts to these changes, the collective focus is on effective implementation, thoughtful governance, and a forward-looking approach that promises growth, stability, and prosperity for all.

Zimbabwe’s New Domestic Minimum Top-Up Tax

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Zimbabwe’s introduction of the Domestic Minimum Top-Up Tax (DMTT) marks a paradigm shift in the taxation of foreign entities operating within the country. The DMTT is meant to foster a fair and effective tax system in line with global rules. This article unpacks the complexities of this new tax for multinational corporations.

At its core, the DMTT is a tax levied on the income of foreign entities active in Zimbabwe. Under the tax, global profits of large multinational enterprises will be taxed at a minimum corporate income tax rate of 15 percent. It targets companies, trusts, or juristic persons domiciled outside Zimbabwe, including locally incorporated subsidiaries, registered companies, and local branches of foreign entities. The essence of this tax is to ensure that foreign entities contribute a fair share to Zimbabwe’s tax revenue, particularly when these entities benefit from the country’s market but pay little to no corporate tax in their country of residence.

To determine the DMTT, a two-step calculation process is used. The actual corporate tax charged on the entity’s income is compared against the corporate tax that would have been charged without deductions under section 15 of the Income Tax Act. This comparison yields the “effective” rate of corporate tax, reflecting the real tax burden on the entity’s income.

The tax comes into play under specific circumstances. It will be applicable when a foreign entity earns income from any business or activity within Zimbabwe. It will also be applicable when the foreign entity’s country of residence either does not levy corporate tax at all or it levies taxes at an effective rate of less than 15% of the corporation’s income. Under these conditions, despite any existing double taxation agreements, the foreign entity is liable to pay the DMTT.

 

The DMTT for entities not liable to tax in Zimbabwe, the DMTT is equal to 15% of jurisdictional profits earned in Zimbabwe during the assessment year. Where the entity on the other hand, is liable to tax in Zimbabwe but at a rate less than 15%: the DMTT is 15% minus the corporate tax rate paid in the country of residence, or the tax chargeable under Zimbabwean law due to double taxation agreements, whichever is greater.

 

The introduction of DMTT has significant implications for foreign entities operating in Zimbabwe. It ensures that these companies contribute a minimum tax amount, thus aligning Zimbabwe’s tax policy with global efforts to prevent tax base erosion and profit shifting by multinational corporations. Recognizing the complexities of international taxation, the DMTT takes into account the potential for double taxation. If a foreign entity’s income in Zimbabwe is taxed as if it were earned in its home country, the DMTT is adjusted accordingly. The entity will pay either the DMTT calculated at 15% minus the tax rate in its country of residence or the amount chargeable under Zimbabwean tax laws due to double taxation agreements.

To facilitate the implementation of this new tax law, the Ministry of Finance is empowered to make regulations deemed necessary or convenient. This provision ensures that the DMTT can be effectively integrated into Zimbabwe’s existing tax framework and adapted as necessary to meet evolving economic and international tax standards.

The DMTT offers several benefits. It will ensure that foreign entities contribute a fair share of tax. Also, the DMTT can potentially increase Zimbabwe’s tax revenue, providing more revenue for public services and development. Third, the tax aligns Zimbabwe with international efforts to curb tax avoidance.

While the DMTT offers many benefits, it also presents challenges such as a compliance burden where foreign entities must now navigate an additional layer of tax compliance in Zimbabwe. Also, there might be implications for international trade and investment if foreign entities perceive the tax as a barrier. There also could be complexity in the implementation of the DMTT. It should be ensured that the DMTT is applied fairly and efficiently. This may require significant administrative effort from the Ministry of Finance and Economic Development, the Zimbabwe Revenue Authority and the Zimbabwe Investment Development Agency.

In conclusion, Zimbabwe’s introduction of the DMTT is a bold step to align the domestic tax system with global tax rules. While it presents certain challenges, the potential benefits in terms of increased revenue are significant.

Zimbabwe’s Sugar Tax: A Public Health Necessity

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The taxation of sugar-sweetened beverages (SSBs) has been brought to the forefront as a key public health intervention strategy amidst the global health crisis. The SSB taxation is endorsed by the World Health Organisation (WHO) and the United Nations Children’s Fund (UNICEF) and is hailed as a “best buy” policy to curb the proliferation of certain health issues. The implementation of such a tax could be a critical step towards fostering a healthier population in Zimbabwe. This article explores the various facets of SSB taxation, its objectives, effectiveness, and the unique context of Zimbabwe’s current tax policy.

 

A tax on sugar-sweetened beverages discourages their purchase and consumption. There has been a decline in SSB consumption in countries that have adopted such taxes. A crucial aim of SSB taxation is to nudge consumers towards healthier alternatives. Beyond economic impacts, SSB taxation strives to reshape societal norms and perceptions. It serves as a potent indicator that regular consumption of sugary drinks does not align with a healthy diet. Reducing sugar intake is essential for combating obesity, type 2 diabetes, and heart diseases. Lower SSB consumption, driven by taxation, is expected to decrease overall sugar intake, leading to improved public health and reduced healthcare costs. The revenue generated from SSB taxes can significantly boost public health initiatives. It enables governments to invest in health education, obesity prevention, and healthcare infrastructure, creating a cycle of health investment.

 

Further to the above, the design of the SSB tax is significant. Analysing how it can be highly effective is important.  In addition to the high tax rate on SSB’s, for the sugar tax policy to be effective, it must clearly define the tax incidence and the range of products it targets. To be highly effective, it is ideal that a wide range of beverages containing free sugars and artificial sweeteners, including carbonated drinks, fruit juices, energy drinks, and flavoured milk should be subject to the tax. This inclusive approach prevents consumers from simply switching to untaxed sugary alternatives. The tax rate is pivotal in altering consumer behaviour. A consensus among health experts suggests that a minimum 20% tax is necessary to effectively deter consumption of high-sugar beverages. This rate is deemed sufficient to prompt a noticeable change in purchasing habits. A tiered tax system, where rates vary according to sugar content, is increasingly favoured. It penalizes higher sugar content more heavily, thus providing a stronger disincentive against consuming such drinks. This method also encourages manufacturers to reformulate their products to lower sugar levels. The policy must be transparent in its objectives and the products it targets, ensuring there’s no confusion among consumers and manufacturers. Additionally, the tax structure should be equitable, avoiding any bias towards domestic or international products to prevent trade disputes.

 

It is apparent that Zimbabwe’s has adopted a conservative approach to SSB taxation which is contrast with international practices, which have demonstrated the effectiveness of higher tax rates in achieving public health objectives without severely disrupting the market. Other countries implementing higher sugar taxes have seen more success in reducing sugary beverage consumption and encouraging healthier lifestyles. It would thus be an arguable consideration that Zimbabwe should consider aligning its tax rate with global standards to enhance the effectiveness of its sugar policy. Such an approach should be accompanied by comprehensive policy measures, including public education, subsidies for healthy alternatives, and safeguards for the beverage industry and employment.  If well implemented, these measures would support the transition to healthier alternatives and enhance public understanding of the policy’s health benefits and revenue collection aim.

 

Unfortunately, Zimbabwe cannot be quick to introduce a high SSB tax. The general design of an SSB tax depends on a number of factors. Zimbabwe has different economic factors from first world countries who have successfully introduced the SSB tax and increased the rate to 20%. As such, the government policy of attracting investment and developing industry should be balanced with the policy’s health benefits and revenue collection to fund the health sector.  Although well intentioned, the introduction of the SSB tax may potentially shrink or destroy the beverage industry. Industry is still attempting to reboot after an economic turmoil which the country faced in 2008 and the years after characterised by currency issues. Also, the government has recently introduced many tax changes which have shocked the business sector. Thus, although 20% is the recommended rate to discourage the consumption of SSB’s, the affected industry needs an opportunity to recover from the many economic shocks, including in tax policy.  

 

Engaging with a diverse range of stakeholders is crucial for a transparent policy development process. It helps in addressing potential conflicts of interest. The successful implementation of SSB taxes in Zimbabwe requires a multifaceted approach. This includes clear policy design, stakeholder consultation, cross-sector support, and continuous monitoring and evaluation. Informed by global practices and adapted to local contexts, these strategies can help Zimbabwe achieve its health and economic objectives through SSB taxation.

IMTT removal and the tradeoff.

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The Monetary Policy Committee (MPC) of the Reserve Bank of Zimbabwe (RBZ) recommended that the government removes IMTT on transactions that are intermediated through plastic bank cards and other digital platforms. The recommendation was part of resolutions of the MPC meeting held on the 23rd of October 2023. Prior to the MPCs meeting, another organ of the country, the Confederation of Zimbabwe Industries (CZI) amplified its call for the government to remove the IMTT. The heightened calls for scrapping of the IMTT are neither new nor few in number. Several key players in industry have called for the scrapping of the IMTT. The IMTT became a significant transaction in 2018 when the government made it a percentage of value of transaction as opposed to being computed on a number of transactions made. This was through Statutory Instrument 205 of 2018 which fixed the rate of IMTT of 2 percent on all value of electronic transactions within Zimbabwe. The IMTT was solely instituted to increase tax revenue and the tax base. Increasing revenue is achieved by collecting revenue from the already existing taxpayer and increasing the tax base is achieved by taxing the informal sector. This means that every electronic payment (with exceptions) will attract the IMTT, therefore, increasing the cost of transacting digitally. Withal, as taxpayers we have been paying the IMTT for close to six years now, with the government receiving the IMTT for a similar period. Therefore, the questions we want answered are, why the sudden pressure from our big institutes and professional bodies, what are the current impacts of the IMTT on taxpayers and the Government of Zimbabwe, and what will a post IMTT Zimbabwe look like?

The calls for scrapping the IMTT begun around 2018 and have spanned to present day. Additionally, the calls for scrapping the IMTT have been made by professional bodies, stand alone firms and some of Zimbabwe’s most prestigious institutions such as the RBZ. However, the calls have recently intensified due to the economy cooling.  The upstream effects include a compounded effect on players in the entire value chain from the producer to the wholesaler. The upstream effects are seen by a negative impact on profits, sales, and revenues. The downstream pressures on retailers and consumers further amplify the impact of the IMTT. Therefore, with the economy cooling down and business activities slowing down, firms and institutes alike have felt the pinch of the IMTT. This has led to calls for scrapping of the IMTT, for example Bankers Association of Zimbabwe have highlighted the fact that the tax acts as a disincentive for banking. Additionally, players like Zimbabwe Investment and Development Agency have positively received the lowering of the IMTT to 1%, however, they also called for the scrapping of the IMTT.

The impact on the taxpayers is seen by an increase in cash transaction, decrease in deposits as most taxpayers would rather prefer to keep their hard-earned currency at their premises, loss of competitive advantage, double taxation, taxation of social basics such as school fees, and a general increase in the cost of doing business, While the impacts on the consumer are negative, the government has reported positive impact of the IMTT as it has contributed to the fiscus. The positive contribution to the fiscus has leveraged the government to execute more projects that are in line with the national development strategy.

Noting the impacts on the taxpayers and the government, removing the IMTT would affect everyday transactions in Zimbabwe. One such an effect would be on electronic payment methods, such as mobile money transfers and digital banking, which may become more attractive and widely adopted due to the reduced costs associated with them. People may also be more inclined to use these methods for everyday expenses like groceries, transportation, and utility payments, leading to a shift from cash-based transactions.

Small and Medium Enterprises (SMEs) are likely to benefit from the removal of IMTT. SMEs often rely on digital payment methods for their operations, and the elimination of this tax would reduce their transaction costs. This could lead to improved cash flow for these businesses, making it easier for them to conduct transactions, pay suppliers, and manage their finances more efficiently. Large corporations may also benefit from the removal of IMTT, particularly when it comes to making large transactions or paying employees electronically. However, the impact on these companies might be less significant compared to SMEs, as they might have already negotiated lower transaction fees with financial institutions due to their higher transaction volumes.

However, the government’s revenue would be significantly affected by the removal of IMTT. The tax has been a reliable source of revenue for the government, contributing to its budget and funding various public services and infrastructure projects. On the other hand, removing the IMTT will stimulate demand within the economy and hence the government will benefit through taxes such as vat and income tax. Yet, if the removal of the IMTT does not stimulate the economy, the government would need to find alternative sources of revenue to make up for the loss. This could involve revising other taxes or seeking external financial assistance. Therefore, the government would need to scale the benefit from removing the tax against the loss of revenue from removing the tax.

In conclusion, the removal of the Intermediate Money Transfer Tax in Zimbabwe would have both positive and negative consequences. Taxpayers, especially individuals and SMEs, would benefit from reduced transaction costs and increased convenience, while the government would face challenges in replacing the lost revenue. The impact on large corporations might be less pronounced, but they would still experience some benefits. Overall, the change in fiscal policy would require careful planning and alternative revenue sources to ensure that essential public services and government functions continue to be adequately funded.

Employees Tax- Pay As You Earn

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The end of the month is approaching, which is a joyous time for a number. It is at this point that you hear employees calling their employers names since their net- pay would not be matching with the gross income specified in their contracts. PAYE and NSSA are the main causes, and some have referred to them as the devils of their era. Allow me to walk you through the Pay As You Earn system for employees.

The Pay As You Earn (PAYE) system is a technique of calculating and paying income tax on wages. Before handing out the net income or pension, the employer is required to deduct tax from salary or pension earnings. The Income Tax Act [Chapter 23:06] outlines which components of an employee’s salary or earnings are taxed and at what rate. It also addresses what income is exempt from taxation and what deductions are permitted from these earnings prior to taxation. Section 4A (1)(a) of the Finance  Act Para 3(1b) of the 13th Schedule to the ITA; Section 2 of the Finance Act no 2 & 3 of 2019 is the legislation that guides on PAYE remittance.

Everything that one makes or earns – whether in cash, perks, or an item of value given in lieu of cash – is taxed in some way. However, in some situations, the determination of the value and related tax liability in relation to any of these kinds of payment will differ.

The official tax table is based on a progressive rate of taxation, which means that the higher your wages, the higher the percentage tax you pay on each earnings group. When your earnings reach a particular level, the percentage stops increasing and a flat tax rate is applied to any earnings over that level – this is known as the Marginal Tax Rate (MTR).

PAYE should be remitted to ZIMRA by the 10th day of the month following the month of deduction, accompanied by PAYE remittance advice (P2).

PAYE is calculated as follows:

  1. Determine gross income for the day/week/month/year.
  2. Deduct exempt income eg bonus =  Income
  3. Deduct allowable deductions, e.g. pension: Taxable Income.
  4. Refer to https://www.zimra.co.zw/domestic-taxes/tax-tables = Tax on Taxable Income. Salaries with both local and USD currency components use the USD tax tables and apportion the tax due accordingly
  5. Deduct tax credits e.g elderly, blind or disabled persons (ZWL450 000.00 or US$900.00 per annum) and medical credit $1.00 of every $2.00 paid = Tax after credits
  6. Calculate 3% Aids Levy and add to tax after credits = Actual tax payable.

VAT dilemma of construction projects

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The construction industry plays a crucial role in the development of any economy. With Zimbabwe’s economic development agenda being premised on 14 pillars under the National Development Strategy, infrastructure development is said to be central to the achievement of the country’s economic goals. In pursuance of the same, the government set aside money for the sector in the 2023 national budget. There are therefore a number on going construction activities in the country. It is critical to stress that the sector, like other sectors of the economy, is not immune to the tax system’s issues and must negotiate its way through the complex tax rules. The VAT complexities of the construction industry stem from the time horizon disparities between the conclusion of the construction contract, the undertaking of the construction and the eventual settlement for the job done. This stands out as one of the construction industry’s distinctive complications, as well as a possible risk to tax compliance, liquidity, and profitability, particularly for small construction enterprises.

By their very nature, construction projects are long term, in some cases spanning several years before the project concludes. The law provides that VAT in the case of construction, manufacturing or construction and assembly work becomes chargeable upon payment being made in respect of any supply becoming due, is received, or any invoice relating only to that payment is issued, whichever is the earliest (underlined own emphasis). The interpretation of what is meant by “any supply becomes due” is critical. Because the construction project is often delivered in parts, it is impractical to expect the “supply which becomes due” to be the full project value.

The building contractor and the contracting entity must agree when the works have been finished for a supply to become due. The view currently embraced by tax authorities and courts is that construction or assembly work is completed when a certificate of completion or progress is issued. This may be viewed as the date of signing a handover protocol denoting the client’s acceptance of the work. In order for this to be achieved the following three conditions should be met : (a) a formal acceptance protocol should be stipulated by the parties under the contract, (b) such formal acceptance protocols are common commercial practice in the field in which the service is supplied and (c) it must not be possible to establish the consideration due by the client before the client formally accepts the construction or installation work. In the absence of a clause in the contract stipulating the acceptance protocols as aforesaid, it appears the date the “supply becomes due” is when the contractor announces to the buyer that the services are complete and ready for handover. How the agreement is worded is a critical consideration in the determination of a tax point underscoring the point in time, rights and obligations
under the contract are exchanged by the parties.

The dilemma with construction contracts is that the process of works acceptance is often very long, consisting of multiple stages, and is never guaranteed to end successfully. When tax chargeability and invoicing date is to be conditional on the works becoming declared ready for acceptance, the contractor may find itself forced to issue an invoice and pay VAT although the contracting entity refused to accept the works and the invoice it received. If this happens, the contractor may find itself facing loss of financial liquidity as it will have to pay the VAT without itself being paid by the contracting entity for the work it performed. This stems from the fact that invoice is one of the three elements which may trigger VAT on a construction contract.
Moreso, VAT issue of front payments as indicated above is another problem, the time of supply is triggered when a supplier receives a payment. It is not relevant whether the goods or services were not physically supplied or performed at that time see: (Case L67 (1989) 11 NZTC 1,391). The fact that the contract is later cancelled does not void the supply. However, of essence is whether such upfront payment is a consideration for the supply or not. The VAT Act has defined term consideration to exclude a deposit, other than a deposit on a returnable container, whether refundable or not, given in respect of a supply of goods or services unless and until the supplier applies the deposit as consideration for the supply or such deposit is forfeited. Deposits are a customer’s way of reserving goods or services or a sum payable as a first instalment on the purchase of something or as a pledge for a contract, the balance being payable later. The far-reaching consequence of this is that the contractor should be able to demonstrate that the upfront payment is a deposit which has not been appropriated to him/her as part of the supply. Where the amount is an advance payment it can be argued that VAT is triggered when such advance is received. In practice an advance payment helps the business to pay its actual costs during a contract. The issue of VAT on deposit is a topic which requires an in-depth analysis, and we will deal with it in our future articles.

In the final analysis the contractor will become liable to VAT based on the progress report as approved by the client, where billing or actual payment has preceded the certificate of completion such payment or invoice, whichever occurs first will trigger the VAT point. The certificate of completion as approved by the client or invoice will force the contractor to declare and pay the VAT long before receiving payment from the client which represents the biggest VAT dilemma within the construction industry. The upfront payment also, although a much better problem to deal with, will trigger VAT even when services has not been performed unless it can be demonstrated that the payment is a deposit as described above. All these are VAT intricacies bedeviling construction contracts which contractors should manage to avoid noncompliance penalties which may take a huge toll on the business liquidity as well threatening business going concern.

ZiG: Transforming Zimbabwe’s Payment Landscape through Gold-Backed Innovation

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On October 5th, 2023, Zimbabwe witnessed a significant shift in its domestic payment landscape with the introduction of Zimbabwe Gold (ZiG), a novel means of payment backed by physical gold. We focus on the implications and motivations behind this policy change, exploring the potential impact on financial stability, risk mitigation, and the broader transition towards digital payment methods.

The introduction of ZiG represents a departure from the conventional means of payment for domestic transactions, which predominantly involved local and foreign currencies. The government’s decision to introduce a gold-backed currency aligns with a dual purpose – not only as a means of payment but also as a vehicle for value preservation. ZiG is uniquely backed by a milligram of physical gold, providing an intrinsic value that distinguishes it from traditional fiat currencies. A noteworthy feature of the ZiG implementation is the application of the Intermediated Money Transfer Tax (IMTT), which is set at half the rate applicable to foreign transactions. This move reflects a conscious effort to incentivize the use of ZiG for domestic transactions, making it a more attractive option for taxpayers. By reducing the tax burden associated with ZiG transactions, the government aims to facilitate its adoption and integration into the existing financial ecosystem.

The operational framework of ZiG involves transactions being cleared on the ZimSwitch platform and settled through the Real Time Gross Settlement (RTGS) system. Banks are required to maintain dedicated ZiG accounts, treating ZiG transactions with the same level of importance as local and foreign currency transactions. Importantly, the absence of tariffs or account maintenance charges for ZiG transactions promotes accessibility and encourages widespread usage. A notable restriction imposed by the government is the prohibition of lending in ZiG by banks. This regulatory measure is likely aimed at preventing speculative activities and maintaining the stability of the gold-backed currency. By restricting lending in ZiG, the government seeks to ensure that ZiG remains a secure and reliable means of payment rather than a speculative financial instrument.

To facilitate the ease of ZiG transactions, the government has authorized the issuance of ZiG cards. This move aligns with a broader trend in the global financial landscape towards digitalization and contactless payments. Individuals can conduct transactions through point-of-sale machines and online payment methods, reflecting a strategic move towards reducing reliance on cash-based transactions. An important aspect of the ZiG system is its flexibility in redemption and payment. While ZiG is backed by physical gold, individuals are permitted to redeem and receive payments in the local currency. This dual functionality provides individuals with options, allowing them to choose the currency that aligns with their preferences and financial needs.

The introduction of ZiG signifies a deliberate effort by the government to diversify the domestic payment system. By offering an alternative backed by a tangible asset, the government aims to provide citizens with choices and reduce reliance on conventional fiat currencies. This diversification may contribute to increased financial stability by introducing an additional layer of security and reliability into the payment system. The ZiG initiative is not just about introducing a new physical currency but is indicative of a broader strategy to promote digital payment methods. With the issuance of ZiG cards and the encouragement of online transactions, the government is aligning its financial system with global trends that prioritize digitalization for its efficiency, speed, and transparency.The reduced IMTT on ZiG transactions serves as a direct benefit for taxpayers. By lowering the tax burden associated with ZiG, the government incentivizes individuals and businesses to adopt this new payment method. This aligns with the broader goal of encouraging financial inclusion and reducing the reliance on traditional cash-based transactions.

However, an important and significant question to accountants, auditors and tax professionals is how ZiG will affect income statements, tax computations, financial statements e.t.c? We also pose another question: according to S37AA, how do we treat ZiG when one transacts in ZiG? The last question, when one purchases ZiG, does the IMTT apply, or it only applies when settling transactions. We will delve into these questions in future engagements of Matrix Tax School.

Therefore, the introduction of ZiG represents a strategic move by the Zimbabwean government to reshape its payment landscape. The gold-backed currency not only provides an alternative means of payment but also signifies a commitment to value preservation and financial stability. The implementation of ZiG reflects a forward-thinking approach that embraces digitalization while leveraging the intrinsic value of physical gold. As Zimbabwe transitions towards a more diversified and technologically advanced financial system, the implications of ZiG are likely to resonate across various sectors, contributing to the nation’s economic resilience and adaptability in an evolving global financial landscape. Given the advantages, ZiG still leaves several accounting and tax questions unanswered.