Insurance Commission Tax: A Regulatory Dilemma with Unintended Consequences

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In Zimbabwe, insurance businesses must navigate and comply with many tax obligations. Among these several tax obligations is the property and insurance commission tax in respect of commission paid to freelance agents or brokers. This tax creates unintended consequences in that the tax liability rests with the person who does not hold any money in their hands or who does not make any “payment” to another.

The property and insurance tax provisions align with the law, which requires that every employer deducts pay-as-you-earn on remuneration to any employee. The term remuneration does not include amounts paid to independent contractors, including freelance agents as defined in the law. Freelance agents involve players in the insurance industry such as insurance brokers and agents who receive commissions from the insurer after they refer policyholders. However, payments to a dependent or working insurance agent for acts done by him on behalf of a registered insurer are considered as remuneration. Thus, taxpayers should distinguish the nature of the relationship with third parties such as insurance agents to determine their income tax and PAYE liability.

To force freelance agents and brokers to be tax compliant, a 20% withholding tax applies on commissions paid to them by insurers. Insurers must withhold this tax from payments made to freelance agents and brokers, and subsequently pay it to the Zimbabwe Revenue Authority by the 10th of the following month. Additionally, insurers must submit a withholding tax return for the tax payment by the same deadline. The tax must be paid in the currency of the transaction or payment. Furthermore, insurers are obliged to provide agents and brokers with a withholding tax certificate upon request. An important consideration is the liability that arises when an insurer pays a commission to the freelance agent or broker. This liability lies with both the insurer and the freelance agent in terms of the law, with the insurer having the liability to pay penalties and interest for failing to withhold the insurance tax commission. However, there is leeway to negotiate full penalty remission in terms of the law. Whilst the architecture of this tax is set up in such a way that the recovery of the tax is to be on the insurer, the fact that the tax remains that of the broker or agent makes the penalty in those circumstances unjustified because the insurer has no control over the compliance of the broker or agent who receives the premiums and pays to the insurer the remainder after removing their commission.

Circumstances arise in which the freelance agent, who is a broker, has withheld the commission before remitting the policy amount to the insurer. This makes it impossible for the insurer to withhold the insurance commission tax as required by the Act. The Act has not taken into consideration that the normal business arrangement is that the insurance broker negotiates insurance business for the insurer, receives funds from the policyholders, and then withholds commission payments from those amounts and pays over the premium amount to the insurer. Thus, the requirement of the Act does not capture the business reality of the insurance industry increasing the burden of compliance on insurance companies. Ideally, and also as part of not promoting unjust enrichment, the tax liability and accompanying penalties must shift to the freelance agents and brokers who have withheld their full commission and paid the net premiums to the insurers.

The insurance commission tax is bound to affect the cash flows of the insurance businesses in that they have to comply with provisions that are impossible to comply with after having paid no commission to insurance brokers. Thus, although the insurance commission tax was introduced with the noble intention to ensure that freelance agents complied with the tax laws, its implementation does not capture business realities. The cost is passed on to insurers through penalties and interest.

Tax policy reformation is required to correct this anomaly as part of streamlining compliance procedures and administrative burdens on insurance companies.

The Role of Tax Education in a VUCA Tax Environment

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Zimbabwe’s growing need to expand its revenue base has made rigorous tax collection a primary focus, creating complex compliance demands for taxpayers and businesses. With ZIMRA’s intensified collection initiatives and the fiscal pressures driving this focus, businesses are facing heightened tax scrutiny. ZIMRA’s proactive stance places pressure on companies to manage tax risks effectively, particularly in areas such as transfer pricing, foreign currency obligations, digital taxation and cross-border transactions.

For businesses, these risks translate into tangible challenges that, if unaddressed, can lead to significant financial exposure. These risks have the potential to expose taxpayers to significant financial penalties if not addressed. Staying informed and adaptable is essential. With this current VUCA tax environment, a solid grasp of tax governance, planning and best practices is critical. Tax education has therefore evolved beyond a professional asset into a critical resource for sustainable business growth. Zimbabwe’s tax base, like those of many jurisdictions, has expanded in scope and complexity, with frequent updates and amendments that require vigilant compliance and precise interpretation. As companies operate across borders and digital platforms, traditional tax policies are being re-evaluated which adds further complexity to compliance. The resulting challenges heighten the risk of audits and disputes for businesses, where defending a tax position or winning cases against ZIMRA often proves difficult. The intricate regulatory framework and the authority’s rigorous enforcement approach places companies at a disadvantage, as the burden of proof frequently lies with the taxpayer.

In response, focused capacity building and tax education have become essential for companies aiming to stay ahead of these challenges. Equipping finance teams and decision-makers with knowledge of evolving tax laws enables businesses to anticipate risks, build defensible positions, and better engage with ZIMRA. This strategic investment in expertise not only strengthens internal tax governance but also positions companies to navigate Zimbabwe’s rigorous tax environment with greater confidence and resilience.

WTS Tax Matrix Academy, along with other esteemed institutions, stands at the forefront of tax education and provides tailored programs aimed at bridging knowledge gaps and fostering effective tax practices. For professionals and organisations committed to meeting the demands of this VUCA tax environment, these programs offer the insights and practical tools to strengthen best practices with key premier events offered to enhance tax knowledge and practical skills. At WTS Tax Matrix Academy, we host a number of trainings which will assist in optimising shareholder value, among them:

The Executive Tax Summit Africa a premier gathering for business leaders, investors and entrepreneurs to discuss global tax risks, governance opportunities and business sustenance strategies. Key topics will include tax reporting and governance, tax risk management, tax structuring and strategies, transfer pricing, the complexities of digital taxation and foreign currency management. The summit, which is led by industry experts, aims to equip participants with practical insights to better navigate evolving tax obligations for optimisation of shareholder value.

The Annual Tax Conference examines the intersection of tax policy reforms and business operations. Attendees can expect in-depth discussions on the latest tax policy developments and regulatory trends, particularly concerning their impact on businesses in Zimbabwe and beyond. Discussions will focus on strategic approaches to adapt to these policy shifts, aiming to mitigate risks while enhancing operational resilience.

The Tax Summer School offers an intensive, hands-on program tailored for professionals and teams seeking practical training in tax management. Through structured workshops, participants will strengthen their expertise in key areas such as payroll management, internal tax audits and risk assessment, ensuring best practices are followed at every organisational level. By the end of the program, attendees will be equipped with practical hands-on knowledge and skills to navigate daily tax operations and managing tax issues.

TaRMS Release 3: A Game-Changer That Could Catch Businesses Off Guard

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With the full rollout of the Tax and Revenue Management System (TaRMS) set for 1st October 2024, Zimbabwe is on the brink of a significant shift in tax compliance. This advanced system aims to streamline tax processes and increase ZIMRA’s oversight capabilities, leaving businesses with little room for error. It is crucial for organisations to understand the implications of TaRMS and take immediate steps to ensure compliance, or risk severe penalties.

TaRMS introduces unprecedented integration across government databases, including the National Social Security Authority, Reserve Bank of Zimbabwe and the Registrar of Companies. This integration grants ZIMRA a comprehensive view of taxpayer activities, significantly heightening the risk of audits. Businesses can expect not only an increase in the frequency of audits but also a greater depth of investigation. ZIMRA’s ability to automatically detect unpaid liabilities, calculate penalties and issue reminders will enhance their enforcement capabilities, making it vital for businesses to ensure tax affairs are in accurate order.

Zimbabwe is joining a global trend of revenue authorities adopting sophisticated digital tax systems to enhance tax collection and detect evasion. TaRMS’ integration with key agencies ensures that tax liabilities are captured more comprehensively. Without proper alignment with this new system, businesses risk discrepancies, missed deadlines and severe penalties that could lead to financial distress. Ignoring these changes could result in operational disruptions and loss of competitive advantage, especially as the system’s reach and accuracy will exceed any previous measures.

To navigate this transition successfully, businesses must embrace digital transformation. TaRMS will streamline areas like tax return management, payments, refunds and debt management, but it also demands a higher level of accuracy and compliance. This means eliminating duplication of taxpayer information and ensuring real-time reporting. However, adapting to the complexities of this system may prove challenging without expert guidance.

ZIMRA’s expanded capacity for oversight means that non-compliance will be swiftly detected and penalised. From taxpayer registration to payment management, aligning your systems with TaRMS is no longer optional but a necessity. Given the enhanced risk and compliance focus of TaRMS, seeking expert consultation is not just advisable, it is imperative. With ZIMRA’s increased auditing capacity, having accurate and up-to-date records is essential to avoid costly penalties and lengthy audits.

TaRMS is set to revolutionise Zimbabwe’s tax landscape, offering advantages for businesses that are prepared but posing significant risks for those that are not. The enhanced ability of ZIMRA to audit and scrutinise taxpayers calls for the need for immediate action. As the October 1st deadline approaches for TaRMS Release 3, businesses must act swiftly.

VAT pitfalls and traps on Property Sales in Zimbabwe

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Understanding the intricate details of Value Added Tax (VAT) in property transactions is critical for both buyers and sellers in Zimbabwe’s property market. Ignoring the complex nuances of Value Added Tax (VAT) can lead to severe financial consequences, placing immense pressure on both sellers and buyers. The stakes are high and a lack of diligence could result in unexpected costs that may destabilize financial outcomes and cash flows.

According to the VAT Act, the sale of immovable property by a registered operator is generally considered a taxable supply, meaning that VAT is due unless the property qualifies for specific exemptions. However, the application of VAT is not straightforward. For VAT to apply, the property must be a trade asset and used in the course or furtherance of the seller’s trade. The term “trade” is critical; for VAT purposes, it refers to activities involving the production of taxable supplies. Therefore, when an operator is involved in producing 100% exempt supplies, any property sold by them is exempt from VAT. This provision underscores the importance of understanding the nature of the property being sold, as VAT liability depends on its use in taxable activities. This means that VAT is only applicable when a registered operator sells a trade asset.

Exemptions do exist under the VAT Act, but they are narrow and specific and require precise documentation. For instance, property acquired before 1 January 2004 by a natural person, used primarily as a private residence, and for which no input tax deduction was claimed, may qualify for exemption. The VAT Act is unforgiving in its application, imposing strict conditions for exemptions and offering no leniency in cases of non-compliance. Properties deemed non-taxable, such as those acquired for non-trading activities or sold by non-registered operators, still require accurate documentation. Failure to meet these conditions can lead to substantial VAT liability, severely impacting the financial standing of the seller or buyer.

The risk intensifies for properties used in both taxable and non-taxable supplies. Registered operators must exercise caution when selling such properties, as the VAT Act deems them as being used in the furtherance of trade, requiring VAT to be paid in full upon sale. This rule applies even if the property was partially used for non-trading activities. Additionally, if property is sold to satisfy a debt and the original owner does not provide written confirmation that the sale is non-taxable, the VAT Act mandates that the transaction be treated as one in the furtherance of trade, thus subjecting it to VAT. Involuntary sales, such as those conducted under a power of sale, can also attract VAT if not properly documented. This is a critical trap that could ensnare those unaware of the intricate legal requirements, leading to significant, unexpected VAT liabilities.

The situation becomes even more precarious when dealing with deregistration. Upon deregistration, any goods or rights that remain part of trade assets are considered supplied immediately before deregistration, potentially triggering VAT unless specific exemptions apply. This rule also applies to fixed property, meaning that VAT could be triggered upon deregistration unless specific exemptions apply.

The sale of a “going concern” introduces another layer of complexity. For a transaction to qualify for zero-rating under VAT, it must involve the transfer of at least 51% of the trade, with both buyer and seller being VAT-registered. There must be a written agreement confirming the sale as a going concern and the business must continue operating in the same manner post-sale. A failure to meet these conditions could result in a significant and unexpected VAT liabilities, undermining the entire transaction. This provision is crucial for taxpayers to consider when structuring the sale of a business as a going concern which involves transfer of property.

Given the complexities involved, sellers and buyers must remain vigilant to avoid the significant financial setbacks that can arise from mishandling VAT on property sales. Without careful planning and strict adherence to the law, the financial consequences could be devastating. Sellers and buyers alike must approach transactions with a thorough understanding of their VAT responsibilities to avoid pitfalls that could lead to substantial VAT implications.

Adapting Zimbabwe’s Assessment Year to New Economic Realities

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The recent introduction of the Zimbabwean Gold (ZIG) currency on April 5, 2024, has prompted significant changes across Zimbabwe’s financial landscape. Among these is the proposed adjustment to the year of assessment for taxable income from employment. This proposal, put forth by the Minister of Finance, Economic Development, and Investment Promotion, seeks to divide the 2024 tax year into two distinct periods: January 1 to April 4, 2024, and April 5 to December 31, 2024. This change is designed to align tax periods with the ZIG’s introduction and to streamline tax administration during this pivotal economic transition. This article explores the details and implications of the proposal, as well as its alignment with the Income Tax Act [Chapter 23:06].

The ZIG currency’s introduction represents a transformative shift in Zimbabwe’s economy, requiring careful adjustments across various sectors. The proposed split in the 2024 tax year addresses this need by creating two separate tax periods. The first period, from January 1 to April 4, 2024, represents the final stage of the old currency regime. The second period, starting on April 5, 2024, coincides with the adoption of the ZIG and extends to December 31, 2024. This bifurcation aims to provide clear demarcation between the two economic phases, simplifying tax compliance for individuals and businesses and ensuring that income earned under the old and new currency regimes is accurately assessed.

The legal framework governing income tax assessment and collection in Zimbabwe is provided by the Income Tax Act [Chapter 23:06]. Under this Act, the “year of assessment” is traditionally defined as a 12-month period beginning on January 1. However, the Act permits adjustments to the assessment year under certain conditions, particularly during significant economic changes. The proposed split for 2024 follows this precedent, aiming to align tax assessment periods with the introduction of the ZIG. Key sections of the Income Tax Act relevant to this proposal include provisions on the levy and calculation of income tax and the interpretation of taxable income. These sections ensure that income earned before and after the ZIG’s introduction is assessed fairly and with precision, minimizing the risks of mistiming or misalignment.

For employees and businesses, this adjustment necessitates careful attention to detail. Employees must ensure that their income is accurately reported for each of the two tax periods in 2024. This may require modifications to payroll systems to accommodate the split assessment periods. Employers, too, will need to issue separate tax certificates for each period, adding complexity to the tax reporting process. For businesses, the proposed change demands a thorough review and adjustment of accounting and tax reporting processes. Income and expenses incurred before and after the ZIG’s introduction must be meticulously separated and reported to ensure compliance and avoid penalties. Accurate record-keeping will be essential to navigate this transition smoothly.

The government, for its part, will need to undertake significant updates to its tax administration systems. This includes modifying tax forms, updating software systems, and providing clear guidance to taxpayers and tax practitioners on the new requirements. The transition, while involving additional administrative costs, is expected to yield long-term benefits by facilitating a smoother shift to the new currency regime. By splitting the 2024 tax year, the government aims to enhance clarity and compliance in tax reporting, reducing the risk of errors and disputes with tax authorities.

While the proposal presents short-term challenges, particularly in terms of administrative adjustments, its long-term impact is likely to be positive. The ability to accurately assess and collect taxes will bolster the government’s revenue base, providing essential funds for public services and infrastructure development. Moreover, by ensuring that income earned under the old and new currency regimes is separately assessed, the government can maintain a fair and equitable tax system that reflects the realities of the country’s evolving economic landscape.

In conclusion, the proposed adjustment to the year of assessment, following the introduction of the ZIG, represents a strategic move designed to facilitate the transition to the new currency and streamline tax administration processes. By splitting the 2024 tax year, the government seeks to clarify tax reporting requirements and enhance compliance, in line with the provisions of the Income Tax Act [Chapter 23:06]. For taxpayers, this change necessitates careful adjustments to payroll and accounting systems, while for the government, it provides a more precise framework for tax assessment and collection.

Fuel Transit Rules Threaten Business Liquidity

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A bold policy from Zimbabwe’s Minister of Finance, Economic Development and Investment Promotion’s Mid-Term Budget Review on how duty and levies on fuel imported under Removal in Transit (RIT) are handled came into effect on 10 August 2024, following the Zimbabwe Revenue Authority (ZIMRA) public announcement. According to the new regulation, duty and levies on fuel must be paid upfront at the port of entry, with reimbursement at the port of exit upon compliance with all transit procedures, including submission of proof that the fuel has been exported. The policy mandates that all types of fuel, including petrol, diesel, paraffin, and Jet A1, transported by road through Zimbabwe are subject to these new duties. This measure excludes entities sourcing fuel directly from the National Oil Infrastructure Company of Zimbabwe (NOIC) at the Msasa Depot or other entities approved by the Minister.

The upfront payment requirement is designed to minimize the risk of fuel being diverted for local consumption without proper duty payments, a practice that has led to significant revenue losses in the past. ZIMRA has been grappling with transit fraud for years, and while the Electronic Cargo Tracking System (ECTS), introduced in 2017, was a step forward, it has not entirely resolved the issue. This new regulation seeks to address these shortcomings by aligning with the Customs and Excise Act [Chapter 23:02], which mandates that all goods, including fuel, pass through designated ports for proper recording and monitoring. The Act empowers the Commissioner to establish transit sheds and customs areas for secure storage and examination of goods and grants the Minister authority to implement regulations ensuring compliance and protecting revenue.

However, significant concerns have emerged regarding the efficiency and practicality of the refund process, especially in light of ZIMRA’s existing challenges with VAT refunds. The requirement for upfront payment of duties and levies places an immediate financial burden on businesses that may already be operating on thin margins. ZIMRA’s public notice explicitly states, “Consignees and/or their representatives should approach ZIMRA at the port of entry to initiate the fuel clearance and payment process. For the refund process, once the fuel has been exported they should approach ZIMRA at the port of exit to initiate the requisite refund process.” Under the Customs and Excise Act, goods are deemed exported when all border formalities are completed. This is the time when the bill of entry or other export document is delivered to and stamped by an officer at the port of exit or when the goods cross the borders of Zimbabwe, whichever is earlier. This process could realistically take at least three days from the time the goods enter and to when they exit Zimbabwe.

For many, this upfront cost could make Zimbabwe an unattractive transit route, especially when alternative routes, such as the Kazungula border, offer less financially onerous options. The administrative burden associated with the refund process cannot be overlooked, as it involves multiple verification steps at both the port of entry and the port of exit, risking delays and bottlenecks that further complicate the supply chain and increase costs for businesses. Given Zimbabwe’s deteriorating road network, challenging geography, and significant traffic volumes, transit through the country has become increasingly difficult for Southern African transporters. The combination of stringent speed regulations, slow ZIMRA payment approvals, and the heavy burden of road user fees further complicates the route. These factors, coupled with stringent practices by traffic police and prolonged customs procedures, often drive businesses to explore alternative, more efficient routes, undermining Zimbabwe’s position as a key transit hub.

Instead of relying solely on upfront payments, the government could consider enhancing existing measures by improving the current tracking systems, designating specific stop areas for transit vehicles, and refining the sealing of transit goods.

While ZIMRA emphasizes that these measures are crucial to combat transit fraud, the broader implications for business liquidity and regional trade dynamics remain a significant concern. This situation risks undermining the objectives of the African Continental Free Trade Area (AfCFTA), which aims to facilitate regional trade by opening borders and reducing trade barriers. Instead of promoting seamless trade across the continent, Zimbabwe’s new policy could inadvertently encourage businesses to bypass the country entirely, leading to a reduction in transit traffic and associated economic benefits.

Adding to the complexity, the premature publication of the Zimbabwe Revenue Authority’s (ZIMRA) Public Notice has raised legal and constitutional concerns within the business community, particularly because it was issued without the backing of Statutory Instruments (SI) or any supporting legislation. The notice cites the Minister’s Mid-Term Budget Review Statement as the basis for these new rules, but no formal legal framework was in place at the time of its publication. This move follows a recent Supreme Court decision in the Zimplats vs. ZIMRA case, where the court upheld the legal force of ZIMRA’s Public Notices. This development raises concerns about ZIMRA’s expanding role, potentially overstepping its authority as it encroaches on legislative functions—a reality that must be examined against the Constitution. It also warrants scrutiny to ensure that the Supreme Court’s decision is not taken out of context.

Tougher VAT deferment Rules looming

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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.

Your Tax Obligation When Working for a Foreign-Based Employer

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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

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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.

The New Face of Income Tax Computation

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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.