Aligning Tax Laws with IFRS 17: Implications for Insurance Sector

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

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

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

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

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

Input Tax and Fiscalisation.

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

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

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

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

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

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

Introduction to Zimbabwe Gold and Taxation Complexities

In a bold move aimed at stabilizing its economy and restoring confidence in its monetary system, Zimbabwe embarked on a revolutionary journey in its monetary policy by introducing the Zimbabwe Gold (ZiG) as its new currency. This seismic shift aimed to recalibrate the nation’s monetary framework, anchoring currency, exchange rate, and price stability on solid ground. Driven by the dual pillars of restoring price and exchange rate stability and re-monetising the local currency, the Reserve Bank of Zimbabwe (RBZ) set forth a policy that endeavours to rebuild market trust and bank policy credibility. As Zimbabwe navigates this transition, understanding the legal and economic groundwork laid for the introduction of ZiG is crucial for grasping the full spectrum of its impacts on tax payments and the broader economic landscape.

The introduction of the Zimbabwe Gold (ZiG) necessitates substantial amendments to revenue laws to ensuring wherever its mentioned ZWL this is replaced by ZiG. This change is pivotal to ensuring that the tax system accurately reflects the realities of the new currency system, ensuring fairness and efficiency in tax collection. To accommodate the ZiG, the revenue laws require specific revisions to address the new currency landscape. The overhaul of the system and the tax tables is crucial for aligning Zimbabwe’s tax system with its new monetary reality. These amendments will require comprehensive guidance from the tax authority to help taxpayers navigate the transition, ensuring clarity in tax obligations and preventing discrepancies in tax liabilities due to currency conversions. Moreover, it’s essential for these changes to be communicated effectively to all stakeholders, providing adequate time for adaptation to the new tax reporting requirements under the ZiG currency regime.

From an income tax perspective, the transition to Zimbabwe Gold (ZiG) significantly impacts the dynamics of quarterly and annual tax payments for businesses and individuals, particularly concerning the choice between average auction rates and spot rates for currency conversions. With ZiG now in the financial ecosystem, taxpayers must recalibrate their approach to calculating tax liabilities, especially for those whose income or transactions span multiple currencies. This decision-making process underscores the broader implications of the switch to ZiG, necessitating a nuanced understanding of the new currency’s behaviour and its impact on financial and tax planning.

There will be a significant shift impacting taxpayers with incomes in US dollars (USD) and Zimbabwean dollars (ZWL), and the newly instituted ZiG. This transition necessitates a complex recalibration of income reporting, tax calculations, and adherence to new regulations that accommodate the ZiG’s unique position within the economic framework of Zimbabwe. The shift to ZiG demands adaptability from taxpayers and vigilance in tracking the economic indicators that influence ZiG’s value. This transition period is pivotal for setting the foundation of a stable economic environment that supports the new currency’s integration into Zimbabwe’s fiscal and monetary systems.

We foresee some issues regarding preparation of 2024 income tax return, further compounding the already complicated issue of income tax declarations when trading takes place in multicurrency. Firstly, there is an issue regarding income tax treatment of balances brought forward from the 2023 year of assessment (e.g., trading stock, income tax values of assets, assessed losses). The transition raises questions about the valuation and conversion of these balances to ZiG, potentially leading to financial discrepancies and challenges in tax calculations. The handling of transactions from the 1st of January until the 8th of April, especially concerning quarterly payment dates (QPDs), presents another challenge. The authorities need to state how these transactions are to be integrated into the final income tax return for 2024. Thirdly, the prescribed values enacted through Finance Act 13 of 2023 as fixed in United States Dollar must be capable of being converted into ZiG. This is yet another area which requires the attention of the authorities to ensure the law reflects the new realities. Taxpayers need clarity on how these transactions are to be treated and converted to ZiG, influencing their tax liabilities and financial reporting for the period.

From a payroll perspective, the transition to ZiG necessitates the existence of at least two years of assessment within a single calendar year (2024)—one ending on the 8th of April and another starting on the 9th. This change affects payroll and employment income calculations, requiring significant adjustments in PAYE systems and tax tables to accommodate this split. The shift from ZWL to ZiG necessitates the modification of prescribed values in tax calculations, including PAYE tables and other tax-related items previously denominated in ZWL. This requires comprehensive adjustments in tax legislation and operational tax guidelines to ensure accurate tax calculations under the new currency system.

Significant legal challenges arise also with regards to other tax heads including but not limited to VAT, Capital Gains, Customs and Excise duty etc. Provisions that explicitly reference the Zimbabwean dollar need to be updated to accommodate ZiG, impacting a wide range of legal frameworks, and necessitating thorough legislative amendments to align with the new monetary system. For instance, the inflation allowance for purposes of capital gains tax in respect of disposals in ZWL will need to be amended to reflect the dictates of the new currency.

Implementing the transition to Zimbabwe Gold (ZiG) presents several challenges, notably in updating financial software, raising public awareness, and ensuring compliance across diverse economic sectors. Software systems used for accounting, taxation, and financial reporting must be updated to accommodate ZiG, requiring significant technical adjustments to handle the new currency, conversion rates, and tax calculations accurately. Additionally, there’s a critical need for widespread public awareness campaigns to educate citizens and businesses about ZiG, its implications for financial transactions, and tax obligations. Ensuring compliance poses another challenge, as entities must adapt to new financial regulations and tax structures swiftly. To address these challenges, a collaborative approach between the government and the private sector is essential.

These highlighted issues demonstrate the complex interplay between monetary policy changes and tax law, underlining the vast array of challenges that stakeholders must navigate during Zimbabwe’s currency transition. As this article continues to explore these issues, it is clear that the path forward is fraught with uncertainty, demanding careful consideration and strategic planning to mitigate potential economic and legal disruptions.

The use of AI in Tax Administration and Compliance

The Zimbabwe Revenue Authority (ZIMRA) introduced the Tax and Revenue Management System (TaRMS) as part of their strategy to transform the administration of taxes by using a system which simplifies registration, enhances online services and automates compliance checks. The efforts to enhance tax administration and compliance can also be enhanced through the use of Artificial Intelligence (AI) and Information and Communication technology (ICT).  The potential of AI to transform tax administration and systems demands scrutiny, evaluating not only the advantages but also the potential impact on taxpayer rights and the intricate web of interactions between tax authorities and citizens. This article explores the intersection of AI, ICT and tax administration to achieve a system which is efficient for taxpayers.

The introduction of AI in tax administration can use algorithms to check data submitted by taxpayers and also to use the data to restructure service provision. Tax administrations globally find themselves in an advantageous position due to their access to copious data of exceptional quality. Leveraging AI becomes imperative, not merely to combat tax fraud but to enhance taxpayer service and compliance. The European Commission highlights the pivotal role of data volume in AI’s efficacy. In this regard, tax administrations access to extensive data places them at the forefront of AI integration. The data they collect can help revenue authorities respond to taxpayer queries and enhance compliance checks ensuring a faster and easier process for taxpayers.

Reports from the OECD indicate a significant number of tax administrations actively employing or planning to adopt AI, indicating a global momentum towards AI integration in tax operations. The implementation of AI in tax systems extends to various domains. Other countries have deployed virtual assistants or chatbots to aid taxpayers in understanding their obligations and resolving queries dynamically. Spain’s collaboration with IBM Watson in creating an AI-based virtual assistant for VAT information is an example. According to the tax agency, this resulted in an eighty percent reduction in email enquiries to the revenue authority and a tenfold increase in queries within the initial week.

AI has also been deployed to detect irregularities, as seen in Spain where the Tax Agency alerted small businesses whose declared revenues deviated below sector averages based on AI derived insights. Other countries, including the United States and Canada, utilize big data and AI to assess tax risks, segmenting taxpayers by compliance probabilities and initiating controls accordingly.

The envisaged scope of AI integration extends comprehensively across tax procedures and administrative functions. Automation of administrative functions and management processes, exemplified by Spain’s General Directorate of Cadastre’s neural network-based real estate valuation, indicates the potential for AI in enhancing procedural efficiency such as advance tax rulings in the Zimbabwean context.

Looking ahead, AI might simplify collection processes by predicting bad debts, enabling prioritized enforced collections, as witnessed in Finland, Ireland, Singapore, and Sweden. The evolution may even encompass automated resolution of tax procedures without human intervention, though this remains a distant reality. The touted benefits of AI in taxation encompass improved compliance, streamlined processes, reduced errors, and enhanced service for taxpayers. However, this optimistic narrative intertwines with potential risks, necessitating ethical assessments and the adherence to principled guidelines.

Principles of prudence, non-discrimination, proportionality, transparency, and data governance should underpin the implementation of AI in tax administration. Prudence advocates for cautious progression and piloting programs before widespread adoption. Non-discrimination warns against the transfer of human biases or errors into algorithmic systems, highlighting the imperative to prevent algorithmic bias. Proportionality emphasizes the evaluation of interference in taxpayer rights, advocating caution in administrative actions based on AI-derived conclusions. Transparency calls for measures enabling taxpayers to understand decisions made through AI without compromising their right to a fair tax system. Data governance becomes pivotal, ensuring data security, privacy, quality, and integration in line with our data protection and privacy laws.

Ultimately, well-designed AI algorithms fed with taxpayer data should lead to a more effective tax system, streamlined administrative processes, enhanced legal certainty, reduced resolution times, and diminished conflict. The societal benefit of curbing tax fraud is evident. However, this technological journey must remain grounded in serving taxpayers and adhere to principled guidelines for ethical and equitable outcomes. Zimbabwe, amidst its socio-economic tapestry, stands at a crossroads where embracing AI in tax administration could redefine its fiscal landscape. In the next half a decade, with the TaRMS system and data available, Zimbabwe could see a big shift in tax and ai. This is in line with the world striving towards an AI-inclusive future, the principles guiding this transformation will determine whether it fortifies or falters the relationship between taxpayers and tax authorities.

Unpacking the types of valued added tax supplies

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

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 

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

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

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

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.