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.

Schemes of Reconstruction and Capital Gains Tax

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

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

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

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

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

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

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

Independent Contractors from a taxman’s perspective

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

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

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

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

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

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

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

Aligning Tax Laws with IFRS 17: Implications for Insurance Sector

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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.

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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

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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

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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

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

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

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

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

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

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

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

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

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

Zimbabwe’s Special Capital Gains Tax on Mining Titles

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

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

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

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

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

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

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

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

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

Unpacking the new wealth tax in Zimbabwe 

by with No Comment News

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.