The New Face of Income Tax Computation

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.

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