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Recently the Zimbabwe Revenue Authority (ZIMRA) through a public notice commanded taxpayers to pay provisional income tax (Quarterly Payment Dates; QPDs) in foreign currency when taxable income is earned, received or accrued in whole or partly in foreign currency. This is not news but an enforcement of the existing laws because the requirement to pay tax in foreign currency has been part of our fiscal statutes since February 2009 when the country adopted the multi-currency system. It has not been an issue until October 2018 when the Reserve Bank of Zimbabwe directed banks to separate bank accounts into RTGS FCA and Nostro FCA. ZIMRA followed suit in November 2018 by issuing a public notice requiring all taxpayers to account for tax in foreign currency in respect of income earned in foreign currency. In February 2019, the government abandoned the one to one (1:1) exchange rate between the United States Dollar and the RTGS/ Bond for the interbank exchange rate system. All assets and liabilities prior to 22 February 2019 were to be converted to RTGS dollars at the rate of 1:1. This article is not seeking to criticize the ZIMRA public notice but to highlight issues raised, the policies and their impact on businesses.
The current systems promotes double dipping. As an example, when RTGS dollar is used as the functional currency for accounting and other purposes as contemplated under SI33 foreign currency exchange differences are bound to occur. These arise when monetary items are settled or when monetary items are translated at rates different from those obtaining when initially recognised or in previous financial statements. A gain is recognised as gross income in the tax return whilst foreign exchange loss is treated as a deductible expenditure. However only foreign exchange gain or loss of a revenue nature and realised are dealt with in this way, whilst capital nature or unrealised gains or loss have no tax implications. It is however my view that when the income tax is paid in foreign currency as contemplated, exchange differences should not exist for tax purposes because tax payment is in the currency of tax reporting, but the fact that the provisions which provides for the treatment of foreign exchange difference have not been outlawed there is no basis for excluding them in the tax return. Double dipping may therefore occur e.g. double taxation where foreign exchange gains are realised and double deduction where exchange losses are realised, when taxes have been accounted for in foreign currency.
Another problem with the current income tax regime is that it taxes capital or productive assets contrary to the spirit of the income tax system. It is the role of a capital gains tax system to levy tax on wealth on fixed properties not an income tax system. As it stands there is juridical double taxation because of application of these two regimes on the amounts. For instance when assets that ranked for capital allowances prior to 2019 are sold after 22nd of February 2019 in RTGS dollars at the prevailing interbank rate of exchange and to be set off against the cost of the asset in RTGS dollars at 1:1 with the United States dollars there may be a taxable recoupment notwithstanding the asset may have been sold at below income tax value in real terms. Another situation is in respect of capital allowances that are at lesser value in real terms for assets brought forward from 2018 because the cost base of the assets will be expressed in RTGS$ at 1:1 with USD. Not to mention also the assessed losses brought forward from 2018 which will be written off at an accelerated pace because they will be set off against sales in RTGS$ at the interbank rate of exchange. Taxing capital impairs the value of the business and reduces its potential to recapitalise as a result reducing the future supply of goods or services or may send companies out of business.
One of the key tents of a good tax system is that it must achieve tax neutrality, that is a good a tax system should not create incentives for firms or individuals to change their behavior—to invest more or less, to work more or less, to locate in one place rather than another, to employ more or less labor or more or less capital. This at the moment is questionable. For example the apportionment of tax into RTGS dollar and foreign currency components using the turnover figures as contemplated in the ZIMRA public notice indirectly attack this principle as it disregards the proportion of deductions where they can be disproportionate or be in a different pattern from that of turnover. One taxpayer may incur expenses predominantly in foreign currency while their turnover is received largely in RTGS$. This presents a distortion on the tax payable in RTGS and foreign currency. The formula further complicates tax administration as taxpayer will have to bear the burden of converting amounts into foreign currency for purposes of complying with the laws.
A country’s income tax regime is a barometer of the business environment and may negatively or positively influence investment. For instance, where the rules and their application are nontransparent, overly complex or unpredictable this will add to the cost of the project, creates uncertainty and thereby discouraging investment. Furthermore, a system that leaves excessive administrative discretion in the hands of tax officials invites corruption and brings uncertainty to the business. Policy makers are therefore encouraged to ensure that their tax system imposes an acceptable tax burden that can be accurately determined, and which keeps tax compliance and tax administration costs in check. The current income tax regime falls short of these requirements as it contains a number of flaws when measured against Adam Smith’s good principles of tax system such as certainty, administrative efficiency, tax neutrality, simplicity etc. Simplifying the tax regime should be the priority when the Minister of Finance and Economic Development presents his midterm fiscal policy soon.