On the 24th of June 2019 the government took a bold move of re-introducing the Zimbabwe dollar as the sole currency for domestic transactions, thereby technically banning the use of foreign currency in settling obligations within Zimbabwe, except for purposes of paying of duty and VAT upon importation of goods as well as paying airfares to airlines. This move is a culmination of a process which started in October 2018 when the government separated bank accounts for RTGS$ and Nostro FCA. In February 2019 it introduced the Zimbabwe dollar as a legal tender along with other foreign currencies and made it the functional currency for accounting and other purposes. Assets and liabilities held on 22 February 2019 were deemed converted from United States dollar to RTGS$ on 1:1 and to remain fixed thereafter. After 22 February 2019 conversion of United States to RTGS$ to be determined using the interbank rate of authorised dealers whose determination is on willing buyer willing seller basis. Enactments in United States were deemed expressed in RTGS$ on a 1:1, implying wherever there is United States dollar amount it should be read as RTGS$ amount on a 1:1 basis. These monetary developments however have not been complemented by fiscal developments which remain stuck in foreign currency as regards to payment of taxes for transactions made in foreign currency, as a result there are now tax challenges of transiting to the Zimbabwe dollar which the government needs to sort out in order to sanitize the monetary policy.
One such challenge is with regard to VAT on credit sales invoiced in foreign currency made before the 24th of June 2019, but whose settlement is made in Zimbabwe dollar thereafter. The payment of output tax is predicated on the time of supply rule, which provides that VAT is triggered when an invoice is issued, payment is made for the supply, goods are delivered, services are performed or when immovable property is registered in the deeds registry whichever occurs first. This therefore entails that output tax can be declared and remitted in foreign currency on credit sale which is settled in the Zimbabwe dollar because of changes brought about by SI142. The government will need to step in and declare how such matters should be dealt with. The credit and debit notes rules provided within the VAT Act do not seem sufficient to address this issue. The same transaction may have income tax implications because the law requires income tax to be paid in foreign currency when the sale is made in foreign currency. A taxpayer may therefore end up being required to pay income tax in foreign currency for a sale it invoiced in foreign currency, notwithstanding the fact that the debtor settled it in Zimbabwe dollar following the banning of foreign currency payments. On the flip side, the government might lose foreign currency as a result of taxpayers claiming input tax on invoices issued in foreign currency but which after the 24th of June 2019 are settled in Zimbabwe dollar. The law allows a VAT registered operator to account for tax payable on invoice basis as long as the operator is in possession of an invoice meeting the requirements of a tax invoice and the claim is made within the tax period the operator is required to submit a tax return or 12 months whichever is the longer period. It is not necessary that the invoice should have been settled for the claim to be made.
The Minister of Finance would also need to review values of tax credits, certain capital expenditure for capital allowances purposes, prescribed donations etc when presenting his mid- term budget later this month. These values were eroded by inflation following conversion from United States dollar to RTGS$ on 1:1 basis and therefore no longer retain their status tax incentives to the taxpayers. Statutory instrument 33 provides that: “… every enactment in which an amount is expressed in United States dollars shall, on the and after effective date, be construed as reference to the RTGS dollar, at parity with the United States dollar, that is to say, at a one-to-one rate”. The same applies for employment tax tables which have resulted to most employees being pushed into high tax brackets.
Capital gains tax rules also need revision. This is because Statutory Instrument 33 which provides that opening balances of assets are valued and denominated in RTGS dollars at a rate of 1:1 with the United States dollar has created an onerous tax burden on taxpayers for assets acquired before 22 February 2019 and sold after this date. The cost base of those assets remains stuck in RTGS at 1:1 with USD whilst the selling price will be inflated as it accords with the interbank rate of exchange. The result is the creation of artificial RTGS$ capital gain when in terms of real value one would not have made any gain. A move to a flat tax rate for such assets would save taxpayers of heavy tax burden, whilst at the same time simplifying tax computation.
Finally the laws for payment of taxes in foreign currency in an economy where the Zimbabwe dollar is the sole legal tender for domestic transaction militates against certainty, simplicity and stability of a tax system. These tents constitute cornerstones of a good tax system which policy makers should always consider whenever introducing any tax policy. They are also the benchmarks by which taxpayers can assess the effectiveness of government in maintaining and improving tax systems. Complicated tax laws alienates investors as well as adding to the cost of doing business. Whereas, effective tax systems are a critical building block for increased domestic resources in developing countries such as Zimbabwe, essential for sustainable development and for promoting self-reliance, good governance, growth and stability. Tax transitionary rules which recognise Zimbabwe dollar as the sole currency for purposes of paying taxes are therefore necessary for purposes for migrating to the new currency and bringing confidence in the Zimbabwe dollar, short of which the business community will continue to have a high regard of foreign currency particularly the United States dollar which may derail the government’s move towards monetary sovereignty. This will also assist in resolving the administrative complexities and tax arbitrages associated with multicurrency system.