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Due to technological developments, intangible properties have become a huge component of most companies’ statement of financial position. The body of accountancy recognises them as capital expenditure because they have a probable future inflow of economic benefits. They are an identifiable non-monetary asset without physical substance. The Organisation of Economic Cooperation Development in their Transfer Pricing Guidelines for Multinational and Administrators 2017 version have classified them into marketing and trading intangibles. Marketing intangible assets are comprised of brands, trademarks, trade names, customer relationships and copyrights. On the other hand, trading intangibles include assets, patents, and products designs, manufacturing warehouse and supplier relationships. Whichever the case may be, for accounting purposes, intangible assets are capital items. Their acquisition or development cost is capitalised for accounting purposes after meeting the recognition criteria stipulated by International Accounting Standards 38 and written off over their useful life provided they have a definite useful life. The tax fraternity also recognises them as capital items not qualifying for deduction in the computation of income tax. The fact that intangible asset is treated as capital asset does not automatically make it qualify for capital allowances. Only expenditure on acquisition or development of computer software qualifies for capital allowance as fully explained in this article.
Computer software as per the Income Tax Act (Chapter 23:06) definition means “any set of machine-readable instructions that directs a computer’s processor to perform specific operations”. The claiming of capital allowances on computer software is a recent development following from the case of D Bank Ltd v ZIMRA (FA 06/13) [2015] ZWHHC 135. In this case, D Bank sought to claim it as an operating expenditure qualifying for full deduction in the year it was incurred. The court dismissed the claim arguing that the expenditure was capital in nature and a prohibited deduction in terms of the law. It was also barred from capital allowances because the expenditure had not been classified as expenditure qualifying for purposes of capital allowances. In view of the importance and growing size of this expenditure in financial institutions and Information Technology companies, the government amended the law to correct the anomaly with effect from 1 January 2015. It amended the definition of “article” in the 4th Schedule of the Income Tax Act (Chapter 23:06) to include tangible or intangible property in the form of computer software that is acquired, developed to or used by a taxpayer for the purposes of his or her trade, otherwise than as trading stock. The effect was to grant capital allowance on computer software expenditure incurred by any taxpayer deriving income from trade and investment, except for mining entities with effect from 1 January 2015. A trader, other than a miner can therefore choose either to claim Special Initial Allowances or wear & tear on computer software expenditure. Special Initial Allowance is an investment allowance which is claimed over a period of four or three years, for big businesses and Small to Medium Enterprises respectively. Where one has opted for wear and tear instead of SIA, the claim is equal to 10% per annum on the written value of expenditure on computer software regardless of size of the business.
While this was a welcome relief for persons deriving income from trade and investment, mining entities have been secluded from enjoying the benefit. The Minister of Finance and Economic Development, Prof. Mthuli Ncube in his 2020 National Budget Speech has however proposed to correct this imbalance by extending capital allowances on expenditure incurred by persons earning income from mining operations on acquisition and development of computer expenses with effect from 1 January 2019. Thus, tangible or intangible property in the form of computer software that is acquired, developed or used by the tax payer in connection with its mining operations and has been classified as capital expenditure for purposes of claiming capital redemption allowance.
Whether or not a taxpayer is a mining entity or not, the provision for capital allowances will not be applied on computer software acquired or developed for resale or sale. The expenditure will be treated as cost of goods or inventory of the taxpayer in the determination of taxable income. Meanwhile licence fees or royalties on computer software is neither tax deductible nor treated as capital expenditure ranking for capital allowances except annual and renewal fees. These are treated as deductible expenses in the computation of income tax.
Any person paying licensee fees (royalties) to a non-resident person, whether or not they are once off or renewal fees, is required to deduct non- resident tax on royalties at 15% of the royalties. A lower rate may apply if the non-resident licensor is a resident of a country that has concluded a tax treaty with Zimbabwe. Value added tax (VAT) on imported services is also applicable. This is an obligation of the resident person importing the services and is levied at the rate of 15% of the open market or invoice value of the imported services.
In conclusion taxpayers should be mindful of penalties and interest that may arise from incorrect deduction of expenditure on computer software acquired or developed by them for use in their business. The tax benefit arising from this expenditure can only arise from claiming capital allowances on this expenditure. To correct the imbalances, miners would also be getting capital redemption allowances on computer software expenditure acquired or developed for use in their trade come 1 January 2020.