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The promulgation of Statutory Instrument 33 of 2019 will forever be remembered in the history of tax as one of legislative instruments that complicated, inter alia, taxation in Zimbabwe. Since its inception, there has been a couple of other legislative instruments which, when interpreted left both the regulator and the taxpayer at odds in terms of interpretation thereof. The transition from a multicurrency system to a mono-currency in 2019 was adopted through introduction of SI 142 which prohibited the use of foreign currency. However, operators continued to trade in foreign currency but remitted taxes in Zimbabwean Dollar. In light of the laws of payment of taxes in foreign currency introduced in 2009, the fiscus has significantly been prejudiced because on the one hand the exchange rate plummeted whilst the United States Dollar remained stagnant. This explains the reason the ZIMRA and the Reserve Bank of Zimbabwe (RBZ) has been calling upon business to declare their taxes in currency of trade and make voluntary disclosure for omissions. We explain in more detail the implications of the ZIMRA’s call for voluntary disclosure by business.
Formal businesses should heed the call from ZIMRA to voluntarily disclose for a number of reasons. There are largely two tax heads which are at the centre of controversy around payment of taxes in foreign currency namely income tax and VAT. However, VAT is not of a wide implication because it only affects registered operators and not producers of zero rated and exempt supplies. However, income tax affects everyone in trade. In practice, income taxes (QPDs) do not carry penalties as long as they remain provisional taxes. Therefore, in principle the risk for the business community on income tax is the interest chargeable on the QPDs understated by a margin of error more than 10%. This is the risk that applies to the period covered by the voluntary disclosure. However, after the return has been filed and ZIMRA discovers understatement additional tax equal to 100% of the income tax due would apply in addition to the interest chargeable. Therefore, the call on income tax is for the business to avoid errors being discovered by the ZIMRA so as to avoid the additional tax as aforesaid.
With regards to VAT, most of the returns for the period covered by the voluntary disclosure have already been filed and are with the ZIMRA. Accordingly, any amendment thereof whether by the ZIMRA or taxpayer will trigger both penalty and interest. This makes a strong case for participating in the on going voluntary disclosure and hopefully the ZIMRA will show lenience in order to avoid the risk of penalty and interest. Although interest is mandatory and cannot be waived by the Commissioner, section 72 of the Income Tax Act empowers the Commissioner to waive interest on understated QPDs upon submission by the taxpayer. We have also seen in the past, interest and penalty being waived under two previous tax amnesties. There may also be reasonable grounds to justify a waiver of penalties and interest because of the impact to the business as a result of Covid 19 and other economic factors. Furthermore, the payment of taxes in foreign currency is of a national interest, which various stakeholders including the Minister of Finance closely follow the events as they unfold. Hence the Minister of Finance may want to use the carrot and stick approach in dealing with the matter. On one hand showing lenience to businesses that have honestly and truthfully made a voluntary disclosure by promulgating a statutory instrument empowering the Commissioner to waive both penalty and interest in full for non-payment of taxes in foreign currency. During our recently held Matrix Tax Forum, the Minister of Finance showed some significant signals to support the business during this period Covid 19. On the other hand the authorities may impose stiff penalties on errant taxpayers and this may include cancellation of trading licences, imposition of heavy penalties, naming and shaming of errant taxpayers. The intention to do so has already been indicated through the joint RBZ and ZIMRA press conference. Furthermore there has been significant surveillance of taxpayers’ activities by both the monetary and fiscal authorities in the recent times. We have seen the RBZ clamping down on retail pharmacies with the Director of one pharmacy being hauled before the court for failing to comply with a foreign currency disclosure order issued by the RBZ. It is therefore difficult for formal businesses to hide.
In a nutshell, whilst laws for payment of taxes in foreign currency create uncertainty and shows preference by the government of foreign currency, these have been in place since 2009. What the business can only do is to lobby for their removal in order to ensure certainty and ease tax administration. As it stands these laws are currently adding to the cost of doing business and discourage investment in Zimbabwe. Taxpayers should brace the call by the ZIMRA to voluntarily disclose their tax statuses and declare all foreign currency income before they face the wrath of law. Apart from simply complying with the law, the taxpayer stands to lose more should an audit be carried out and they be penalised for incorrectly declaring their foreign currency income.