The saga continues regarding payment of income tax in foreign currency
The enactment of SI 33 and 142 in 2019 provoked a whirlwind of tax controversy in the arena of payment of income tax in foreign currency. This is notwithstanding existing laws providing for payment of income tax in foreign currency on foreign currency trading since 2009. Where taxable income is earned, received or accrued in whole or in part in foreign currency, income tax is to be paid in the same or another specified foreign currency. Therefore, taxpayers are required to pay income tax in foreign currency where income is received, earned or accrued wholly or partly in foreign currency. The Finance Act provides for the splitting of tax liability on the basis of respective taxable incomes when earnings are partly in foreign currency and Zimbabwean dollar. However the law is silent on the methodology of split, this creates multiple basis of splitting the tax liability and open doors for manipulation of the law by either the ZIMRA or taxpayers. Moreover, income and expenditure profile of a particular taxpayer may influence the basis of splitting the tax thereby undermining tax principles of equity, neutrality, simplicity, certainty etc.
The tax controversies also stem from the wording of the law and its practical implementation. Firstly, the law refers to paying income tax in foreign currency on taxable income earned, received or accrued in foreign currency. The tax paying community has raised a concern in that taxable income is not earned, received or accrued, instead advancing the notion what is earned, received, accrued etc. in foreign currency is gross income. Therefore, the law for payment of income tax in foreign currency did not exist or at best not enforceable. The second source of controversy is on the basis of splitting of incomes and expenses to allow payment of income tax in currency of trading. Thirdly, it is also not possible for the ZIMRA to collect foreign currency income tax on the basis of the return or assessment filed or made in Zimbabwe dollar. This would turn out to be unlawful since the law did not provide for assessment or return to be made denominated in foreign currency. More so the issuance of two assessments in foreign currency and Zimbabwe dollar in respect of the same year of assessment is currently not provided for by the law.
The Zimbabwe Revenue Authority (“ZIMRA”) has given guidelines through public notices to try and address the issue of splitting the tax liability in local and foreign currency. Public notice 26 of 2020 provided for turnover of the taxpayer as the basis of apportionment on tax liability for taxpayers that earn both foreign currency and Zimbabwe dollars. Subsequent public notices also provided the same basis of apportionment of tax liability. Other public notices provided for an application process explaining the basis of computation to be adopted by the company. However, these notices are not law and as a result, there has been various methods of computation and split of income in the market because of lack of clarity on the methods of computation.
As a result, the legislature has sought to address that through the Midterm fiscal budget. It proposes that where a taxpayer earns part of his income in foreign currency, the taxpayer must file a separate return of income in foreign currency. Implying that two returns are to be filed when trade takes place in local and in foreign currency. It is further proposed that a taxpayer be assessed on the proportions of tax to be paid in Zimbabwe dollars or in foreign currency based on the proportions in which each part of the income was earned in the year of assessment. The deduction and allowances are to be apportioned between the United States Dollar (USD) and Zimbabwe dollar (ZWL$) income tax computations on the basis of income in USD and ZWL$. Income in foreign currency other than United States must be converted to United States dollar using the international cross rate of exchange on the date of the return. The legislature also proposes for the usage of the average auction rate applicable in a year of assessment for purposes of conversion anything from USD to ZWL or vice versa where necessary for purposes of computation of tax. For purposes of computing the Quarterly Payments (“QPDs”) it is proposed to use the average auction rate of the quarter.
The Finance Bill has attempted only to cure the last defect by operationalizing the collection of tax in foreign currency based on return or assessment made in foreign currency. It appears the proposed mid-term Finance Bill departed from the ZIMRA’s position that advocates for splitting tax liability on the basis of turnover through resolving the issue of taxable income received, earned or accrued in foreign currency but clarity is still misty. If QPDs are computed using the average auction rate of the quarter there are high possibilities of fluctuation of the rate which will impose that the general rule of 10% of the margin error becomes less feasible when splitting income using the split basis. The possibility of having QPDs functioning as before is likely high since the fluctuating rate will cause an automatic correction of the previous QPD when a new one is computed. The rationale behind the Minister’s pronouncements could probably be inspired by the rate and its connection with the estimate basis employed when coming up with a QPD. Furthermore, the use of average auction rates distorts historic cost accounting for purposes of tax by giving way to current value accounting as per International Accounting Standards 29 and 21. Though plausible, there is need for a further scrutiny of the clause in the proposed mid-term bill.