Complexities and admin issues of law on income tax in foreign currency

The Finance Act No.8 of 2022 which was gazetted on 24 October 2022 has provided for the submission of a separate income tax return for foreign currency transactions. This applies from the year of assessment commencing 1 January 2022. The Act has also simultaneously cured the defect in the previous law regarding the method of splitting of income tax liability where trading has taken place in Zimbabwe dollar and foreign currency. This is in line with the law on payment of income tax in foreign currency where trading has taken place in foreign currency which was introduced in 2009. All along, the law had not provided for the basis of tax split. The Finance Act therefore has operationalised the collection of tax in foreign currency by providing for the need to identify actual income and expenses in foreign currency. The total expenses in foreign currency and Zimbabwe dollar are to be expressed in common currency by converting one of them to the other using the average auction rate for the year of assessment. After which the total expenses are then split between foreign currency and Zimbabwe dollar using the proportion of incomes in foreign currency and Zimbabwe dollar. The same procedure is followed when computing provisional income tax liability (QPDs) except that the average auction rate to be applied is that of the quarter of the applicable QPD.  Whilst it is accepted that not every law is expected to be palatable to taxpayer, this new law will cause more harm than good to business and authorities.      

Accounting standards prescribe that an entity should choose their reporting currency for which its financial statements will be presented, normally this results in an entity settling for one currency and producing its financial statements in that presentation currency. The above in our view, implies therefore the need for taxpayers to maintain separate set of accounts for tracking of foreign currency transactions from ZWL$ transactions as proof of returns, possibly have two presentation currencies. Taxpayers must therefore configure accounting systems which should facilitate separation of transactions in foreign currency. Could this be yet another cost for businesses?

In line with the above requirement, the authority recently announced through Public Notice 68 of 2022 that taxpayers now have two separate Business Partner Numbers, one for USD returns and another for ZWL$ returns. Taxpayers will be expected to submit all the foreign currency returns and make payments for foreign currency tax liabilities through this Business Partner Number. The ZWL$ Business Partner Number will remain in place for the ZWL$ returns and payments thereof. The authority has therefore automatically generated foreign currency contract accounts for all tax heads which the effective date of registration has been prescribed as the date of first foreign currency payment. The authority will split returns already submitted into ZWL$ and foreign currency guided by the various declarations already submitted to ZIMRA.This means that even though a taxpayer had been making submissions of returns, the ZIMRA will make a further scrutiny on the submissions and splits. There is a possibility of administrative issues to loom on the part of the both the taxpayers and the authority. What then will happen to the businesses solely trading in USD, what happens to their ZWL BP number? Suffice to mention that could be an extra burden on the taxpayers especially on bringing sense around the effective date of return, which is the date of first foreign currency payment i.e., it is a first foreign payment to who by who? Is it Customer to Taxpayer or Taxpayer to ZIMRA.?

Could this new law on payment of income tax in foreign currency as well as the administrative issues surrounding it potentially scare away the investors or lure them closer? This is a question that is worth pondering on. Does the position projected by the new law follow the line of principles that the subject of Taxation is founded upon. Does it project clarity, equity, certainty, simplicity, flexibility, effectiveness, consistency, and coherence as well as administrative efficiency? If the purpose of the law falls away, the law itself falls away. This is a story for another day but is very much key in this law. The above had mentioned the aspect of administrative efficiency. Taxes should be easy to administer and cheap to collect. Therefore, in tax policy, design costs should be associated with the administrative options, both for the taxpayer and taxing authority.

The separation of accounts completely changes the traditional methodology of computing income tax of staring from net profit before tax. Firstly, the accounts which are prepared for all other stakeholders are rendered useless for tax purposes. The data for tax purposes will have to be regenerated. We can imagine how long it will take to produce a proper tax computation going forward. Is this not rendering audited accounts meaningless for tax purposes?  We further doubt in the absence of proper guidance from tax authority all the taxpayers will interpret the new law in the same way. For instance, part of the new law has stated that” Provided that if there is any need for the purpose of this subsection to convert any sum from Zimbabwe dollars into United States dollars or the reverse, the rate of conversion to be applied shall be…”. Some taxpayers could argue there was no need for these conversions. Is this part of the law not also likely to open floodgates for tax disputes? Others could still convert the foreign currency expenses already converted using the spot rate to Zimbabwe dollar using the average rates to facilitate apportionment of expenses. Another interesting aspect of this new law is that it applies from the year of assessment commencing 1 January 2022 and yet taxpayers only know about this now. How would they have expected to maintain separate accounts?  Does it then mean they are expected to revise the QPDs based on the new law? What if they had not yet separated books of accounts?

The list of what we see as complexities and adman issues of this law appears endless. The taste of the pudding is in the eating and only time will tell? In my view there is more harm than good to both taxpayers and authorities emanating from the new law.   

The Finance Act No.8 of 2022 which was gazetted on 24 October 2022 has provided for the submission of a separate income tax return for foreign currency transactions. This applies from the year of assessment commencing 1 January 2022. The Act has also simultaneously cured the defect in the previous law regarding the method of splitting of income tax liability where trading has taken place in Zimbabwe dollar and foreign currency. This is in line with the law on payment of income tax in foreign currency where trading has taken place in foreign currency which was introduced in 2009. All along, the law had not provided for the basis of tax split. The Finance Act therefore has operationalised the collection of tax in foreign currency by providing for the need to identify actual income and expenses in foreign currency. The total expenses in foreign currency and Zimbabwe dollar are to be expressed in common currency by converting one of them to the other using the average auction rate for the year of assessment. After which the total expenses are then split between foreign currency and Zimbabwe dollar using the proportion of incomes in foreign currency and Zimbabwe dollar. The same procedure is followed when computing provisional income tax liability (QPDs) except that the average auction rate to be applied is that of the quarter of the applicable QPD.  Whilst it is accepted that not every law is expected to be palatable to taxpayer, this new law will cause more harm than good to business and authorities.      

Accounting standards prescribe that an entity should choose their reporting currency for which its financial statements will be presented, normally this results in an entity settling for one currency and producing its financial statements in that presentation currency. The above in our view, implies therefore the need for taxpayers to maintain separate set of accounts for tracking of foreign currency transactions from ZWL$ transactions as proof of returns, possibly have two presentation currencies. Taxpayers must therefore configure accounting systems which should facilitate separation of transactions in foreign currency. Could this be yet another cost for businesses?

In line with the above requirement, the authority recently announced through Public Notice 68 of 2022 that taxpayers now have two separate Business Partner Numbers, one for USD returns and another for ZWL$ returns. Taxpayers will be expected to submit all the foreign currency returns and make payments for foreign currency tax liabilities through this Business Partner Number. The ZWL$ Business Partner Number will remain in place for the ZWL$ returns and payments thereof. The authority has therefore automatically generated foreign currency contract accounts for all tax heads which the effective date of registration has been prescribed as the date of first foreign currency payment. The authority will split returns already submitted into ZWL$ and foreign currency guided by the various declarations already submitted to ZIMRA.This means that even though a taxpayer had been making submissions of returns, the ZIMRA will make a further scrutiny on the submissions and splits. There is a possibility of administrative issues to loom on the part of the both the taxpayers and the authority. What then will happen to the businesses solely trading in USD, what happens to their ZWL BP number? Suffice to mention that could be an extra burden on the taxpayers especially on bringing sense around the effective date of return, which is the date of first foreign currency payment i.e., it is a first foreign payment to who by who? Is it Customer to Taxpayer or Taxpayer to ZIMRA.?

Could this new law on payment of income tax in foreign currency as well as the administrative issues surrounding it potentially scare away the investors or lure them closer? This is a question that is worth pondering on. Does the position projected by the new law follow the line of principles that the subject of Taxation is founded upon. Does it project clarity, equity, certainty, simplicity, flexibility, effectiveness, consistency, and coherence as well as administrative efficiency? If the purpose of the law falls away, the law itself falls away. This is a story for another day but is very much key in this law. The above had mentioned the aspect of administrative efficiency. Taxes should be easy to administer and cheap to collect. Therefore, in tax policy, design costs should be associated with the administrative options, both for the taxpayer and taxing authority.

The separation of accounts completely changes the traditional methodology of computing income tax of staring from net profit before tax. Firstly, the accounts which are prepared for all other stakeholders are rendered useless for tax purposes. The data for tax purposes will have to be regenerated. We can imagine how long it will take to produce a proper tax computation going forward. Is this not rendering audited accounts meaningless for tax purposes?  We further doubt in the absence of proper guidance from tax authority all the taxpayers will interpret the new law in the same way. For instance, part of the new law has stated that” Provided that if there is any need for the purpose of this subsection to convert any sum from Zimbabwe dollars into United States dollars or the reverse, the rate of conversion to be applied shall be…”. Some taxpayers could argue there was no need for these conversions. Is this part of the law not also likely to open floodgates for tax disputes? Others could still convert the foreign currency expenses already converted using the spot rate to Zimbabwe dollar using the average rates to facilitate apportionment of expenses. Another interesting aspect of this new law is that it applies from the year of assessment commencing 1 January 2022 and yet taxpayers only know about this now. How would they have expected to maintain separate accounts?  Does it then mean they are expected to revise the QPDs based on the new law? What if they had not yet separated books of accounts?

The list of what we see as complexities and adman issues of this law appears endless. The taste of the pudding is in the eating and only time will tell? In my view there is more harm than good to both taxpayers and authorities emanating from the new law.