VAT implication of services supplied to a non-resident.

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Value Added Tax (VAT) is an indirect tax on consumption, charged on the supply of taxable goods and services. It is the responsible of persons who are registered for VAT (also known as registered operators) to charge and collect VAT on behalf of the fiscus. Exception applies only with regard to importation of goods or services; in which case it is the importer whether individual or company is liable to pay the VAT to the Zimbabwe Revenue Authority.  Registered operators must charge VAT on sales to their customers, unless the goods are exempt in terms of the law. There are two rates for VAT 14.5% and 0%.  Goods or services charged to VAT at 14.5% are referred to as standard rated supplies and those charged at 0% are called zero rated goods or services. Zero rated category is mostly applied to pro poor goods and exported goods and services. Many a time however people assume that if services are supplied to a non-resident person there are automatically zero rated because there are export sales.  It is the purpose of this article to demystify this misconception so as to reduce the possibility of misunderstanding which could give rise to some tax ramifications.

 

As stated earlier, exported services are mostly zero rated. In order to qualify for zero-rating, the place of consumption of the services and the residence status of the recipient are some of the key considerations.  In general services supplied to non-resident persons namely exported services are zero rated, among them are the services supplied directly in connection with land, or any improvement thereto, situated in any export country; or the services are supplied directly in respect of movable property situated in any export country at the time the services are rendered. Also, zero rated are services that are supplied for the benefit of and contractually to a person who is not a resident of Zimbabwe and who is outside Zimbabwe at the time the services are rendered. It was held in CA (Pvt) Ltd vs The Commissioner General of the ZIMRA HH 343-19 that the phrase “the benefit of and contractually to” are not qualified by such words as the “sole” or “dominant” or “main” or one of the main” and therefore do not require the Commissioner or on appeal the Fiscal Appeal Court to assess the extent of the “benefit of” and contractual link to the affected taxpayer. It further held that the lack of such qualification favors taxpayers because the words must be given a wide ambit and secondly if at all the words could be construed as ambiguous then the contra fiscum rule would favour interpreting them in favour of the taxpayer.

 

Meanwhile, services which are supplied directly in connection with (i) land or any improvement thereto situated inside Zimbabwe; or (ii) movable property situated inside Zimbabwe at the time the services are rendered are standard rated. The rationale for standard rating is that the services are being consumed in Zimbabwe. This rationale was upheld in XO Africa Safaris v CSARS (395/15) [2016] ZASCA 160. The taxpayer was denied zero rate because the supply was made to people who enjoyed the services whilst in South Africa. The taxpayer, assembled tour packages for foreign tour operators (FTO’s) arranging for group and individual foreign tours to South Africa which included accommodation, travel, restaurant bookings and recreational activities, such as golf, safaris, whale watching etc. to be provided in South Africa. It had a contract with FTO’s and a corresponding contract with local supplies for the supply of the packages. It was held that the fact that XO Africa Safaris provided local packages in South Africa whether through other people or not, zero rating is inapplicable since the supply was not directly to the FTO, but to other persons who were in South Africa at the time that the goods and services were provided.  This therefore implies that if a Zimbabwean tour operator sells a tour to a foreign tour operator, the services are supplied to a non-resident, but if the actual tourists benefit from the services in Zimbabwe, the supply cannot be zero-rated. The same applies to accounting services rendered to a local branch of a non-resident company. This is because the non-resident has a presence (the branch) in Zimbabwe while the services are rendered. Zero rating however will be applied on the supply, for example of a tax opinion by a Zimbabwean resident to a foreign company if such services were rendered while the foreign company did not have any presence in Zimbabwe.

 

In conclusion to qualify for zero rating, taxpayers should look at the services supplied, to whom they were contractually supplied, the resident status of recipient of services and whether the person was present in the country when the services were rendered. We urge you to thoroughly look at your contractual arrangement with non-resident persons before you can conclude on zero rating the services as it is not always straight forward that all arrangements with non-resident persons are zero rated.

 

Meanwhile Matrix Tax School invites you to take part in the Accounting for Tax in Financial Statements course. The course commences on the 18th of August 2021 and is for a duration of 4 weeks. Marvellous Tapera is the Founder of Tax Matrix (Pvt) Ltd and the CEO of Matrix Tax School. He writes in his personal capacity.

 

Whether not to tax motoring benefit in the wake of Covid 19?

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The employment relationship is coupled with a number of duties and obligations by either party but one other aspect that employers use to motivate their employees is that of fringe benefits because they reduce expenses for employees. Fringe benefits are brought into gross income in terms of s8 (1) (f) of the Income Tax Act. The law defines a benefit or advantage in relation to employment as the value of an advantage or benefit in respect of employment, service, office or other gainful occupation or in connection with the taking up or termination of employment, service, office or other gainful occupation. This implies anything that has saved an employee from taking out of his or her own pocket. Common employment benefits in Zimbabwe include housing, use of furniture, motor vehicle, loan, telephone or cellphone, domestic worker or gardener, security services, fuel coupons, school fees, passage benefit, medical cover, pension cover, holiday, airtime and entertainment allowance. With the coming in of Covid 19 and working from home becoming a new norm, taxability of some of these fringe benefits has come under the spotlight and other aspects that may not necessarily fall under the fringe benefits bracket may have since become relevant. We take stock of motor vehicle use in the wake of Covid 19 and build a case whether to continue or discontinue taxation of this benefit.

Motoring benefit arises where an employee is granted the right of private use of the employer’s vehicle. Private usage of the vehicle includes travelling between home and place of work, the use of the vehicle during weekends and holidays. In the case of Butcher it was held that the mere parking of the vehicle at the employee’s residence will give rise to car benefit. Meanwhile, the Income Tax Act does not provide any other method of reducing the deemed cost for usage of the motor vehicle except if it was used was less than the year of assessment. It follows therefore that employees will be taxed for use of motor vehicles during the lockdown for as long as they are or were using the vehicles for personal use. A taxable benefit will generally arise on each day when the car is garaged at the employee’s residence—even if the employee does not use the car on that day. In other words, if employees are not using a car in the way that they usually would because of COVID-19 restrictions, a liability for PAYE can still arise. For most employees, working from home came as a cost-cutting measure but those employees with company vehicles will still incur the tax for use of the vehicle

The Zimbabwe Revenue authority will not see cars as “available” for benefit-in-kind tax purposes if employees are able to hand the car back to their employer – by posting their keys, for example. Holding on to a company car cannot help the employee as long as the car is garaged at the employee’s premises. Adjustments are usually made to the benefit-in-kind tax deductible from an employee’s salary if the company car was not available; if they were in for repair, for example. In practice this does apply if the period the car is unavailable is less than 30 days.

The situation is different when it comes to private mileage fuel. Whilst the company car cannot be difficult to withdraw the private fuel benefit can be, as this does not need a physical return of the fuel card. It will, however, need a change of policy and employee agreement to proportionally reduce their benefit while the car remains unavailable.  Employers should also consider revising their policies around private fuel benefit in order to prevent employees from being taxed on a benefit they cannot use. To facilitate the process employees should keep logbooks and record the number of kilometres travelled when the vehicle is used for business purposes. The number of kilometres travelled when the vehicle is used in a private capacity is therefore equal to the difference between the total number of kilometres travelled and the number of kilometres travelled when the vehicle is used for business purpose. The amount of the taxable benefit corresponds to the ratio of the cost of the vehicle and the kilometres travelled, multiplied by the private kilometres. Preferably, this should be calculated monthly.

It can therefore be concluded that the benefit arising from the right of use of company cannot be diminished by having the car parked at home owing to Covid 19. Our laws are not flexible enough to remove this benefit due to circumstances imposed on employers and employees by Covid 19. Meanwhile motoring benefit is not the only one affected by the restrictions. There are other benefits such as the airtime, accommodation etc which would need to be evaluated case by case. Employers and employees should therefore be vigilant to ensure they do not continue to pay taxes on a benefit which has been made redundant due to Covid 19 or other like circumstances. Considering the novelty nature of the COVID 19 and lack of preparedness for it in terms of laws and administrative systems, we implore the authorities to provide guidance on the current laws so that they suit the times and realities that taxpayers are facing. This is to ensure certainty in the tax treatment of benefits as the circumstances in which the laws were drafted have since been shifted by the new order.

Authorities clampdown on taxpayers

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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.

Taxpayers caught in the mix as they await passing of Finance Bill

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The Finance Act is one of the most crucial pieces of legislation in Zimbabwe as it guides businesses and the economy at large. Taxpayers look forward to the announcement of the Fiscal Budget and consequently the Finance Bill as it normally brings changes that affect them in their order of doing business. With the setting in of Covid 19, the Finance Bill 2020 has been stalled due to Parliament having to halt its sittings more frequently. The law-making process as envisaged in section 131 of the Constitution has up to 9 stages and this means it may take a bit of time before the Finance Bill is passed into law. One of the challenges this has brought to the business arena is whether or not to adopt the new tax rates or to use the old rates given that the Bill has not yet been passed into law. The ZIMRA recently published Public Notice 52 advising taxpayers to adopt the tax tables provided for in terms of the Finance Bill.

The Finance Bill, 2020 proposes to raise tax free threshold to ZWL$5,000 p.m and top rate of 40% for amounts exceeding ZWL$100,000 per month. It also proposes two assessment years 1 January 2020 to 31 July 2020 and 1 August 2020 to 31 December 2020. The implication is that for 2020 two ITF16s will be filed. Although the ZIMRA has announced so, legally speaking the Finance Bill is not yet law and neither is Public Notice by the ZIMRA. The law-making process is provided for in terms of s131 of the Constitution of Zimbabwe and legislative provisions only come into force upon being gazetted. There are, however, practical considerations involved in the ZIMRA’s stance of adopting the rates as provided for in terms of the Finance Bill.  For Instance, the PAYE tax tables are for the benefit of the taxpayer.

Adoption of the new employment tax tables for the month of August to December as published by ZIMRA automatically entails acceptance of two tax years of assessment for 2020. Then ITF 16 which was due for submission on the 31st of August must have been submitted taking into account the two years of assessment provided in the Finance Bill still to be gazetted. It is trite at law that one may not approbate and reprobate. Once an acquiescence is made to the status quo, either expressly, or by some unequivocal act wholly inconsistent with an intention to contest it, one cannot change his position when it suits them. It is a principle known as peremption which is aptly described by Mullins J in National Union of Metalworkers of SA and Others v Fast Freeze held inter alia that: “Peremption is an example of the well-known principle that one may not approbate and reprobate, or, to use colloquial expressions, blow hot or cold, or have one’s cake and eat it. Peremption also includes elements of the principles of waiver and estoppel.”  This entails that taxpayers are bound by the tax tables and regulations attached thereto they used in filing the August return. However, one may argue that the contra fiscum rule may potentially be adopted in order to interpret the law in favour of the taxpayer. The legislature is burdened with the responsibility to make laws and taxpayers must not be punished for the legislature’s drag in providing the laws. On this basis a taxpayer cannot be penalised if they do not adopt provisions which are not in their best interests.

There are, however, likely to be penal measures attached to using the old tax tables, despite not having been outlawed by a gazzetted law. Taxpayers face the risk of being penalised should they rely on using the tax tables arguing legality thereof. The adoption of the tax tables entails an automatic adoption of associated provisions. It bars the taxpayer from denying the application of the other provisions on submission of ITF 16. The drawback however is that it may cause unnecessary legal debate which may result in the taxpayer ultimately losing in terms of penalties and interest given the time frame it takes to resolve a tax dispute. Nonetheless we foresee a situation in which the laws will be backdated to the 1st of August which are the intended dates for these laws to come into effect. Accordingly, despite not yet being passed into, taxpayers are better of abiding the ZIMRA Public Notice in order to avoid disputes in future.

Payment of taxes in currency of trade: some practical considerations

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Payment of taxes in foreign currency has been part of our law from as far back as February 2009 since the country’s adoption of the multi-currency system. It was never a topical issue until 2018 when the local currency was introduced and bank accounts were separated into RTGS FCA and Nostro FCA.  From 2018 to date, it has been a roller-coaster ride for tax payers. The situation was further complicated in June 2019 by the phasing out of the multi-currency system with the introduction of use of local currency only. Whilst the law did phase out the multi-currency system, in practice entities and individuals continued with the use of multi-currency. This resulted in the ZIMRA issuing public notices to the effect that taxpayers should remit taxes in currency of trade despite illegality of trading in foreign currency. In 2020, we have seen the use of foreign currency being re-introduced partially.

Recently, the ZIMRA and the RBZ issued a statement emphasising that entities should remit taxes in currency of trade, failure of which will result in all taxes being deemed to be in foreign currency. This was triggered by the fact that most businesses have and some are still charging in foreign currency but invoicing in ZWL thus resulting in them remitting less tax. There are VAT practical challenges involved in invoicing where payments are made in two currencies for a single transaction. It appears that operators are required to issue invoices for each currency used in sales. However, the time of supply rules as amended provide that VAT shall be charged on the earlier of invoice or payment. In the case of a supply of a moveable goods, the time of its removal from the place of sale; in the case of a supply of an immoveable goods, the time the recipient takes possession of it and in the case of a supply of a service at the time the service is performed; whichever time is earlier. A possible challenge is where an invoice has been issued, operator pays VAT on an invoice that has not been settled only for the payment to be made in both local and foreign currency. This may create VAT liabilities in foreign currency despite the amount having been received in local currency. The VAT laws place more emphasis on what has been received for purposes of declaration and payment of output VAT. A customer who pays for goods and services in foreign currency may potentially claim input tax in foreign currency. The ZIMRA requires proof showing input tax was incurred in foreign currency. Therefore, an operator that wishes to claim input tax in foreign currency will have to produce an invoice denominated in foreign currency and the proof of payment in foreign currency. Failure to produce the invoice or proof of payment in foreign currency will result in the input tax claim being denied.

The stance taken by the regulatory authority is that incorrect declaration by a registered operators will result in all income being deemed to be foreign currency income and all tax to be paid in forex and not apportioned. Companies will need to be vigilant in declaring their taxes and even more so, there is need to keep all documentation to avoid heavy penalties that come with non-compliance. The ZIMRA has indicated that falsification of records attracts a penalty of 100% of the tax due. There has also been an indication that all cash must be banked. This is probably one of the measures to ensure that taxpayers truthfully declare their taxes. Practically, this may be a challenge given the history of events which saw people’s foreign currency accounts being abruptly changed to ZWL$. The trust relationship between the government, banks and ordinary citizens may have been ruined by the past sequence of events which resulted in citizens losing out value for their moneys they had deposited into bank accounts. We however, anticipate this being addressed by clients insisting on invoices being in currency of trade which invoices they will use to claim VAT.

COVID-19 implications on tax treaties

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The COVID-19 restrictions affect many people and businesses and could raise tax issues, especially in cross-border situations where employees are unable to physically perform their duties in their country of employment. These issues may have an impact on double taxation agreements. Recognizing this, the Organisation for Economic Cooperation and Development (OECD) Secretariat has issued guidance on several tax issues arising from the COVID-19 crisis.

In general, a state cannot tax profits of an enterprise of another state unless that enterprise carries on its business through a permanent establishment situated therein. As a result of the current COVID-19 crisis businesses may be concerned that their employees will create a PE for them in another jurisdiction because of a change in working location, which would trigger new filing obligations and tax obligations.  A PE must have a certain degree of permanency and be at the disposal of an enterprise to be considered a fixed place of business through which the business of that enterprise is wholly or partly carried on. In the guidance the position is taken that an employee who, because of the extraordinary nature of the COVID-19 crisis stays at home to work remotely should not create a PE for the business / employer to the extent that it does not become the new norm over time. This is, either because such activity lacks sufficient degree of permanency or continuity or because the enterprise has no access or control over the home office (and the enterprise in normal circumstances provides an office which is available to its employees).

Linked to this is whether the employee temporarily working from home for a non-resident employer could qualify as a dependent agent PE. Although the activities of an employee may create a PE for an enterprise if the employee habitually concludes contracts on behalf of the enterprise, OCED has stated that its unlikely that the employee who, only temporarily and forced by governmental measures works from home could be considered to ‘habitually’ conclude contracts in his home state on behalf of the enterprise. It stressed a PE should be considered to exist only where the relevant activities have a certain degree of permanency and are not purely temporary or transitory. However if the employee was already habitually concluding contracts on behalf of the enterprise in his home state COVID-19 crisis would not exempt him/her. A building site or construction or installation project of an enterprise in another state will in general constitute a permanent establishment only if it lasts longer than a certain period (under the OECD Model more than 12 months). According to the OECD Secretariat, the duration of a temporary interruption of activities on those sites or projects due to the COVID-19 crisis should be included in determining the time those sites or projects last, and therefore will affect the determination whether a construction site constitutes a PE.

The COVID-19 crisis may raise concern about a potential change in the “place of effective management” of a company (for example because of inability to travel of chief executive officers and other senior executives). According to the guidance, it is however unlikely that the COVID-19 crisis will create any changes to an entity’s residency under a tax treaty, in essence because all relevant facts and circumstances should be examined to determine the “usual” and “ordinary” place of effective management, and not only those that pertain to an exceptional and temporary period such as the COVID-19 crisis. The measures to mitigate the economic impact of the COVID-19 crisis may contain stimulus packages adopted by governments (e.g wage subsidies to employers) to keep employees on a company’s payroll. According to the issued guidance by the OECD Secretariat, these payments should in a cross-border situation be attributable to the place where the employment used to be exercised. The guidance further makes clear that a change of place where cross-border workers exercise their employment may also affect the application of the special provisions in some bilateral treaties that deal with the situation of cross-border workers, and that may contain limits on the number of days that a worker may work outside the jurisdiction he or she regularly works. A question not specifically addressed by the OECD Secretariat is whether the COVID-19 crisis may have an impact on the “183-days rule”. Income of an employee working in another state should not be taxable in the source state if (amongst others) the employee is not present in that state for more than 183 days in any twelve-month period. Travel restrictions due to the COVID-19 virus, may potentially have an impact on the 183-days rule and taxing rights between jurisdictions. Finally, the guidance addresses the impact of the COVID-19 crisis on the residence status of individuals. Issues could arise when individuals are, for example, stranded in a host country due to travel restrictions or temporarily return to their previous home country. It is, according to the guidance, however unlikely that in these specific temporarily and extraordinary circumstances, the COVID-19 crisis will affect the treaty residence position of the individuals.

The guidelines issued by the OECD Secretariat are only persuasive in as far as they cover the generalised tax implications of the treaties of any nationalities.  In view thereof, although not a member of the OECD, Zimbabwe may adopt these guidelines given the novelty nature of COVID 19 and lack of laws addressing the COVID 19 situation.

Are you ready for first time submission of Transfer Pricing Returns?

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MNEs and companies with associate transactions will be required for the first time in Zimbabwe to file Transfer Pricing returns. Disclosure is also required when taxpayer has transactions with tax havens i.e. low tax jurisdiction countries. The return is to be filed at the same time with the Income Tax Return (ITF12C) on the 31st of August 2020, being the new submission date for 2019 income tax returns following an extension granted by the government owing to COVID 19. 

The ZIMRA announced in March2020 that it has received assistance from the ATAF International Taxation team in coming up with an advance version of the transfer pricing return that taxpayers are directed to file with their annual self-assessment corporate income tax return for the year ended 31 December 2019. The return supplements the new transfer pricing reporting requirements Zimbabwe introduced in 2019.  The transfer pricing return must be completed by all taxpayers with international and/or domestic related party transactions. The information requested in the return will assist the Zimbabwe Revenue Authority (ZIMRA) to identify and assess potential risks to Zimbabwe’s tax base from abusive transfer pricing practices and ensure that ZIMRA focuses its resources on the highest risk cases. This will provide greater tax certainty and reduce compliance costs for complaint taxpayers in Zimbabwe (https://www.ataftax.org/zimbabwe-introduces-new-transfer-pricing-return-for-taxpayers).

Related party or associate transactions are those entered into with near relatives, between companies under the same control (affiliates or sister companies), a partner and fellow partner in a partnership, trustees with their trust or trustee and beneficiary (ies) etc. A company is deemed controlled by a person when that person alone or together with 1 or more associates or nominee controls the majority of the voting rights of the capital in the company whether directly or through one or more interposed companies, partnerships or trusts. Control is deemed also if the person alone or together with associates direct or indirect influence the policy or operation of the company. When you have engaged in the purchase or sale of goods or services, loan transactions, sale or leasing of intangibles, or intra group service agreement etc with your associate you are required to prepare the necessary Transfer Pricing Documentation regardless of transaction value.

Transfer pricing is not an exact science. Therefore, tax authorities can impose TP adjustment requiring taxpayers to have strong arguments that intra-group transaction prices were at arm’s length. Transfer pricing affects cash flow, investment decisions and performance indicators. The additional corporate tax imposed by the tax authorities will affect cashflow, investment decisions, certainty and profitability. Other consequences include adjustment for customs value – rejection of transfer prices declared by a company and impose different price levels. Transfer pricing can involve revenue or expense adjustments which may trigger double taxation especially where a corresponding adjustment has been denied to the counter party or by the other jurisdiction. Additional taxes in the form of withholding taxes and accompanying penalties will also arise.  Finance Act no 1 of 2019 has explicitly stated that 100% penalty will apply on additional tax arising from TP adjustments if there is evidence that the avoidance, reduction or postponement of the liability to tax was actuated by the use of fraud or evasion. In the event that there is lack of contemporaneous transfer pricing document to support the transaction giving rise to the amendment assessment despite absence of fraud or evasion, a 30% penalty level will apply on the assessed tax.  The same applies to a taxpayer who has not complied with transfer Pricing Guidelines. If the taxpayer has done all what it can including having in place Transfer Pricing documentation which comply with Transfer Pricing Guidelines and there is no fraud or evasion, but nonetheless a TP assessment is made by the ZIMRA, a reduced penalty level of 10% will apply on the shortfall tax.  Besides the penalties as aforesaid, tax default is subject to interest charge. A new interest regime which provides for 25% interest for any month or part thereof during which tax remains unpaid was gazetted through SI282 of 2019 to take effect from 1 January 2020.  This interest has not discriminated between foreign currency and ZWL$ taxes and may prove a heavy burden for the defaulting taxpayers. Whilst there is a leeway for the Commissioner General to adjust the penalty based on a taxpayer representations there is limited scope with regard to interest.  Interest is meant to compensate the fiscus for time value of money and the Commissioner General has no authority whatsoever to waive it except through an Act of Parliament. Other indirect penalties include damaging of business image.

Where for some reason the Transfer Pricing documentation has not been prepared and is impractical to complete the exercise by the due date, it may be worth writing to the ZIMRA seeking for an extension of time. The letter for seeking extension can only be considered if done before the due date.  For those who have already prepared their TP policy documents, they must ensure that transactions as reflected in the tax returns pass the arm’s length test. If there is a divergence between transfers pricing policy document including underlying contracts and the financial records (accounts) it may be necessary to make adjustments to the income tax return before return submission.  Even if price, terms and conditions are similar to those of independent parties, TP documentation is still required because it is mandatory. Without TP documentation a taxpayer will not be able to evidence to ZIMRA that associate transactions are occurring at arm’s length. There are however practical challenges and other considerations for completion of return, adjustments and other matters underlying TP returns which require face to face discussion with an expert and you are urged to consult with your tax expert.

Tax deferments a necessary measure to save businesses

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The covid-19 pandemic has caused several disturbances and serious disruption to the business, not mentioning its impact on people’s lives throughout the globe. There are several measures some countries including Zimbabwe have undertaken in order to reduce the impact of the covid-19 on people and businesses. What appears missing for Zimbabwe is the most immediate and critical government intervention measure to address cashflow challenges currently facing most businesses following Covid-19, which is affecting their ability to honour current tax debts to the ZIMRA. Henceforth, some businesses have since filed applications for tax deferments but with little success.

As part of the measures for covid-19, the Minister of Finance through a press statement made on the 30th of March 2020 provided for  the ZIMRA to process requests for extension of time period within which tax is payable without accruing penalties and interest. This seems to suggest that the government is not prepared to give a blanket moratorium on tax deferments but to consider the applications on a case by case basis because it also needs the money. It however appears even the granting of tax deferment applications is not happening on the ground. In the normal course of business, failure by taxpayers to pay for their tax obligations leads to interests of 25% per month or any part thereof, as revised in the Finance Act no 3 of 2019 (Chapter 23:04) and also 100% penalty on the tax liability. When a tax deferment application is denied it implies that the business cannot be guaranteed that there will be no consequence of an unapproved deferment thereby causing a lot of uncertainty. Whilst it is appreciated that the government of Zimbabwe needs cashflow to pay for its recurrent and further expenditure brought about by covid-19, our view is that where a genuine cash flow challenge is presented by a taxpayer to the ZIMRA it is in the interest of the fiscus to allow such deferment. The cost is much bigger going forward, businesses straddled with debts are likely to shut down resulting in retrenchments which have the effect of placing a huge burden on the government. We have seen daily the City Councils and the vendors playing catch and mouse game, and it’s all because there are no jobs for these people. The situation will be compounded this time around because Covid-19 is affecting the whole world. For Zimbabwe, its people in the diaspora have already started coming back into the country putting a further strain on the economy. More people will need recuse packages which will come at a cost should the government fail to take timely and necessary intervention measures. A month of lock down has already witnessed casualties with some businesses not affording to honour April 2020 salaries, others paying 50% or some other percentage of those salaries, some retrenchments have already taken place, some companies within the tourism and hospitality have already announced business closure for the next three months and every day companies weighing the options to retrench in order to survive going forward.  We all don’t know when this Covid- 19 will end and better safe companies are taking serious contraction measures.

If a total moratorium of payment of taxes cannot be achieved, we implore ZIMRA to consider all genuine covid-19 cash flow constrains and grant extension where the case permits. A blanket denial of the requests for extensions is not beneficial to both the fiscus and the taxpayer. There is life after covid-19 and it is important to help businesses to make it through this period and beyond by granting fiscal reliefs to businesses in order to save jobs. Whilst the efforts by the authorities such as the deferment of the submission of the ITF 12C for 2019 and customs rebates granted on some products are much appreciated gestures for the business, tax deferments are much more appreciated because they relate to the current situation. Meanwhile, we implore the President to also consider announcing an employment tax holiday or incentives of some sort. For example, a measure such as exempting PAYE on at least 50% of employee earnings for a period of 3 month starting April 2020, linked to job retention may go a long way in saving jobs. This has a much wider and positive effect to the nation compared to the selective rental moratorium. PAYE is a more direct cost to the business whereas rentals can be negotiated or one can seek alternatives. 

Claims of VAT on imported services by registered operators

by with No Comment Uncategorized

Prior to 2019, only persons who were not VAT registered operators and those consuming or utilising imported services to produce exempt supplies would bear the burden of VAT on imported services. This changed with effect from 1 January 2019 when the government extended the tax burden to all importers of services notwithstanding some may be VAT registered operators. The Finance Act 3 of 2019, has restored the position prior to January 2019 by ensuring VAT registered operators do not suffer the burden of VAT on imported services. Therefore VAT on services imported by registered operators and utilised, consumed or used imported services in the production of non-taxable supplies is reclaimable. At issue is the mechanism for reclaiming this VAT by registered operators and this is the subject matter of discussion.

The Finance Act no 3 of 2019 amends the definition of input tax to include VAT on imported services (VIS). It also amended the section of the VAT Act which deals with claiming of input tax, to allow the claiming of VAT incurred on services imported by registered operator if such services are utilised, consumed or used wholly for the purpose of consumption, use or supply in the course of making taxable supplies. To the extent the services are acquired by the registered operator partly in the production of taxable supplies and some other purpose the only part of VAT on imported services to be claimed is that which relates to production of taxable supplies. The basis of apportionment should be fair and reasonable and in this case it should be based on the invoice value of the imported services.   

The law requires that the registered operator to be in possession of an invoice and to have paid the tax to the ZIMRA to qualify for the input tax claim. The payment should be made to the ZIMRA within 30 days of time of supply of the imported services. The time of supply is defined by the date of the invoice or the date the supplier of the services is paid, whichever comes first. The mechanics however are that the operator will declare the VIS on the VAT 7 or 9 return and remit this tax to the ZIMRA before he can claim it as deduction. This creates financial implication for the operator due to deferral of input tax claim until the VIS is fully paid to the ZIMRA. Registered operators should note further that VIS is payable within the 30 days of time of supply whereas input tax can be claimed any time after the VIS has been paid to the ZIMRA. There is no limit as to how far in the future it can be claimed because the claim is made on the basis of an invoice as opposed to a tax invoice whose life span for purposes of the claim should not exceed 12 months from the date of the tax invoice. The amendment by the Finance Act no 3 of 2019 has therefore reinstated the position of registered operators prior to 1 January 2019 except that it comes with some administrative burden and cashflow implications of having to declare and pay VIS first to the ZIMRA before a claim can be made. Before 1 January 2019, registered operators did not have to declare and pay VIS to the extent the services were utilised or consumed by them in the production of taxable supplies.

The new law creates an administrative and cashflow burden on the part of the registered operators of having to pay the VAT first to ZIMRA before they can make the claim. This adds to the cost of doing business for the registered operators, let alone the cashflow implication compared to the position that existed prior 1 January 20219.  Companies need working capital to survive the current economic onslaught. Any leakages would worsen the situation for the already struggling companies.  Additionally. Zimbabwe is the only country in the world that made registered operator to pay VIS, which was the case in 2019 and even now it among the few countries that requires VIS to be paid and then claimed later. These features are unique throughout the world and actually place our businesses at less competitive edge compared their counter parties. This could impact on our exports. The country needs foreign currency and growth in production and anything short of this does not tell a good story of the country. Besides, the claim may prompt investigation of taxpayers’ affairs by the ZIMRA from time to time, resulting in management time spent on defending tax issues. The Minister should consider restoring position of prior to 1 January 2019 or allow concurrent claiming and declaration of VIS on the same return for the sake of easy of doing business and promoting business growth.