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Tax Compliance in the Liberalised Foreign Exchange Environment

Posted on 10 June, 2019 at 16:22

By Luxon Kalonga

 

Following the enactment of Statutory instruments 32 and 33 of 2019 which brought to life the RTGS Dollars as a legal and functional currency in Zimbabwe, the taxation authorities put in place measures to ensure that taxation for compliance purposes would be measured in terms of the RTGS$, despite the actual remittances being still required in the original currency of trade in line with the provisions of the 2019 National Budget Statement. In this article, will outline how the changes affect players in the Non-Profit Sector.

 

1          Pay-As-You-Earn (PAYE)

For the period 18 November 2018 to 28 February 2019, the RTGS balances were still considered at par with the US Dollars hence all remuneration was calculated using the existing Tax Tables and remittances were in the currency of remuneration.

 

When the Interbank Market for RTGS Dollars was introduced by SI 33 of 2019, Zimbabwe Revenue Authority (ZIMRA) issued a public notice specifying that any remuneration in foreign currency should be converted into RTGS$ at the prevailing interbank market exchange rate and the tax tables are used to calculate PAYE on the RTGS$ taxable income. Any allowable deductions and credits earned are also converted to RTGS$ where necessary. The resulting RTGS$ PAYE should be converted to the original foreign currency and payments should be deposited in the Zimra Nostro FCA accounts.

 

As a result of the interbank rate, some employees were moved to a higher tax bracket and hence have to pay a greater proportion of their income to Zimra. For example, an employee earning taxable remuneration of US$1,450 was moved from the 20% tax bracket to the 25% tax bracket in the payroll for March 2019. For employers, however, this measure has not effect since the total remuneration would still be the same. With the fast depreciating RTGS$, the USD disposable incomes are continuously being decimated and the tax bracket moves higher and higher.

 

One of the tax principles applied in coming up with the progressive tax tables is the Equity Principle which basically states that individuals in the same circumstance should pay equal taxes, all things being equal. It is arguable that the new tax system might going against “horizontal equity”… An individual earning the same amount of remuneration is now taxed more despite there being no change in the tax tables. Does it mean that someone’s ability to pay taxes increases with the proportion of foreign currency they earn? I am sure USD earners have more questions than answers regarding this regulation.

 

2          Value Added Tax (VAT)

ZIMRA also issued a directive whose effect is that all output and input VAT figures for tax purposes should be converted to RTGS$ on the date of transaction and one return should be submitted in RTGS$ since it is the functional currency. However, on settlement of VAT, US Dollar taxes should be separated from RTGS taxes and separate payments made into the Zimra Nostro FCA and RTGS FCA accounts respectively. This affects non-profit organisation to a lesser extent because most are not registered for VAT because of their non-trading nature.

 

However, according to Value Added tax Act [Chapter 23:12], Section 45A, development partners and their agents are entitled to VAT refunds on goods and services purchased under Aid or Technical Cooperation Agreements approved by the Minister of Finance. For purposes of compliance, such development partners and agents should convert their purchases to RTGS$ on the date of transaction and submit their VAT Returns in RTGS Dollars. Payment should however be made in US Dollars for all transactions completed in US Dollars.

 

Most development organisations normally perform their transactions in US Dollars, hence the requirement to convert all transactions to RTGS Dollars has brought extra administrative burden which might saddle their budgets.

 

3          Other Taxes

Similar provisions were put in place for Customs Duty and Withholding Tax and ZIMRA sought to adjust to the new functional currency.

 

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There are other arguments on the legality of the regulations, especially on PAYE where employees feel prejudiced by the provisions. Perhaps there ZIMRA has something else up its sleeves to make compliance better for taxpayers or the authorities. In this volatile environment it is imperative for us to keep our ears on the ground for any further implications.

 

KFM Consultants will be hosting a breakfast meeting on Taxation for NPOs in the New Foreign Exchange environment on the 27th of June 2019. Contact Caroline on caroline@kfm.co.zw to hear more information about it.

 

 

Bibliography

Ministry of Finance and Economic Development. (2018, November 22). The 2019 National Budget Statement. Austerity for Prosperity. Retrieved November 30, 2018, from http://veritaszim.net/sites/veritas_d/files/Zimbabwe%202019%20National%20Budget%20Statement%2022%20Nov%202019.pdf

Reserve Bank of Zimbabwe. (2018, October 1). Monetary Policy Statement. Strengthening the Multi-currency System for Value Preservation and Price Stability. Retrieved June 10, 2019, from https://rbz.co.zw/documents/mps/mpsOct2018.pdf

The Government Gazette. (2019, February 22). Statutory Instrument 32 of 2019. Exchange Control (Amendment) Regulations, 2019 (No. 6). Retrieved March 13, 2019, from https://www.rbz.co.zw/documents//acts/SIs/Exchange-Control-Regulations-Amendment-S.I.-32-of-2019.pdf

The Government Gazette. (2019, February 22). Statutory Instrument 33 of 2019. Presidential Powers (Temporary Measures) (Amendment of Reserve Bank of Zimbabwe Act & Issue of Real Time Gross Settlement Electronic Dollars (RTGS Dollars)) Regulations. Retrieved March 13, 2019, from https://www.rbz.co.zw/documents/acts/SIs/RTGS--S.I.-33of-2019.pdf

Zimbabwe Revenue Authority. (2019, April 17). Public Notice: Submission of PAYE returns and payments. Retrieved May 31, 2019, from https://www.zimra.co.zw/index.php?option=com_content&view=article&id=2944:public-notice-submission-of-paye-returns-and-payments&catid=5:notice&Itemid=7

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