Legislative changes withholding taxes
The Finance Bill after the 2022 Zimbabwe National Budget was announced, was passed into law on December 31, 2021 and the new Finance Act brought about a number of changes including those on withholding taxes. This article seeks to look at what changed and the possible implications of those changes to withholding taxes.
What has changed?
• Repeal of the definition of “contract” and the substitution of the definition of contract to define the applicable thresholds in US$.
The minimum threshold for this law to apply is now stated in both ZW$ and US$.
The new thresholds are ZW$130 000 and US$1 000
The new definition does not seem to put a time period over which this threshold applies
• Increase in the percentage of taxes to be withheld from 10% to 30%
Implications of the changes?
•
Foreign denominated thresholds Confidence in the local currency
The denomination of the thresholds in both ZW$ and in US$ signals that the economy is significantly operating in US$ or indexing its transactions in US$, to a point that laws are increasing capturing the specific US$ implications rather than just stating the local currency implication and allowing conversion from the currency in which transaction will have occurred. Furthermore, this stating of amounts in both US$ and ZW$ signals or confirms inflation on the local currency, as the local currency amounts must be changed from time to time. In the process a disparity in the foreign currency exchange rate system and lack of confidence in the local currency is inadvertently signalled. Legislating for temporary challenges The mono or dual or multi-currency system challenges faced by Zimbabwe, are protracted but may not be permanent. The changes to the Taxes Act and other Acts in reaction to legislative changes around currencies will result in “bubblegum” legislation that is likely self-contradictory and often unnecessarily complex to interpret. These are not attributes of a good tax system.
Timeframes
The minimum thresholds for which section 80 must apply to a taxpayer are cumulative and not per transaction. Previously the Act specified that this threshold applied over a year of assessment. This new law does not specify the period over which the threshold applies. The impact of it is very low since the implementation is likely to be over a year of assessment.
Increase in withholding rate threefold
• Compliance – This change is likely intended to increase compliance by scaring the unregistered to register in order to avoid the punitive implications.
• Rate jump threefold
The increase threefold signals that either the old 10% was always grossly unfair to the state or the new 30% is a by design meant to punish for compliance. The intention to punish is not a good way to improve compliance and it is a minus when it comes to attributes of a good tax system.
• Tax refunds
The tax rate in Zimbabwe is effectively 24,72% and therefore the withheld taxes will be more than what will finally be taxed anyway. This means that ordinarily all withheld taxes at 30% will result in refunds for transactions that are taxable at 24,72% and below. While this is meant to force compliance, it creates an administrative burden and also results in significant value erosion to taxpayer funds which could have been put to better use by the taxpayer with a compounding effect on the working capital cycles, generating significantly more income and resulting in significantly more taxes. Increasing the rate from 10% is therefore potentially self-defeating.
• Punitive change
The 24,72% is on taxable income while the 30% is on topline. This significant difference is illustrated above:
Assume a sale transaction of water US$1 000 which had been purchased for US$600 for resale. This means that the business is operating on a gross profit margin of 40% which is normal for retailers
Punitive cashflow implication
The illustrative example shows that the taxpayer suffers 75% of the profit of $400 upfront only to be refunded 50% of that 75% at year end. This militates against ease of doing business.
While this rate increase may improve compliance, it may have the unintended consequences of:
•
Choking some businesses since not having a tax clearance in a lot of cases is because of Zimra not being able to issue them out to willing taxpayers. This therefore is akin to killing the goose that lays the eggs.
•
Signalling a militant anti-taxpayer sentiment. These rate changes may see increasing non-compliance as businesses may go evasion and risk it all rather than being a part of a high taxes system that has an anti-taxpayer stance. This stance is opposed to viewing taxpayers as partners or clients. So while there could be an increase in compliance amongst those already captured by the tax system, there can be an inadvertently growing resentment by citizenry to view taxes as their moral duty.
Inflation
While there is a refund for all excesses collected upfront, this refund process is an annual process. For the ZW$ transactions the amounts are likely to have eroded in value, just going by the current conservative official inflation rate. Furthermore, the cashflows of the business will have been severely crippled.
Tax clearance certificates challenges
The Section 80 withholding taxes are particularly premised on having a valid tax clearance certificate.
In Zimbabwe there is a perennial administrative challenge of obtaining tax clearance certificates even for the tax compliant taxpayers. Some of the common reasons for difficulty in obtaining tax clearance certificates are:
• A Zimra information technology system that is perennially under development and has technical glitches. It is therefore likely to continue into the foreseeable future and 2022 will likely see the same challenges of old in which taxpayers are granted short term or temporary tax clearance certificates which have to be renewed periodically. This means a high probability of numerous taxpayers being affected by the new section 80 yet they are up to date with their taxes.
• Zimra is currently rolling out a fiscalisation programme that is also failing on many fronts as either the gadgets are not available or those that were sold are now obsolete before taxpayers have properly used them or some other technical challenge. The current legislative changes seek to tie this yet-to-be-successful fiscalisation programme to tax clearances and therefore it is more likely than not most taxpayers will be strictly non-compliant in 2022, unless granted some relief or unless Zimra turns a blind eye to the fiscalisation issues.
• Other administrative challenges include disputes due to lack of clarity to taxpayers on how assessments are done.
• Other administrative challenges such as misallocation of compliant taxpayers’ payments to wrong accounts i.e. overpaying one tax head and underpaying another.
Given the foregoing, this means SMEs and big companies alike may be severely affected (cashflow wise) as they will first find it difficult to get a tax clearance certificate and then be affected by this s80 change, whether or not they have their tax affairs in order.
This legislation therefore may inadvertently push businesses to be informal and evasive rather than to force compliance and grow the taxpayer base.
This legislation is also not making it easier to do business in Zimbabwe as it compounds to the already high transaction taxes (IMTT, bank charges and transaction charges).
However, on the flip side this legislation will likely drive compliance in some taxpayers since there is a stick for not complying.
Taxpayers are however encouraged to be tax compliant whether or not there is punitive legislation in place. This is because taxes are a crucial and integral part of the economy from which business shall operate and individuals make a living. If the government fails to collect enough taxes, it comes back to bite the citizenry and businesses. Taxpayer education and ethics are therefore crucial so that in tax policy formulation, the use of punitive legislation to enforce compliance is not necessary but actually falls away.
Mapetere is the head of CAA Business School (CBS). — 071 714 4840 or zvino@caa.ac.zw or www.cbs.ac.zw