EXTORTION, shocking and outrageous, are the main words being used to describe Finance minister Tendai Biti’s proposed Income Tax Bill meant to widen environs for government revenue.
The Bill was gazetted over a month ago to amend the current Income Tax Act and if approved by Parliament and assented to by the President, the proposed law would be effective January 1 2014.
What has outraged companies and individuals is the broadening of the tax base from deemed source to residents’ base, meaning a departure from where only income from Zimbabwe or deemed to be from the country was taxable for both individuals and companies.
If the Bill is passed, it is proposing that on the residents’ basis, world-wide income would become taxable to net the diasporan and offshore investments and trading income. This will affect Zimbabweans working abroad.
The double taxation agreements (DTAs) remain in place and as such, only the difference between the Zimbabwean tax on foreign income and what has been taxed externally will be due to Zimra.
The scope of residence has also been widened for both companies and individuals to include physical presence in Zimbabwe for 183 days or having an abode or residence in the country to which typically non-resident Zimbabwean returns to, for even one day in the year (Diaspora net) or being a Government of Zimbabwe official or temporary resident with a work permit.
For companies, cross-border operations with a central head office in Zimbabwe will be deemed resident and cross border income of those firms is taxable in Zimbabwe.
The proposed new law has also specifically included “interest on foreign debt secured by Zimbabwean property or by Zimbabwe resident company” as deeming the lender to have resident income with that interest being income subject to company law (rates higher than withholding tax) and is silent on the inclusion of interest and dividends under the withholding tax section. So whether interest on any further external loans from 2014 and beyond will attract higher tax rates is not clear. This may have the negative effect of the lender expecting a tax cushion from the company making debt very expensive.
The Bill is antithetical to investment and good governance as it seeks to punish formally employed Zimbabweans in the Diaspora whose remittances to the country have been of immense importance to the stabilisation of the economy. It also penalises companies whose operations are above board.
It is estimated that about $4 billion is circulating in the informal sector and that government is losing out big time. Biti should come up with strategies and policies on how to tax the informal sector instead of continuing to milk the already over taxed, formally employed individuals and companies.
Biti’s Bill as it stands discourages honest business and should be revisited. We need a tax regime that promotes good corporate governance and social development, not on-the-hoof measures of this sort.