Why are Zim companies failing to pay taxes?

By The Standard and Newsday | Sep. 20, 2021 | 5 Min read

The Zimbabwe economy had already relapsed from 2019, when radical policy reforms were implemented, ending the multi-currency system to bring back the Zimbabwe dollar as the sole medium of exchange for domestic transactions.

BY SHAME MAKOSHORI

A ZIMBABWE Revenue Authority (Zimra) annual report for 2020 released last week confirmed the heavy burden that the country’s industries are battling to contain — outstanding taxes are mounting, and with each month that passes, the burden is increasing.

At the core of the debilitating crisis, which will soon be entering its 22nd year, is the recent slowdown in spending by Zimbabwe’s consumers, who have had to contend with the effects of the COVID-19 pandemic in the past year.

But COVID-19, while a big blowback to struggling industries, only amplified an already bad situation for companies.

Soon, the domestic currency hit turbulences, depreciating at a frightening pace against major currencies, while sparking an inflationary rage that had been last experienced in 2008.

From a fixed rate of US$1:$2,50 in 2019, the exchange rate has rocketed to US$1:$180 in the past few weeks, as a combination of shortages on the foreign currency auction system, the end of the tobacco marketing season and the reopening of schools following a lengthy closure, have beefed up demand on the expensive parallel market, giving black market kingpins the leeway to reap super profits.

The strife is seen not ending soon.

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The impact of these dislocations has been less and less consumer spending, and this has affected revenues to companies when overheads have been escalating, production has been affected by power shortages and raw material imports have been difficult.

“We cannot expect the situation to be normal under these circumstances, it has been a difficult phase for companies,” Trade Winds head of strategy Tapiwa Sibanda said.

“At law, most of these executives know that they have to pay taxes, but the economic climate has made it difficult for them to pay consistently.

In fact, it is difficult for companies to perform well when demand is subdued and they are facing heavy taxes, fees and commissions, as well as high utility costs.

“The Zimbabwean situation is unique, and authorities must be careful in their pursuit to force companies to pay up. There will be more corporate graveyards than there are already,” he said.

“The problems that companies face have been compounded by the fact that they already pay high taxes in Zimbabwe, much more than what companies in stable economies are paying to their governments. In fact, the fact that Zimbabwe has had to maintain high taxes is also the result of the economic crisis.

Many companies have closed in the past two decades, and many more have fled the economic crisis.

When governments realise that they cannot sustain operations with dwindling tax inflows, the temptation is to increases taxes and fees, and impose stiffer penalties for those that fail to comply. We are seeing this manifesting in Zimbabwe now,” Sibanda told Weekly Digest.

He spoke as the Zimra annual report said companies owed $6,5 billion in unpaid taxes to government at the end of last year.

Zimra said parastatals owed government $1,4 billion, while local authorities owed $306 million, with importers owing the government $521 million during the period.

Out of the total debt of $8,7 billion, Zimra recovered $3,2 billion during the review period.

Total revenue in the period under review stood at $182 billion.

In 2019, the private sector owed $3,4 billion before the figure rose to $6,5 billion last year, parastatals owed $1 billion, importers owed $187 million and councils owed $175 million.

Failure to pay taxes by companies has hamstrung the government in its efforts to fund public sector programmes including roads and dams, bridges, schools, hospitals and other important services.

“Outstanding debt position as at 31 December 2020 closed at $8,669 billion which translates to a debt to revenue ratio of 3% against a target of 5%, a decrease from 21% in 2019. Despite the increase in debt from $4,791 billion as at December 31 2019, debt to revenue ratio improved due to increased revenue collected during the year,” Zimra acting commissioner general Rameck Masaire said.

An analysis of the tax heads showed the debt in respect of value-added tax (VAT), including penalties and interest, was $2,7 billion, pay as you earn (Paye) $2,6 billion, income tax $1,6 billion, withholding tax $1,3 billion and customs duty $521 million.

The private sector has blamed Zimra’s heavy-handed taxation measures saying it does not encourage the thriving of formal businesses.

In a way, the heavy fines and other forms of punishment have been blamed for subdued revenues.

After seeing many of their peers go through a gruelling punishment regime, many businesses have opted out of formal operations.

The result has been a flourishing informal trade sector, whose members are estimated at more than 5,7 million.

These businesses rarely pay any form of taxes, fees and commissions because they operate from the boot of their cars.

That way, many of them say, they save themselves from the heavy-handed authorities, including the taxman.

Of this figure, 500 000 informal sector operators run their businesses in the mining sector, mostly gold panning.

The result has been clear

Over US$1,5 billion has been salted away every year into the black market, where the gold is mostly sold on the international black market, with little or no benefit to Zimbabwe.

Early this year, government attempted to solve the problem by rolling out incentives for those that sale their gold to the official market. Some say it has worked, but many analysts say, leakages remain.

But Zimra is optimistic that its strategies, used in managing the debt, will yield positive results.

These include prosecution of tax and customs defaulters, as well as coming up with payment plans that help companies manage their cashflows, while paying their outstanding taxes.

“Zimra is now carrying out criminal investigations to prosecute taxes and customs defaulters,” the tax collector said in the report.

“The authority also enforces the Money-Laundering and Proceeds of Crime (Amendment) Act, 2019. A campaign on the unexplained wealth orders has been launched and will be run in collaboration with the Zimbabwe Anti-Corruption Commission and the National Prosecution Authority,” the annual report said.