Tax expert clears air on Finance Act changes

TAX Management Services managing director Tendai Mavima says the government’s plan to tax persons who earn wages in United States and Zimbabwe dollars, as if they are earning entirely in the former, will not erase the foreign component of their earnings.

In the recently enacted Finance Act No 7 of 2021, which became effective this month, the government made changes to existing taxing laws to give effect to changes announced in the 2022 national budget announced last November.

Among the tax changes, the government announced plans to tax persons who earn both United States and Zimbabwe dollars as if their entire salary was forex-based .

“For the purpose of section 14(2)(a) of the Finance Act, the taxable income from employment of a person who receives such income partly in Zimbabwe dollars and partly in United States dollars shall be taxed as if the income was all denominated in United States dollars, with the Zimbabwe dollar portion of the income being converted to its United States equivalent at the interbank rate prevailing when the income was received, and aggregated to the part of the income denominated in United States dollars.”

This part led to widespread outrage as most feared that the new measure would essentially wipe out their entire foreign currency earnings.

“They (workers) don’t understand how you pay the income tax.

“Their outcry would be genuine if the authorities say from your US$80 that you are earning, as an example, you pay US$120 as tax.

“If you go to the workplace scenario, as an example, where somebody is earning US$50 and $80 000 if you apply this formula, to say that the official rate is say US$1:$100, as an example, you are earning US$800,” Mavima told NewsDay Business.

“You add your US$800 to your US$50 it means you are earning US$850.

“When you calculate the income tax of US$850, just for this discussion, you get US$212,50 (based on the income tax bracket of 25% for the US$850 earnings).

“To the general public, you will think ‘but I only earn US$50 and now you are asking me to pay US$212,50’, no.

“That is because of the US$212,50 income tax, your US$50 earnings is divided by US$800 to determine the proportion of your tax.

“That amounts to 6,25% of your foreign currency earnings which means that you are only paying US$3,13 as tax from the US$212,50 and the rest as Zimbabwe dollars at the interbank rate.”

Concern over the income tax rate comes as the majority of the public’s earnings are being eroded by the high cost of living which is being caused by the continued depreciation of the local unit.

This has led many to turn to informal activities for an income on top of their formal earnings. As a result, the Treasury in Finance Act No 7 of 2021 raised the income tax-free threshold to US$100, from US$70, for forex earners and $25 000 from $10 000 for local currency earners.-newsday