This article attempts to answer several critical questions on the practical application of the 10% withholding tax on contracts for the supply of goods or services. With the negative impact this tax has on business, it is essential that we have a close look at it to avoid some common pitfalls in its administration. Failure to comply with this tax head (or any other for that matter) results in businesses losing potential working capital savings. While some people may have benefited by collecting the tax without submitting it to ZIMRA, some others have lost by failing to withhold from suppliers. Failure to withhold the tax transfers the obligation to pay it from the supplier to the customer, compounded with 100% penalty and interest.
There are a few critical questions which must be answered about this tax head. Under what circumstances does this tax apply? Who is entitled to withhold the 10%? Are there any persons or products that are exempt from this tax? Does it apply to individuals who are not in business? Why does ZIMRA withhold 10% from amounts due a supplier of goods or services? Once withheld, is it recoverable and from whom? What information is required to institute recovery of the tax? Are there any obligations attached to withholding the tax? These and many other practical questions are discussed in this article.
The 10% withholding tax applies where any person contracts with another person registered with the Zimbabwe Revenue Authority (ZIMRA) for the supply of goods or services. If the first mentioned person (company, individual, etc) does not have a Tax Clearance Certificate, 10% of the total amount due him will be withheld by the customer. Certain conditions must be present for this to apply. The customer has to be registered with ZIMRA as a taxpayer, while the supplier does not have to be registered. This implies that the customer ought to have a Business Partner (BP) number allocated by ZIMRA on registration. The value of the goods or services supplied should be ZWL10 000 or more in a year of assessment. This threshold is determined by looking at the invoice value, the cumulative invoice value, or the amount payable.
There are certain institutions and suppliers that are exempt from this withholding tax. Exempt institutions include financial institutions, medical aid societies, schools, hospitals etc. The only suppliers of goods that are exempt are farmers when supplying agricultural produce, including livestock (based on ZIMRA practice, not legislation). This exemption therefore is specific to the nature of the supplier, only farmers are exempt with regards to the supply of agricultural produce. The exemption does not cover agricultural produce supplied by middlemen, such as ‘green’ vendors. It is however noteworthy that supermarkets are exempt when selling to customers who are purchasing not in the course of trade.
It is interesting, though disturbing to note that supplies by individuals, whether in business or not, are not covered for exemption. A case to note is when an individual sells his personal motor vehicle to a company registered with ZIMRA. While such a person may not be a motor dealer, he/she will lose 10% of the value of the car if he/she fails to produce a tax clearance certificate. The big question is how does the individual obtain a tax clearance certificate while he is not trading? It would appear, without recourse to the Law, that tax clearances are only for people or companies engaged in some form of trade. However a close look at the provisions of the Law shows that a tax clearance can be given to any person who satisfies the Commissioner that he is up to date with any tax obligation. An employee can thus prove to the Commissioner that his employer is on Final Deduction System and is up to date with all PAYE payments. This implies that the employee is therefore up to date with his income tax obligations, barring any business income. Such an individual can get a tax clearance certificate from ZIMRA.
Once deducted, getting a refund of the withholding tax is a long and painful process. One must submit his Income tax return(s) and any other returns due to ZIMRA and satisfy the Commissioner that he is due the refund. One way to satisfy the Commissioner is to prove that the amount withheld was actually paid to ZIMRA. This calls for proof of payment of the amount withheld by the customer. It may not be enough just to get proof of deduction from the customer, proof of receipt by ZIMRA may also be required. ZIMRA may also want to ensure that the claimant has no further tax obligation against which the refund can be set-off. Therefore, one has to ensure that all his books are in order before daring to claim a refund of the withholding tax.
Administration of this tax head has its fair share of practical challenges. How does one withhold 10% on a prepayment? How do you deduct the 10% withholding tax from a sole supplier of critical raw materials? How does one deal with cash payments exceeding the threshold? How can one pay 90% of a product’s price when tendering cash, having withheld 10%? Won’t the supplier provide goods worth the amount tendered? One of the ways out of this puzzle is to gross-up the amount due and pay for the supplier. This entails increasing the cost of the product to cover the 10% paid on behalf of the supplier. Such a move would drive prices up, making the man in the streets poorer. This practice does not only prejudice the final consumer, it also prejudices ZIMRA. While the customer claims the cost including the 10% paid on behalf of the supplier, the supplier may not declare that amount as income. He will only declare as income what he receives for the supply.
This complexity in the administration of this tax head has prompted some traders to decline dealing with customers without tax clearance certificates. While this is not encouraged it provides a way of mitigating against the risks of dealing with customers without tax clearance certificates and the administrative costs associated with withholding the tax. The Law requires that everyone who withholds the 10% should give the supplier a certificate as proof of the deduction. One should also ensure that the amount withheld is remitted to ZIMRA by the 10th of the month immediately following the deduction. Some are however happy to deal with customers without tax clearance certificates as a way of getting free funds. The amounts deducted can be invested in stock or raw materials until the time they are due to ZIMRA. Such a move requires proper planning, nevertheless.
Written by Simon Gwenzi