Marvelous Tapera 
Capital allowances are incentives granted to taxpayers incurring expenditure on business assets. They are available on qualifying capital expenditure incurred on the provision of certain assets to be used in the production of income or for the purposes of trade.
There are of two types, namely Special Initial Allowance (“SIA”) and Wear & Tear (“W&T”). With SIA the expenditure is claimed over a period of four years for big businesses and in three years for SMEs. It is claimed upon election by the taxpayer.
Immovable property should have been constructed by taxpayer and asset must be used at least 90 percent in the production of income.
W&T is granted in all cases where SIA has not been granted and computed on the written down value (tax value) of the asset for movable assets and on cost for immovable property. Under W&T the asset write off period is 10 years.
Finance Minister, Mthuli Ncube
Following the promulgation of Statutory Instrument 33 (SI 33) of 2019, unredeemed capital allowances and assessed losses that were denominated in US$ were converted and carried forward as RTGS dollars on a one to one basis.
Further in an inflation environment, with the prices of goods and services escalating the sales will always outpace the costs resulting in creation of artificial profit.
The situation is further compounded on capital expenditure in that their deduction against taxable income is spread over a number of years.
With the RTGS dollar value deteriorating, it means that the deductible capital expenditure would be low relative to the income received.
In a bid to resolve this problem, Finance minister Mthuli Ncube acknowledges in his 2021 National Budget Statement that due to SI 33, businesses have been recording artificial profits and that this affected their taxable income and consequently their tax liability.
The Finance Bill 2 of 2020, which passed its second reading, includes a proposal to correct this anomaly. On that note, Clause 2 of the Finance Bill reads “(11) If, in relation to capital allowances claimed (in any year of assessment before the year of assessment beginning on the 1st January, 2021) in terms of paragraphs 2, 3 and 4 of the Fourth Schedule to the Taxes Act, any balance of such allowances remains unredeemed as at January 1, 2021, any such unredeemed balance shall be rebased to the local currency equivalent of the outstanding foreign currency invoice value using the exchange rate prevailing on January 1, 2021.”.
The rebasing of unredeemable balances means that on January 1, 2021 businesses will convert their Income Tax Values (for assets initially purchased in US$) to RTGS dollars. The foreign currency invoice is converted using the prevailing interbank rate of the day.
This means that if the asset had still two years of SIA remaining half of the rebased invoice is what should be written off over the remaining two years. Simply put, SIA in each year will be the foreign cost of the invoice multiplied by 25 percent (SIA rate) then multiplied by interbank rate as at January 1, 2021.
The procedure appears a bit more complicated regarding claiming of W&T on movable assets. One must get to the reducing balance of the foreign currency invoice by subtracting deemed capital allowances in foreign currency before computing W&T on the reduced balance.
The rebasing of unredeemed capital expenditure is very noble. We however, appeal to the minister to revisit the matter as there are some areas which need tweaking for the incentive to make more sense to the business.
The first one is with regard to the timing of rebasing. Considering the fluctuation of the RTGS dollar in the past year, if the same situation prevails for the coming years, businesses may not get the intended benefit from the capital expenditure.
The official exchange rate may be significantly different at the time the outstanding foreign invoices for assets are valued vis-à-vis when the income tax return is filed at the end of 2021.
It is with this in mind that we appeal to the minister to rebase at the year- end as opposed to the beginning of the year.
Secondly, the effective date of application of the law is January 1, 2021.
This does not resonate with the referencing by Ncube to SI 33 of 2019 in his National Budget Statement. Because of this, we request the minister to consider rebasing from February 22, 2019.
With inflation peaking the whole of 2019 and part 2020 a relief is needed for these tax years. Artificial profits were created in those years not only because of depressed capital allowances but also due to depressed cost of sales and operating costs in a period of high sales. Additionally, SI 33 of 2019 was more impactful itself than inflation, and business needs relief following the loss of its capital.
Thirdly, the referencing to “outstanding foreign currency invoice value” appears to suggest the relief is only given for assets which were purchased in foreign currency and not to those purchased in Zimbabwe dollar.
The law therefore, seems to be discriminating against local currency purchases but yet the impact could have been the same or worse. Finally, we expected the rebasing to be extended to unredeemed losses and to future periods as well. It appears this applies only to capital expenditure in foreign currency incurred prior to January 1, 2021.
In conclusion, we applaud the Finance ministry for continuously amending the law to suit the dictates of the unique Zimbabwean environment thereby promoting the ease of doing business and encouraging investment in the country.
We however, appeal to him to consider revisiting the rebasing proposal taking into account some of these suggestions.
Meanwhile, Matrix Tax School (Pvt) Limited will be hosting a webinar seminar on “2021 Tax Developments and December MTU” on January 20, 2021. Do not miss out on this very important event!!!
● Tapera is the founder of Tax Matrix (Pvt) Ltd and chief executive of Matrix Tax School. He writes in his personal capacity.
