Marvelous Tapera 
THE hiring of equipment or intellectual property from non-resident persons is prevalent in developing countries such as Zimbabwe.
The leasing option is often preferred due to technological changes and lack of the capital outlay required to make an outright purchase. Also, owners of intellectual properties usually hold out their properties for hire while retaining ownership of the property. This hiring of property from a non-resident creates taxes in Zimbabwe and an obligation on the part of the resident payer of the royalty or rent to deduct and remit such taxes to the Zimbabwe Revenue Authority (Zimra)as fully explained below.
All rental type arrangements between residents and non-resident persons are within scope except for the stated exclusions.
The scope of royalties includes payments for the hiring of intellectual property such as literary, dramatic, musical, artistic, scientific or other work whatsoever in which any copyright exists, any patented article, trade mark, design or model, plan, secret formula or process as well as for the hiring of industrial, commercial or scientific equipment, or for the use or right of information concerning industrial, commercial or scientific experience.
It does not cover payments for the outright purchase of the item and often finance lease, sale and lease back and hire purchase agreements are regarded as outright purchases and therefore outside the scope of royalties.
The OECD 2014: Article 12:8.2 also provides that where a payment is in consideration for the transfer of the full ownership of an element of property referred to in the definition, the payment is not in consideration “for the use of, or the right to use” that property and cannot therefore represent a royalty.
The law also exempts certain payments which would otherwise be royalties such as when the project benefits the country through infrastructure development or if the project is the subject of any agreement entered into by the government of Zimbabwe with any other government or international organisation in terms of which any person is entitled to exemption from tax in respect of such amount.
Essentially, all rental type arrangements between residents and non-resident persons are within scope except for the stated exclusions.
Although the Income Tax Act has not defined the term “commercial, industrial or scientific” equipment, it is widely understood under international tax to include all forms of tangible equipment excluding motor vehicles.
A resident person who pays royalties to a non-resident person must withhold non-resident tax on royalties. Non-resident tax on royalties is fixed at 15 percent, but the rate may be reduced by the provisions of a double taxation agreement (DTA) between Zimbabwe and the non-resident’s country of residence.
For example, the revised Zimbabwe and South Africa DTA has a reduced rate of 10 percent. In practice, a DTA relief does not apply where the payee is not the beneficial owner and on an excessive portion of royalties.
Royalties payable in cross border leasing between a resident person and its non-resident affiliate are subject to the application of transfer pricing, and those not meeting arm’s length test pricing are disallowed for income tax purposes.
They would not meet arm’s length if the price is over or under compared to that payable between unrelated parties or in an uncontrolled transaction. Resident payers of royalties are liable for deducting the tax on royalties and remit the same to Zimra within 10 days of the date of payment.
Payment of royalties is deemed to have occurred when they are credited to the non-resident’s account or so dealt with that the conditions under which the non-resident is entitled to them are fulfilled, whichever occurs first.
In Barclays Bank of Limited vs. ZIMRA, HH 162-2004, the phrase “dealt in such a way that the conditions under which the payee is entitled to it are fulfilled” was held to embrace every method open to the payer to discharge his obligation to the payee other than the direct payment to the payee’s account.
The term payment also covers payment by barter, set-off, crediting of accounts, intercompany debits and credits or by other settlement of obligations whatsoever and in any form. A non-resident person is also deemed entitled to royalties the moment an invoice for work done is made. Therefore, within 10 days of invoice or actual payment date, NRTRoy should be remitted to the Zimra.
Royalties are taxable as part of the profits of a permanent establishment (PE) if they are paid in respect of rights or property forming part of the assets of the PE of a non-resident situated in country or otherwise effectively connected with that establishment. Under such circumstances, the NRTRoy is not applicable.
A PE is an international tax term referring to a fixed place of business through which a non-resident person’s business is wholly or partly carried on or a dependent agent who habitually concludes contracts or plays the principal role leading to the conclusion of contracts on behalf of the non-resident person.
In MA Limited vs. Zimra 16-HH-316, a PE was found to exist by virtue of the tangible and intangible assets which a non-resident held and used continuously in Zimbabwe.
Meanwhile, a resident person who pays NRTRoy has an equal obligation to remit VAT on import services. According to the VAT Act, the VAT on imported services is payable by every resident person importer of such services as are used or consumed by him/her in Zimbabwe.
The tax is fixed at 14,5 percent of the amount paid or value of the imported services. It however, does not apply when the services are procured from a non-resident person who carries a trade on a continuous or a regular basis in Zimbabwe such that he/she creates a VAT nexus in Zimbabwe or where the non-resident person has established a PE in Zimbabwe.
Zimbabwe residents renting equipment from non-residents are accordingly advised to ensure that non-resident tax on royalties and VAT on imported services are deducted and remitted to Zimra, otherwise they face the risk of penalties and interest for late or non-payment of the taxes.
Non-resident tax on royalties is the tax for the non-resident person whilst the burden on VAT on imported services falls upon the resident importer of the services.
Meanwhile, Matrix Tax School will be hosting its “Managing VAT Compliance- Practical Considerations” Webinar Seminar on March 17, 2021. This issue among others will be discussed during the seminar.
● Tapera is the founder of Tax Matrix (Pvt) Ltd and the chief executive of Matrix Tax School. He writes in his personal capacity. Matrix Tax School (Pvt) Limited hosts a webinar short course in Managing Tax Practice (Basic Theory & Practice) every Wednesday and Saturday.
