CROSS border hiring of capital equipment, (mining, manufacturing, telecommunications, construction etc) from a non-resident person creates a withholding tax liability for the non-resident in Zimbabwe and an obligation on the part of the resident payer of the royalty or rent to deduct and remit the said tax liability to the Zimbabwe Revenue Authority (Zimra) in terms of the 19th Schedule to the Income Tax Act.
The same applies for the hiring of intellectual property e.g. computer software, brands, patent etc. Section 32 as read with the 19th Schedule to the Income Tax Act provides for the deduction of non-resident tax on royalties (NRTRoy). The 19th Schedule covers all rental type arrangements entered into with a non-resident. Not only does it include payments for the use or right of use of intellectual property such as trademarks, trade names, patents and know-how payments, but also scope in rentals of tangible assets payable to non-residents.
The Income Tax Act has not defined the term “commercial, industrial or scientific” equipment, but is widely understood under international tax to include all forms of tangible equipment excluding motor vehicles.
Although not conclusive, method of payment may be an indication of whether a payment constitutes a royalty payment, but it does not necessarily follow a lump sum payment cannot be a royalty (Vauban v HMQ [1975] CTC 511).
The Black’s Law Dictionary defines royalty as a “compensation for the use of property, usually copyrighted material or natural resource, expressed as a percentage of receipts from using the property or as an account per unit produced” .
It is equivalent to the fee that is paid to a patentee for the use of a patent or the money owed to an author for each copy of a book sold. It was held in Alamo Nat. Bank of San Antonio v. Hurd, Tex. Civ. App ., 485 S. W. Zd. 335, 338 that a royalty is the share of a product or a profit reserved by the owner for permitting another to use the property .
Royalties are from a source within Zimbabwe, if they arise from exercising of wits, labour and skill or if the work was created and perfected in Zimbabwe (Millen v CIR 3 SATC 170). In addition, section 12 (4) of the Act deems royalties to be from a source within Zimbabwe if they accrue or are received by reason or by virtue of the use in Zimbabwe of or the grant of permission to use in Zimbabwe, or the imparting of or the undertaking to impart any knowledge directly or indirectly connected with the use in Zimbabwe of specified properties.
The 19th Schedule of the Act, expands the deemed source in section 12(4) and deems the royalties to be from a source within Zimbabwe if the payer is a person who or a partnership, which is ordinarily resident in Zimbabwe. Zimbabwe tax laws impose an obligation on ordinary residents to withhold tax on royalties paid or payable to a non-resident payee. A non-resident means a person (other than a company), partnership or a foreign company, not ordinarily resident in Zimbabwe.
The term person embraces a company, body of persons corporate or un-incorporate (not being a partnership), local or like authority, deceased or insolvent estate and, in relation to income the subject of a trust to which no beneficiary is entitled, the trust. This means any person so defined as person and is non-resident is affected by the provision of this schedule. A foreign company refers to a body corporate that is incorporated outside Zimbabwe.
The residence status of the payee or that of the payer shall be decided by reference to the date on which the royalties are paid by the payer. In the case of a partnership carrying on any trade in Zimbabwe, it shall be deemed to be ordinarily resident in Zimbabwe if at least one member of such partnership is ordinarily resident in Zimbabwe.
A resident payer is required to withhold Non Resident Tax on Royalties on cross border lease payments and remit the same to Zimra within 10 days of the date of payment. Payment of royalties is deemed to have occurred when the royalties 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. Non-resident tax on royalties is triggered by payment of royalties to a non-resident, from a source within Zimbabwe or for the right of use of property in Zimbabwe notwithstanding the payment is being made elsewhere.
The payer has to withhold non-resident tax on royalties of 15 percent of the gross royalties, which has to be remitted to Zimra within 10 days of payment of the royalty to the non-resident or within such further period as the Commissioner may approve. Where the payer has failed to withhold the tax, an agent of the payee must do so and remit the tax to Zimra not later than 10 days from the date of receipt.
An agent must also issue to the payee a withholding tax certificate. An agent of the payee includes a person whose address appears as the address of the payee in the records of the payer and to whom the warrant, cheque or draft in payment of the amount has been delivered to. A payee who receives royalties from which withholding tax was not deducted must remit the applicable withholding tax to Zimra within 10 days of receipt of royalties.
In conclusion, our tax laws impose an obligation on ordinary residents to withhold tax on royalties paid or payable to a non-resident payee.
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Tapera is the founder of Tax Matrix (Pvt) Ltd and chief executive of Matrix Tax School. He writes in his personal capacity.