eBusiness Weekly
Tapiwanashe Mangwiro
The Government recently issued a new statutory statement regarding the taxation process of employees paid in two currencies.
Zimbabwe is still a dual currency economy with the local Zimbabwe dollar and the United States dollar being used concurrently and interchangeably.
As a result of trying to cushion employees, some industries and companies had resorted to paying their employees’ salaries in a ratio of the local currency and the greenback.
Some companies went as far as paying salaries 50 percent in local currency and 50 percent in USD.
This has led to never-ending headaches for the taxman on which method to use in order to tax such incomes. To avoid such confusion, the Minister of Finance and Economic Development, Professor Mthuli Ncube, said beginning this month those paid in two currencies will be taxed in US dollars after conversion of the other currency into the equivalent.
The Law
According Finance Act No 7 the taxable income for a person that receives their salary partly in United States dollars shall be taxed as if the income was in US dollars.
“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 dollar equivalent at the interbank rate prevailing when the income was received, and aggregated to the part of the income denominated in United States dollars.”
Rationale
The rationale of the decision by the Treasury to implement such a taxing regime is to try and get as close to a fair value tax as possible.
The Treasury feels that companies have been using the payment method to run away from paying tax for the US dollar component or stay under the taxable threshold in both currencies, thereby prejudicing the State of its income.
It is also understandable that in order to avoid much confusion on the amount of tax to be paid by each employee in both currencies, the company will have to remit the tax in one currency.
This also holds as an opportunity by the authorities to boost their foreign currency income despite the employer paying local currency as well.
It gives Treasury income enough to help sustain the auction market as it already releases about US$3 million per each auction from tax revenues.
Effects of the law
Every decision has its own effects, either good or bad, and in this case, the employees will be losers. The new tax measure will lead companies to use one currency in payment in order to maximise the value of their employees’ salaries.
In essence, companies do not like to part with their foreign currency in most cases and this will see more of local currency salaries than US dollar salaries. This also has an effect on the national purse as it will dwindle from the small US dollar component they used to get before.
On the employee side, they will feel hard done by the law, as they see it as double taxation on their part. If the foreign currency auction rate was anywhere closer to the parallel market rate, they wouldn’t mind.
The conversion of their salary at the official rate of $108/US$1 of today would mean they are being charged 100 percent lower than the everyday accessible black market rate of $205-210/US$1.
In essence the employee is now being charged tax on every US$0,50 they earn rather than each US$1,00.
In a country where companies are crying that consumers are still tied up on disposable income, the Government is finding it in itself to further burden the employee with a double tax in the name of fundraising foreign currency.
This law seems very noble in a country that has employees living above poverty datum line, but in an economy like ours, the authorities have just increased the rate of poverty to families that are already struggling to make ends meet.
