(a) Limiting the deductibility of interest on debts owed by certain taxpayers to thirty percent of earnings before interest, tax, depreciation and amortization.
In December, 2017 Zambia joined the Inclusive Framework on Base Erosion and Profit Shifting (BEPS) Project under the Organisation for Economic Cooperation and Development (OECD).
As a member of the BEPS Inclusive Framework, Zambia is required to implement minimum standards.
Currently, the country has thin capitalization rules to prevent tax base erosion through excessive interest payments associated with extreme debt financing. Thin capitalization refers to a situation in which a company is financed more through debt than equity. However, the current thin capitalization ratio of 3:1 only applies to the Mining sector. For non-mining companies there is no prescribed debt-to-equity ratio but thin capitalization is dealt with under the transfer pricing rules.
The proposed measure, therefore, is intended to tackle tax base erosion through interest deductions and is in line with the Organization for Economic Cooperation and Development (OECD) Base Erosion on Profit Shifting (BEPS) Action 4 on limiting base erosion via interest deductions and other financial payments.
This measure will only affect businesses that are liable to income tax while Small and Medium Enterprises (SMEs), including those in agriculture and manufacturing, that pay tax on turnover will NOT be affected. Further, due to the limits on leverage already imposed through the prudential regulations, it is proposed to exclude taxpayers engaged primarily in Banking and Insurance.
(b) Revising the Kwacha to United States Dollar exchange rate to be used in computing indexed losses and indexed capital allowances for persons carrying out mining operations and keeping their books of accounts in United States Dollars.
In 2017, section 55 of the Income Tax Act was amended to provide for the use of the average Bank of Zambia mid-rate for the accounting period when translating books of accounts held in US Dollar. However, Sections 30A and 33 that have a link with Section 55 were not amended to reflect that change. Therefore, the measure will harmonise the kwacha exchange rate to be used on both the translation of books of accounts and the indexation of losses and capital allowances.
(c) Making mineral royalty non-deductible for income tax purposes.
Currently, mineral royalty is deducted for purposes of computing company income tax. Therefore, making mineral royalty a non-deductible levy for income tax purposes is aimed at making mineral royalty a FINAL TAX which will increase the taxable base for company income tax and therefore enhance revenue collection from the mining sector.
(d) Requiring a business, to which tax avoidance provisions of the Act apply, to retain documents and other information relating to the business’ transactions for a period of ten years.
Transfer pricing audits generally take longer than normal audits because of their complex nature and the need for gathering of information of the persons transacting. For instance, completing transfer pricing audits may require exchange of information between Zambia and the tax jurisdiction of the tax payer’s related parties. The exchange of information is another lengthy process. Due to the foregoing, the six year period limitation is not adequate for transfer pricing audits, hence the extension to ten years.
(e) Authorising the Commissioner-General to appoint a taxpayer as an agent to withhold turnover tax on payments made to suppliers of goods and services.
The Commissioner General may appoint any person as an agent to withhold turnover tax before making any payments for the supply of goods or services.
(f) Introducing a presumptive tax on betting and gaming businesses.
The Amendment outlines the turnover tax rates and introduces a new tax regime on casino, lottery, betting and gaming to allow for better regulation of the industry as follows:
1) Casino live games at 20% of gross takings;
2) Casino machines games at 35% of gross takings;
3) Lottery winnings at 35% of net proceeds;
4) Betting at 10% of gross stakes; and
5) Gaming at K250 to K500 per machine per month.
(g) Increasing the maximum penalty that may be prescribed by a statutory instrument on transfer pricing for non-compliance with provisions of that instrument to twenty-four million Kwacha from three thousand Kwacha.
Currently, the penalty for non-compliance with Transfer Pricing Regulations is 10,000 units which is equivalent to K3, 000.00. Following the issuance of the Transfer Pricing regulations that have provided for maintenance and provision of documentation on controlled transactions, the penalty of K3, 000 is not punitive enough to compel the companies to comply with the documentation rules. Therefore, this measure is expected to make the penalties for non-compliance to transfer pricing provisions more punitive.
(h) Introducing penalties for negligent, fraudulent or willful submission of an incorrect balance sheet, account or other document in respect of the skills development levy under the Skills Development Levy Act, 2016.
Currently, there are no specific penalties for incorrect declaration in relation to the skills development levy. Therefore, offences for incorrect declaration in relation to the levy are subjected to penalties that are applicable to corporate income tax as prescribed under Section 100 of the Income Tax Act. Therefore, the measure to introduce penalties specific to the skills development levy will bring in equity as the specific penalty structure will charge penalties that are in a way commensurate to the rate of the levy.
(i) Revising the current turnover tax regime and introducing a flat rate of four percent on businesses with a turnover of eight hundred thousand Kwacha or below per annum.
The amendment is intended to simplify the application of Turnover Tax. Currently, businesses with a turnover up to K800, 000 per annum are taxed based on turnover at the rate of 3 percent plus specific presumptive amounts. The amendment is meant to make taxation of small and medium enterprises simpler and thereby encourage compliance.
(j) Reducing the company income tax rate to fifteen percent from thirty-five percent for companies that add value to copper cathodes.
The measure is intended to encourage value addition and employment creation in the copper-sub sector.
(k) Increasing the withholding tax rate on dividends, payments or distribution of branch profits and payments of interest to a non-resident to twenty percent from fifteen percent.
This measure is intended to harmonise at 20 percent the withholding tax rate for all payments in the form of cross-border dividends, interest payments, branch profit remittances, royalties and commissions payable to non-residents.
MINES AND MINERAL DEVELOPMENT
(a) Increasing mineral royalty rates by 1.5 percentage points at all levels of the sliding scale.
The measure is intended to increase the take for Government by adjusting the sliding scale for mineral royalty and to allow Zambia to benefit from exceptionally higher metal prices.
(b) Introducing a fourth tier rate at 10 % on the sliding scale mineral royalty regime which would apply when copper prices raise beyond US$7,500 per metric tonnes.
The intention is to enable Zambia benefit from the upward trending metal prices on the international market. Currently, mineral royalty is paid on the gross value range on a sliding scale starting from the rate of 4 percent to 6 percent.
(c) Making mineral royalty a non-deductible levy for income tax purposes.
This measure is intended to make mineral royalty a final tax which will increase the taxable base for company income tax and therefore enhance revenue collection from the mining sector. Currently, mineral royalty is deductible for purposes of computing company income tax.
CUSTOMS AND EXCISE
(a) Introducing Customs Duty on Motor Cycles.
Specific duty rates were introduced on motor vehicles in 2018. However, this was not extended to affect motor cycles. It is in this regard that the measure is intended to introduce duty on motor cycles at the rate of 25%. This will also harmonize the duty treatment with bicycles which currently attract a duty rate of 25%.
(b) Introducing excise duty on non-alcoholic beverages.
This measure is intended to assist in reducing the prevalence of life-style diseases such as diabetes etc. and to raise revenues for the Government.
(c) Introducing an export duty on raw hides, raw skins, pearls, precious metals and precious stones.
The measure is intended to encourage value addition and further investment in the leather and precious metals industry.
(d) Increasing the export duty on Manganese ores and Manganese Concentrates.
The measure proposes to lift the suspension of the export duty and increase the substantive rate 15%.
(e) Suspending Customs duty on LED lights.
This measure is intended to encourage use of energy saving bulbs. Currently customs duty on LED lights is at 15%.
(d) Introducing an export duty on precious metals and precious stones at the rate of 15 percent.
The measure is intended to enhance revenue collection from mineral resources.
VALUE ADDED TAX
(a) Providing for the use of an electronic fiscal device in recording daily sales.
The measure broadens the scope of the current definition of cash register in the VAT Act because an electronic cash register is only one type of an electronic fiscal device.
(b) Providing a legal basis for the current practice where taxpayers are not allowed to account for tax on the discounted price when they offer any cash discount.
The current practice is that for a trade discount, the discounted price is the one on which Value Added Tax is based whereas for a cash discount, the original price (price before discount) is what is used for the purposes of Value Added Tax.
(c) Provide for the prosecution of directors or managers of a company, where the company commits an offence under the VAT Act.
Where any offence under this Act has been committed by a body corporate or an unincorporated body, every director or manager of the body corporate or unincorporated body shall be liable, upon conviction, as if the director or manager had personally committed the offence, unless the director or manager proves to the-satisfaction of the court that the act constituting the offence was done without the knowledge, consent or connivance of the director or manager.
INSURANCE PREMIUM LEVY
(a) Providing for the issuance of fiscalised invoices in respect of the levy.
The measure is intended to provide for the issuance of fiscalised invoices in respect of the levy.
(b) Revising the due date for the remittance of the levy.
Revise the due date for the remittance of the levy to the Zambia Revenue Authority from the fourteenth day of the month, following the month in which the levy is collected, to the eighteenth day.
NON TAX MEASURES
(a) Digitization of all revenue collection processes for Government services.
This measure is intended to enhance collection of fines and fees.
(b) Enhancing system interface between Zambia Revenue Authority and other institutions.
This will maximise the use of third-party data in taxpayer compliance management.
(c) Reviewing the Rating Act to facilitate the mass valuation of properties.
This will facilitate collection of appropriate taxes and fees.
(d) Establishing a public auction mechanism for timber and lift the ban on all timber exports.
This measure is aimed at increasing domestic revenues.