IMF roped in for planned tax reforms

MBONGENI MGUNI
Staff Writer | Friday July 23, 2010 00:00

 

It is understood the IMF consultant, engaged last week, has submitted a report on a draft prepared by the Ministry and containing the proposed amendments to the Income Tax Act.

The amendments involve plans to discard the current two-tier system and replace it with a single corporate tax rate of 25 percent. They also include reducing the withholding tax on dividends to 7.5 percent, from 15 percent. Disagreement, however, is around what to do with the credits companies receive against the Additional Company Tax (ACT) of 10 percent they have been paying.

The current Income Tax Act allows companies to offset withholding tax against the ACT due for that tax year, with the ACT paid being carried forward as a credit for five years in the event that dividends are not declared. Effectively, companies retain withholding tax whenever they declare dividends, as it is set against the ACT held by the BURS.

When dividends are not declared, the ACT paid for that tax year is carried forward as a credit for a period of five years; should a company fail to declare dividends within five years, ACT from the first year falls away, denying the company the right to offset withholding tax against it.

This week, BusinessWeek learnt that the draft amendments to the Income Tax Act are the subject of internal consultation in the Finance Ministry and will soon be forwarded to the Attorney General's office, where they will be formulated into a bill.

'The minister will then present this Bill in Parliament; this is planned for the National Assembly's November sitting. At present, the proposed amendments are in the hands of the drafters and in due course, after internal consultation, a clearer picture will emerge,' highly placed sources said.

Recently, senior Finance Ministry officials advised that industry should treat the planned reforms as having taken effect on July 1, which is the beginning of the tax year and the date originally announced by Minister Kenneth Matambo in the February budget speech.

The officials said the minister would introduce the Bill in Parliament and seek retroactive approval, meaning that the tax reforms would be deemed to be with effect from July 1, 2010.

While they accept the reforms in general, BOCCIM and other industry leaders are pushing for the inclusion of a transition period in the amendments to be brought before Parliament. In a meeting held on July 8 with Finance Ministry principals, BOCCIM proposed a transition period of 12 months, during which companies will attempt to declare dividends and thus use up their credits.

BOCCIM Executive Director, Maria Machailo-Ellis said the July meeting had been fruitful in terms of assuaging the fears of industry and investors regarding the proposed tax changes.

'Our concern is that as long as there's no official statement, it creates uncertainty within investors and the business community. We pleaded our case to the effect that we need an official statement on the way forward and the Minister said such an announcement will be made,' she said.

On the duration of the transition period, Machailo-Ellis said BOCCIM has made its proposals to government and is awaiting a final announcement.

'We have put forward our proposals on how long this transition should be and government has its own ideas. We are concerned that those companies that have accumulated ACT should not be unduly disadvantaged by this transition period. In additional financial planning involves knowing what revenues to expect in and what spending to expect; if at this stage we don't have a definite duration for the transition period, this also creates uncertainty in the market,' she said.

The BOCCIM executive director noted that government has been forthcoming in terms of consultation and feedback on the tax reform process.

'Our engagement with the ministry has helped in terms of us appreciating where we are and where we are going. As BOCCIM, we may know the position, but the general business community may not know.

'That's why we told government that the sooner people know through an announcement the better,' she said.

'However, the business community should also know that these changes took effect on July 1, 2010. The finance minister announced this date in February and there has been no announcement to the contrary. The business community must not think that because it has not been announced, it is not in effect; the minister already announced it in February.'

Those against a prolonged transition period say it would disadvantage shareholders who will be charged the 15 percent withholding tax, at a time when the rate should be 7.5 percent. Tax experts told BusinessWeek that the crux of the tax reform difficulties is the absence of a transitory period in the current Income Act.

'The Income Tax Act does not have that transitional arrangement, whereas the VAT Act has a built-in arrangement. The lawmakers did not foresee this for the Income Tax Act.

'At one point, BOCCIM had proposed a long period whereas the BURS wanted the period to run until the end of September 2010,' said one tax law expert.

'There's a problem with the Act because originally, companies could carry over their credits indefinitely, but from 2006 the law changed and set the period at five years. When this happened, income tax payers had to forego part of their credits.

'To now say the entire system is being discarded, companies will not be willing to simply throw away their credits again.' Attempts to get a comment from the finance minister failed as he was said to be out of the country.