Global Tax Alert. Zambia issues 2015 Budget proposals. Executive summary. Detailed discussion

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1 17 October 2014 EY Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Services/Tax/International- Tax/Tax-alert-library#date Zambia issues 2015 Budget proposals Executive summary On 10 October 2014, the Zambian Government issued its 2015 Budget proposals (the Budget). The major changes are to the Mining Tax Regime where the Minister of Finance has removed the corporation and variable profits tax. These taxes have been replaced with a mineral royalty at the rate of 8% for deep mining and 20% for open cast mining. This Alert outlines the key income and indirect tax changes of the Budget. The changes are proposed for the income tax year 2015 and would take effect as of 1 January Detailed discussion Return filing The Budget includes the following requirements regarding return filing: Manual returns relating to PAYE and Turnover tax to be filed on the 5th of the month Electronic filing of Turnover returns for businesses whose turnover exceeds K 200,000 per annum remains on the 14th of the month Filing for Annual Income Tax returns, PAYE returns and VAT returns is mandatory where there are 10 or more transactions Mining tax regime The Budget replaces the current two tier system of corporation tax and variable profits tax with the following mining tax structure: 8% Mineral Royalty for underground mining operations as a final tax 20% Mineral Royalty for open cast mining operations as a final tax 30% Corporation Income Tax rate on income earned from tolling 30% Corporation Income Tax rate on income earned from processing of purchased mineral ores, concentrates and any other semi-processed minerals

2 The above changes will not apply to mining of industrial minerals (Lime/ Sand/Gravel) The definition of minerals in the Income Tax Act is to be amended to align it with the definition provided in the Mines and Minerals Development Act No 7 of 2008 which reads as follows: Mineral means any material substance, whether in solid, liquid, or gaseous form, that occurs naturally in or beneath the surface of the earth, but does not include water, petroleum or any substance or thing prescribed by the Minister by regulation. Taxation of income arising from carriage by a Zambian resident Income earned by a business resident in Zambia and arising from carriage of persons, mail, livestock or any other goods shipped or loaded outside Zambia to other destinations outside Zambia will be taxable in Zambia. Currently income earned by a Zambian resident business operating completely outside Zambia is not taxable. The measure is intended to widen the tax base by preventing double non-taxation of income from international carriage where Zambia (the resident state) does not tax such income and the other state which is supposed to tax the income may not have provisions or rights to tax the said income. Permanent establishment The definition of permanent establishment in section 81AA Income Tax is to be amended to align it with the current international definitions. Exempt entities liable to withholding tax The sub-heading in Paragraph 6A of the second schedule of the Income Tax Act is to be amended to align it with the substantive provisions of Paragraph 6A of the second schedule of the Income Tax Act. The measure is intended to cover other entities that are exempt from income tax but still subject to withholding tax on interest arising from treasury bills, Government bonds or any financial instrument or security, currently the subheading under Paragraph 6A refers to withholding tax on interest earned by Public Benefit organizations only. New definition of turnover tax The definition of turnover in the Turnover Tax regulation will be amended to exclude interest, rental income, royalties and dividends as provided under the Income Tax Act. Audited accounts submission on request only The requirement for businesses to submit financial statements and other information together with electronically filed annual income tax returns will be removed. Currently all businesses are required to submit financial statements together with annual income tax returns. However with the introduction of electronic filing of annual income tax returns, the requirement will no longer be mandatory. Financial statements and other supporting documents will however be submitted only when required by the Commissioner General. Property transfer tax The exemption from property transfer tax on the transfer of property where there is group reorganization will be limited to a group of companies that has a holding company incorporated in Zambia. The measure is intended to promote the incorporation of holding companies in Zambia. Bad and Doubtful Debts The Income Tax Act to be amended to restrict the deduction of bad and doubtful debts incurred by banks and other financial institutions in determining taxable income only to the extent not covered by security or collateral pledge. Zambia Development Agency (ZDA) The Income Tax Act charging schedule that provides for Income Tax incentives provided through the Zambia Development Agency (ZDA) will be aligned to the ZDA (Multi-facility Economic Zone and Industrial Part) (Priority Sectors) (Declaration) order of 2014 (Statutory instrument no 17 of 2014). The alignment will clarify that the tax holiday on Corporation Income Tax and deduction of withholding tax on dividends is only applicable to manufacturing enterprises that are either located in a rural area or operating in a multi-facility Economic Zone or Industrial Park. Millennium Challenge Account The Income Tax Act is to be aligned to provide for exemption on income of entities or persons as provided for in the Millennium Challenge Compact Act No 6 of

3 The measure is intended to amend the Income Tax Act to cover eligible entities or persons such as contractors, consultant and other vendors that may qualify for tax exemption on income from the Millennium Challenge Account (MCA). Currently only MCA-Zambia and the implementing agents are covered under the Income Tax Act. Value Added Tax The Value Added Tax (VAT) Act is to be amended to restrict the deduction of input tax for an intending trader and provide for the Commissioner General to make Administrative rules on the deduction of input tax incurred by intending traders. This measure will restrict input tax deductible by intending traders to corresponding business lines after the expiry of the period where one has not commenced trading. Section 17 of the VAT Act will be amended to clarify the effective date of charging penalties on delayed payments of tax due on a VAT return. This measure is intended to ensure that the penalty for late payment is linked to the due date of the return. Currently the penalty on late submission is linked to the date of submission of the return instead of the due date of the payment. The Budget also proposes to expand the anti-avoidance provisions in Section 50 of the VAT Act. This measure is intended to expand the provisions in the VAT Act where a scheme to obtain undue benefit is detected if either of the conditions provided in section 50 of the VAT Act are met. The provision can only be invoked if both conditions on which undue tax benefit is obtained are fulfilled. Suppliers whose turnovers fall below the registration threshold for VAT will be allowed to de-register after the end of such an accounting year. The VAT Act will be amended to provide clarity on what items qualify for Zero rating under the project funded by Donor funds or co-financed with the Government. The measure is intended to clarify that only goods and services that are deductible under the VAT Act qualify for Zero rating under the relevant agreements and the goods/ services qualifying are those for the project/program and not for the contractors so as to avoid possible abuse. Customs & Excise The Budget proposes the following changes: Increase the duty rate on refined edible oil to K2.20 per kilogram from 85 Ngwee Increase customs duty on explosives to 25% Increase customs duty on roofing sheets to 30% Increase excise duty on imported un-denatured spirits of alcoholic content of 80% or higher by volume to 125% from 0%. The increase will only apply to importers who are not licensed to manufacture excisable products while the licensed manufacturers will continue to account for excise duty at the point of sale of the manufactured potable spirits at 60%. The above measures are intended to support the growth of the local manufacturers industries. Remove the 5% customs duty on aviation fuel. The measure is intended to reduce costs in the aviation sub-sector. The Customs and Excise Act is to be amended to introduce a penalty of 5,000 units (K 1,000) for submission of multiple declarations for the same transaction by declarants and provide for deregistration after the third offense. Mobile Telephone operators The Customs and Excise Act is to be amended to distinguish among the various value addition services offered by mobile phone service providers. This measure is intended to provide for separate tariff codes for various services offered by mobile phone service providers such as voice, Data and SMS. Currently there is only one tariff code that covers all various services offered by mobile service providers. 3

4 2015 Tax Rates Corporation Tax Rates Mining 0% 30% Income from tolling and metal processing 30% 35% Manufacturing and Trading 35% 35% Farming business 10% 10% Banking profits 35% 35% Profits from production of chemical fertilizers 15% 15% Profits from Telecommunication business: Profits up to K 250 million 35% 35% In excess of 250 million 40% 40% Companies with turnover of K 800 million 3% 3% Newly listed companies on LuSE year of listing only 2% discount 2% discount Mineral Royalty Underground mining operations 8% (Final) 6% Open cast operations 20% (Final) 6% Withholding Tax Withholding Tax on Commissions 20% 20% Foreign contractors 20% 20% Dividends to resident individuals and companies 15% 15% Commissions earned by nonresidents 20% 20% Management and consultancy fees to nonresidents 20% 20% Interest earned by individuals (savings/deposit a/cs) exempt exempt Medical levy on interest earned abolished abolished Royalties 20% 20% Interest on treasury bills 15% 15% Interest on Government Bonds 15% 15% Discount on financial instruments 15% 15% Rents 10% (final) 10% (final) Gaming/Lotteries and betting winnings 20% 20% Branch Profits Distribution 15% 15% 4

5 Multi-Facility Economic Zones/Industrial Parks Dividends (first 5 years) 0% 0% Management and consultancy fees 20% 20% Foreign contractors 20% 20% Royalties 20% 20% Property Transfer Tax Land and Buildings 10% 10% Shares 10% 10% Mining Rights 10% 10% Capital Allowances Buildings Industrial Buildings Improvement allowance 100% 100% Initial Allowance 10% 10% Wear & Tear 5% 5% Low cost housing 10% 10% Commercial Buildings Wear & Tear 2% 2% Implements, Machinery and Plant Wear & Tear Implements/machinery/plant/commercial vehicles 25% 25% Non-commercial vehicles 20% 20% 5

6 For additional information with respect to this Alert, please contact the following: Ernst & Young (Zambia), Pan Africa Tax Desk, Lusaka Nelson H. Mwila Ernst & Young Advisory Services Ltd., Africa Tax Policy Leader, Johannesburg Keith Engel Ernst & Young Advisory Services Ltd., Africa ITS Leader, Johannesburg Justin Liebenberg

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