Name. Tim Ruther. address. Local EY Firm Na. Limited Trinity Office. Alick Nkhata LUSAKA Zambia National Budget Proposals

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1 Name Tim Ruther Job Title Manag Country Manag Direct Direct Tel: Directtel: Tel: Direct Direct Fax: +26 Directfax: Fax: Main tel: +00 Main Tel: tim.ruth Mobile: tim.ruthe address Local EY Firm Na Ernst Ernst & & Young Young Address Line 1 AA Limited ServicesLine Limited Address 2 Trinity Office Office Pa Address Line 3Pa Stand No No Address Line 4 P O Box BoxLine Address 5 Alick Alick Nkhata Nkhata Ro Address Line 6Roa LUSAKA LUSAKALine 7 Address ey.com 2018 Zambia National Budget Proposals 1

2 Disclaimer This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgement. Neither EY Zambia nor any other member of the global EY organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor Zambia National Budget Proposals

3 About EY Zambia 2 EY Global 3 A Global leader in professional services 3 Who we are 4 Quality as a constant 4 Budget Overview 5 Budget Summary 16 Budget Tax Proposals Tax Rates 31 Corporate Tax Rates Zambia National Budget Proposals 1

4 About EY Zambia EY Zambia is an integrated member of EY Central Africa, a member firm of EY Global, a leader among the world s professional services organisations. The firm is one of the longest-established auditing, advisory and tax firms in the region offering an unrivalled pool of specialists in business related services. Our grouping as part of the EY Global firm provides us with access to international resources and to new technologies, methodologies and leading practices at a global level. EY in Zambia Joined in EY is a thorough professional services organisation with its network gathering national offices all over the world, united by a single operating structure and a common culture of innovation and knowledge sharing. This unique One-Firm approach qualifies the people of EY to serve clients by bringing together any of the more than 20 competencies which transcend geographic borders and organisational lines. EY s global presence and integration has been a critical success factor in delivering value to our clients as well as broadening their views by exposing them to global best practice as well as developments in their respective industries across the world. We define ourselves into 4 service lines: Audit & Assurance Advisory Services 1. IT Risk Advisory Services 2. Risk Advisory Services 3. Fraud Investigation and Dispute Services 4. Performance Improvement Transaction Advisory Services Global Tax Advisory Services Zambia National Budget Proposals

5 EY Global The world is changing so rapidly that traditional ways of doing business are no longer sufficient. Now, more than ever, businesses need to act with the best knowledge possible and move forward with confidence in order to compete effectively. A Global leader in professional services EY is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 212,000 people are united by our shared values and unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Increasingly our clients and our people expect us to be more global in our outlook, more integrated in our thinking and more inclusive in our approach. EY has been proactive in responding to the globalisation of our clients by integrating our country practices across Europe, the Middle East, India and Africa. This bold move has brought together over 60,000 EY people in 87 countries generating revenues of $11.4 billion. We are the first of the Big 4 firms to achieve a level of integration of this scale and scope and believe we have set a new standard in professional services by bringing a truly borderless approach to our clients. EY currently has representation in most African countries. Our network throughout Africa ensures that communication is responsive to the needs of our clients, thereby stimulating trade and enhancing business relationships. We offer an invaluable on the ground service to investors, and can provide expert advice on local taxes, customs and systems, as well as introductions to influential local contacts 2018 Zambia National Budget Proposals 3

6 Who we are We are people who demonstrate integrity, respect and teaming, People with energy, enthusiasm and courage to lead. People who build relationships based on doing the right thing. Quality as a constant While change has become a given in today s world, at least one aspect of the way we serve clients remains constant: the fundamental of imbedding quality in every aspect of our business. To us, quality means getting the right information, making the right judgements, taking actions and maintaining the public trust Zambia National Budget Proposals

7 Budget Overview The State of the Economy The economic performance of the Zambian economy in 2017 continued on a positive trajectory following subdued growth in 2015 when growth fell to its lowest rate since 1998 at 2.9%. The economy was affected by depressed global economic activities and domestic factors which constrained growth. Key among these included lower copper prices, electricity supply deficit, high inflation, a deteriorated external sector and Government s challenges to fully finance its commitments. The economy is however, expected to grow by around 4% in 2017 compared to the growth rate of 3.4% recorded in For most of 2016, inflation remained elevated (peak of above 20%) before slowing down in the last quarter of the year on account of the base effect and the strengthening of the Kwacha relative to the major tradable currencies. Inflation closed at 7.5% in 2016 and registered further decline to 6.6% by September 2017 mainly driven by a reduction in food inflation and the pass through effect from the continued appreciation of the Kwacha against major tradable currencies. In 2017, the Kwacha exchange rate remained relatively stable averaging K9.4/US$ compared to an average of K10.2 in This has been on account of improved market confidence which has spurred among others increased participation by non resident investors in Government securities. The relatively lower inflation outlook in 2017 together with a stable kwacha regime led the Bank of Zambia to ease its monetary policy, thus reversing the pressure on credit growth, although lending rates have remained relatively high. Notwithstanding that lending rates remained high, there has been a downward trend since the beginning of the year from an average of 29.6% to an average of 27% as at September The strong macroeconomic indicators have, however, not translated in an improvement in the fiscal position. Total revenue mobilisation was below target in the first half of 2017 by 8.6% mainly on account of lower than expected collections from customs and excise duties, various nontax revenues and lower grant inflows from cooperating partners. Further, total expenditure for the period under 2018 Zambia National Budget Proposals 5

8 review was lower by 11.9% mainly due to the challenging fiscal position, seasonality in the implementation of capital projects and procurement constraints on foreign financed expenditures. Comparatively, in 2016, the total revenue was below target by 7.6% while total Government expenditure was above target by 10.1% further widening the fiscal deficit. The expenditure pressures arose on account of unbudgeted spending on electricity and fuel subsidies, higher than expected external interest payments buoyed by a weaker Kwacha, and higher than budgeted for spending on Farmer Input Support Programme (FISP) and on crop marketing under the Food Reserve Agency (FRA). The 2016 fiscal deficit was recorded at 5.7% of GDP against the budget target of 3.8% on a cash basis while the deficit on a commitment basis was at 8.5% of GDP. Going forward, GDP growth in 2017 is expected to be around 4% aided by increased output in agriculture, mining and manufacturing sectors. Further, improved electricity supply is anticipated to support increased production across all sectors of the economy. Consistent with the macroeconomic performance in the first part of the year, it is expected that the stability of the local currency relative to major tradable currencies, low inflation and expansionary monetary policy will continue for the rest of the period in 2017 (See Figures 1 and 2 on the trends in monthly inflation and exchange rates). Figure 1: Monthly Inflation Rates ( ) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: BoZ Zambia National Budget Proposals

9 Budget Overview (continued) Figure 2: Monthly Exchange Rate of the Kwacha to the USD ( ) Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Source: BoZ The 2018 Budget The economic environment in which the 2018 budget will be implemented, has remained challenging. On one hand, global growth at 3.5% and 3.6% in 2017 and 2018, respectively, is forecast to be higher than the 3.2% recorded in 2016 on account of improved growth in advanced, emerging and developing countries. Further, due to an increase in global demand as a result of the pick up in global economic activities, commodity prices and in particular, copper prices, are projected to continue to rebound. While on the local front, it is expected that continued fiscal consolidation coupled with eased monetary policy, barring unforeseen inflationary pressure, will support increasing economic activities. This is supported by the inflation projection of 6 8 % in the medium term within the medium target range. On the other hand, it is anticipated that fiscal challenges will persist due to inadequate resources to fully finance Government s commitments. As such, wide ranging structural reforms are needed to boost revenue collections and compliance to realise increased growth in line with the Seventh National Development Plan which focuses on an integrated multi sectorial development approach of accelerating development efforts towards Vision It is noteworthy that Government has pledged to continue with the implementation of reforms under the Economic Stabilisation and Growth Programme (ESGP) Zambia Plus which focuses on restoring fiscal fitness for sustained growth Zambia National Budget Proposals 7

10 The 2018 budget macroeconomic objectives and our commentary are outlined below: Achieve real GDP growth rate of at least 5.0%. Comment: This will likely be achieved, given the improved economic activities fuelled by expected higher commodity prices. Comparatively, 2017 projected GDP growth is 4% above the 2017 target of 3.4% Maintain single digit inflation in the range of 6-8%. Comment: Comparatively, September 2017 inflation closed at 6.6% with the projection that the year-end inflation will end within the 6 8% medium term target range. This is an improvement from the 2017 year-end target of 9%. Maintain international reserves of at least 3 months of import cover. Comment: This target is consistent with the 2017 target. The actual performance at August 2017 was 3.2 months of import cover. Attain domestic revenue mobilization of at least 17.7% of GDP. Comment: In view of the low revenue collections experienced over the last 2 years, this may not be attainable. Compared to 2017, domestic revenue mobilisation target was 18% of GDP, while the actual revenue collection are projected to be below this target by 7% by year end. Government needs to be innovative to augment their collection measures. Limit the fiscal deficit, on a cash basis, to 6.1% of GDP. Comment: This is a slightly enhanced target when compared to the 2017 target of 7 percent. Currently, it is projected that the fiscal cash deficit for 2017 will close at 6.8%. This may not be achieved given the rising infrastructure commitments. Limit domestic financing to no more than 4.0% of GDP Zambia National Budget Proposals

11 Comment: This target may be challenging to achieve in view of the planned structural alignment in the composition of the debt from foreign to domestic. Additionally, the levels of arrears which remain elevated may trigger high domestic debt levels. Comparatively the actual position for domestic financing accrued by August 2017 was 6% of GDP, against a target of 2% in Accelerate implementation of measures towards diversification of the economy. Comment: In this budget, there are a number of pronouncements made with respect to this target and its realisation will depend on their implementation. Reduce the stock of arrears and curtail the accumulation of new arrears. Comment: In 2017, against a budgetary allocation of K3.27 billion, Government spent K5.9 billion as at June 2017 in dismantling of arrears to suppliers and contractors. Government is to be commended for increasing the amount spent on clearing the backlog of arrears. However, there is still a substantial outstanding amount of K13.2 billion that remains to be cleared. We note that while Government has made commitments to clear the outstanding arrears, this remains a financial strain on suppliers and contractors and is contributing to the strained economic performance. We also note that K441 Million has been allocated for the clearance of FISP and FRA arrears in the 2018 budget. The Minister has however, not specified the sum allocated for the balance of other arrears and the method of dismantling them. Slow down the contraction of new debt to ensure debt sustainability. Comment: Although the debt to GDP ratio remain the same at 47% as at end of August 2017 compared to September 2016, the quantum of the total public debt burden has increased from US$9.3 billion at September 2016 to US$12.5 billion at August In the medium term, Government intends to restructure the 2018 Zambia National Budget Proposals 9

12 domestic to foreign debt ratio to 60% against 40%, respectively, from the current 55% to 45% ratio of foreign debt to domestic debt, to reduce foreign currency risk. Further, Government wants to lengthen the Government securities maturities to spread redemption over time. This measure has the potential to crowd out the private sector and increase the cost of financing. It will need to be implemented cautiously. To attain the macroeconomic objectives set above, Government will undertake the following key sector policies and interventions organised according to the five pillars of the Seventh National Development Plan and sectors. These are as follows: 1. Economic diversification and job creation; 2. Poverty and vulnerability reduction; 3. Reducing development inequalities; 4. Enhancing human development; and 5. Creating a conducive governance environment for a diversified and inclusive economy. Below are some of the policy interventions that Government will undertake in 2018: Agriculture, Livestock and Fisheries Development of a farm block model anchored on a core venture, agro processing and small holder farms with three farm block models planned for the Copperbelt, Muchinga and Northern Province in Facilitation of a US$100 million tractor and agricultural equipment assembly plant in the Lusaka South Multi Facility Economic Zone using the public private sector investment model. Continued promotion of diversification of agriculture through the e voucher input system by allowing farmers to access inputs for varied cash crops as well as livestock and fisheries development. Facilitate farmer s access to other necessary Zambia National Budget Proposals

13 services and support infrastructure in order to raise productivity and fully realise diversification. Continue with the development and facilitation of irrigation schemes across the country. Scale up production of vaccines and continue with the construction and completion of 18 artificial insemination centres. Facilitate access to both local and foreign market for goat and sheep. Implementation of the US$50 Million Zambia Aquaculture Enterprise Development Project aimed at building institutional capacity for fish, fingerlings and feed production. Industrialisation Facilitate the development of the Kafue Iron and Steel, Kalumbila and Chembe Multi Facility Economic Zones. Operationalise the Agricultural and Industrial Credit Guarantee Scheme to facilitate access to affordable credit to SMEs. Energy Finalisation of the cost of service study to guide future adjustment to electricity tariffs. Establishment of two large scale solar plants with an estimated capacity of 100MW underway. The works on the second phase of the 300 MW Mamba Thermal Plant and the 250 MW Kalungwishi Hydro Power Project will commence in The construction of the 750 MW Kafue Gorge Lower Power project will continue in 2018 In collaboration with the Zimbabwean Government commenced preliminary works for the development of the Batoka Hydro Power Project. The Project, with an expected output of 2,400 MW between the two countries has generated significant interest among 2018 Zambia National Budget Proposals 11

14 stakeholders following an Investor Conference held in March, Works to develop and connect the Zambia- Tanzania-Kenya Interconnector to increase the country s energy security and diversify the export base will commence in due course. Disengagement by Government from direct procurement of finished petroleum products by March This measure was initially announced in the 2017 National Budget with an initial implementation date of the first quarter of No feedback has been given on the apparent delays in implementing this. Transport and Information Technology Infrastructure Continue with the on-going construction of various road infrastructure projects currently underway, including the Link Zambia 8000, the Lusaka 400 and the Copperbelt 400. The US$240 Million Lusaka City Traffic Decongestion project will commence in The construction of Lusaka Ndola Dual Carriage to be financed through a public private initiative will commence in due course. Works on the Kitwe to Chingola Dual Carriage way and the Chingola to Solwezi road under - National Pension Scheme Authority (NAPSA) financing will continue in Collection of invested funds by NAPSA will be through toll gates. Continue with the construction of tolling sites across the country under the National Road Tolling programme. Continue with the expansion and modernisation of the Kenneth Kaunda International Airport and the new Copperbelt International Airport. Health Focus on completing the construction and upgrading of various health facilities Zambia National Budget Proposals

15 Recruiting of health care staff and establishing of essential medicine and medical supply hubs in Ndola, Mansa and Mpika. Establishment of the National Social Health Insurance Scheme in 2018 through a bill to be presented to the National Assembly for enactment aimed at achieving universal health coverage. Education and Skills Development Continue to expand access and provision of quality early childhood, primary, secondary and tertiary education in order to improve learning outcomes. Specific interventions will include among others the operationalisation of the Loan Scheme and strengthening the Loan recovery system for student loans in order to make student financing self-sustaining. Debt Management Maximize the use of available concessional resources before resorting to commercial loans consistent with the country s Medium Term Debt Strategy. The contraction of new debt over the medium term will be scaled down, consistent with Government s lower fiscal deficit targets. Repealing of the Loans and Guarantees (Authorisation) Act to enhance the oversight over the borrowing activities of Government by having the National Assembly approve the loans. Any new borrowings will be governed by a commitment to ensure that the country s domestic and external debt remains sustainable. Measures to be put in place to address the 2022, 2024 and 2027 maturities on the three (3) Euro Bonds that were issued in the international capital markets by setting aside funds in the Sinking Fund over the medium term Zambia National Budget Proposals 13

16 Social Protection Increasing the beneficiary household of the social cash transfer scheme from 590,000 to 700,000 households in Enactment of the social protection bill which will result in the establishment of the unified pension scheme, national social security agency, national security fund and will provide for basic social protections including health and maternity insurance. Examination of Some of the Policies in the 2018 Budget Shortfalls in revenue collections Revenue and grants are projected to be below target as was the case in The reason provided is that there was delayed and non-implementation of some measures such as the use of fiscal devices and low tax compliance in some taxes. While there is increased visibility by the Zambia Revenue Authority (ZRA) in its compliance function, it is not clear how Government will overcome the Information Communication Technology (ICT) structural challenge to successfully implement fiscal devices in the short-term. Secondly, it is not clear how much incremental revenue could be generated from the implementation of fiscal devices, given that the quantum of leakages in the current manual process has not been highlighted. Falling non-traditional exports While the total export earnings increased when compared to the previous year, it is noted that non-traditional exports (NTEs) reduced from US$835.5Million to US$811.7Million in This is a continuation from the previous year when the NTEs declined from US$1.6billion in 2015 to US$1.3billion in While a lot has been pronounced in terms of diversification from copper, the outcome has not been favourable as evidenced by falling export earnings from NTEs over the last three years. There is need for concerted efforts, first, in identifying the obstacles inhibiting the growth of NTEs Zambia National Budget Proposals

17 and thereafter implementing appropriate intervention to rectify the situation so that the economy becomes more resilient against commodity price shocks. Non-performing loans interventions Notwithstanding the easing of the monetary policy, the private sector credit contracted by 2.9% for the period to August This is in addition to the asset quality deterioration as evidenced by the increase in non-performing loans from 9.7% at the end of 2016 to 12.2% in August Government has noted that measures are being taken to reverse this trend, however it should be noted that the accumulations of arrears by government to domestic suppliers and contractors could be contributing to this deterioration in the asset quality. Any efforts by Government to quickly clear the arrears would inject needed liquidity and reverse this trend. It is also likely to impact on overall lending rates to the private sector and contribute to the increased economic activities. Integrated Multi-sectorial policies and interventions The Integrated multi-sectorial approach to development implies that sectors work in unison to achieve the objectives of the Seventh National Development Plan (7NDP). This is commendable and we applaud government s efforts in this regard. However, the policies and interventions in the 2018 budget though they are clustered under the 5 pillars of the plan, are still sector specific and are not based on an integrated multi-sectorial approach. Government needs to come up with interventions that would cut across sectors and speak to pillars of the 7NDP if its objectives are to be realised Zambia National Budget Proposals 15

18 Budget Summary Table 1 gives an overview of the 2018 Budget and compares it to the 2017 Budget. Table 1: 2018 Budget Summary (K Million) Revenue by category K million (2018) Resource Envelope % share of Totalresources (2018) K million (2017) % share of Totalresources (2017) Tax revenues 41, % 37, % 9% % change Non-tax revenue 7, % 5, % 49% Grants 2, % 2, % 100% Borrowing 20, % 19, % 4% Total Revenues 71, % 64, % 11.1% Expenditure by category K million (2018) Expenditure by function % share of budget K million (2017) % share of budget % change General public 25, % 17, % 44% services Defence 3, % 3, % 9% Public order and 2, % 2, % -8% safety Economic affairs 17, % 21, % -18% Environmental % % 54% protection Housing and % % -1% Community amenities Health 6, % 5, % 18% Recreation, % % 39% culture and religion Education 11, % 10, % 9% Social protection 2, % 2, % -15% Total expenditure 71, % 65, % 10% Source: Extracts from the Budget speeches for 2017 and Zambia National Budget Proposals

19 Figures 3 and 4 compares resource composition for the 2017 and 2018 budgets, while Figures 5 and 6 compares the expenditure allocation for the 2017 and Zambia National Budget Proposals 17

20 Budget Tax Proposals 2018 Overview In line with the theme for the 2018 budget, Accordingly, Government has proposed a number of measures. These revenue measures are aimed at pursuing the strategic objectives contained in the Seventh National Development Plan (7NDP). These include increasing the revenue base to drive sustained inclusive growth. These are discussed below. Due dates for Filling of Tax Returns The due-dates for filing of the Value Added Tax (VAT) returns and making payments have been amended as follows; from 16th to 18th of every month for VAT Property Transfer Tax Proposed changes Introduce Property Transfer Tax (PTT) at the rate of 5% of the transaction value attributable to the Zambian entity (for instance, using the share of the Zambian entity in the total stock of the group) in a case where direct or indirect ownership or control of a company incorporated or registered in Zambia and carrying out business in Zambia changes outside the Republic of Zambia and introduce relevant collection and declaration modalities thereof. Comment: Currently, the PTT does not apply to the transfers of shares in a company which is not incorporated in Zambia. The proposed measure is intended to bring within the scope of taxation in Zambia, the transfer of economic interests in Zambian companies irrespective of where it takes place and at what level in the shareholding structure. We note that experience in other jurisdictions such as Uganda (Tullow Oil/Heritage Oil case) and India (Vodafone/ Hutchison Whampoa Properties) has shown that unless the related legislation is carefully drafted, its enforcement may lead to disputes with taxpayers. We also note that currently, collection of PTT is largely focused on the transfers that require registration such as shares (Patents and Companies Registration Agency) (PACRA), land (Registrar Zambia National Budget Proposals

21 of Lands and Deeds) and mineral rights (Ministry of Mines and Mineral Development). This has led to lack of clarity with regard to the application of PTT on rights whose transfer does not require registration. If the new measures are to succeed, reporting and compliance requirements will have to be strengthened as offshore transactions will not be reported and registered in Zambia. Therefore, tax collection mechanisms must shift focus away from the point of registration. Consideration should also be given to exemption of intra-group transactions that do not lead to a transfer of economic value from a multinational group. The Minister has proposed to introduce Property Transfer Tax on the transfer of Intellectual Property at a rate of 5% and provide for a definition of intellectual property in the Income Tax Act. Comment: This is a welcome measure as it will not only increase revenue but also enhance recognition and protection of intellectual property rights. It is however not clear what will be included in the definition of intellectual property. As we have noted above with respect to offshore transfers, this measure might only work effectively for intellectual property such as trademarks or brands which have a clearly defined registration process. Furthermore, as intellectual property relates to largely intangible assets, consideration should be given to introducing income tax allowances for purchased intellectual property. Such recognition of intellectual property is key to developing a knowledge based economy. Corporate Income Tax (CIT) Transfer Pricing - Government announced that there will be greater enforcement but the regulations have not yet been issued. The minister also announced government s intention to strengthen audit capacity to deal with Base Erosion and Profit Shifting. We expect government to make further announcements with regard to participation in the Organisation for Economic Corporation and Development (OECD) Base Erosion and Profit Shifting (BEPS) agenda in the coming year Zambia National Budget Proposals 19

22 The definition of resident has been amended to refer to place of effective management rather than central management and control. Comment: The determination of a Place of Effective Management (PoEM) is hardly a straightforward subject matter in international taxation. The PoEM basis of determining tax residency provides relatively more clarity as a tie-breaker in determining residency for tax payers but it still requires further clarification in order to achieve the desired result of broadening the tax base for Zambia. Establishing the PoEM depends on an objective assessment of facts and this will require guidance as well as interpretation from the ZRA. (OECD) has provided commentary on the application of effective management, with a focus of the location where a company s strategic decisions are made. We note however that a number of jurisdictions have filed objections to the OECD s interpretation. These include Zambia s major trading partners. South Africa for example focuses on the place where a company is managed on a regular day to day basis by Directors or Senior Managers. Such varying definitions are likely to pose challenges for taxpayers unless clarity is provided. Removal of 5 year tax holidays Comment: This measure furthers the agenda of maximizing revenue. A widely held opinion by the public is that this regime has been exploited to evade tax. The counter measure proposed is accelerated capital allowances. This measure might contradict the objectives stated in the Seventh National Development Plan to develop a smart economy. The replacement of an incentive based on taxable profits with an incentive based on capital allowances reinforces the focus on manufacturing and the industrial economy at the expense of the knowledge economy that should also be a driver of economic growth. Whilst one would argue that such industries are able to benefit from research and development deductions in the Income Tax Act, these deductions currently exclude expenditure on research that is of a capital nature. This change Zambia National Budget Proposals

23 would offer little incentive for investments in the service industry, for example which is key to diversification and strong economic growth. In addition, this change may not solve one of the core problems with the current tax incentive regime, which is that capital allowance reliefs expire before or at the same time as the tax incentive (most assets are fully depreciated for tax by the fifth year of their use). We also note that a number of investment plans have also been made and modelled based on the current incentive system. These investments plans have a lengthy planning horizon and the sudden removal of this incentive could have a detrimental effect. Amendment to mandate companies to disclose all related parties Comment: Disclosing all of a company s related parties may be an onerous obligation on tax payers especially multinationals, many of whom would have a large number (up to thousands) of related parties. In many cases, the bulk of these relationships may be of little value to the tax authorities as the list of related parties may well include dormant companies in the group. There is a significant risk that this amendment may result in an information overload for the tax authorities that may not help in identifying revenue streams in related party transactions. It is also not clear what level of detail that should be attached to the disclosure of each relationship. It would be more useful, in our view, to require the disclosure of actual transactions with related parties in greater detail. Further information could also be gained from the adoption of Country-by- Country Reporting (CbCR) which is part of the OECD s Base Erosion and Profit Shifting (BEPS) Action Plan 13. Such reporting mechanisms would provide more useful but substantially reduced information. Amendment to clarify the tax point for the deduction of Withholding Tax (WHT). Comment: This measure clarifies what was an established but often misunderstood position. The current tax point for WHT is determined with 2018 Zambia National Budget Proposals 21

24 reference to the timing of receipt of income for corporate income tax purposes. This change duplicates the provision dealing with receipt of income and allows the tax point for Withholding Tax to be determined separately. Amend Section 2 of the Income Tax Act to redefine the term management or consultancy fees to make it clearer as regards services relating to Information Technology. Currently the definition reads as follows: Management or consultancy fee means payment in any form, other than an emolument, for or in respect of any creation, design, development, installation and maintenance of any information technology or solution, programme or system, administrative, consultative, managerial, technical or consultative or any service of a like nature. The proposed definition will read as follows: Management or consultancy fee means payment in any form, other than an emolument, for or in respect of any administrative, consultative, managerial, technical, or any service of a like nature or any creation, design, development, installation and maintenance of any information technology solution, programme, system, or a combination. Comments: There has been a lot of misunderstanding on whether the programme or system on its own would create a tax point for WHT under management and consultancy fees. The proposed definition now seeks to link the programme and system to the services rendered, such as the creation, design, development and maintenance Removal of 20% specific capital allowance provided to soft drinks manufacturers Comment: This change removes the largely irrelevant industry specific incentive provided to soft drinks manufacturers. The normal capital allowance for manufacturing equipment is 50% event, even without the above provision. The provision of a due date for the first provisional CIT return for a person that is registers after 31 March of a given charge year Zambia National Budget Proposals

25 Comment: The measure provides a ninety day grace period to file a provisional income tax return, when registration for income tax is effected after 31 March. Previously, persons registered for Corporate Income Tax after 31 March would be required to file a return at the nearest subsequent due date. Introduction of qualification criteria for individual Tax Payer Identification Numbers (TPINs). Comment: The measure emphasizes the intention of the tax authorities to enforce maximum compliance. This change mandates the population of individuals capable of earning income to obtain TPINs, as a foundation for better tax compliance monitoring and evaluation in the near future. Amendment to include banks as part of institutions required to request TPINs prior to providing relevant services Comment: As above, the amendment clarifies that banks should request TPINs from clients, as banks interact with a vast majority of tax payers, these institutions are being used as a catch-all for qualifying tax payers, to ensure maximum compliance. This measure is meant to help progress the agenda for informal sector taxation. Amendment of the definition of an incapacitated person to revise the legal age of a person to 21 years. Comment This inevitable measure harmonises the provisions of Income Tax Act with the amended Constitution. The taxation of the income of incapacitated persons is provided for in Section 66 (1) (h); providing for an agent to be legally appointed to account for tax in an incapacitated person s stead. Increase in base tax from K150 to K350 per year. Comment This measure (affecting Section 64 (d) (i)) reflects the Ministers intention to explore all available options for revenue maximisation. The base tax is charged in instances where the Commissioner General has no information on which to base a formal tax assessment Zambia National Budget Proposals 23

26 Pay As You Earn The exempt threshold is still K3,300 and the top marginal tax rate is 37.5%. See table Below: First 0 % First 0% Above Above K4,100 Above K3,300 to 25% Above 4,100 to Above Above K6,200@ 37.5% Proposed changes The Minister has proposed to remove the allowable deduction for contribution to approved pension funds of K255 per month. The rationale for this is that at the time one gets their lump sum payment and annuities, relief already exists. Comment: The removal of the allowable deduction for contribution to approved pension funds means that under the PAYE system, the amount of tax deductible by the employer on any pay will be calculated on an employee s total gross pay. The allowable deduction was used to provide relief for pension contributions however, terminal benefits are now tax free. Therefore, the proposed measure aligns the provisions of the Income Tax Act to the Constitutional provision which excludes terminal benefits from taxation. It is no longer necessary to exclude part of pension contributions from tax The measure is also intended to be part of the wider efforts to remove non-performing tax incentives offered by the Government and limit incentives to those that translate into the intended objective. Presumptive tax The presumptive tax payable by Individuals and partnerships involved in the operation of public service vehicles has been adjusted upwards as per the table on the next page: Zambia National Budget Proposals

27 Type of vehicle (setting capacity) a) 64 Seater and above Current tax per vehicle per annum K7, Proposed tax per vehicle per annum K10, b) Seater K6, K9, c) Seater K4, K7, d) Seater K3, K5, e) Seater K2, K3, f) Seater K1, K g) Below 12 Seater (including taxis) K K Comment: The increase in the presumptive tax may prompt the fleet owners and the association to demand for an increase in bus fares. This could have an impact on lower income groups. Value Added Tax Proposed changes Amendment to Section 16 of the VAT Act to provide for the following: 1. Amend the due date for the VAT Return to the 18th day after the month of transactions from the 16th day; 2. Provide for the due date of the 16th day after the month of transactions with respect to withholding VAT Agents. Comment: This is a welcome change as it allows taxpayers to have full information on VAT withheld at source and to take it into account before calculating the VAT payable for the month. Provide amendment to the Act by introducing a provision to impose penalties for a supplier that fails to issue a tax invoice from an approved computer package, a pre-printed tax invoice book or Fiscalised Cash Register Zambia National Budget Proposals 25

28 The proposed structure shall be a fine of: 1. 10,000 penalty units (K6,000) for the first offence; 2. 25,000 penalty units (K15,000) for the second offence; and 3. 50,000 penalty units (K30,000) for the third and any subsequent offence Comment: We welcome the focus of compliance on the issuer of invoices, as opposed to the current provisions which penalize the recipient of an invalid invoice. In most cases, recipients of invalid invoices have limited means of verifying that computerized invoices are valid and that the invoices have been issued from a computer package approved by the Commissioner-General. The compliance should be enforced on the supplier of the invalid invoice, rather than the recipient. Further changes to remove sanctions on the recipient should be considered. Amendment to the Exemption Order to exempt unprocessed and semi-processed Tobacco from VAT. Comment: This change is likely to increase costs for tobacco farmers as they will not be able to claim input VAT. There are costs incurred by farmers that are standard rated for VAT purposes, such as payments for leased equipment. The farmers can no longer claim input VAT on these costs. Introduce penalties for failure to furnish records for inspection. Comment: It is not clear how this provision will apply in instances where there is an integrated audit of all tax types. There is a danger that this provision could be invoked even when the audit process has not been completed properly. Currently, there are no clear guidelines on the conduct of the audit process and in some instances, due process is not followed. It is important that such legislative provisions are accompanied by a clear tax audit operating framework including sufficient notice for audits. Government should consider introducing a unified tax admiration act covering all tax types anchored Zambia National Budget Proposals

29 on taxpayer constitution rights. A unified Act would ensure that the approach to audits is uniform irrespective of tax type. Concessional Measures Government has removed the Insurance Premium Levy on re-insurance. Comment: This measure will reduce the cost of reinsurance and should help to increase the risk appetite of insurance companies. Customs and Excise Duty Proposed Changes Increase excise duty from 0 percent to 125 percent on methylated spirits, denatured alcohol and undenatured alcohol of heading Comment: The increase will lessen the misclassification of methylated spirit for denatured alcohol. Methylated spirit is a denatured alcohol also called denatured rectified spirit. Its ethanol based and includes methanol. Methanol is added to discourage recreational consumption. Methylated spirit can be used for medicinal purposes. We are of the view that any increase in duty on other spirits of heading 2207 should be accompanied by a reduction in duty on spirits used for medicinal purposes. Increase customs duty on unmanufactured tobacco and tobacco refuse from 15% to 25%. Comment: This will harmonise the tax treatment with all other types of tobacco, however, the new duty appears to conflict with the stated aim of encouraging local processing of tobacco. Furthermore, if government want to increase value addition in Zambia, in line with the measures announced in the budget, we are of the view that customs duty on unmanufactured tobacco should not be increased. Currently Zambia produces about tonnes of tobacco but has installed capacity to process tonnes meaning Zambia needs to import tobacco for its processing plants to be sustainable and this measure might have the opposite effect. Introduce a specific excise duty on manufactured tobacco and provide for a separate tariff classification for other manufactured tobacco which are currently classified together as cigarette Zambia National Budget Proposals 27

30 Amend Chapter 24 by the subdivision of heading to provide a tariff line for Cut rag, provide for the statistical unit of kilogram and exempt excise duty when an import is made by a licensed manufacturer. Comment: The proposal intends to introduce a specific excise duty on manufactured tobacco is revenue measure targeting the so-called sin taxes. We believe that such measure should be accompanied by rigorous efforts to control illegal importation of tobacco products which remains a challenge. Remove of customs duty on various inputs that are used in the manufacture of stock feed and fish feed in order to support Business growth and diversification. Comment: The proposed is welcome as it is meant to support the growth of the agricultural sector. Reduce customs duty on Ladle bricks that are used in the formation of furnaces from 5%t to 0% to reduce the cost of manufacturing. Comment: The proposal is intended to promote the growth of the local industries that use the products as inputs. Increase customs duty on electric geysers and stoves to 40 percent from 25 percent. Comment: The proposed amendment is meant to encourage the use of solar energy as opposed to hydro-electric power. Currently, solar geysers are exempt from customs duty and import VAT. This change should lead to wider use of solar geysers. Remove the customs duty on point of sale machines, electronic fiscal devices and SIM cards. Comment: The proposed measure is welcome and intended to promote the use of electronic transactions and facilitate the implementation of the use of fiscal registers. It will assist in the digitization on purchasing transactions. Introduce of 15% levy on all import (except imports on CE7 form, individual declarations) that are not accompanied by a corresponding proof of payment through the banking system. Comment: The proposed measure is intended to promote the use of electronic transactions and curb under valuation, money laundering and illicit financial flows. However, it is not clear how Zambia National Budget Proposals

31 this provision will apply to importers that enjoy extended credit terms from their suppliers as such importers will not have a proof of payment. Other changes Extend the number of items on which the surtax applies and also to remove raw materials that were erroneously put on the surtax schedule. Amend the Customs and Excise Act by the subdividing HS Code to provide a tariff line for the cathodes and sections of cathodes of refined copper. Amend the Customs and Excise Act by subdividing Heading 3923 to provide tariff lines for Bottle Closures and Sleeves for flower packaging. Delete Section 3 (4) of the Customs and Excise Act. Introduce a customs valuation referencing system to reduce under valuation of imports. Non-tax measures Compensating measures Government has introduced a charge of K2 per 50 kilogram of cement. Comment: This measure increases the cost of investing in capital expenditure. More effective revenue measure that focus on consumption should be considered such as imposition of a levy on plastic bags. This would also help to mitigate the environment costs that arise from uncontrolled disposal of plastic bags. Government will remove tax exemptions on public works financed through commercial loans. Comment: This measure will ensure that there is equity between private sector borrowing which does not benefit from exemptions and public sector borrowing. Government has proposed for the removal of the provision which provides for a government agency which is not engaged in providing taxable supplies to claim input VAT from Ministry of Finance. Government has proposed the extension of the period for which a person carrying on exploration can claim input VAT refunds from 7 years to 10 year to be in line with the maximum period for which an exploration licence is valid Zambia National Budget Proposals 29

32 Government has proposed to reduce the validity period of supporting documentation for input VAT claims to three from six months. Government has proposed to provide for the submission of three VAT returns and payments per month by oil marketing companies on fuel uplift, to align with the customs and Excise (general) Regulations Zambia National Budget Proposals

33 Tax Rates Corporation Tax Rates Mining 30% 30% Income from tolling and metal 35% 35% processing Manufacturing and Trading 35% 35% Farming business 10% 10% Banking profits 35% 35% Profits from production of 15% 15% chemical fertilizers Profits from Telecommunication business: a) Profits up to K % 35% b) In excess of % 40% Companies with turnover of K % 3% Newly listed companies on LuSE year of listing only Withholding Tax a) Withholding Tax on Commissions 2% discount 2% discount 20% 20% b) Foreign contractors 20% 20% c) Dividends to resident 15% 15% individuals and companies d) Commissions earned by 20% 20% non-residents e) Management and consultancy 20% 20% fees to non-residents f) Management and consultancy 15% 15% fees to residents g) Interest earned by individuals (savings/deposit a/cs) exempt exempt h) Medical levy on interest abolished abolished earned i) Royalties 20% 20% j) Interest on treasury bills 15% 15% k) Interest on Government 15% 15% Bonds l) Discount on financial instruments 0% 0% 2018 Zambia National Budget Proposals 31

34 m) Rents 10% (final) n) Gaming/Lotteries and betting winnings o) Branch Profits Distribution 10% (final) 20% 20% 15% 15% Multi-Facility Economic Zones/ Industrial Parks: a) Dividends (first 5 years) 0% 0% b) Foreign contractors 20% 20% c) Royalties 20% 20% Property Transfer Tax a) Land and Buildings 5% 5% b) Shares 5% 5% c) Mining Rights 10% 10% d) Intellectual Property 5% N/A Capital Allowances Building Industrial Buildings a) Improvement allowance 100% 100% b) Initial Allowance 10% 10% c) Wear & Tear 5% 5% d) Low cost housing 10% 10% Commercial Building a) Wear & Tear 2% 2% Implements, Machinery and Plant (Farming and Agro-processing) a) Wear & Tear 100% 50% Implements, Machinery and Plant (Energy Sector) a) Wear & Tear 50% 50% Implements, Machinery and Plant (Other) a) Wear & Tear 25% 25% Non-commercial vehicles a) Wear & Tear 20% 20% Zambia National Budget Proposals