Tax planning in Zimbabwe

Introduction

Income tax planning is the process of arranging your financial affairs in order to minimize the amount of tax you will have to pay. It's one way for individuals and companies to reduce their effective personal or corporate income tax burden. While it might be difficult at first, once you develop good habits about how and when your income gets taxed, it becomes easier over time.

Tax planning does not necessarily mean paying less than what would have been due under normal circumstances; rather one should try to structure things so that they will result in the least amount possible being paid by the company into Government coffers

Tax planning can help reduce your effective personal or corporate income tax burden significantly if done properly and legally. In addition, it is important that any changes made during this process remain confidential so as not to jeopardize any future claims or agreements with other parties involved with the plan itself (for example, banks).

Who Pays Tax?

According to the Zimbabwe income tax act Section 6 any PERSON generating taxable income is expected to pay tax. A “person” includes a company, body of persons corporate or unincorporate (not being a partnership), local or like authority, deceased or insolvent estate and, a trust (to which no beneficiary is entitled). 

Why is tax planning important?

Tax planning has various benefits for your business or trade and these include the following:

1. Reducing the tax burden – tax planning allows one to take advantage of credits and exemptions provided by the law to reduce the amount of tax payable. Through planning it is easier to identify allowable deductions (expenses that are non taxable). 

2. Planning cashflows – a business that plans its taxes knows when they are due and how much they will cost. This information is very important for cashflow planning and the budgeting process. It is a poor business practice to encounter unexpected cash outflows that could have been easily anticipated through proper planning.

3. Avoiding penalties – Failure to submit tax returns and paying the correct amount due attracts heavy penalties with the tax authorities. Therefore to avoid such it is important to engage in tax planning as this enables a business to know when they are supposed to make tax payments and how much.

4. Avoiding litigation – Tax planning reduces the risk of documentation errors which attracts litigation from the tax authorities. Without planning it is very easy to furnish tax authorities with wrong information unknowingly. Such an action attracts legal action from the tax authorities which can be disastrous for business. Through planning, errors re anticipated, risks are identified and mitigation measures are put in place.

How can one reduce the tax burden?

There are several ways you can reduce your tax burden by making use of the provisions provided by law. Below is a brief summary of some of the areas one can look at whilst doing tax planning to reduce the tax burden:

1. Maximize Tax credits – A tax credit is a provision that allows a taxpayer to subtract dollar for dollar their tax bill. Section 7 (1) c of the Zimbabwe income tax act allows a tax payer to claim credits in the computation of their tax payable. Section 5 to 13 of the Finance act explains the credits available and the conditions henceforth to claim such. When planning it is important for one to identify the credits that apply to them and fully claim them.

2. Maximize Exemptions – Exempt income relates to income which the law specifically state that it should not be charged tax. Section 14 (1) as read with the 3rd Schedule of the income tax act clears lays out the income and accruals that are exempt from tax. Examples include; bonus and performance related payments (up to the max stipulated by the act at that particular time), dividends, entertainment allowance, rental income paid to a person above 55 years of age. Refer to the act for a full list.

3. Allowable deductions – these are expenses which the law allows to be subtracted from your income to arrive at taxable income. Section 15 of the Income tax act clearly stipulates these expenses. It is therefore important for a taxpayer to ensure that they include all expenses mentioned in this section in their calculation of tax payable.

4. Claim Rebates – the law allows for taxpayers to apply for a complete suspension of a tax obligation in particular instances. This usually applies to customs duty. For example an organization importing goods for drought relief purposes can apply to have customs duty nullified at point of entry. Without proper planning it is difficult to take advantage of such.

Is tax planning legal?

Tax planning is legal in Zimbabwe, and it’s also legal in most countries. Tax planning is a legal practice that helps individuals save taxes by reducing their taxable income and expenses. Tax planning is not evasion, it’s just trying to minimize your taxable income by legally reducing it!