Zimbabwe’s cumbersome tax system scaring away investors

To review economic trends in the past year, the Zimbabwe National Chamber of Commerce (ZNCC) commissioned a survey where business responded to a range of questions. Below is an abridged version of the ZNCC’s report, which also gives a glimpse of what to expect in 2022.

In some tax jurisdictions, some of the tax paying processes are considered as cumbersome, bureaucratic, costly and time consuming, thus making the investment climate in such a country not attractive.

Zimbabwe performs badly as it ranks 146 out of 190 countries with a score of 58,7, while the best African performer, Mauritius was ranked number five with a score of 94.

Zambia was ranked 17 with a score of 88,9 and was followed by Seychelles which ranked 36 with a score of 84,7. Overall, Zimbabwe’s performance is poor and discourages investment in the country, when compared to other regional SADC countries.

The Zimbabwe tax rate system is characterised by too many tax heads with very high tax rates.

The tax system does not promote compliance and investment but rather promotes tax evasion, defaults, informalisation of businesses and company closures.

The system is penalising the complying formal businesses the most.

The system is punitive given the prevailing operating environment as it increases the cost of doing business rendering local products uncompetitive. However, Mauritius has a simple and advantageous tax policy.

For instance, as a resident of Mauritius, the taxpayer has no property taxes to pay or inheritance tax.

The taxpayer simply has to pay income tax, which represents 15% of income. Maximum taxation in Mauritius is 15% and the Mauritian government has developed its economic strength through a policy that encourages investment while respecting international standards. The signing of double taxation agreements and treaties with many countries, including France, has allowed the OECD to classify Mauritius as one of the most virtuous countries in terms of taxation.

An investment in Mauritius is therefore, carried out in a perfectly legal framework and represents a particularly interesting “tax optimisation”.

 Getting electricity

Electricity is one of the main enablers of economic activities in any business environment.

Zimbabwe’s rank of 167 and score of 48,6 show the extent to which the country’s performance on this component is very poor and discouraging to any potential investor, both local and foreign investors.

The best performers in the Sadc region are Mauritius with a global rank of 28 (and score of 88) followed by Namibia (ranked 76 and score of 78,3) and Tanzania with a rank of 85 and a score of 74,9.

Zimbabwe is characterised by erratic power supplies, especially during the winter period where agricultural activities such the winter wheat crop will be at its most critical stage.

During this critical period, electricity is prioritised to the agricultural sector leaving other sectors without energy supply.

Although electricity tariffs are among the lowest in the Sadc region, electricity supply has been the average business person’s worst nightmare.

Erratic power supplies have resulted in huge losses for most businesses over the years due to interrupted operations, lost time and revenue, damage to machines and lost data.

However, Zesa Holdings (Zesa) has, in recent months, moved to scheduled power cuts by area targeting the peak hours.

Other sources of energy such as liquid fuels are expensive considering the unit price of fuel which is among the highest in Sadc.

Zesa has attributed the erratic power supplies to excess demand and the $16 billion (US$64 million) owed by its customers.

Getting credit

Zambia performs extremely well on this sub-component as it was ranked number four globally with a score of 95, while Malawi was second best performer in the Sadc region with a global ranking of eleven and a score of 90.

Zimbabwe was ranked number 67 globally with a score of 65.

In short, the performance of Zimbabwe is poor when compared to most countries. To add on, an ordinary citizen can get a loan within 30 minutes in Zambia.

The Zimbabwe’s regulatory and supervisory system on the financial sector has resulted in the betrayal of the fiduciary responsibilities and loss of public confidence.

A robust credit legislation regime should envisage and effectively deal with issues of finance charges, interest rates, debt-restructuring, charges for extensions of credit in excess of pre-established limits, late fees or delinquency charges, data protection and consumer rights. However, Zimbabwe lacks the benefits of such a robust regime.

There is no one clear piece of legislation that wholly deals with this subject in Zimbabwe, as is the case in South Africa (National Credit Act).

Trading across borders

Given that more countries over the years have become progressively open, trading across borders becomes paramount in terms of gauging how countries ensure efficiency when it comes to trading with other nations.

Zimbabwe was ranked 159 with a score of 54,3 while the best Sadc region performer was Eswatini which was ranked 35 with a score of 92,9.

On the other extreme, the Democratic of Congo (DRC) performed very badly as it had a score of just 3,5 and a ranking of 187 out of 190 countries.

Zimbabwe’s international trade facilitation is below par.

Delays at the border posts are common phenomena especially during the peak period. It may take at least 12 hours to have a passport stamped at the border posts and transit trucks wait for at least three days to be cleared.

However, the introduction of a one-stop border post system at Chirundu and the upgrading of the Beitbridge Border post has improved the situation although a lot still needs to be done.

Zimbabwe lies at the centre of the Southern African trade corridor and inefficient border clearing systems as well as rampant corruption have resulted in the country losing millions of dollars annually.

Because of stringent cross-border trading measures imposed on some goods by the government, smuggling and use of unofficial channels have been widespread.

Perceptions on the Ease of Doing business

Business survey respondents were asked on how they perceived the ease of doing business in Zimbabwe for 2020 and 2021.

About 15, 92% of the respondents viewed the 2020 doing business environment as unfriendly, with the figure going down to 76% for 2021.

The responses suggest that there was a slight improvement in the ease of doing business.

However, the proportion of businesses which consider the 2021 doing business environment to be unfriendly (76%) is too high compared to those who consider it to be friendly (11%) and neutral (13%). As such, more still needs to be done to improve the doing business environment in Zimbabwe.

Consistency in the interventions that have seen the international rankings improve since 2016 is needed to maintain the positive trajectory.

Respondents were asked to indicate the challenges weighing on the ease of doing business in the country.

According to the survey results, the major challenges relate to limited availability of credit (91%), unpredictable policy landscape (82%), multiple licence requirements (73%) and red tape in public offices (67%), among others.

Relating to credit availability, Zimbabwe lacks patient capital which is critical for the much-needed recapitalisation and retooling.

International lines of credit remain elusive given the country’s high sovereign risk.

Furthermore, banks have no appetite to loan out the estimated US$1,7 billion lying idle.

Moreover, the past three years have seen the promulgation of a plethora of statutory instruments (SIs) which have had unintended destabilising effects on businesses.

These are introduced with neither consultation with the business community nor impact analysis.

Despite the establishment of the Zimbabwe Investment Development Agency (Zida), red tape and multiple licences remain major inhibitors to doing business in Zimbabwe.

More reforms are still needed in the licencing regime and efficiency in public service delivery.

In terms of business confidence, businesses were asked about their perception of the current situation compared to the previous year, and their expectations for the next year.

Overall, more businesses considered 2021 a better year than 2020.

However, it is important to note that the proportion of those who perceived no change was only slightly less than those who felt 2021 was better, save for the profitability aspect where there was a marked difference. — Zimbabwe National Chamber of Commerce

About Post Author