THE ZAMBIAN TAXATION SYSTEM
chapter
We begin our study of Advanced Taxation with a brief look back at some fundamental topics that were
covered in the Taxation paper, namely how the Zambian tax system works, when a person is liable to tax
and the administration of taxes.
1
topic index
syllabus references
1 The Zambian Taxation System
2 Liability to Taxation
1A
1B(i)
3 Personal tax computations
1B(i)
4 Administration of taxes
1B(ii)
3
LEARNING OBJECTIVES

Explain the nature of taxation and investment regulation in Zambia, dealing specifically with legal,
administrative and political environment of the Zambian tax system (1A)

Explain the interaction of taxes, prepare relevant tax computations and advise when the taxes are payable,
dealing specifically with:
(i)
Liability of various persons to taxes and collection of taxes using a wide range of methods such as selfassessment, direct assessment, deduction at source and so on
(ii)
Objections and appeals procedure in respect of all extant taxes (1B)
. The Zambian taxation system
……………………
In this section we first examine the role of taxation as part of the government's raising of revenue. We
then introduce the main taxes in Zambia (how they affect individuals and companies is covered in later
chapters of this Study Manual) and consider how rules and regulations form tax law. Finally we look at
the role of government bodies in the taxation process.
……………………
.. The role and functions of taxation
The Zambian Government, like any other government raises its revenue through taxes imposed on the
income and gains of Zambian resident persons.
However, the choice of taxation policy has wider implications and may be used as a way of addressing social
and economic issues, such as the redistribution of wealth.
Taxes are levied in order to raise revenue for the central government. This revenue is then used to meet
public expenditure on the provision of public goods and services, such as:
•
•
•
•
Education
Health
Road network, and infrastructure
Defence
Apart from raising revenue for the central government, there are other functions of taxation which include
the following:
4
(a)
Influencing economic activity in the country, for example by giving tax incentives to individuals and
institutions that engage in activities that contribute towards economic growth. Examples are the
capital allowances given on implements, plant and machinery and on buildings, which are all assets
used in the conduct of business activity that leads to economic growth.
(b)
Re-distributing income and wealth, by using progressive tax systems to prevent the rich from getting
richer at the expense of the poor.
(c)
Maintaining the well being of the environment, for example by imposing heavy taxes on income and
gains arising from activities which are not friendly to the environment. Activities such as those
contributing to climate change are discouraged using taxes levied on the income or on the acquisition
of assets used in the conduct of those activities.
.. Zambian taxes
The main taxes found in Zambia are:
•
•
•
•
•
•
•
•
•
Income Tax
Value Added Tax
Mineral Royalty Tax
Customs and Excise Duty
Property Transfer Tax
Turnover Tax
Presumptive Taxes for Transporters
Base Tax
Insurance levy
These taxes can be categorised in a number of different ways as follows.
... Direct taxes
These are levied directly on the income and gains. Normally a percentage of the income or gain is paid in the
form of a tax. Examples of direct taxes in Zambia are:
•
•
•
Income Tax
Mineral Royalty Tax
Property Transfer Tax
In general, direct taxes are progressive (see below), which means that the amount of tax payable is
dependent on the level of income. The higher the income, the higher the tax; the lower the income, the
lower the amount of tax.
Persons whose income levels are low, therefore, will not pay the same amount of tax as those whose income
levels are high.
These are taxes that are imposed indirectly. They are expenditure taxes and therefore, they are borne by
consumers. Traders who are registered for charging indirect taxes charge these taxes on the supplies they
make and collect the tax on behalf of the Zambia Revenue Authority (ZRA). The indirect tax collected must be
paid to ZRA by a set date.
The amount of indirect tax payable does not depend upon the level of income of the consumer. Both those
who are in the low income group as well as those who are in the high income group pay an equal amount in
the form of taxes.
An example of an indirect tax is Value Added Tax (VAT).
... Capital taxes
These are taxes on capital receipts. A capital receipt is an amount of receipt resulting from a disposal of a
capital item.
An example of a capital tax in Zambia is Property Transfer Tax.
... Revenue taxes
These are taxes which are levied on revenue receipts. A revenue receipt is a receipt arising from a sale of a
non-capital item. Items acquired with a view to subsequent resale are non-capital items. When they are sold,
the amount received is a revenue receipt or income and is subjected to a revenue tax.
An example of a revenue tax is income tax.
5
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
... Indirect taxes
... Regressive taxes
These are taxes that represent a smaller proportion of a person's income as the income of that person rises.
The average rate of tax falls.
Value Added Tax is a regressive tax because the rate of Value Added Tax is the same on the good whether
that good is bought by a rich person or by a poor person.
... Progressive taxes
These are taxes that represent a larger proportion of the person's income as that person's income rises. The
average rate of taxation rises. The rates of tax for lower income levels are less than the tax rates for higher
income levels. Income tax is generally an example of a progressive tax where it is levied at different tax rates
such that low income is taxable at lower rates. In Zambia, this is the case concerning personal income tax.
Lower income is chargeable at lower tax rates and higher income is chargeable at higher tax rates.
... Proportional taxes
These are taxes where the percentage of income paid in taxation always stays the same. The average rate
of taxation is constant irrespective of the level of income. An example would be a fixed percentage tax rate
on investment income.
..
Sources of tax law
... The statutes
The source of tax law is the statute. Statutes or Acts of Parliament make it legal for taxes to be levied. In
Zambia, the main statutes include the following:
•
•
•
•
•
•
The Zambia Revenue Authority Act under which the Zambia Revenue Authority (ZRA) is set up
The Income Tax Act that governs income tax in Zambia
The Value Added Tax Act that governs VAT
The Customs and Excise Act that governs customs and excise duties
The Property Transfer Tax Act that governs property transfer tax
The Mines and Minerals Development Act that governs mineral royalty
... Statutory instruments
These are a form of delegated legislation issued by a Government Minister. Statutory Instruments related to
tax matters are issued from time to time by the Minister of Finance. The statutory legislation empowers the
Minister to make orders to give effect to legislation.
... Case law
Decided cases in taxation assist with the interpretation of a particular statute which relates to the specific
circumstances of a case. Taxing Acts are a special form of statute demanding a strict or predictable form of
interpretation. Over the years, certain broad principles have been laid down as follows.
6
•
The words of the Act must be given their natural meaning.
•
Where there is doubt as to meaning of a statutory provision, the taxpayer must be given the benefit
of the doubt.
•
The tax must be clearly imposed on the taxpayer by the terms of the statute.
•
There is no equity in taxation.
... Practice Notes
Other sources of legislation derive directly from the ZRA. While these do not have a legal effect, they assist in
the smooth running of the taxation system.
Practice Notes are the most significant form.
These are issued by the ZRA to indicate the ZRA's Interpretation of a statute. Practice Notes are normally
issued following amendments to tax legislation.
..
Charge year
Amendments to statutory provisions are made generally every charge year following the proposals made by
the Minister of Finance in his or her budget speech.
A CHARGE YEAR is a year for which tax is chargeable. It is also known as a year of assessment, a fiscal year or
an income tax year. Income and gains arising in a particular charge year are taxable in that charge year.
In Zambia, a charge year runs from 1 January to 31 December. For example, the year from 1 January to 31
December 2018 is the charge year 2018. Similarly, the year from 1 January 2019 to 31 December 2019 is the
charge year 2019.
The charge year is very important when dealing with income tax as amendments to the income tax act
generally take effect from 1 January.
In the case of Value Added Tax and customs and excise duties, amendments do not generally take effect
from 1 January. They may be effective from a date earlier than 1 January or later in the charge year.
For ZiCA examination purposes, the tax legislation examinable in a particular year is that which relates to that
year. The taxation table showing the rates of income tax for individuals and for companies will be included in
the examination paper. In addition, the rates of customs and excise duties, rate of Property Transfer Tax, rate
of Turnover Tax, together with the Value Added Tax registration threshold and standard rate will be provided
in the taxation tables.
..
The Zambia Revenue Authority and the Ministry of Finance
The Zambia Revenue Authority (ZRA) collects revenue on behalf of the Government under the supervision of
the Minister of Finance. Its goal is to maximise tax compliance and increase domestic revenue yield in
Zambia by instituting a fair, efficient and effective tax regime.
The ZRA also advises the Government on matters of taxation policy to ensure that tax revenue is maximised.
The two operations divisions of the Zambia Revenue Authority are:
(1)
Domestic Taxes, which is responsible for the administration of income tax, property transfer tax and
mineral royalty tax, excise duty and domestic value added tax
(2)
Customs Services, which deals with customs duty and import VAT.
Advice Centres provide an interface between the ZRA and taxpayers. They are a one-stop shop for taxpayer
information and services for ZRA.
... The Ministry of Finance
Once collected, taxes are remitted to the Ministry of Finance.
This is the Government Ministry that is responsible for mobilising the financial resources needed by the
Government and allocating them to other Ministries, Provinces and other spending agencies. The Ministry
7
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
... The Zambia Revenue Authority
supervises the ZRA in ensuring that the authority collects tax revenue that it is expected to collect in a given
period of time.
……………………
Taxes provide revenue for the government. There are a number of taxes in Zambia, which can be
classified in different ways, and are generally governed by statutes and regulations.
The Zambian Revenue Authority administers the collection of taxes, which are then passed to the
Ministry of Finance.
……………………
. Liability to taxation
……………………
This section discusses the rules for determining whether someone is liable for, or exempt from, income
tax. It also covers what income is liable to income tax or not.
……………………
.. Persons liable to income tax
Income tax is chargeable on the income of persons resident and ordinarily resident in Zambia. The term
person refers to individuals and legal persons, such as Zambian companies.
... Residence
The term residence applies to both the taxable individuals and other taxable persons, for example
companies.
The Income Tax Act states how to establish the residence status in respect of individuals as well as in respect
of persons other than individuals.
An individual is resident in Zambia if he or she is physically present in Zambia for a period of not less than
183 days in a charge year. For example, if Mr Alutuli is physically present in Zambia for 183 or more days in
the charge year 2019, he will be resident in Zambia for that charge year.
A person, other than an individual is resident in Zambia if:
•
•
That person is incorporated or formed in Zambia, or
The effective management of the person's business or affairs are exercised in Zambia.
A person other than an individual is effectively managed in Zambia if the board of directors or other central
management board for that person meets in Zambia for the purposes of decision making affecting that
person.
... Ordinary residence
Individuals who normally live in Zambia are resident and ordinarily resident in Zambia.
Individuals who come to Zambia with the intention of remaining here for more than 12 months are deemed
to be resident and ordinarily resident in Zambia from the date of arrival.
In the British case of Lysaght v IRC, ordinary residence was defined as to mean that the residence is not
casual and uncertain, but that the person held to reside does so in the ordinary course of his life.
8
... Domicile
This concept relates to the place which an individual refers to as the permanent home. A person is domiciled
in the country that is his or her permanent home. The two types of domicile are domicile of origin and
domicile of choice:
(a)
Domicile of origin is the domicile acquired at birth. This means that individuals are domiciled in the
country in which they are born.
(b)
Domicile of choice is the domicile that is acquired by choice. Individuals can be able to make a choice
as to what country should be their permanent home once they attain the age of 16 years.
The concept of domicile may affect the amount of income that will be assessed on a taxable individual where
such an individual has income from all over the world. Individual who are domiciled in Zambia would be
liable to Zambian income tax on their world wide income whether the foreign income is remitted to Zambia
or not, unless the income is specifically exempt from income tax. However, the system applicable in Zambia
is to assess income to tax if it has a Zambian source. As a result, the world wide income may not be assessed
in Zambia if its source is deemed to be not a Zambian source.
Zambian income tax is chargeable on the income of all persons that are resident in Zambia.
Required
Explain:
(a)
The circumstances under which a company is held to be resident in Zambia for income tax purposes.
(b)
The circumstances under which an individual is held to be resident and ordinarily resident in Zambia
for income tax purposes.
(c)
The meaning of 'income is liable to tax in Zambia if it is from a source within Zambia or from a source
deemed to be within Zambia'.
.. Persons exempt from income tax
Persons who are not resident in Zambia are exempt from Zambian income tax.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
1.1 Residence
Certain persons are exempt from Zambian income tax although they are resident and ordinarily resident
here. These persons include:
•
The Republican President on the income received as President
•
The income of Chiefs received from the government
•
Local authorities
•
Approved funds
•
Commonwealth Development Corporation
•
A club, society or association organised and operated only for social welfare or recreation, and
improvement and so on, if its income may not be received in any way by a member or shareholder
•
Registered Trade Unions
•
Political parties registered as a statutory society under the Societies Act
•
Other persons listed in Part III of the second schedule of the Income Tax Act
9
.. Taxable and exempt income
Income that is liable to tax is income that arises from a source within Zambia or deemed to be within
Zambia.
Taxable income includes the following:
•
•
•
•
•
•
•
•
Rental income from letting of property in Zambia
Profits or gains derived from a business
Emoluments from holding an office or from being employed
Interest from banks and building societies
Loan and debenture interest
Dividends
Royalties received
Income received by way of annuities
Certain income is exempt from tax. Examples are:
•
Scholarships or bursaries payments for education and maintenance during education
•
The emoluments of the Republican President which are received as a result of holding that office
•
The emoluments of chiefs, including those of the Litunga of Western Province
•
War disability pensions
•
Income received by way of grant as compensation for loss of office or disturbance by an officer
admitted to the permanent and pensionable establishment of the government
•
Income received in conjunction with the award of military, police, fire brigade or as an old age
pension paid out of public funds, or as a benefit paid under any written law in respect of injury or
disease suffered in employment.
……………………
Liability to tax is based on the residence and ordinary residence of a person.
The liability of an individual will also depend on his domicile position.
A person, and certain types of income, may be completely exempt from tax.
……………………
. Personal tax computations
……………………
In this section we introduce the steps involved in performing simple income tax computations.
……………………
An individual's income that arises in a given tax year is aggregated to arrive at the total taxable income for
that year. For married taxpayers, each spouse is taxed separately.
Income tax rates applicable to that tax year are then applied on the income to calculate income tax payable.
Certain income is not subjected to assessment at the end of the tax year because it is taxable at source.
For the tax year 2019, the income tax rates are as follows.
Income band
First
Next
Next
Excess over
10
K1 – K39,600
K39,601 – K49,200
K49,201 – K74,400
Total income
K
39,600
9,600
25,200
74,400
Rate
%
0
25
30
37.5
The rate of income tax on income from farming is 10%. This means the excess of farming profits over the tax
free amount (the first K39,600 for the tax year 2019) is taxable at the rate of only 10% for individuals.
EXAMPLE
Income tax payable 1
Mr Zimba has business profit of K79,000 for the tax year 2019. The turnover of the business for the tax year
2019 was K900,000.
Required
SOLUTION
Calculate the income tax payable by Mr Zimba for the tax year 2019.
MR ZIMBA
PERSONAL INCOME TAX COMPUTATION FOR 2019
Business profit
Less tax free income
K
79,000
(39,600)
39,400
Income tax
25%  K9,600
30%  K25,200
37.5%  K4,600
Income tax payable
2,400
7,560
1,725
11,685
EXAMPLE
Income tax payable 2
Mrs Banda runs a farm on a commercial basis in the Central Province of Zambia. Her farming profits for the
tax year 2019 were K109,500. She has no other sources of income.
Required
MRS BANDA
PERSONAL INCOME TAX COMPUTATION FOR 2019
Farming profit
Less tax free income
Income tax payable: 10%  K69,900
K
109,500
(39,600)
69,900
6,990
EXAMPLE
Income tax payable 3
Mr Nkumbwa is employed at annual salary of K108,000 which is payable to him in 12 monthly instalments.
He was in employment throughout the tax year 2019.
Required
11
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate, for Mrs Banda, the income tax payable for the tax year 2019.
SOLUTION
Calculate the income tax payable by Mr Nkumbwa for the year 2019.
MR NKUMBWA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
K
108,000
(39,600)
68,400
Emoluments from employment
Less tax free income
25%  K9,600
30%  K25,200
37.5%  K33,600
Income tax payable
2,400
7,560
12,600
22,560
Where an individual has both farming income and non-farming income, then the income tax should be
calculated in a manner that minimises the income tax payable by the individual. This is achieved when the
tax free amount is allocated as much as is possible to the non-farming income before it may be allocated to
the farming income. The following example illustrates how this is done to ensure that the individual taxpayer
pays the minimum possible amount of income tax where non-farming income is more than K39,600.
EXAMPLE
Income tax on farming income 1
Mutiti has been running a farm for several years. The average turnover in last three years has been around
K950,000. For the tax year 2019, he made a tax adjusted farming profit of K55,000 after deducting capital
allowances. He also received employment income of K44,000 from part-time employment. Income tax
deducted from the part-time employment income under the Pay As You Earn system was K15,400.
Required
SOLUTION
Calculate the income tax payable by Mutiti for the tax year 2019.
Mutiti has both non-farming and farming income. As the non-farming income exceeds K39,600, its excess
over this exempt amount will be chargeable at the rates of 25% and 30% while the whole of the farming
income will be chargeable at only 10%.
MUTITI
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Income from part-time employment
Farming profits
Less tax free income
12
Total
K
44,000
55,000
99,000
(39,600)
59,400
Non-farming
income
K
44,000
Farming
income
K
55,000
44,000
(39,600)
4,400
55,000
Income tax on non-farming income
25%  K4,400
1,100
Income tax on farming income
10%  K55,000
5,500
6,600
(15,400)
(8,800)
Less Pay As You Earn
Final income tax payable/(repayable)
If non-farming income is not more than K39,600, then part of the tax free amount is still allocated to cover
part of the farming income as shown in the following example.
EXAMPLE
Income tax on farming income 2
Sonkwe, runs a farming business in Zambia. When he is free, he conducts part time lectures in agriculture at
a local college. He has the following income for the tax year 2019:
K
82,000
9,000
Profits from farming
Salary from part time lecturing
Income tax deducted from his salary under the Pay As You Earn system was K2,500.
Required
Sonkwe's non-farming income is less than K39,600. Part of his farming income will also be exempt from
income tax. As the non-farming income is K9,000, an amount of K30,600 of the farming income will be tax
free.
SONKWE
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Income from part-time employment
Farming profits
Less tax free income
Total
K
9,000
82,000
91,000
(39,600)
51,400
Non-farming
Income
K
9,000
9,000
(9,000)
Nil
Farming
income
K
82,000
82,000
(30,600)
51,400
Income tax on farming income
10%  K51,400
Less Pay As You Earn
Final income tax payable
5,140
(2,500)
2,640
If a taxpayer dies part way through the tax year, the income that is subject to income tax is all income
earned up to the date of death. Income arising after the date of death forms part of the estate of the
deceased and is subject to tax on that estate.
13
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate the final amount of income tax payable by Sonkwe for the tax year 2019.
……………………
An individual's income that arises in a given tax year is aggregated to arrive at the total taxable income
for that year. Income tax rates applicable to that tax year are then applied on the income to calculate
income tax payable.
Where an individual has both farming income and non-farming income, then the tax free amount should
be allocated to non-farming income first to minimise the income tax payable by the individual.
……………………
. Administration of taxes
……………………
This section covers the various methods of collecting taxes and the procedures for objections and
appeals against assessed tax.
……………………
..
Collecting direct taxes
Taxpayers must submit a return of provisional income to the Commissioner General, containing their
estimate of taxable income for the tax year, not later than 31 March of the tax year to which it relates. For
those who register after 31 March for income tax, the due date for filing a provisional return is 90 days from
the date of registration for income tax.
Following the end of the tax year, a taxpayer is required to submit a self-assessment income tax return,
showing the amounts of income received from all the sources and a computation of income tax payable, to
the Commissioner General by 21 June following the end of the tax year to which the return relates.
The income tax due in respect of the above income is collected using many methods which include the
following.
... Pay As You Earn (PAYE)
PAYE is a method of collecting income tax at source from individuals in gainful employment. The employer
will deduct the amount of tax from their employee's salary or wages on each pay day and then remit the tax
to the Authority. This method enables the employee to avoid paying taxes at the end of the charge year and
also shifts the burden of responsibility to the employers. Details on the operation of PAYE are covered later
in this Text.
Income tax deducted from emoluments under the Pay As You Earn system is payable not later than the 10th
day of the month following that in which the income tax was deducted.
... Self-assessment
Self assessment applies in Zambia. Self assessment is a system of collecting tax under which returns are issued
to taxpayers to enable them make their own assessments. These assessments, made by the taxpayers
themselves, are the self assessments. Each taxpayer includes the amount of taxable income for a given year in
the relevant return, together with the tax thereon. A return of provisional income is issued at the start of the tax
year to enable the taxpayer to estimate the taxable income and tax for the tax year.
Provisional tax is a quarterly advance payment of income tax due based on estimated income for the current
year. Any person in receipt of income, other than emoluments subject to PAYE, is required to pay provisional
income tax within 10 days following the end of each quarter of the tax year, on the following dates:
14
•
First instalment for the quarter ended 31 March due on 10 April in the tax year
•
Second instalment for the quarter ended 30 June due on 10 July in the tax year
•
Third instalment for the quarter ended 30 September due on 10 October in the tax year
•
Fourth instalment for the quarter ended 31 December in the tax year due on 10 January in the
following tax year
The amount of provisional tax payable is an estimate of the income tax for a given charge year on the
estimated income.
The taxpayer should estimate the taxable income for a charge year and then calculate income tax on the
amount of estimated income. The estimated income tax is the provisional tax which is payable in four
quarterly instalments on the dates stated above.
The main advantages of the provisional tax system are:
(a)
There is inflow of revenue to the government throughout the year.
(b)
The burden on the part of the taxpayer is reduced as the huge amount of tax will not be payable at
once at the end of the charge year.
The actual amount of income tax will be known at the end of the tax year when all the necessary information
is available. The balance of income tax, if any, is payable not later than 21 June following the end of the tax
year to which it relates. There is a balance of income tax if the actual amount of income tax for the tax year
exceeds the provisional income tax already paid.
... Withholding tax
Withholding tax (WHT) is deducted at source from certain sources of investment income which include:
rents, interest, dividends, royalties, and so on.
Type of investment income
WHT rate
Final tax?
Royalties
15%
NO
Dividends paid by mining companies to
individuals
0%
NO
Rent
10%
YES
Exempt
NO
Other interest income
15%
YES
Dividends received from other Zambian
companies
15%
YES
Bank interest received by individuals
The above rates of WHT also apply to any investment income received by Zambian companies from
Zambian sources, with the exception that for companies, deposit and savings interest received from financial
institutions and other type of interest income is subject to WHT at the rate of 15% which is not a final tax.
The WHT is merely an advance tax. After computing the final company income tax on the chargeable profits,
WHT is given as a credit against that company's income tax.
A WHT rate of 20% applies to dividends, payment or distribution of branch profits and payment of interest to
a non-resident.
... Turnover tax
This is a direct tax chargeable on the taxpayer's turnover for a given tax year. It is payable by all persons
running businesses, other than excluded persons, whose annual turnover is not more than K800,000.
Excluded persons are:
•
Partnerships
15
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The main rates of WHT on investment income received by individuals are as follows:
•
•
Individuals and partnerships carrying on the business of passenger transport, and
Persons making taxable supplies who opt to register voluntarily for value added tax.
The turnover must not be made up of excluded income. Excluded income is consultancy income and any
income that is subjected to final withholding tax.
Turnover tax is a form of presumptive tax (see below).
Turnover tax is calculated on a monthly basis and paid not later than the 10th day following the end of the
month to which the tax relates. A taxpayer can make an election to pay turnover tax on a quarterly basis. If
this is the case, the due date for payment of turnover tax is the 10th day following the end of the quarter to
which the tax relates. Persons who are required to pay turnover tax are excluded from payment of
provisional tax.
... Presumptive tax for transporters
Presumptive tax is a fixed amount of tax payable each year. It is chargeable in cases where it would be
difficult to collect income tax on profits in the normal way, for example on activities and income from the
informal sector. This greatly reduces the possibility of tax evasion.
Individuals and partnerships carrying on businesses in the transport sector, for transportation of passengers,
are liable to pay presumptive taxes, based on the seating capacities of their transportation vehicles.
The current amounts of presumptive tax are as follows:
Sitting capacity
Amount of tax per vehicle (per annum)
K
64 seater and above
10,800.00
50–63 seater
9,000.00
36–49 seater
7,200.00
22–35 seater
5,400.00
18–21 seater
3,600.00
12–17 seater
1,800.00
Below 12 seater (including taxis)
900.00
To make the amounts more affordable, the following seven categories of daily tickets have been provided
for:
Sitting capacity
Tax per day
K
64 seater
29.60
50–63 seater
24.70
36–49 seater
19.70
22–35 seater
14.80
18–21 seater
9.90
12–17 seater
4.90
Below 12 seater (including taxis)
2.50
Presumptive taxes for transporters do not apply to Limited companies running public passenger
transportation businesses. Such businesses are assessed under company income tax on profits.
16
(a)
Describe the types of taxable persons who are required to pay provisional income tax.
(b)
Explain how provisional income tax for the tax year 2019 would be calculated.
(c)
Persons who are required to pay provisional income tax must do so at the specified times.
Required
(i)
(ii)
State the due dates for payment of provisional income tax for the tax year 2019.
Describe the consequences of paying provisional income tax late by one month.
(d)
Explain to Mr Tembo, who is required to pay provisional income tax, the due date when he should file
his 2019 income tax return and pay the final income tax.
..
Penalties and interest
Penalties are chargeable for late or underpayments of taxes as well as for late submission of returns. Most
of the penalties are standard. They apply to all the direct taxes equally and in some cases, to other taxes as
well.
There are a number of different penalties that may be charged.
... The general penalty
A general penalty is chargeable in cases where no specific penalty has been prescribed. The amount of
general penalty is currently 100,000 penalty units or imprisonment for a term not exceeding 12 months or
both. Interest is chargeable for underpayments and late payments of income tax.
... Late and underpayments of tax
If income tax is paid late, or underpaid, the penalty is 5% of that income tax per month or part thereof. This
penalty runs from the due date of payment of income to the date of actual payment. In the case of late
payments of value added tax, the penalty is 0.5% of the outstanding value added tax for each day that the
tax remains outstanding.
Interest on overdue tax is charged at the Bank of Zambia discount rate plus 2% per annum. The interest is
calculated on the income tax, value added tax or any other tax that is paid late. Interest on overdue tax runs
from the due date of payment of tax to the date when payment is actually made.
If the amount of provisional income tax paid is less than the actual total income tax for the tax year by at
least one third, then an additional penalty apply at the rate of 10% of the underpaid income tax. To avoid
such a penalty, taxpayers should keep on monitoring their affairs during the tax year and ensure that
revisions are made to their return of provisional income whenever circumstances change.
The self-assessment income tax return should be submitted on or before 21 June following the end of the
tax year. The balance of income tax, if any, should also be paid on or before that date.
... Late submission of returns
If the self-assessment income tax return is submitted late, the amount of penalty charged depends on
whether the taxpayer is an individual or a person other than an individual:
(a)
Where the taxpayer is an individual, the penalty is 1,000 penalty units (K300) per month or part
thereof.
17
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
1.2 Administration of income tax
(b)
Where the taxpayer is a person other than an individual, for example, a company, the penalty is 2,000
penalty units (K600) per month or part thereof.
If the VAT return is submitted late, the daily penalty is the higher of:
(a)
(b)
0.5% of the outstanding value added tax, and
1,000 penalty units (K300).
... Other penalties and fines
Other penalties and fines are summarised below.
(a)
The penalty for failing to attend the proceedings of the Tax Appeals Tribunal as provided for in the
Act, or failing to attend without reasonable excuse, or refusing to answer questions put to that
person is 5,000 penalty units.
(b)
Unauthorised disclosure of information contrary to section 8 of the Income Tax Act is punishable by:
(i)
(ii)
(iii)
(c)
Imprisonment for a term not exceeding two years
A fine not exceeding 200 penalty units, or
Both imprisonment and a fine.
The penalty for fraudulent returns is:
(i)
(ii)
(iii)
Imprisonment for a term not exceeding three years
A fine equal to 300,000 penalty units, or
Both imprisonment and a fine.
... Status of penalties
Penalties charged under the Income Tax Act for failing to comply with the obligations have the same status
as income tax. They are therefore not allowable expenses in the computation of taxable profit for the
following or any other period.
..
Objections and appeals procedure
The Income Tax Act makes provision for dealing with disputes arising from assessments and determinations
as follows.
Within 30 days of the issue of an assessment, a taxpayer may notify the Commissioner General of their
objection in writing. Beyond this period, the objection will be considered late. The Commissioner General
may make a determination either allowing or disallowing a late objection. If they decline, the taxpayer may
appeal to the Tax Appeals Tribunal on the grounds that the Commissioner General's determination was
unreasonable. The Commissioner General is required to inform the taxpayer of their decision regarding the
objection.
If the taxpayer is dissatisfied with the Commissioner General's decision, they may within 30 days of the
Commissioner General's notice, lodge an appeal with the Tax Appeals Tribunal.
The Appeal may be on a point of law or fact or both. The taxpayer may not appeal to the Supreme Court
against the ruling of the Tax Appeals Tribunal on a point of fact, but only on a point of law.
The Tax Appeals Tribunal, which was introduced by the Tax Appeals Tribunal Act (2015), consists of seven
members appointed by the Minister of Finance. Its main function is to determine facts, listen to the
arguments adduced by the appellant on one side and the representative of the Commissioner General on the
other, and to reach a decision, either confirming or discharging the assessment.
The chief administrative officer of the tribunal is the Registrar who is responsible for:
(a)
18
Ensuring that notices, summons, or other documents are served not less than seven days before the
date of hearing
(b)
Receiving relevant documents on behalf of the tribunal from appellants
The quorum of the tribunal is three, of which one should be an accountant. At any meeting of the tribunal,
there shall preside:
(a)
The Chairperson
(b)
In the absence of the Chairperson, the Vice Chairperson
(c)
In the absence of the Chairperson and the Vice Chairperson, such member as the members present
may elect for the purpose of that meeting
The Tribunal delivers its decision at the end of the hearing, but in any case, the decision may be put in
writing and sent to all parties to the appeal within 14 days of delivering the decision. The Registrar keeps
copies of all decisions endorsed with a date of issue to all parties, and publishes the decision in the
government Gazette within 14 days of the date of the decision being delivered.
... The Tax Appeals Tribunal
The functions of the Tax Appeals Tribunal (TAT) as outlined in the Tax Appeals Tribunal Act (2015) are to hear
and determine:
(a)
Appeals from decisions of the Commissioner-General under the Customs and Excise Act, the Income
Tax Act, the Property Transfer Tax Act, the Value Added Tax Act and other tax legislation; and
(b)
Any matter prescribed by the Minister of Finance, by statutory instrument, to be a matter against
which an appeal may be made under the Acts referred to in (a) above.
The Tribunal consist of the following members who are appointed by the Minister of Finance:
(a)
Three legal practitioners of ten years or more standing recommended by the Judicial Service
Commission and who have sufficient knowledge of, and experience in, tax matters;
(b)
Two qualified accountants certified as such by the Zambia Institute of Chartered Accountants; and
(c)
Two persons from the business community.
A member appointed to the tribunal holds the office for a period of four years from the date of appointment
but may be reappointed for one further term. A member may resign upon giving three months' notice, in
writing, to the Minister of Finance.
The chief administrative officer of the Tribunal is the Registrar who is appointed by the Judicial Service
Commission. The responsibilities of the Registrar are to:
(a)
Issue summons;
(b)
Keep a record of the proceedings of the Tribunal;
(c)
Keep, or cause to be kept and maintained, a register of orders and judgments of the Tribunal;
(d)
Maintain custody of, and keep an account, of fees and other moneys payable or paid to the Tribunal,
and keep proper accounts of the moneys;
(e)
Hear and determine interlocutory applications, subject to any rules made under the Act;
(f)
Perform such other functions and exercise such other powers as may be conferred by rules made
under section 18 of the Tax Tribunal Act.
A direction or order made on an interlocutory application under point (e) above cannot be made so as to
prejudice the Tribunal from rendering a just decision on a matter. A person aggrieved with a decision of the
Registrar may appeal to the Chairperson and in the absence of the Chairperson, the Vice-Chairperson and in
the absence of both the Chairperson and Vice-Chairperson, a member who is a legal practitioner.
19
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The Minister of Finance appoints a Chairperson and Vice Chairperson from amongst the members who are
legal practitioners.
The Act provides that a person shall not be appointed as Registrar unless the person is a legal practitioner of
five years or more standing. The Ministry of Finance additionally provide such other staff as may be
necessary for the performance of the functions of the Tribunal.
The quorum of the Tribunal is three, of which one should be an accountant. At any meeting of the Tribunal,
there shall preside:
(a)
The Chairperson
(b)
In the absence of the Chairperson, the Vice Chairperson
(c)
In the absence of the Chairperson and the Vice Chairperson, such member as the members present
may elect for the purpose of that meeting
The appeal to the Tribunal shall be made in writing and shall be lodged with the Tribunal within 30 days from
the date of decision or determination and shall state:
(a)
(b)
(c)
(d)
(e)
Details of the decision appealed against
The date of the decision
The office giving the decision
The grounds for appeal
Any other information as the Tribunal shall require
For VAT, a taxable supplier may make an appeal on decisions or determinations made by the Commissioner
General in relation to:
(a)
(b)
(c)
(d)
(e)
Registration or cancellation of registration or refusal to register a supplier
The tax assessed to be payable on any supply of goods or the importation of any goods
The amount of any input tax that may be credited to any taxable supplier
The application of any rule providing for the apportionment or disallowance of input tax
Any notice requiring early payment of tax or security
Similarly, appeals may be made against Income Tax assessments made by the Commissioner General in
circumstances where a taxpayer has submitted a return which the Commissioner General considers to be
inaccurate.
The appellant may appear in person at a hearing or be represented by such person as they may appoint.
The Commissioner General may be represented by any person the Commissioner General may appoint for
the purpose.
At the hearing of an appeal, the rules of natural justice apply but the Tribunal is not bound by the rules or
practice as to evidence and may inform itself in relation to any matter in such manner as it thinks fit.
The Tribunal delivers its decision at the end of the hearing, but in any case, the decision may be put in writing
and sent to all parties to the appeal within 14 days of delivering the decision. The registrar keeps copies of all
decisions endorsed with a date of issue to all parties, and publishes the decision in the government Gazette
within 14 days of the date of the decision being delivered.
……………………
Taxes on income are collected from taxpayers using a variety of methods. These include self assessment,
the withholding tax system, the Pay As You Earn system, the turnover tax system and the presumptive tax
system.
Penalties and interest apply when a return or tax payment is late or less than it should be is paid.
A taxpayer may notify the Commissioner General of any objection against any assessment made on them
within 30 days.
……………………
20
Chapter Roundup
Taxes provide revenue for the government. There are a number of taxes in Zambia, which can be classified in
different ways, and are generally governed by statutes and regulations.

The Zambian Revenue Authority administers the collection of taxes, which are then passed to the Ministry of
Finance.

Liability to tax is based on the residence and ordinary residence of a person.

The liability of an individual will also depend on their domicile position.

A person, and certain types of income, may be completely exempt from tax.

An individual's income that arises in a given tax year is aggregated to arrive at the total taxable income for
that year. Income tax rates applicable to that tax year are then applied on the income to calculate income
tax payable.

Where an individual has both farming income and non-farming income, then the tax free amount should be
allocated to non-farming income first to minimise the income tax payable by the individual.

Taxes on income are collected from taxpayers using a variety of methods. These include self assessment, the
withholding tax system, the Pay As You Earn system, the turnover tax system and the presumptive tax
system.

Penalties and interest apply when a return or tax payment is late or less than it should be is paid.

A taxpayer may notify the Commissioner General of any objection against any assessment made on them
within 30 days.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system

21
Quick Quiz
22
1
What are the main Zambian taxes?
2
Briefly describe the functions of taxation in the economy.
3
Describe, using appropriate examples, the various ways in which taxes may be classified.
4
Who is required to pay income tax in Zambia?
5
Explain the two terms 'domicile of origin' and 'domicile of choice'.
6
List the classifications of taxable and exempt income.
7
What are the due dates for payment of provisional income tax for the tax year 2019?
8
What is the due date for filing the return of provisional income for the tax year 2019?
9
What action should a taxpayer take if they are not in agreement with the assessment raised by the
Commissioner General?
Answers to Quick Quiz
1
•
•
•
•
•
•
•
Income Tax
Value Added Tax
Mineral Royalty Tax
Customs and Excise Duty
Property Transfer Tax
Turnover Taxes
Presumptive Taxes
2
•
•
•
•
Raising revenue for central government
Influencing economic activity
Redistributing income and wealth
Maintaining the well being of the environment
3
Direct – Example: Income Tax
Indirect – Example: Value Added Tax
Capital – Example: Property Transfer Tax
Progressive – Example: Income Tax
Regressive – Example: Value Added Tax
Proportional – Example: Tax on investment income
4
Income tax is chargeable on the income of persons resident and ordinarily resident in Zambia. The term
person refers to individuals and persons other than individuals, such as Zambian companies.
5
Domicile of origin is acquired at birth. Domicile of choice is the country the individual elects to make their
home and where they establish their closest ties (after they reach the age of 16).
6
Taxable income
Rental income from letting of property in Zambia
Profits or gains derived from a business
Emoluments from holding an office or from being employed
Interest from banks and building societies
Loan and debenture interest
Dividends
Royalties received
Income received by way of annuities
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
•
•
•
•
•
•
•
Exempt income
•
Scholarships or bursaries payments for education and maintenance during education
•
The emoluments of the Republican President which are received as a result of holding that office
•
The emoluments of chiefs including those of the Litunga
•
War disability pensions
•
Income received as compensation for loss of office or disturbance by an officer admitted to the
permanent and pensionable establishment of the government
•
Income received in conjunction with the award of military, police, fire brigade or as an old age
pension paid out of public funds, or as a benefit paid under any written law in respect of injury or
disease suffered in employment.
7
First instalment 31 March 2019
Second instalment 30 June 2019
Third instalment 30 September 2019
Fourth instalment 31 December 2019
8
31 March 2019
23
9
24
Initially, the taxpayer should raise an objection within 30 days.
Answers to Questions
1.1 Residence
(a)
The terms dealing with residence for tax purposes apply differently to individuals and companies as follows:
A company is held to be resident in Zambia for income tax purposes if:
(i)
(ii)
That company is incorporated or formed in Zambia, or
The effective management of the company's business affairs is exercised in Zambia.
A company is effectively managed in Zambia if the board of directors for that company meets in Zambia for
the purposes of decision making affecting the company.
(b)
An individual is held to be resident in Zambia if he or she is physically present in Zambia for a period of not
less than 183 days in a charge year.
Individuals who normally live in Zambia are resident and ordinarily resident in Zambia.
Individuals who come to Zambia with the intention of remaining here for more than 12 months are deemed
to be resident and ordinarily resident in Zambia from the date of arrival.
Individuals may be resident in Zambia for only one tax year if they do not show any intentions of remaining
here for a relatively long period of time.
(c)
The phrase that 'income is liable to Zambian income tax if it is from a source that is deemed to be within
Zambia' means that Income of Zambian resident persons is liable to Zambian income tax unless it can be
proved that the income is not derived from sources linked to Zambia.
1.2 Administration of income tax
(b)
The types of taxable persons who are required to pay provisional income tax are:
(i)
Individuals whose income does not consist only of emoluments taxable under the Pay As You Earn
System and also not covered by turnover tax, and
(ii)
Limited companies and other taxable bodies of persons which are expected to make profits where
turnover tax is not applicable.
In order to calculate provisional income tax for the tax year 2019, the taxpayer should estimate the taxable
income at the start of the tax year.
The estimated taxable income would be the provisional taxable income for the tax year 2019.
Provisional income tax would then be computed on the provisional taxable income at the tax rate applicable
in the tax year 2019.
(c)
(i)
The due dates for payment of provisional income tax for the tax year 2019 are as follows:
10 April 2019, 10 July 2019, 10 October 2019 and 10 January 2020.
(ii)
(d)
The consequences of paying provisional income tax late are that a penalty at the rate of 5% of the
outstanding tax is chargeable per month or part thereof. In addition, interest is chargeable on
overdue tax at the Bank of Zambia discount rate plus 2%.
The due date when Mr Tembo should file his income tax return for the tax year 2019 is 21 June 2020.
The due date when Mr Tembo should pay the final amount of income tax for the tax year 2019 is 21 June
2020
25
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(a)
TAXATION OF INDIVIDUALS:
UNINCORPORATED BUSINESSES
In this chapter we look at the taxation of individuals, specifically how to calculate the business profits for a
sole trader and also for a partnership, both of which are unincorporated businesses run by individuals.
26
1B(iii)
2 Capital allowances
1B(iii)
3 Taxation of partnerships
1B(iii)
4 Basis periods and accounting dates
1B(iii)
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
syllabus references
1 Taxation of business profits
27
LEARNING OBJECTIVES

Explain the interaction of taxes, prepare relevant tax computations and advise when the taxes are payable,
dealing specifically with:
(iii)
Income Tax liabilities for sole traders, partners, employees and individuals with investment income
and farming income (1B)
. Taxation of business profits
……………………
This first section covers the taxation of business profits for an individual operating as a sole trader.
……………………
.. Business: statutory definition
A BUSINESS has been defined in section 2 of the Income Tax Act as any profession, vocation or trade and
includes any adventure or concern in the nature of trade whether singular or otherwise, manufacturing, and
farming and hedging.
A PROFESSION was defined in the case of IRC v Maxse as an occupation requiring either the use of purely
intellectual skill or manual skill directed by the intellectual skill of the operator.
A VOCATION was defined in the case of Partridge v Mallandaine as the way in which a person passes his or
her life.
The statutory definition cannot be relied upon to establish whether a trade exists or not. In
order to establish whether a trade exists, the badges of trade are used. These were developed
in the UK by the Royal Commission on Taxation.
..
The badges of trade
In arriving at a conclusion as to whether a trade exists or not, all of the badges of trade are taken into
consideration and weighed. Some may show that there is a trade, while others may show that there is no
trade.
When a series of transactions is engaged in, reliance on the determination as to whether
those constitute trading is placed on the badges of trade.
The main badges of trade are discussed in turn below.
... The subject matter of realisation
Some assets are normally held as trading stock while others are not. If the asset that has been
sold is one which is normally held as trading stock the presumption that a trade is being
conducted will be greater.
In Martin v Lowry, an agricultural machinery merchant purchased the government's entire
stock of aircraft linen amounting to almost 45 million yards. He had hoped to sell the linen to
manufacturers but instead was forced to sell it through an extensive retail operation direct to
the public. He made a huge amount of profit. It was held that there was a trade.
28
In Rutledge v CIR, the taxpayer, while in Germany on business, purchased 1.25 million toilet
rolls. Shortly after his return to England, he sold them making some profit. It was held that he
was trading.
On the other hand if an asset that has been sold is one which is not normally a trading stock it
is likely that the transaction may not be interpreted as trading.
... The length of the period of ownership
Guidance has been provided that trading stock is not normally held for a long period of time.
As a result if a person disposes of an asset that they held for a long period of time it will be
quite difficult to determine whether the asset had been held as trading stock. Assets held for
long periods of time are normally investments.
In Wisdom v Chamberlain, the taxpayer used borrowed money to buy silver bullion which he
intended to use as a hedge against possible devaluation. After about a year, he sold the silver
bullion making some profit. It was held that there was a trade. In passing judgment, Harman L
J said: 'this was a transaction entered into on a short term basis for the purpose of making a
profit…and if that is not an adventure in the nature of a trade, I do not really know what it is'.
... The frequency of similar transactions
If the frequency of similar transactions is high, chances of classifying a taxpayer as a trader are high. In
Pickford v Quirke, the taxpayer was one of the syndicates who purchased the shares of companies,
liquidated them and sold the assets at a profit. The taxpayer had entered into four transactions each
resulting in a profit. It was held that he was trading.
Where the frequency is low chances are also low. Harman L J, in J Bolson & Son Limited v
Farrelly, as cited by Beardon, D. (1993), said 'a deal done once is not trading. Done three or
four times, it is'.
If an asset is acquired when it is in a poor state and supplementary work is carried out to
improve the asset by making it more marketable, then such an asset when sold will give rise
to trading profit. The argument is that supplementary work is performed so that the assets
could be sold at a higher price than its value just acquired.
... Circumstances giving rise to realisation
An asset which has been sold will not always give rise to taxable profits. The circumstances
that led to the sale are also taken into account. If a taxpayer disposes of an asset in order to
raise money to help solve a financial problem it will be difficult to establish whether the asset
was trading stock.
... The taxpayer's intention
Intention to trade clearly constitutes trading. However, intention to make a profit may not
constitute trading. As such it has to be established as to whether a taxpayer sold an asset
because the intention was to trade.
29
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
... Supplementary work and marketing
... Other factors
In addition to the six badges of trade there are three further factors which have to be taken
into account. These are as follows:
(a)
The taxpayer's other circumstances/activities
If the other activities of a taxpayer indicate the existence of a trade then even the
current transaction is likely to be interpreted as an indication of the existence of the
trade.
(b)
The way the asset sold was acquired
If the asset sold was acquired by inheritance or by way of gift the transaction may not
be considered to be a trading transaction.
(c)
The method of finance
If the asset sold was bought using some borrowed money the presumption that the
asset was trading stock is high. The presumption is even greater if some interest was
paid on the amount of money borrowed at a high interest rate.
..
Accounting and taxable profits
... Level of business profits
Income tax is only chargeable on the profits of an unincorporated business, run by an individual as a sole
trader, if the turnover for the year is over K800,000.
Where the annual turnover generated from an unincorporated business run by an individual is K800,000 or
below, that individual is assessed under turnover tax. Turnover tax is covered in a later chapter in this Study
Manual.
The Zambia Revenue Authority will normally accept profits which are determined in
accordance with the accounting principles provided that there is no conflict between the
accounting principles and tax legislation.
However, there is normally a conflict and the accounting profits require several adjustments
to be made to them in order to determine the taxable profits. Taxable profits are required to
be determined in accordance with the requirements of tax legislation.
Some expenses which are charged in the accounts are not recognised as expenses for tax
purposes. Most expenses are specifically non-deductible because as per requirements of tax
legislation while other expenses are non-deductible because they do not meet the general
criteria for allowing them as expenses for tax purposes. Similarly, some income which is
credited to the profits is not taxable as business receipts or is entirely exempt from income
tax.
The taxable profits are determined as follows.
... Computation of taxable business profits
K
Net profit as per accounts
Add:
(a)
30
Expenses charged in the A/Cs but not deductible for tax purposes
X
K
X
(b)
Taxable income not credited to A/Cs
X
X
X
Less:
(c)
Income credited to accounts but not taxable
(d)
Expenses for tax purposes not deducted in the accounts.
Taxable business profits
..
X
X
(X)
X
Rules for determining deductible expenses when computing
taxable profits
In order for an expense to be allowed for the purposes of the taxable profits computation:
(a)
(b)
It must be revenue and not capital; and
It must be incurred wholly and exclusively for the purposes of the business.
Rules applicable to other expenses are as follows.
... Capital expenditure
This is specifically disallowed. There are three main points to remember when computing
taxable profits:
(a)
Expenditure incurred on the improvement of non-current assets cannot be deducted.
(b)
Depreciation of non-current assets and losses on the disposal of non-current assets are nondeductible expenses.
(c)
Profits on disposals of non-current assets are not taxable income.
Problems arise generally when dealing with repairs and renewals. Repair is restoration by renewal or
replacement of subsidiary parts of the whole. In the case of Samuel Jones and Co (Devondale) Limited v CIR,
expenditure incurred on a new factory chimney replacement was allowable as the chimney was a subsidiary
part of the whole. On the other hand, renewal is the construction of the entirety. In the case of Brown v
Burnley Football and Athletic Co. Limited, expenditure incurred on the construction of a replacement
spectator's stand was held to be capital.
When an asset is acquired which requires substantial expenditure to be incurred on it before
it can be used in the trade, this expenditure will normally be capital. In Law Shipping Co.
Limited v CIR, it was held that expenditure incurred on making recently acquired ships
seaworthy was capital.
However, expenditure incurred on recently acquired assets to remedy normal wear and tear is
revenue and allowed. This was held in the case of Odeon Associated Theatres Limited v
Jones.
... Appropriations of profits
Appropriation of profits such as wages and salaries of owners of a trade, profession or
vocation, interest on capital, transfers to reserves are not allowed as expenses for tax
purposes.
31
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
When expenditure is made once and for all but with a view to bringing into existence an asset
or advantage for the enduring benefit of a business, that expenditure will reasonably be
treated as capital expenditure.
... Goods taken for personal use
If a trader withdraws goods for personal or family's use, he should be charged at the market
value of the goods. As such if the goods have been recorded in the statement of profit or loss
as sales at cost then the profit should be added when computing taxable profits. If the goods
have not been recorded even at cost then the amount to be added to the accounting profit is
the market value of the goods.
... Irrecoverable debts
Rules which apply to irrecoverable debt expenses are as follows.
(a)
Trade debts written off are allowed. Trade debts previously written off but now recovered are
taxable income.
(b)
Specific provision for irrecoverable debts are allowed i.e. an increase is deductible as an expense and
a decrease is taxable as income.
(c)
Non-trade debts arising in the course of a trade such as loans written off are not allowed. Loans
written off should be added back and loans previous written off but now recovered should be
deducted. However, if the business is that of providing loans then loans written off are allowed.
(d)
General provisions for irrecoverable debts are not allowed. These provisions are specifically not
allowed for tax purposes because they do not represent a specific debt that will become
irrecoverable.
... Defalcations
Losses suffered by a business due to the dishonesty of a person who has control such as a
proprietor or managing director are not allowed. But losses suffered because of the
dishonesty of a subordinate who has no control are allowed.
... Payments to family members
If a trader employs members of his family, wages and salaries paid to them will be disallowed
if they are unreasonable and not wholly and exclusively incurred. What is reasonable has not
been defined but the Zambia Revenue Authority would seek explanation as to whether those
wages and salaries were wholly and exclusively incurred for business purposes. The wages and
salaries paid to employees who are non-members of the trader's family will also be taken into
consideration in establishing whether the payments to members of the family were
reasonable.
... Legal and professional fees
Costs of normal accountancy work are allowed. Legal costs are allowed if they are revenue.
An example of allowable legal costs is the legal cost for the recovery of trade debts.
Other legal and professional fees are dealt with as follows:
32
(a)
Costs of preparing the income tax return are allowed. However, additional accountancy costs
incurred as a result of investigation revealing discrepancies are not allowed.
(b)
Legal costs for advice in connection with a taxation liability are allowed.
(c)
Normal accountancy expenses incurred in connection with agreeing taxation liabilities are allowed.
(d)
Costs incurred in connection with defending title to existing non-current assets are allowed.
... Gifts and entertainment
Expenditure incurred on entertaining third parties like suppliers, customers and so on is not
allowed. However, expenditure incurred on entertaining employees is allowed.
The cost of a gift is allowed if:
•
•
It bears a prominent advertisement for the donor
The total value of such gifts in the year to any customer does not exceed K100
The cost of trade samples which are mainly for advertisement is allowed.
If the business being conducted is that of providing entertainment or hospitality, then the
entertainment expenses are allowed.
... Travelling expenses
Expenses incurred by the trader in travelling in the course of the trade are allowed. Expenses
incurred in travelling between home and the place where the trade is being conducted are not
allowed unless the trader can prove that home is also a place of carrying on the trade.
... Leasing and hire charges
These are generally allowed if the leased or hired asset is being used wholly and exclusively
for the purposes of the trade.
... Pension and benefits
Remuneration of and the cost of benefits provided to employees, together with contributions
to approved pension funds are allowable as long as they are reasonable.
This is specifically not allowed. The tax is an accounting expense. It is the responsibility of the
trader to pay the tax and as such, the tax cannot also be allowed as an expense against the
taxable profits.
... Interest payable
Interest on short-term borrowings such as business account overdrafts is allowed on the
accruals basis. No adjustments are required to the accounting profits in respect of the
interest. Interest paid on overdue tax is not allowed.
Any penalties arising under the Income Tax Act are also not allowed.
... Fines
These are generally not allowed. They include fines such as penalties for traffic offences or for
other breaches of the law.
33
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
... Income tax on profits
... Subscriptions
Subscriptions paid to any trade, professional or technical association that is related to the
business being carried on are allowed. Those which are paid to such associations which are
not related to the trade are not allowed.
... Technical education
A deduction is allowed in ascertaining the profits or gains of a business in respect of any
expenditure made for the technical education relating to that business, or to obtain further
education by the employees of that business.
... Public Benefit Organisations
Amounts paid to a charitable, ecclesiastical, research or educational or for national amateur
sporting purposes are allowed if:
•
•
•
The payment is made in money or in kind
The payment is made for no consideration whatsoever
The institution has been approved by the Minister of Finance
The maximum amount that is allowed is 15% of the taxable profits of the business.
... Research
A deduction is allowed in ascertaining the profits or gains of a business in respect of
expenditure incurred on scientific experiment or research relating to the business.
Any contribution to a scientific or educational society or similar institution that has been
approved by the Commissioner General is allowed.
... Pre-trading expenditure
This is specifically deductible by statute. The expenditure must have been incurred within a
period of 18 months prior to the commencement of the business and it must be of a type
that should have been allowed had the business been carried on at that time.
Examples of expenses that would be allowed are:
•
•
Cost of stock in trade acquired before commencing the business
Rent for business premises paid in advance before commencing the business
... Trading losses
These are losses as adjusted for taxation purposes after capital allowances. A trading loss is
not deductible in computing taxable profit. It is carried forward and relieved against the
profits of the same trade arising in the following five years. After the expiry of the five-year
period, it is not possible for the trading loss to be relieved.
... Unrealised gains/losses
Unrealised gains are not taxable, and, similarly, unrealised losses are not tax deductible.
34
... Foreign exchange gains/losses
Foreign exchange gains are only taxable to the extent that they are revenue rather than capital in nature, in
the charge year in which such gains are realised (i.e. in the charge year in which the business benefits from a
reduction in the amount of Kwacha paid on settlement of a foreign debt or liability).
Similarly, foreign exchange losses are only deductible to the extent that they are revenue in nature in the
charge year in which such losses are realised (i.e. in the charge year in which the business is required to pay
the additional Kwacha in settlement of a foreign debt).
By exception, foreign exchange losses of a capital nature incurred on borrowings used for the building and
construction of an industrial or commercial building are deductible.
In the case of banks the tax treatment of foreign exchange gains or losses are on a translation basis in line
with accounting principles. However, foreign exchange gains or losses of a capital nature are not assessable
or deductible as the case may be in the charge year in which they are translated.
.. Income not taxable as business profits
Generally, income receivable by a trader is considered to be a trading receipt unless it is assessable in some
other way.
Examples of income taxable at source through the withholding tax system are:
•
•
•
•
Rental income
Interest income such as debenture interest, bank interest and building society interest
Royalties
Dividends
If such amounts are credited to the statement of profit or loss they have to be deducted and if they are
taxable, the gross amount is to be included in the final personal tax computation, as will be seen under
personal income tax computations.
Other amounts credited to the statement of profit or loss, such as trade discounts received are taxable as
trading receipts.
..
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
As stated earlier on, profits on disposals of non-current assets are not taxable income. They are capital and if
they have been credited to the statement of profit or loss, they have to be deducted in arriving at the final
taxable profits.
Computing income tax on taxable business profits
EXAMPLE
Taxable business profits
Mulongoti has been in business on his own account as a retail grocer for many years. His
business premises consist of a shop with living accommodation above, which houses
Mulongoti and his family. For the year ended 31 December 2019, his statement of profit or
loss the following.
35
Staff wages
Wife's wages
Rent and rates
Light and heat
Motor car expenses
Telephone
Postage, stationery and wrapping
Repairs and renewals
Bad debts written off
Miscellaneous expenses
Advertising
Loan interest
Depreciation – plant
Motor car
Net profit
K
74,160
6,240
6,300
21,720
3,360
780
10,800
4,760
1,000
3,460
10,240
11,300
4,800
1,200
156,400
316,520
Gross profit
Profit on sale of plant
Profit on sale of Investments
Bank interest received
K
303,260
2,400
10,320
540
316,520
The following information is also relevant:
1
The Zambia Revenue Authority has agreed that one third of the expenditure on rent, rates, heat and
light is applicable to the living accommodation.
2
One seventh of the motor car expenses relates to private motoring.
3
Repairs and renewals comprise:
K
1,550
1,010
2,200
4,760
Painting shop internally
Plant repairs
Constructing extension to stock room
4
Irrecoverable account
Irrecoverable debts written off
Balances c/f
General reserve
Specific reserve
K
1,020
4,000
3,980
K
Balances b/f
General reserve
Specific reserve
Irrecoverable debts recovered
Profit and loss
9,000
5
2,000
3,600
2,400
1,000
9,000
Miscellaneous expenses included:
Donation to local charity
Subscriptions to chamber of commerce
Entertaining customers
Christmas gifts – bottles of gin and whisky
Payment to employee in lieu of notice
Legal expenses – debt collecting
Sundry allowable expenses
K
100
180
900
700
200
150
1,230
3,460
The charity to which the donation was made is an approved one.
6
36
The profit on the sale of investment relates to the sale of a holding of ordinary shares in a company
quoted on the Lusaka Stock Exchange. These shares were acquired by Mulongoti on 1 January 2019
for K84,600 and sold on 30 June 2019 for K94,920.
7
Mulongoti estimates that during the year, he has withdrawn goods from stock costing K3,400 for the
use of himself and his family.
8
Mulongoti estimates that his gross profit percentage on turnover is 15%.
9
Mulongoti is entitled to a nominal salary of K4,000 per annum. This amount is included in the figure
for staff wages. Mrs Mulongoti worked full time in the business.
Required
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Compute Mulongoti's tax adjusted business profits for the year ended 31 December 2019, giving reasons for
any adjustments made by you.
37
SOLUTION
In this example, Mulongoti has no assets on which he can claim capital allowances (which are covered in the
next section). As a result, the tax adjusted profit is also the taxable profit for the year ended 31 December
2019.
Income tax will then be computed on the amount of tax adjusted profit. Notes explaining why adjustments
have been made are required to accompany the computation.
MULONGOTI
COMPUTATION OF TAX ADJUSTED BUSINESS PROFITS FOR THE YEAR ENDED 31 DECEMBER 2019
Note
Net profit as per accounts
Add:
Rent and Rates (1/3  K6,300)
Heat and light (1/3  K21,720)
Motor car expenses (1/7  K3,360)
Building extension to stock room
Increase in general irrecoverable debt provision
Entertaining customers
Christmas gifts – bottles of gin and whisky
Goods for personal use (100/85  K3,400)
Mulongoti's nominal salary
Depreciation of plant
Depreciation of motor car
K
1
1
1
2
3
4
4
5
6
7
7
K
156,400
2,100
7,240
480
2,200
2,000
900
700
4,000
4,000
1,200
4,800
29,620
186,020
Less:
Profit on sale of plant
Profit on sale of investments
Bank interest received
8
8
9
2,400
10,320
540
(13,260)
172,760
Notes
38
1
These are not wholly for business purposes. They are private expenses and hence are treated as
appropriations of profits.
2
This is specifically not allowed as it is capital expenditure.
3
Increases in general irrecoverable debt provisions are specifically not allowed.
4
Entertainment of customers and gifts that do not bear a prominent advertisement for the donor are
specifically not allowed.
5
Goods taken for personal use are charged at the full market price.
6
This is an appropriation of profits and hence, it is specifically not allowed.
7
Depreciation of non-current assets is specifically not allowed. It is replaced by capital allowances
which are computed in a standard manner.
8
Profits on disposals of non-current assets are not taxable income.
9
Bank interest is taxable at source. The amount of withholding tax deducted at source is the final
income tax on the bank interest. Bank interest is effectively exempt from tax for individuals.
QUESTION
2.1 Taxable profits
In arriving at the profit for the year ended 31 December 2019, the following items were
charged in the profit and loss account of James Muyambango, a businessman whose turnover
was K970,000:
(a)
In repairs and renewals, an amount of K8,000 was included for the fitting of security bars over the
factory windows as a precaution against theft.
(b)
A loan of K500 to a former employee was written off.
(c)
Gifts of Muyambango calendars in November/December 2019 costing K75 each.
(d)
A donation of K520 was made to the Zambia Armature Athletics Association for the sponsorship of a
race.
(e)
In repairs and renewals, an amount of K10,000 to recondition a second hand stitching machine
bought for K40,000. The repairs were necessary before the machine could be used in the business.
(f)
Cost of a course in computer skills, costing K2,000 for Mr Muyambango himself who had no previous
computer experience.
(g)
A parking fine of K54 incurred by an employee on a business trip out of town.
(h)
A lease rental of K4,000 per annum on a car provided for use by a senior employee.
(i)
Payment of K3,000 re-location expenses to a new employee.
(j)
An amount of K1,600 incurred in connection with the agreement of the taxation liability.
Required
State how each of the above items would be dealt with when preparing the business profits
computation for the year ended 31 December 2019. You should give a brief explanation for
your treatment of each item.
A trade exists if the badges of trade are present. Once the trading profits of a business have been
adjusted for taxation purposes, for example by adding back capital expenses and those revenue expenses
that are not incurred wholly and exclusively for the purposes of the business, income tax is computed on
them using the rates applicable to the tax year when the profits are chargeable.
……………………
. Capital allowances
……………………
In this section we cover the capital allowances that are available on qualifying capital expenditure
incurred wholly and exclusively for the purposes of a business.
……………………
..
What are capital allowances?
CAPITAL ALLOWANCES are a form of tax relief given for capital expenditure.
39
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
Capital allowances replace accounting depreciation because they are given in a standard manner according
to the tax legislation.
Capital expenditure is not an allowable deduction in the computation of taxable business profits. Amounts
written off the capital expenditure are the capital allowances.
Capital allowances are not given on all the types of capital expenditure. The Income Tax Act contains the
types of capital expenditure on which capital allowances may be claimed. The qualifying expenditure
includes expenditure on:
•
•
•
•
Implements, plant and machinery
Industrial buildings
Commercial buildings
Farm works and improvements
..
Capital allowances on implements, plant and machinery
... What is 'plant'?
The Income Tax Act provides that when ascertaining the profits or gains of a business, a deduction in the
form of capital allowances shall be allowed based on the cost of any implements, plant and machinery used
in that business.
There is no definition of plant in the Act. Case law provides some guidance as to what is plant and what is not
plant.
In the case of Yarmouth v France, Lindlay L J said: 'In its ordinary sense (plant) includes whatever apparatus
is used by a businessman for carrying on his business, not his stock in trade, but all goods and chattels, fixed
or movable, live or dead, which he keeps for permanent employment in his business.'
In some other cases, items which may not appear to be plant have been held to be plant. Similarly, items
which may appear to be plant have been held not to be plant.
The general guidance is to distinguish between the setting in which the business is carried on and the
apparatus which are used to carry on the business.
In Munby v Furlong, the law books of a barrister were held to be plant.
In Jarrold v John Good and Sons Limited, movable partitioning was held to be plant.
In Coke v Beach Station Caravans Limited, a swimming and paddling pool together with the appropriate
landscaping were held to be plant.
Some other items which may appear to be plant have been held not to be plant.
In Benson v Yard Arm Club, a ship used as a floating restaurant was held not to be plant.
Principles which will normally be applied in order to establish whether an asset qualifies as plant include the
following.
40
(a)
The words implements, plant and machinery must be given their ordinary meaning.
(b)
Equipment used in a business will generally qualify as plant provided that it has some degree of
durability.
(c)
Plant does not include the setting in which the business is carried on.
(d)
In deciding whether an item in dispute is plant or a setting, it is necessary to look at the item to see
exactly what it is and what its function is in the context of the business in question.
(e)
Exceptionally, a building or structure may be plant if it performs an operational function in the
business.
(f)
Exceptionally, items of décor may be plant if the facts show that they go to create the atmosphere
which is an important function of its particular trade they provide.
Based on the guidance as to what is plant and what may not be plant, the following items should qualify as
plant:
•
•
•
•
General plant and machinery
Fixtures, fittings and furniture
Motor vehicles
Fire safety expenditure, provided that it does not form part of a structure
... The allowances available
Capital allowances on implements, plant and machinery are available in the form of wear and tear
allowances. The wear and tear allowances are based on the cost of any qualifying expenditure.
The rates at which the wear and tear allowances are available are as follows:
Asset
Wear and tear allowance
(%  cost)
Implements, plant and machinery
•
•
25%
Used in manufacturing, tourism and leasing
50%
Used in farming and agro processing
100%
Commercial vehicles
25%
Non-commercial vehicles
20%
A commercial vehicle is a road vehicle of a type that is not commonly used as a private
vehicle and unsuitable to be used as such, but includes all types of road vehicles used solely
for hire or carriage of the public for reward.
All other vehicles are non-commercial vehicles. They include saloon cars, station wagons and
so on.
In the year of purchase, full wear and tear allowances are available on all implements, plant and machinery.
However, there are no wear and tear allowances in the year of disposal.
... Qualifying periods
Capital allowances on implements, plant and machinery are available for charge years.
Each item of qualifying expenditure qualifies for capital allowances individually. There is no time when the
expenditure should be pooled.
EXAMPLE
Capital allowances
Chomba is in business preparing accounts annually to 31 December. He has acquired the following assets
since the commencement of his business.
Date
Asset
1 February 2018
1 March 2018
31 January 2019
Toyota car
Equipment
TATA truck
Cost
K
17,500
12,000
45,000
41
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Commercial vehicles include vans, buses, pick-up trucks, lorries and other vehicles of a similar
type.
1 May 2019
Furniture
11,000
All of the above assets were used wholly and exclusively in the business. Banda's business does not include
any aspect of manufacturing.
Required
SOLUTION
Calculate the capital allowances claimable by Chomba for the charge years 2018 and 2019, showing the
income tax values at the start and end of each year.
Chomba's business does not involve manufacturing. This means all the assets will qualify for the basic wear
and tear allowances available in the normal way.
Each asset will qualify for capital allowances for the first time in the charge year when acquired. In all cases,
the wear and tear allowances are given on the original cost of the assets and not on the written down values.
The computation of the capital allowances should be clearly labelled as the capital allowances computation
as shown
CHOMBA COMPUTATION OF CAPITAL ALLOWANCES ON IMPLEMENTS, PLANT AND MACHINERY
Charge year 2018
Toyota Car
Purchase cost
Wear and tear allowance
(20%  K17,500)
Income tax value c/f
Values
K
Capital
allowances
K
17,500
(3,500)
14,000
3,500
Equipment
Purchase cost
Wear and tear allowance
(25%  K12,000)
Income tax value c/f
Total capital allowances for the charge year
12,000
(3,000)
9,000
3,000
6,500
Charge year 2019
Toyota Car
Income tax value b/f
Wear and tear allowances
(20%  K17,500)
Income tax value c/f
14,000
(3,500)
10,500
3,500
Equipment
Income tax value b/f
Wear and tear allowance
(25%  K12,000)
Income tax value c/f
9,000
(3,000)
6,000
3,000
TATA Truck
Purchase cost
Wear and tear allowance
(25%  K45,000)
Income tax value c/f
Furniture
42
45,000
(11,250)
33,750
11,250
Purchase cost
Wear and tear allowance
(25%  K11,000)
Income tax value c/f
Total capital allowances for the charge year
11,000
(2,750)
8,250
2,750
20,500
QUESTION
2.2 Capital allowances on implements, plant and machinery
Alex commenced trading on 1 January 2018. The trading results, as adjusted for taxation purposes, but
before capital allowances, have been as follows:
Period from: 01.01.18 to 31.12.18
Period from: 01.01.19 to 31.12.19
K65,000
K95,000
Transactions in non-current assets have been as follows:
Acquisitions:
Date
Asset
Cost
01.01.18
31.03.18
31.12.19
Motor car
Fixtures and fittings
General plant
K12,500
K10,500
K20,000
Required
Calculate the taxable profits for the first two charge years of trading.
... Divided use
This arises when an asset is used partly for business and partly for private purposes by the
trader, and not by an employee of the trader.
Where an asset has divided use, then the Commissioner General should determine the
amount of capital allowance to be given based on the proportion of business use of the asset.
The wear and tear allowances should be calculated in full at an appropriate rate and then the
deductible capital allowance will be that wear and tear allowance multiplied by the
percentage of business use of the asset.
EXAMPLE
Divided use
Mwanza who has been in business for several years owns equipment that he had acquired a year ago at a
cost of K20,000. At 1 January 2019, the equipment had an income tax value of K15,000.
During the tax year 2019, Mwanza bought a Nissan car for K23,000. It has been agreed with the
Commissioner General that Mwanza's private use in the car is 25%.
There were no other assets owned by Mwanza on which capital allowances could be claimed.
Required
43
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
If plant has an element of private use by the proprietor, the wear and tear allowance deductible from cost is
given in full at the rate of 25% or 20%, while the capital allowance claimable is restricted to the proportion of
business use only.
SOLUTION
Calculate Mwanza's capital allowances for the charge year 2019, showing clearly the income tax values at the
start and end of each tax year.
Only the capital allowances for the charge year 2019 are required in this example.
The capital allowances computation is as follows:
MWANZA
COMPUTATION OF CAPITAL ALLOWANCES ON IMPLEMENTS, PLANT AND MACHINERY
Charge Year 2019
Value
K
Equipment
Income tax value b/f
Wear and tear allowance (25%  K20,000)
Income tax value c/f
15,000
(5,000)
10,000
Nissan Car
Purchase cost
Wear and tear allowance (20%  K23,000)
23,000
(4,600)  75%
Income tax value c/f
Total capital allowances for the charge year
Capital
allowances
K
5,000
3,450
18,400
8,450
... Disposals of implements, plant and machinery
When there is a disposal of implements, plant and machinery, the disposal proceeds should
be deducted from the income tax value at the start of the charge year in which the disposal is
made. The result may be a balancing allowance or a balancing charge. Wear and tear
allowances are not available in the year when an asset is disposed of.
If an asset is disposed of in the year of acquisition, there is no wear and tear allowance. The
disposal proceeds are matched with the acquisition cost of that asset.
Disposal value cannot exceed original cost for capital allowances purposes.
... Balancing allowance
This arises when the disposal proceeds are less than the income tax value that is matched
with those proceeds.
Balancing allowances are capital allowances in the same way that wear and tear allowances are. They should
be added to the wear and tear allowances and the total treated as the capital allowances for the year. If the
asset sold has an element of private use by the trader, then the balancing allowance is restricted to the
proportion of business use of the asset.
... Balancing charge
This arises when the disposal proceeds are more than the income tax value being matched
with the proceeds.
44
The balancing charges are also referred to as capital recoveries. The capital recoveries are
restricted to the actual capital allowances given on the asset sold in the form of wear and
tear allowances.
Balancing charges or capital recoveries reduce the capital allowances. If the net result is a balancing charge,
then that amount should be added to the profits to arrive at the amount of taxable business profits.
If the asset sold has an element of private use by the trader, then the balancing charge will be
restricted to the proportion of business use of the asset.
EXAMPLE
Balancing adjustments
Lungu runs a small business buying and selling goods to households. He acquired a Nissan motor car at a cost
of K18,000 in the tax year 2018. At 1 January 2019, the income tax value of the motor car was K14,400. It has
been agreed with the Commissioner General that Lungu's private use of the motor car is 25%. Lungu also
owns a pick up truck whose income tax value at 1 January 2019 was K15,000. Lungu acquired the pick up
truck at a cost of K30,000.
During the tax year 2019, Lungu acquired a computer for K6,000 and sold the Nissan motor car for K20,000.
He also sold the pick up truck for K13,000. Lungu replaced the two motor vehicles in the same tax year 2019.
As a result of disposing of the pick up truck, Lungu bought a Toyota truck for K35,000 He replaced the Nissan
car with a Mitsubishi motor car costing K20,000. Lungu's private use of the Mitsubishi motor car continued to
be 25%.
Required
Wear and tear allowances are to be given only on the assets held at the end of the charge year 2019. Balancing
adjustments are to be computed in respect of assets disposed of during the tax year. Where an asset is sold for
more than its original cost, the disposal proceeds for the purpose of capital allowances should be restricted to
the amount of original cost. This is the case with the Nissan motor car.
LUNGU
CAPITAL ALLOWANCES COMPUTATION FOR THE TAX YEAR 2019
Value
K
Nissan Car
Income tax value b/f
Disposal proceeds (limited to cost)
Balancing charge
14,400
(18,000)
(3,600)  75%
Pick up truck
Income tax value b/f
Disposal proceeds
Balancing allowance
15,000
(13,000)
2,000
Computer
Purchase cost
Wear and tear allowance
25%  K6,000
Income tax value c/f
Capital
allowances
K
(2,700)
2,000
6,000
(1,500)
4,500
1,500
45
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate Lungu's capital allowances for the charge year 2019, showing clearly the income tax values at the
start and end of each tax year.
Value
K
Toyota truck
Purchase cost
Wear and tear allowance
25%  K35,000
Income Tax Value c/f
Mitsubishi Car
Purchase cost
Wear and tear allowance
20%  K20,000
Income tax value c/f
Total capital allowances for the tax year
Capital
allowances
K
35,000
(8,750)
26,250
8,750
20,000
(4,000)  75%
16,000
3,000
12,550
... Hire purchase and leasing
There are two types of leases under which plant and machinery may be acquired. These are a finance lease
and an operating lease.
A FINANCE LEASE is one that transfers substantially all the rewards and risks of ownership of the asset from
the lessor to the lessee. However, title does not pass to the lessee.
Characteristics of a finance lease are:
(a)
The rewards and risks of ownership of the asset are transferred substantially from the lessor to the
lessee.
(b)
The lease term with one lessee covers substantially the entire useful economic life of the leased asset
such that at the end of the lease, the asset cannot be available for further leasing.
(c)
The lessee is responsible for repairs and maintenance of the leased asset.
(d)
The lease cannot be cancelled once entered into without incurring heavy financial penalties.
(e)
The leased asset is recognised in the financial statements of the lessee as a non-current asset, with
the obligations under finance leases recognised as liabilities.
An OPERATING LEASE is a lease other than a finance lease. It is normally the same as a hire purchase contract
where the lessor remains responsible for repairs and maintenance of the leased asset.
If an item of plant and machinery is acquired under a hire purchase agreement, then capital allowances are
available to the buyer based on the cash cost of the item. The item will be treated as if it was acquired at the
time the hire purchase contract was entered into for cash. Hire purchase interest paid is an allowable
expense as a finance charge.
Where an item of plant is acquired under a lease, the treatment for capital allowances purposes depends
upon the type of lease. If the asset is acquired under a finance lease, then the lessee claims the capital
allowances on it. If the asset is acquired under an operating lease, then the legal owner of that item of plant
and machinery generally continues to obtain capital allowances on it. The lessee in this case is allowed to
deduct lease rentals from the profits.
EXAMPLE
Leasing
46
Ngosa who runs a small internet café acquired a computer on hire purchase from Manzi computers limited on 1
July 2019. The terms were that Ngosa should pay an initial deposit of K1,500 and pay six monthly instalments of
K1,200 each starting on 1 July 2019. The cash price of the computer is K5,000 Three other computers have been
acquired under an operating lease at an annual lease rental of K1,500 per computer. The cash price of each of
the three leased computers is only K4,000. Manzi Computers Limited has agreed with Ngosa that all the three
leases of computers are renewable annually.
Ngosa's tax adjusted profit figure before capital allowances, lease rentals and hire purchase interest for the
year 2019 was K69,000
Required
All the hire purchase payments were made in the tax year 2019. As such, the whole amount of hire purchase
interest is an allowable expense in the tax year 2019. Wear and tear allowances are not available to Ngosa in
respect of the leased computers, as they are leased under an operating lease.
NGOSA TAXABLE BUSINESS PROFIT FOR THE TAX YEAR 2019
K
Tax adjusted profit
Less:
Lease rentals (3  K1,500)
Hire purchase interest
[K1,500 + (K1,200  6) – K5,000]
Capital allowance on computer
25%  K5,000 (Cash price)
Total deductions
Taxable business profit
..
K
69,000
4,500
3,700
1,250
(9,450)
59,550
Capital allowances on buildings
Capital allowances are available on various types of expenditure on buildings. The types of buildings which
qualify for capital allowances include industrial buildings (including low cost housing) and commercial
buildings.
... Industrial Buildings Allowances
Capital allowances on industrial buildings may also be referred to as the Industrial Building Allowances
(IBAs).
(a)
Qualifying buildings
•
Buildings used for industrial purposes
Unlike plant and machinery that is not defined, the Income Tax Act defines an industrial
building in part I of the fifth schedule as:
'A building or structure that is used for the purposes of any electricity, gas, water, inland
navigation, transport, hydraulic power, bridge or tunnel undertaking, or any undertaking of
public utility, or is in the use for the purposes of any trade which:
–
Is carried on in a mill, factory or similar premises
–
Consists of the manufacture of goods or materials, or their subjection to any process
47
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate Ngosa's final taxable profit for the tax year 2019 after deduction of capital allowances.
–
Consists of the storage of goods or materials to be used in the manufacture or
processing of other goods
–
Consists of the storage of goods on import or for export
–
Consists in the working of a mine or well for the extraction of natural deposits. '
In general, a manufacturing trade is one that subjects an item to a process which in some way
changes its character. In Buckingham v Securitas Properties Limited, a building used for
breaking down bulk cash into individual wage packets did not qualify as an industrial building.
What is produced by the process should be commercially useful. In Bourne v Norwich
Crematorium Limited a crematorium was not held to be an industrial building.
Manufacturing is interpreted in a functional way so that while sales offices would not qualify
as industrial buildings, engineering drawing offices have been held to qualify. This was
considered in IRC v Lambhill Ironworks Limited.
In the sections that follow we look at certain buildings which do not appear to be industrial
buildings but which do quality for IBAs as long as certain criteria are met.
•
Hotels
As long as they comply with certain conditions, hotels built since 1966 qualify as an industrial
building.
Expenditure incurred on the construction or extension of a hotel on or after 1 April 1966 may
qualify. The hotel should be certified by the government body that is responsible for the hotel
industry as meeting the relevant government standards. The standards prescribed by the
government are considered to be those in the Hotels Act. Allowances on hotels are at the
same rates as other industrial buildings while in the case of low cost housing, all the three
types of allowances are available at the rate of 10% on cost.
•
Low cost housing
IBAs are available for expenditure on the construction of a building that is used for the welfare
of employees such as canteens or workplace nurseries, or for any building acquired or
constructed to provide housing for the purposes of their business at a cost that does not
exceed a certain prescribed amount.
The Act provides that any building that is constructed or acquired by a person to provide
housing for the purposes of his business, at a cost for each housing unit not exceeding a
specified amount is an industrial building. This type of industrial building is referred to as low
cost housing.
Low cost housing will qualify as an industrial building if the cost of each housing unit does not exceed
K20,000. The cost of any housing unit that exceeds K20,000 will not qualify for an IBA.
A housing unit may be a separate building complete in itself or part of a larger building. Where
the housing units are flats, then each flat would be a housing unit for capital allowances
purposes.
(b)
Non-qualifying buildings
The following do not qualify as industrial buildings:
•
•
•
•
•
Dwelling houses
Retail shops
Showrooms
Offices
Buildings which are used for the purposes of:
–
–
–
48
A retail trade
Repair or servicing trade
A trade of a similar nature
(c)
Qualifying expenditure and allowances
Capital allowances are only available on the actual expenditure incurred in the construction of a
building less amounts of any subsidy or grant received from public funds towards the expenditure
incurred.
The cost of land does not qualify. However, incidental expenditure may qualify. Incidental
expenditure that may qualify includes:
•
•
•
Expenditure incurred on digging foundations
Expenditure incurred on preparing the land
Architect fees
EXAMPLE
IBA 1
Gabriel who runs a manufacturing business constructed a factory in the year 2019. The cost of the factory
was made up of the following.
Land
Digging foundations
Preparing the building site
Architect fees
Factory building
Total cost of factory
K
50,000
25,000
30,000
80,000
800,000
985,000
There were no grants received to assist Gabriel in meeting the cost.
Required
The cost qualifying for Industrial Building Allowances includes only the construction cost and costs incidental
to construction. The cost of land is excluded. The qualifying cost is therefore calculated as follows.
Total cost of building
Less cost of land
Qualifying cost
K
985,000
(50,000)
935,000
Where a structure includes a non-qualifying part, such as a showroom or general offices, that
part would not qualify unless the cost of that part, excluding the cost of land, does not exceed
10% of the total cost of the entire structure, excluding the cost of land.
In order to determine the qualifying cost of an industrial building, the following rules should
be applied:
(a)
Where a building is purchased from another person trading as a builder/constructor, the full
purchase price is the qualifying cost. Any proportion of the purchase price that is attributed to the
land would not qualify.
(b)
Where a building is constructed by the trader themselves, the qualifying cost is the construction
cost. The cost of land is excluded.
49
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate the cost qualifying for Industrial Building Allowances.
EXAMPLE
IBA 2
Mary constructed a building whose cost was as follows:
Land
Staff canteen
Showroom
Main factory
Total cost
K
100,000
250,000
300,000
800,000
1,450,000
Required
SOLUTION
Calculate the cost qualifying for Industrial Building Allowances.
The only non-qualifying building included in the structure is the showroom. If the cost of the showroom
exceeds 10% of the total construction cost of the structure, then the showroom will not be part of the
industrial building.
1
The construction cost of the building is:
Total cost
Less cost of land
Total construction cost
K
1,450,000
(100,000)
1,350,000
2
10%  K1,350,000 = K135,000
3
The cost of the showroom exceeds 10% of the total construction cost of the building. As such, the
showroom will not qualify as an industrial building.
The qualifying cost will be as follows:
Total construction cost
Less cost of showroom
Cost qualifying for Industrial Building Allowances
K
1,350,000
(300,000)
1,050,000
EXAMPLE
IBA 3
Muyunda who has been running a small business constructed a building at a cost of K2,250,000 made up as
shown below:
Land
General administrative office
Engineering drawing office
Staff canteen
Factory unit
Total cost
Required
Calculate the cost qualifying for Industrial Buildings Allowances.
50
K
150,000
200,000
600,000
400,000
900,000
2,250,000
SOLUTION
The only building included in the above structure that does not qualify as an industrial building is the general
administration office. If its cost exceeds 10% of the total construction cost, then it will be excluded.
1
The construction cost of the building is:
Total cost
Less cost of land
Total construction cost
K
2,250,000
(150,000)
2,100,000
2
10%  K2,100,000 = K210,000
3
The cost of the general administrative office does not exceed 10% of the total construction cost of the
building. As such, the general administrative office will qualify as an industrial building.
The qualifying cost will therefore be K2,100,000 consisting of all the buildings, but excluding the cost
of land.
... The allowances available
There are three types of allowances available on the expenditure qualifying as industrial buildings as follows:
•
•
•
Initial allowance
Investment allowance
Wear and tear allowance
(1)
Initial allowance
This is available only in the first year when the industrial building is first put to use. The rate of initial
allowance is 10% of the qualifying expenditure.
The initial allowance is deductible from the qualifying cost in arriving at the income tax value at the
end of the first year.
Investment allowance
This is available also only in the first year at the rate of 10% of the qualifying expenditure. The
allowance is given against the profits of the first year. It is not deductible from the qualifying cost in
arriving at the income tax value at the end of the first year. Only newly constructed buildings qualify
for this allowance.
(3)
Wear and tear allowance
This is available at the rate of 5% on the qualifying expenditure. The allowance is available starting
from the first year to the year immediately before that in which the building is disposed of.
Where a building is used for qualifying purposes for part of the year and for non-qualifying purposes
for the other part, then that building should be treated as if it were in use for only qualifying
purposes throughout the year. The wear and tear allowance would then be given in the normal way.
Buildings are not pooled in any way. Each building is dealt with on an individual basis.
EXAMPLE
IBA 4
Kunda constructed a new building at a cost of K500,000 including land costing K90,000 at the start of the
year 2019. The building qualifies as an industrial building for income tax purposes.
During the tax year 2019, Kunda's tax adjusted business profit before capital allowances was K106,000.
Required
51
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(2)
SOLUTION
Calculate the capital allowances claimable by Kunda for 2019 and the final amount of taxable business profit
for the same year.
The qualifying cost of the building is:
Total cost including land
Less cost of land
Qualifying cost
K
500,000
(90,000)
410,000
COMPUTATION OF INDUSTRIAL BUILDING ALLOWANCES FOR 2019
Qualifying cost
Wear and tear allowance
(5%  K410,000)
Initial allowance
(10%  K410,000)
Investment allowance
(10%  K410,000)
Income tax value c/f
Total capital allowances
Value
K
410,000
Industrial
Building
Allowance
K
(20,500)
20,500
(41,000)
41,000
41,000
348,500
102,500
Note. In later years, Kunda will continue to claim wear and tear allowances at 5% on the original qualifying
cost of the industrial building of K410,000.
COMPUTATION OF FINAL TAXABLE BUSINESS PROFITS FOR 2019
Tax adjusted business profits
Less capital allowances
Final taxable business profits
K
106,000
(102,500)
3,500
Low cost housing allowances
Low cost housing qualifies for industrial building allowances in the form of wear and tear allowances. The
rate of wear and tear allowance is 10% on cost. The initial allowances and investment allowances are
available at the rate of 10% on cost in the first year only on newly constructed low cost housing.
... Disposal of buildings
(a)
Disposal of industrial buildings
When an industrial building is disposed of, the disposal value should be matched with the income tax
value at the start of the tax year in which the disposal takes place. The wear and tear allowance is
not available in the year of disposal. Like in the case of implements, plant and machinery, the result
will be a balancing allowance or a balancing charge. The balancing allowance arises when the
disposal proceeds are less than the income tax value at the start of the tax year in which the disposal
takes place. On the other hand, a balancing charge arises when the disposal proceeds are more than
the income tax value at the start of the tax year in which the disposal takes place.
52
The buyer of a used building gets only wear and tear allowances at 5% on the cost of the building to
them. Initial allowances and investment allowances are not available on used buildings. These two
allowances are only available on newly constructed buildings.
(b)
Disposal of low cost housing
When there is a disposal of low cost housing, a balancing allowance or charge is computed in the
same way as in the case of any other industrial building. The buyer of used low cost housing gets
wear and tear allowances on the purchase price paid. Initial allowances and investment allowances
are not available on used low cost housing.
..
Commercial buildings
... What is a commercial building?
A COMMERCIAL BUILDING has been defined as to mean a building or structure or part thereof, which is not an
industrial building, or farm improvement or farm works, and which is in use for the purposes of any
business, provided that the construction of such a building or structure is completed for first use on or after
1 April 1969.
Most buildings which do not qualify as industrial buildings are commercial buildings for the purposes of
capital allowances. Examples of commercial buildings are warehouses used in a retail or wholesale trade,
showrooms, sales offices, administration offices, and retail shops.
Commercial buildings qualify for wear and tear allowances at the rate of 2% of cost. The cost that qualifies is
any expenditure that is incurred on the construction or extension of an existing building or structure.
... Disposal of commercial buildings
A balancing allowance or balancing charge arises when there is a disposal of a commercial
building. This is calculated in the same way as for any other building or plant.
(a)
Mr James Banda, a trader had a net profit of K125,000 for the year ended 31 December 2019. The net
profit was arrived at after charging and crediting the following items:
Expenditure
(i)
Depreciation of non-current assets of K21,000. The non-current assets consist of plant that is
used wholly for the purposes of the business.
(ii)
Irrecoverable debts which had been arrived at as follows:
Irrecoverable debts written off
Increase in general irrecoverable debt provision
Decrease in specific irrecoverable debt provision
Charge to statement of profit or loss
K
850
580
(400)
1,030
(iii)
A fine for a speeding offence of K75. Mr Banda was arrested for exceeding the prescribed
speed limit while travelling to see a supplier.
(iv)
K5,000 was incurred on making good the office building. The office building was damaged by a
flood in January 2019.
(v)
A charge of K22,000 was made in respect of staff wages.
53
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
2.3 Capital allowances on buildings
(vi)
A penalty for late payment of income tax of K350 was charged in the statement of profit or
loss.
(vii)
Expenditure of K20,000, incurred on a staff Christmas party was charged to the statement of
profit or loss and other comprehensive income for the year. This expenditure was not
budgeted for.
(viii)
Bank overdraft interest paid of K2,500
Income
(ix)
K5,200 of discounts received was credited to the profit and loss account.
(x)
A profit on the disposal of non-current assets of K5,850 was credited to the statement of profit
or loss.
Further information
The balances on the assets qualifying for capital allowances as at 1 January 2019 were as follows:
Toyota Corona car (25% private use by Mr Banda)
Printing machine
K
5,000
9,000
The Toyota corona car was bought on 1 December 2017 for K12,500 while the printing machine was
bought for K12,000 on 1 April 2018.
On 31 May 2019, Mr Banda acquired another car for K18, 000. The car was to be used wholly and
exclusively in the business.
Required
Calculate Mr Banda's taxable business profits for the year ended 31 December 2019.
(b)
The following information is available in respect of two traders:
(i)
Mr Jones Banda constructed a building whose cost was made up as follows:
Cost of land
Factory unit
Staff canteen
General administrative offices
Total
K
25,000
99,000
52,000
35,000
211,000
The building was put to use on 1 January 2018 for business purposes. In the year ended 31
December 2019, an extension was added to the factory at a cost of K80,000, excluding the
cost of land.
(ii)
Mr Nixon, a trader constructed an industrial building at a cost of K500,000 inclusive of the cost
of land of K80,000. He received a government grant to assist with the construction work of
K100,000. The building was put to use for the purposes of the business in June 2019.
Required
Calculate all the capital allowances which can be claimed for the charge year 2019 by each of the two
traders.
54
……………………
Capital allowances are available on qualifying capital expenditure incurred wholly and exclusively for
the purposes of a business.
They are available in the form of wear and tear allowances for implements, plant and machinery, and for
industrial and commercial buildings (i.e. buildings other than industrial buildings).
On disposal of qualifying assets a balancing allowance or a balancing charge may arise.
Industrial Buildings Allowances (IBAs) are available in the form of not only wear and tear allowances, but
also investment and initial allowances.
Commercial buildings do not attract initial or investment allowances.
……………………
. Taxation of partnerships
……………………
In this section we deal with the taxation of partnerships. A partnership is a group of individuals who are
trading together. They will agree among themselves how the business should run and how profits and
losses will be shared. It is not treated as a separate entity for tax purposes.
……………………
..
Meaning of 'partnership'
A PARTNERSHIP is created when two or more people join together in business with a view to profit. The
people who join together are known as partners.
Partnerships are business organisations. As such they make taxable business profits, though sometimes
losses may be incurred.
..
Computing partnership taxable profits
Taxable business profits of partnerships are computed in the same way as for sole traders. The net profit
figure appearing in the accounts is adjusted using the same rules for adjustments of profits as are applicable
to sole traders. Revenue expenses, which are incurred wholly and exclusively for the purposes of the trade,
profession or vocation, are allowed as business expenses. If a partner incurs an expense that is partly for the
purposes of the business and partly for private purposes, only the business proportion would be allowed for
tax purposes.
Partners' appropriations of profits are not deductible in the computation of the taxable business profits
which are available for appropriations. The partners' appropriations are, in fact, part of the taxable income of
the individual partners. Partners' appropriations generally include partnership salaries and interest on capital
account balances.
After the profits have been adjusted, capital allowances on all assets which are owned by the partnership
should be deducted, after any adjustment is made for any private use.
In some cases, the individual partners will use their private assets in the partnership business. Capital
allowances on these assets should be deducted from the individual partners' shares of the partnership's
profits.
55
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
However, the partnership does not pay income tax on these profits. Instead, the individual partners pay
income tax on their share of the taxable business profits.
..
Appropriations of profits and losses
The profits of the partnership should be divided among the partners on the basis of the partnership
agreement that is in existence in the accounting period.
EXAMPLE
Partnership profits
Luwi, Kayla and Sena are in partnership sharing profits and losses in the ratio of 1:2:3 after allowing for
annual partnership salaries of K15,000 for Luwi, K12,500 for Kayla and K11,000 for Sena.
The partnership made taxable profits for the recent two accounting periods as follows:
Year ended 31 Dec 2018
Year ended 31 Dec 2019
Profit
Profit
K75,000
K70,250
Required
SOLUTION
Show how the partnership profit will be shared between the partners.
There were no changes in the partnership agreement during the two-year period. The partners will therefore
share the profits and losses based on the existing partnership agreement. The procedure is as follows:
step 1
Allocate to each partner their entitlements such as partnership salaries and interest
on capital
step 2
Deduct the total of the partners' entitlements from the total taxable profit to arrive at
the balance to be shared according to the partnership profit and loss sharing ratios
step 3
Divide the balance among the partners in their profit and loss sharing ratio
LUWI, KAYLA AND SENA
DIVISION OF PARTNERSHIP PROFITS
56
Total
K
Luwi
K
Kayla
K
Sena
K
Y/e 31 December 2018
Partnership salaries
Share of balance (1:2:3)
Total
38,500
36,500
75,000
15,000
6,083
21,083
12,500
12,167
24,667
11,000
18,250
29,250
Y/e 31 December 2019
Partnership salaries
Share of balance (1:2:3)
Total
38,500
31,750
70,250
15,000
5,292
20,292
12,500
10,583
23,083
11,000
15,875
26,875
..
Changes in partnership agreement
If there is a change in the partnership agreement during the accounting period then the following steps
should be taken in order to arrive at the profits to be assessed on each partner:
step 1
step 2
step 3
The accounting period should be divided into two periods on the date when the
partnership agreement was changed so as to have a period before the change and a
period after the change.
The total profits should then be allocated to each of these two periods on a time
basis. For example, if the period before the change is made up of four months and the
period after the change made up of eight months, then 4/12 of the profit for the year
should be allocated to the period before the change so that 8/12 is allocated to the
period after the change.
The profits allocated to each period are finally divided between the partners on the
basis of the partnership agreement that is in existence in each period.
EXAMPLE
New partnership agreement
Mr Kateule and Mr Chansa are in partnership as property consultants preparing accounts to
31 December each year. On 1 September 2019 Mrs Kalenga joined Mr Kateule and Mr Chansa as a new
partner and the partnership agreement was changed.
The partnership agreement has been as follows:
Mr Kateule
Mr Chansa
Mrs Kalenga
Period up to 31 August 2019
Annual salaries (K)
Share of balance
12,000
3
:
6,500
2
8,000
5
:
9,000
3
Period from 1 September 2019
Annual salaries (K)
Share of balance
:
10,000
2
Required
SOLUTION
Show how the partnerships profit for the year ended 31 December 2019 will be shared by the three partners.
Since there were changes in the partnership agreement, the year ended 31 December 2019 should be split
into two notional periods for the purposes of dividing the profits between the partners. However, the
amount of assessable profit for each partner is the sum of the allocation for the period before the change
and the allocation for the period after the change of partnership agreement.
MR KATEULE, MR CHANSA AND MRS KALENGA
DIVISION OF PARTNERSHIP PROFIT FOR THE YEAR ENDED 31 DECEMBER 2019
Total
K
01.01.2019 – 31.08.2019
Salaries
Balance (3:2)
12,333
47,667
60,000
Mr Kateule
K
Mr Chansa
K
8,000
28,600
36,600
4,333
19,067
23,400
Mrs Kalenga
K
Nil
Nil
Nil
57
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The partnership's taxable profit for the year ended 31 December 2019 was K90,000.
Total
K
01.09.2019 – 31.12.2019
Salaries
Balance (5:3:2)
Total profit
..
Mr Kateule
K
Mr Chansa
K
Mrs Kalenga
K
9,000
21,000
30,000
2,667
10,500
13,167
3,000
6,300
9,300
3,333
4,200
7,533
90,000
49,767
32,700
7,533
Income tax assessments
Income tax assessments are made on the individual partners in the same way as they are made on sole
traders. The accounting period for a partner is the partnerships accounting period that produced the profits.
The rules for making income tax assessments on commencement of businesses are applied on new partners
who join the partnership. Similarly, the rules for making assessments on cessation are applied on retiring
partners. Rules relating to accounting dates and basis of assessment are dealt with in section 4.
..
Loss relief
If a partnership makes a loss that loss should be divided between the existing partners on the basis of their
partnership agreement in the same way the profits are shared. Each partner can then claim loss relief based
on his or her own circumstances.
A trading loss should be carried forward by each partner and be relieved against future partnership profits
arising from the same trade.
EXAMPLE
Profit and loss sharing
Katib and Percy are in partnership sharing profits and losses in the ratio of 1:3 respectively. On 1 April 2019,
Francis was admitted to the partnership and the profits and losses were to be shared between Katib, Percy
and Francis in the ratio of 2:5:3 respectively. Partnership salaries were K50,000 per annum for each partner
up to 31 March 2019. From 1 April 2019, the partners' salaries were K60,000 per annum for each of Katib and
Percy and K40,000 per annum for Francis.
The profits and losses for the recent years have been as follows:
Year ended 31 Dec 2018
Year ended 31 Dec 2019
Profit
Loss
K150,000
(K250,000)
Required
Show how the profits and losses will be shared between the partners for each of the two accounting periods.
58
KATIB, PERCY AND FRANCIS
DIVISION OF PARTNERSHIP PROFITS
Total
K
Year ended 31.12.2018
Salaries
Balance (1:3)
Total
Year ended 31.12.2019
01.01.2019 – 31.03.2019
Salaries
Balance
Katib
K
Percy
K
Francis
K
100,000
50,000
150,000
50,000
12,500
62,500
50,000
37,500
87,500
Nil
Nil
Nil
25,000
(87,500)
(62,500)
12,500
(21,875)
(9,375)
12,500
(65,625)
(53,125)
Nil
Nil
Nil
Salaries
Balance (2:5:3)
120,000
(307,500)
(187,500)
45,000
(61,500)
(16,500)
45,000
(153,750)
(108,750)
30,000
(92,250)
(62,250)
Total
(250,000)
(25,875)
(161,875)
(62,250)
01.04.2019 – 31.12.2019
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
The change of partnership agreement took place in the year ended 31 December 2019. The year should be
split into two notional periods as in the example New partnership agreement above.
59
QUESTION
2.4 Partnership
Mutinta and Nyambe are in partnership sharing profits and losses in the ratio of 2 to 3 respectively after
allowing for partnership salaries of K40,000 per annum for each. The partnership accounts are prepared
annually to 31 December.
On 1 April 2019, Mbulo was admitted to the partnership and with effect from that date, the partnership
agreement was changed. Profits and losses and partners' annual salaries were to be provided for as given in
the table below:
Salaries per annum
Share of balance of profits and losses
Mutinta
K32,000
5
:
Nyambe
K30,000
3
:
Mbulo
K28,000
2
The partnership's statement of profit or loss for the year ended 31 December 2019 was as follows:
Notes
Gross profit
Less expenses:
Wages and salaries
Rent and rates
Repairs and renewals
Electricity
Legal expenses
Motor car running expenses
Depreciation
Provision for income tax
Miscellaneous expenses
K
1
2
3
4
5
6
K
377,470
128,650
84,290
15,880
2,515
4,215
6,250
8,150
10,180
12,140
7
(272,270)
105,200
Net profit
Notes to the statement of profit or loss and other comprehensive income are as follows:
1 – Wages and salaries
Included in wages and salaries are the partners' salaries of K12,000 for Mutinta and
K5,000 for Nyambe.
2 – Rent and rates
One third of the expenditure on rent and rates relates to rent paid for the houses occupied by the three
partners and their families.
3 – Repairs and renewals
The charge in the statement of profit or loss includes K3,000 incurred on fitting fire safety equipment in the
factory.
4 – Electricity
The charge for electricity is made up as follows:
Electricity for partners' houses
Administrative offices
Factory
Total charge
60
K
691
829
995
2,515
5 – Legal expenses
These are made up of the following:
Defending action in respect of alleged faulty goods
Costs in connection with acquisition of new 55-year lease
Defending Mutinta in connection with speeding offence
Appeal against previous year's income tax assessment
Total
K
1,150
1,200
865
1,000
4,215
6 – Motor car running expenses (see also note 8)
The partners use their own private motor cars in the partnership's business. Business mileage as a
percentage of total mileage done by each partner together with the total motor car running expenses are as
given below:
Partner
Mutinta
Nyambe
Mbulo
Business mileage
%
75%
80%
60%
Motor car expenses
K
2,210
2,150
1,890
6,250
7 – Miscellaneous expenses
These expenses consist of the following
Theft of money by employee
Donation to ZUL, a political party
Sundry allowable expenses
Total
K
3,100
2,500
6,540
12,140
8 – Additional information (see also note 6 above)
Mutinta's car
Nyambe's car
Mbulo's car
Purchase cost
K
14,000
15,000
18,000
Date brought into
business use
1 January 2017
1 May 2018
1 July 2019
Capital allowances on other assets held by the partnership were K12,000 for the year ended
31 December 2019.
Required
(a)
Calculate the partnership's tax adjusted business profit for the year ended 31 December 2019 before
division between the partners.
(b)
Calculate the amount of business profits on which each partner will be assessed for the year ended 31
December 2019.
61
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The table below provides information about the partners' motor cars referred to in note 6 above:
……………………
A partnership is a group of individuals who are trading together. They will agree amongst themselves
how the business should be run and how profits and losses shall be shared. It is not treated as a separate
entity for tax purposes.
Tax adjusted business profits and capital allowances for partnerships are computed in the same way as
for sole traders.
The final profit or loss of a partnership is divided between the partners in accordance with the partnership
agreement that is in force during the accounting period when the profit or loss was made.
A trading loss should be carried forward by each partner and be relieved against future partnership
profits arising from the same trade.
……………………
. Basis periods and accounting dates
……………………
In this section we cover how the accounting period for which taxable profits are assessed is determined.
……………………
..
Basis periods
A BASIS PERIOD for a given tax year is an accounting period whose profits are to be assessed in that particular
tax year.
The basis of assessment is the set of rules for establishing a basis period. Therefore, it is important to
consider the bases of assessment in order to come up with a basis period for any tax year.
In Zambia, the tax year runs from 1 January in one year to 31 December in the same year. This is a charge
year for which income shall be liable to tax. For business purposes, however, accounts may be prepared to
any date depending on the convenience to the business or in some industries, regulation which enforces a
particular date for that sector.
Businesses, are however, encouraged to prepare their accounts to 31 December so that the accounting
periods coincide with the tax years.
The bases of assessment applicable are discussed below.
... Accounts prepared to a date falling between 1 April and 31 December of the same
year (inclusive)
If accounts are prepared to a date between 1 April and 31 December (inclusive), then the basis of assessment
is the current year basis (CYB). This means that the tax year in which the accounting period ends is the year
in which any resulting profits are to be assessed.
EXAMPLE
Assessment period 1
Mr Chansa who has been in business for many years prepares accounts to 31 December each year. He has
provided the following tax adjusted trading results for the most recent accounting periods:
Year ended 31 December 2017
Year ended 31 December 2018
Year ended 31 December 2019
62
Profit
K
45,850
51,200
55,650
Required
SOLUTION
Show the income tax assessments for all the relevant tax years, identifying the basis periods.
Mr Chansa prepares accounts to a date falling between 1 April and 31 December. As such, the current year
basis is the applicable basis of assessment. Under the current year basis, an accounting period is a basis
period for the tax year in which that accounting period ends. The earliest of the three periods given (i.e. the
year ending 31 December 2017) falls between 1 April 2017 and 31 December 2017, which is in the tax year
2017. This means the year ended 31 December 2017 is the basis period for the tax year 2017 and the next
two accounting periods are the basis periods for the following two tax years, i.e. 2018 and 2019.
The income tax assessments for Mr Chansa based on the current year basis are as follows:
Tax year
2017
2018
2019
Basis period
y/e 31.12.2017
y/e 31.12.2018
y/e 31.12.2019
Profit
K
45,850
51,200
55,650
EXAMPLE
Assessment period 2
The following are the recent tax adjusted trading results produced by Mr Chilekwa who prepares accounts
annually to 31 August.
Profit
K
45,780
65,800
51,240
75,660
Year ended 31 August 2016
Year ended 31 August 2017
Year ended 31 August 2018
Year ended 31 August 2019
Required
Mr Chansa, like Mr Chilekwa, prepares accounts to a date falling between 1 April and the following 31
December. As such, the current year basis is the applicable basis of assessment. The earliest of the tax years
given is 2016. We need the 31 August that is between 1 April 2016 and 31 December 2016. This is 31 August
2016. This means that the basis period for the tax year 2016 is the year ended 31 August 2016. The basis
periods for the next three tax years are the following three accounting periods.
The income tax assessments for Mr Chilekwa are as follows:
Tax year
2017
2018
2019
Basis period
y/e 31.08.2017
y/e 31.08.2018
y/e 31.08.2019
Profit
K
65,800
51,240
75,660
63
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Show the income tax assessments for the tax years 2017, 2018 and 2019, identifying the basis periods.
... Accounts prepared to a date falling between 1 January and 31 March of the same
year (inclusive)
If accounts are prepared to a date falling between 1 January and 31 March, then the basis of assessment
applied is the preceding year basis (PYB). This means that the profits of the accounting period ending at any
time between the dates stated are to be assessed in the preceding tax year.
EXAMPLE
Assessment period 3
Mr Maambo is a businessman who prepares accounts to 31 March each year. The following are the recent
tax adjusted trading profits:
K
72,450
75,000
77,850
Year ended 31 March 2018
Year ended 31 March 2019
Year ended 31 March 2020
Required
SOLUTION
Show the income tax assessments for all the relevant tax years, clearly identifying the basis periods.
Accounts are being prepared to 31 March. When this is the case, the preceding year basis is the applicable
basis of assessment. Under the preceding year basis, the accounting period ending in one tax year is the basis
period for the preceding (previous) tax year. The earliest of the accounting periods ends on 31 March 2018.
This date falls between 1 January 2018 and 31 March 2018. The tax year in which the period ends is
therefore 2018.
Using the preceding year basis, the year ended 31 March 2018 is the basis period for the tax year preceding
the tax year 2018. This tax year is the tax year 2017. The next accounting period, that is, the year ended 31
March 2019 is the basis period for the tax year 2018, and the year ending 31 March 2020 will be the basis
period for the tax year 2019.
The income tax assessments based on the preceding year basis are as follows:
Tax year
Basis period
2017
2018
2019
y/e 31.03,2018
y/e 31.03.2019
y/e 31.03.2020
Profit
K
72,450
75,000
77,850
EXAMPLE
Assessment period 4
Mr Nkumbwa is in business buying and selling farming inputs. He always prepares his accounts to 31 January.
The following are the recent results from his business as adjusted for tax purposes:
Year ended 31 January 2018
Year ended 31 January 2019
Year ended 31 January 2020
Profit
K
59,850
71,200
56,800
Required
Show the income tax assessments for the tax years 2017, 2018 and 2019.
64
SOLUTION
Mr Nkumbwa prepares accounts to a date falling between 1 January and 31 March of the same calendar
year. This means the preceding year basis is the applicable basis of assessment. The accounting period that
ends in the tax year 2018, will be the basis period for the preceding tax year, that is, for the tax year 2017.
This is the accounting period for the year ended 31 January 2018. The next two accounting periods are the
basis periods for the following two tax years.
The income tax assessments based on the preceding year basis are as follows:
Tax year
2017
2018
2019
..
Basis period
y/e 31.01.2018
y/e 31.01.2019
y/e 31.01.2020
Profit
K'000
59,850
71,200
56,800
Commencement of business
In the first period of trading, it may not be possible to prepare accounts for a period of 12 months. As such,
the basis of assessment for the first tax year requires the above rules to be modified.
The rules applicable on commencement of business are as follows:
(a)
If the first accounting period is made up of exactly 12 months or less, then the normal rules specified
above apply. That is, the CYB or the PYB may apply depending on when the period ends.
(b)
If the first accounting period is made up of more than 12 months, then that period should be split into
two notional accounting periods for tax purposes. The first period should consist of less than 12
months while the second period should consist of exactly 12 months. The profits for the whole period
should be allocated to the two notional accounting periods on a time basis. For examination purposes,
the number of months in the period should be used, though in practice, the number of days may have to
be used to achieve accurate results. Thereafter, the normal rules should be applied to determine the tax
year in which the profits of the second accounting period should be assessed. The profits of the first
period should then be assessed in the preceding tax year.
Mr Zulu commenced trading on 1 October 2017 and prepared the first accounts for the three-month period
to 31 December 2017. He continued to prepare accounts for years ending on 31 December thereafter.
The trading results as adjusted for tax purposes for the first three accounting periods have been as follows:
Profit
K
Three-month period ended 31 Dec 2017
25,400
Year ended 31 December 2018
78,000
Year ended 31 December 2019
96,400
Required
SOLUTION
Show the income tax assessments for the relevant tax years.
Mr Zulu has prepared accounts to 31 December and this means the current year basis is the applicable basis
of assessment. Since the first period consists of less than 12 months, the current year basis is still applicable.
65
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
EXAMPLE
Start of trading 1
As the three-month period ends in the tax year 2017, that period is the basis period for 2017 and the next
two accounting periods are the basis periods for the following two tax years.
The income tax assessments based on the current year basis are as follows:
Tax year
2017
2018
2019
Basis period
p/e 31.12.17
y/e 31.12.18
y/e 31.12.19
Profit
K
25,400
78,000
96,400
EXAMPLE
Start of trading 2
Namwene commenced to trade on her own account on 1 September 2017. She prepared the first accounts
for the 16 month period ended 31 December 2018. She prepared the next accounts for the year ended 31
December 2019. Her tax adjusted results for the periods of trading are as follows:
Period ended 31 December 2018
Year ended 31 December 2019
Profit
K
96,000
84,000
Required
SOLUTION
Show the income tax assessments for the first three tax years of trading.
Namwene prepares accounts to a date falling between 1 April and 31 December inclusive. Therefore,
assessments will be based on the current year basis. The first accounting period exceeds 12 months.
Therefore, it should be split into two and profits allocated to each period on a time basis. This is done as
follows:
Period from 1.9.17 to 31.12.17 = 4/16  K96,000= K24,000
Period from 1.1.18 to 31.12.18 = 12/16  K96,000= K72,000.
The position now is that there are three accounting periods as shown below:
Profit
K
24,000
72,000
84,000
P/e 31.12.17
Y/e 31.12.18
Y/e 31.12.19
As the earliest accounting period ends in the tax year 2017 and the current year basis is in use, that tax year
is the first tax year. The income tax assessments based on the current year basis are as follows:
Tax year
2017
2018
2019
..
Basis period
p/e 31.12.2017
y/e 31.12.2018
y/e 31.12.2019
Profit
K
24,000
72,000
84,000
Cessation of business
This occurs when a business permanently comes to an end. As with commencement, it may not be possible
to apply the normal rules without modification. The rules which are applied are as follows:
(a)
66
If the last accounting period is exactly 12 months long, then the normal rules will apply.
(b)
If the last accounting period is less than 12 months, then the profits of that accounting period are
assessed in the tax year following the one in which the profits of the second last accounting period
are assessed.
(c)
If the last accounting period is made up of more than 12 months, then that period should be split into a
12 month period ending on the normal accounting date and a short accounting period ending on the
date of cessation. The profits of the long accounting period should be allocated to the two resulting
periods on a time basis. The tax year in which the profits of the 12 month period are to be assessed is
determined using the normal rules. The profits of the last accounting period (the one with less than 12
months) are to be assessed in the following tax year.
EXAMPLE
Cessation of business 1
Francis Alutuli, who has been in business for many years, ceased to trade on 30 September 2019. The recent
tax adjusted trading results have been as follows:
Profit
K
89,500
94,000
74,000
Y/e 31.12.17
Y/e 31.12.18
P/e 30.9.19
Required
Accounts have always been prepared to a date falling between 1 April and 31 December inclusive. This
means that the current year basis applies to the first two accounting periods given.
The last accounting period consist of less than 12 months. To determine the tax year in which profits for this
period will be assessed, the normal rules (i.e. the current year basis or the preceding year basis, as the case
may be) will not apply. Instead, profits for the period to 30 September 2019 will be assessed in the tax year
following the one in which the profits of the second last accounting period were assessed. The second last
accounting period in this case is the year ended 31 December 2018, and profits for this period were assessed
in the tax year 2018. The tax year following this tax year is therefore the tax year 2019. This is the tax year in
which profits for the final nine months of trading will be assessed.
The income tax assessments are as follows:
Tax year
2017
2018
2019
Basis period
y/e 31.12.17
y/e 31.12.18
p/e 30.9.19
Profit
K
89,500
94,000
74,000
67
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Show the income tax assessments for all the relevant tax years.
EXAMPLE
Cessation of business 2
Sonkwe, who has been running a retail business will ceased to trade on 31 March 2020. He will prepare the
last accounts for a period of 15 months ended 31 March 2020. Recent tax adjusted trading profits have been
as follows:
Profit
K
Y/e 31.12.17
Y/e 31.12.18
P/e 31.03.20 (forecast)
48,900
58,700
74,500
Required
SOLUTION
Show the income tax assessments for all the relevant tax years.
Accounts have been prepared to 31 December. Therefore, the current year basis applies. Since the last
period exceeds 12 months, it should be split into a 12 month period ending on the normal accounting date of
31 December and a period ending on the date of cessation. The profit for the last period will be assessed in
the tax year following that whose basis period is the year ended 31 December 2018.
The last period is split as follows:
Period from 1.1.19 to 31.12.19 = 12/15  K74.500 = K59,600
Period from 1.1.20 to 31.3.20 = 3/15  K74.500 = K14,900
The periods and their respective taxable profits are as follows:
Profit
K
48,900
58,700
59,600
14,900
Y/e 31.12.17
Y/e 31.12.18
Y/e 31.12.19
P/e 31.3.20
The income tax assessments are as follows:
Tax year
2017
2018
2019
2020
Basis period
y/e 31.12.17
y/e 31.12.18
y/e 31.12.19
p/e 31.3.20
Profit
K
48,900
58,700
59,600
14,900
The assessment for the last period is not based on the preceding year basis even though the period ends on a
date in respect of which the basis of assessment would normally be the preceding year basis.
..
Change of accounting date
... Reasons to change the accounting date
Accounts should be prepared to a specified accounting date. All the accounting periods and, their basis
periods should consist of 12 months (with the exception of commencement and cessation of businesses as
we have seen above). However, sometimes when good commercial sense or regulation requires it, a trader
may wish to make a change to the accounting date.
68
The Income Tax Act does not make preparation of accounts to 31 December mandatory, although this date is
preferred.
... Determining the basis period
When a change of accounting date occurs, the following general rules apply:
(a)
In order to determine the basis period in the tax year when the change occurs, the normal basis of
assessment (either the CYB or the PYB) applies.
(b)
In the tax year when the change of accounting date occurs, the basis period should end on the new
accounting date. At least 12 months' worth of profits is chargeable to income tax in the tax year
when the change occurs.
(c)
If accounts are prepared for a period of less than 12 months, the profit for that period is scaled
upwards to correspond to a profit figure that would arise for a period of 12 months. The scaled up
amount is the profit chargeable to income tax in that tax year.
EXAMPLE
Change of accounting date 1
Mwila, who has been in business for many years, has always prepared accounts to 31 December. After
preparing accounts for the year to 31 December 2018, he changed the accounting date to 30 September and
prepared the next accounts for the period of nine months ended 30 September 2019. His taxable profits for the
relevant accounting period have been as follows:
Profit
K
77,000
63,600
78,900
y/e 31.12.18
p/e 30.9.19
y/e 30.9.2020 (Forecast)
Required
Mwila has always prepared his accounts to 31 December. Being a date falling between 1 April and
31 December, the basis of assessment has been current year basis. The change occurred after 31 December
2018. The year ended 31 December 2018 will be the basis period for the 2018 tax year. The basis period for
the 2019 tax year will end on the new accounting date of 30 September in the tax year and this will be the
nine month period ended 30 September 2019. Since at least 12 months' worth of profits must be assessed
when accounting dates are changed, the amount of chargeable profit will be scaled upwards to be for 12
months as follows:
Profit chargeable for 2019
= K63,600  12/9
= K84,800.
This results in overlap profits of
= Chargeable profit – Actual profit made
= K84,800 – K63,600
= K21,200
The overlap profit of K21,200 will be set off against the assessment for the final year of trading. Giving the
overlap relief ensures that the amount of profit chargeable to income tax throughout the life of the trade is
equal to the actual taxable profit made.
The income tax assessments will be as follows:
Tax Year
Basis Period
Profit
K
69
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Show the income tax assessments for the tax years 2018, 2019 and 2020.
2018
2019
2020
(d)
y/e 31.12.18
p/e 30.9.19 (see the notes above)
y/e 30.9.20
77,000
84,800
78,900
If two accounting periods end in the same tax year, the amount of profit chargeable to income tax in
that tax year is the sum of the profits for the two periods.
EXAMPLE
Change of accounting date 2
Kangwa who has been in business for many years has always prepared her accounts for years ending on 30
September. After preparing accounts for the year ended 30 September 2018, she changed her accounting
date to 31 December and prepared accounts for the period of three months ended
31 December 2018.
The recent tax adjusted profits have been as follows:
Profit
K
76,500
66,300
79,900
y/e 30.9.18
p/e 31.12.18
y/e 31.12.19
Required
SOLUTION
Show the income tax assessments for the tax years 2018 and 2019.
Kangwa has always prepared her accounts for years ending on 30 September. The basis of assessment has
always been the current year basis. Following the change of accounting date, the basis of assessment
remains the same (i.e. current year basis) as the new accounting date also falls between 1 April and 31
December in the same year.
The basis of assessment for the tax year 2018 has two accounting dates, the year ended 30 September 2018
and the three months to 31 December 2018. The amount of profit to be assessed in the tax year 2018 will be
the sum of the profits for these two periods which amounts to:
Assessable profit for 2018
=
=
=
Profit for y/e 30.9.18 + profit for p/e 31.12.18
K76,500 + K66,300
K142,800
There is no overlap profit (see below) as no profit has been charged to tax more than once.
The final assessments for all the relevant tax years are as follows:
70
Tax Year
Basis Period
2018
2019
p/e 31.12.18 (note above)
y/e 31.12.19
Profit
K
142,800
79,900
(e)
If accounts are prepared for a period of more than 12 months ending in the tax year when the change
of accounting date occurs, the profit for that period is the amount chargeable to income tax in the
tax year when the change occurs.
(f)
If accounts are prepared for a period exceeding 12 months such that there is no accounting period
ending in one tax year, the profit for that period is scaled upwards to the equivalent of profits for a
period of 24 months. The scaled up amount of profit is then chargeable to income tax in equal
amounts in the tax year when no accounts were prepared and in the tax year to which accounts for
the period were actually prepared.
(g)
The process of scaling profits upwards produce overlap profits. An overlap profit is an amount of
profit that is subjected to income tax assessments more than once. Such a profit is carried forward
and relieved against the assessment for the final tax year of trading. In case the profit for the final tax
year is insufficient to absorb the overlap profit, the balance of the overlap profit is set off against the
assessment for the penultimate tax year. The relief under which the overlap profits are relieved is
known as overlap relief.
EXAMPLE
Change of accounting date 3
Maria, who has been in business for many years, has always prepared her accounts for years ending on 31
March. After preparing accounts for the year ended 31 March 2018, she intends to change her accounting
date to 31 August and by preparing accounts for the period of 17 months ending 31 August 2019.
The recent tax adjusted profits have been as follows:
Profit
K
88,800
170,000
89,000
y/e 31.3.18
p/e 31.8.19 (Forecast)
y/e 31.8.20 (Forecast)
Required
Maria has always prepared her accounts to a date falling between 1 January and 31 March. So the preceding
year basis has always applied. Following the change of accounting date to 31 August, the basis of assessment
changes to current year basis.
For the tax year 2017, the basis period is the year ended 31 March 2018. For the tax year 2018, the basis
period is a period of 12 months ending on the new accounting date. This will be the 12 month period ending
on 31 August 2018. As such a period does not exist, the 17 months' profit will be expanded to 24 months and
shared between the tax years 2018 and 2019 as follows:
Expanded taxable profits
= K170,000  24/17
= K240,000
Profit chargeable for 2018
= K240,000  12/24
= K120,000
Profit chargeable for 2019
= K240,000  12/24
= K120,000
or
= K240,000 – K120,000 (assessed in 2018)
= K120,000
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Show the income tax assessments for the tax years 2017, 2018, 2019 and 2020.
There are overlap profits arising as profits for the period from 1 April 2018 to 31 August 2019 have been
expanded to 24 months when they were only for 17 months. The amount of overlap profit is:
Overlap profit for period
= K240,000 – K170,000
= K70,000
71
The final assessments for all the relevant tax years are as follows:
Tax Year
Basis Period
2017
y/e March 2018
Profit
K
88,800
2018
2019
2020
y/e 31 August 2018 (See note above)
y/e 31 August 2019 (See note above)
y/e 31 August 2020
120,000
120,000
89,000
•
If the first accounting period resulting from the change of accounting date produces a loss, that loss is
the final trading loss. If the loss arises from a situation where any profits would have been scaled
upwards, that loss is not scaled upwards. This is because only profits can be scaled upwards, not
losses.
..
Capital allowances and basis periods
Capital allowances should be given in full for all the charge years. In the last charge year, there will be
balancing allowances and balancing charges only as all the assets may have to be disposed of on cessation
of business.
EXAMPLE
Capital allowances
Mr Kateule commenced to trade on 1 July 2018. He prepared the first accounts for the period from that date
to 31 December 2019. The tax adjusted profit figure before capital allowances for the period was K99, 500.
Mr Katuele had the following transactions in non-current assets:
1 July 2018
3 June 2019
1 Sept 2019
Bought motor car
Bought plant
Bought fixtures
Cost
Cost
Cost
K15,000
K18,000
K20,000
Required
SOLUTION
(a)
(b)
Calculate the capital allowances for the relevant charge years in question.
Calculate the amount of profits chargeable for each of the relevant charge years.
Although Mr Katuele commenced to trade and prepared accounts for a period exceeding 12 months, capital
allowances will only be computed for tax years when the assets were in use in the business. The dates of
purchase of the implements, plant and machinery are in the tax years 2018 and 2019.
The basis period for the two respective tax years 2018 and 2019 will be identified using the current year basis
as the accounts are prepared to 31 December. Since the period of account is made up of 18 months from 1
July 2018 to 31 December 2019 it will be split into the first six months and the last 12 months with the tax
adjusted profit figure before capital allowances being apportioned on a time basis. Capital allowances will
then be deducted from the tax adjusted profits as shown below.
2018 Profits 6/18  99,500 =
2019 Profits 12/18  99,500
72
K33,167
=
K66,333
(a)
CAPITAL ALLOWANCES COMPUTATION
2018
K'000
(b)
Motor car
Wear and tear allowance:
20%  K15,000
3,000
2019
Motor car
Wear and tear allowance
20% K15,000
3,000
Plant
Wear and tear allowance
25%  K18,000
4,500
Fixtures
Wear and tear allowance
25%  K20,000
Total capital allowances
5,000
12,500
FINAL TAXABLE PROFITS
Tax adjusted profit
Less capital allowances
Final taxable profits
2018
K
33,167
(3,000)
30,167
2019
K
66,333
(12,500)
53,833
In the example above, capital allowances have been computed and allocated to appropriate tax years in
respect of a trader who recently commenced to trade and prepared accounts for a period exceeding 12
months. The rules for identifying the basis period discussed earlier on apply for the purpose of determining
the relevant tax years.
Mary, who has been in business for many years, ceased to trade on 30 June 2019. She had always prepared
accounts to 31 December each year but the last accounts were prepared for the period of 18 months from 1
January 2018 to 30 June 2019.
The tax adjusted profit for the 18 months' period was K90,000, before deduction of capital allowances.
The income tax values on assets qualifying for capital allowances at the end of the charge year 2017 were as
follows:
Asset
Motor car
Fixtures and fittings
General plant
ITV at end of 2017
K9,000
K5,000
K2,500
Original cost
K15,000
K10,000
K5,000
Mary had private use of the motor car of 25%. On 30 June 2019, Joyce sold the assets at the following values:
Asset
Motor car
Fixtures and fittings
General plant
Disposal proceeds
K4,000
K12,500
K3,000
Required
Prepare a computation of profits chargeable for the final two charge years of trading.
73
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
EXAMPLE
Capital allowances and cessation
SOLUTION
Mary has always prepared her accounts for years ending on 31 December. However, the business ceased on
30 June. The last period of trading consist of 18 months from 1 January 2018 to 30 June 2019. This period will
be split into the 12 month period to 30 December 2018 and the last six month period to 30 June 2019.
Profits, as adjusted for taxation purposes but before capital allowances will then be apportioned on a time
basis. The year ended 31 December 2018 is the basis period for the tax year 2018 while the six months
period ended 30 June 2019 is the basis period for the tax year 2019.
The capital allowances will be calculated for the tax years when the implements, plant and machinery were
used in the trade. Balancing adjustments will arise on disposal of all the assets on 30 June 2019. The net capital
allowances will be deducted from the tax adjusted profits allocated to the relevant tax years.
CAPITAL ALLOWANCES COMPUTATION
2018
Motor car
ITV b/f
Wear and tear allowance
20%  K15,000
ITV c/f
Fixtures and fittings
ITV b/f
Wear and tear allowance
25%  K10,000
ITV c/f
General plant
ITV b/f
Wear and tear allowance
25%  K5,000
ITV c/f
K
9,000
(3,000)  75%
6,000
2,250
5,000
(2,500)
2,500
2,500
2,500
(1,250)
1,250
Total capital allowances
2019
Motor car
ITV b/f
Disposal
Balancing allowance
Fixtures and fittings
ITV b/f
Disposal
Balancing charge
General plant
ITV b/f
Disposal
Balancing charge
Net balancing charge
K
1,250
6,000
K
6,000
(4,000)
2,000  75%
2,500
(10,000)
(7,500)
1,250
(3,000)
(1,750)
K
1,500
(7,500)
(1,750)
(7,750)
Final taxable profits
Tax adjusted profits (12:6)
Less Capital allowances/Add
balancing charge
Final taxable profit
74
2018
K
60,000
2019
K
30,000
(6,000)
54,000
7,750
37,750
Justin commenced to trade on 1 October 2018. The trading results, as adjusted for taxation purposes, but
before capital allowances, have been as follows:
Period from 1.10.18 to 31.12.18
Year ended 31.12.19
K65,000
K95,000
Transactions in non-current assets have been as follows:
Acquisitions:
Date
1.10.18
31.10.18
31.12.19
Asset
Motor car
Fixtures and fittings
General plant
Cost
K12,500
K10,500
K20,000
Required
Calculate the taxable profits for the first two charge years of trading.
……………………
A basis period is an accounting period whose profits are to be assessed in that given tax year.
The two bases of assessment are the current year basis (CYB), used when accounts are prepared to a
date falling between 1 April and 31 December (inclusive), and the preceding year basis (PYB), used when
accounts are prepared to a date falling between 1 January and 31 March (inclusive).
Modified rules apply in the first and last years of trade, and also when there is a change of accounting
date.
Capital expenditure qualifies for capital allowances starting in the charge year when it is incurred.
When accounts are prepared for a period with less than 12 months, capital allowances are available in
full for the tax year whose basis period is that period with less than 12 months.
……………………
75
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
2.5 Basis of assessment
Chapter Roundup

The term business includes trades, professions and vocations.

A trade is said to be in existence if the badges of trade are present.

The badges of trade are:
•
•
•
•
•
•
76
The subject matter of realisation
The length of the period of ownership
The frequency of similar transactions
Supplementary work and marketing
The circumstances giving rise to realisation
The taxpayer's intention

Accounting principles are often in conflict with tax legislation. The taxable business profit is computed by
making several adjustments to the accounting net profit figure so that the profit is brought in line with the
tax legislation.

Expenses are only deductible for the purposes of taxation if they are of a revenue nature and they are
incurred wholly and exclusively for the purposes of the business.

Income that is taxable at source through the withholding tax system is not normally taxable as trading
receipts.

Once the trading profits have been adjusted for taxation purposes, income tax is computed on them using
the tax rates and allowances applicable to the tax year when the profits are chargeable.

Capital allowances are available on qualifying capital expenditure incurred wholly and exclusively for the
purposes of a business.

They are available in the form of wear and tear allowances for implements, plant and machinery, and for
industrial and commercial buildings (i.e. buildings other than industrial buildings).

On disposal of qualifying assets a balancing allowance or a balancing charge may arise.

Industrial Buildings Allowances (IBAs) are available in the form of not only wear and tear allowances, but
also investment and initial allowances.

Commercial buildings do not attract initial or investment allowances.

A partnership is a group of individuals who are trading together. They will agree amongst themselves how
the business should be run and how profits and losses shall be shared. It is not treated as a separate entity
for tax purposes.

Tax adjusted business profits and capital allowances for partnerships are computed in the same way as for
sole traders.

The final profit or loss of a partnership is divided between the partners in accordance with the partnership
agreement that is in force during the accounting period when the profit or loss was made.

A trading loss should be carried forward by each partner and be relieved against future partnership profits
arising from the same trade.

A basis period is an accounting period whose profits are to be assessed in that given tax year.

The two bases of assessment are the current year basis (CYB), used when accounts are prepared to a date
falling between 1 April and 31 December (inclusive), and the preceding year basis (PYB), used when accounts
are prepared to a date falling between 1 January and 31 March (inclusive).

Modified rules apply in the first and last years of trade, and also when there is a change of accounting date.
Capital expenditure qualifies for capital allowances starting in the charge year when it is incurred.

When accounts are prepared for a period with less than 12 months, capital allowances are available in full
for the tax year whose basis period is that period with less than 12 months.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system

77
Quick Quiz
1
What is a business for tax purposes and what are the main categories of businesses?
2
List the badges of trade.
3
State the general rule applied to determine whether expenditure is allowed for taxation purposes.
4
Explain how the following should be dealt with when computing taxable business profits.
(a)
(b)
(c)
(d)
(e)
(f)
5
Explain how the following should be dealt with when computing taxable business profits.
(a)
(b)
(c)
(d)
78
Trade debts written off
Loans to former employees written off
Increase in general provision for irrecoverable debts
Decrease in general provision for irrecoverable debts
Increase in specific provision for irrecoverable debts
Decrease in specific provision for irrecoverable debts
Legal fees connected with defending title to non-current assets
Legal fees connected with the recovery of loans to former employees
Legal fees connected with preparing employment contracts for staff
Goods taken for personal and family use and not recorded in sales
6
Explain the rule used to determine whether expenditure on gifts should be allowed for tax purposes.
7
On what types of asset can capital allowances be claimed?
8
What are the rates of wear and tear allowances on implements, plants and machinery?
9
How are leased implements, plant and machinery dealt with for the purposes of capital allowances?
10
What types of allowances are claimed on industrial buildings?
11
What are commercial buildings and what types of allowances can be claimed on them?
12
How are the taxable profits of partnerships calculated?
13
Explain how the taxable profit of a partnership is shared by the partners.
14
Explain how the taxable profits of a partnership are shared by partners when there is a change in partnership
agreement partway through the accounting period.
15
Henry's accounting year ends on 15 July. Are his taxable profits assessed on a current year or a preceding
year basis?
16
George began trading on 1 October 2017. His first accounting period lasted 16 months to 31 January 2019.
What was the first period assessed for tax purposes and for which taxable year was it assessed?
17
Gordon ceased trading on 30 November 2019. His last accounts were prepared for the 18 months ended 30
November 2019. How would the profits be assessed for tax purposes?
18
Noah changed his accounting date from 30 November to 31 August in 2019. His profits for the 9 months
ended 31 August 2019 were K210,000 and for the year ended 31 August 2020 K360,000. What profits will be
assessable for tax in the tax year 2019?
Answers to Quick Quiz
Any profession, vocation or trade and includes:
•
•
•
Any adventure or concern in the nature of trade whether singular or otherwise
Manufacturing
Farming
2
•
•
•
•
•
•
The subject matter of realisation
The length of the period of ownership
The frequency of similar transactions
Supplementary work and marketing
The circumstances giving rise to realisation
The taxpayer's intention
3
Expenses are only deductible for the purposes of taxation if they are of a revenue nature and they are
incurred wholly and exclusively for the purposes of the business.
4
(a)
(b)
(c)
(d)
(e)
(f)
Trade debts written off:
Loans to former employees written off:
Increase in general provision for irrecoverable debts:
Decrease in general provision for irrecoverable debts:
Increase in specific provision for irrecoverable debts:
Decrease in specific provision for irrecoverable debts:
5
(a)
Legal fees connected with defending title to non-current assets:
(b)
Legal fees connected with the recovery of loans to former employees:
Not allowable (unless a company whose business is the provision of loans)
(c)
Legal fees connected with preparing employment contracts for staff:
(d)
Goods taken for personal and family use and not recorded in sales:
Market value of goods is taxable
6
Allowable
Not allowable
Not allowable
Not taxable
Allowable
Taxable
Allowable
Allowable
The cost of a gift is allowed if:
•
•
It bears a prominent advertisement for the donor
The total value of such gifts in the year to any customer does not exceed K100
7
Implements, plant and machinery; Industrial buildings; and Commercial buildings.
8
Implements, plant and machinery as well as commercial vehicles qualify for wear and tear allowances at the
rate of 25% of cost.
9
The lessor claims capital allowances on operating leases, while the lessee claims capital allowances on
finance leases.
10
Wear and tear allowances, investment allowances and initial allowances.
11
Commercial buildings are buildings or structures used for the purposes of a business, other than industrial
buildings or farm improvements or farm works, which were constructed for use on or after 1 April 1969.
Commercial buildings qualify for wear and tear allowances at the rate of 2% of cost. There are no initial and
investment allowances.
12
In the same way as for sole traders.
13
In accordance with the partnership agreement in force during the relevant accounting period.
14
When a partnership agreement is changed partway through the accounting period, that period is split into
two notional periods for the purposes of dividing the profit between the partners. The old partnership
79
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
1
agreement applies to the earlier of the two notional periods and the new partnership agreement applies to
the later of the two notional periods.
15
Current year basis.
16
Four months ending 31 January 2018, assessed in 2017 tax year.
17
Profit for 12 months ended 31 May 2019, assessed in tax year 2019.
Profit for 6 months ended 30 November 2019, assessed in 2020 tax year.
18
80
K280,000 (K210,000  12/9).
Answers to Questions
(a)
The expenditure incurred on fitting security bars on the factory windows is capital. Therefore, the amount of
K8,000 should be disallowed when computing the taxable business profits.
(b)
Loans written off are not allowed unless the business being carried on is that of making loans available.
Therefore, the amount of loan written off should be disallowed.
(c)
Gifts are allowed if they contain a prominent advertisement for the donor and the cost of each item is not
more than K100. The gifts in question are Muyambango calendars costing only K75. They contain an
advertisement for Muyambango. Therefore, they are allowed. No adjustment will be made when computing
taxable business profits.
(d)
Donations to national armateur sporting associations are allowed by statute. The K520 is therefore allowed.
No adjustment will be made when computing taxable business profits. (s.41(1) of the Income Tax Act).
(e)
Expenditure incurred on recently acquired non-current assets so as to put them in a useful state is not
allowed (Law Shipping Company Limited v CIR). The cost of repairs of K10,000 will therefore be disallowed.
(f)
The proprietor's own costs charged to the business accounts are specifically not allowed. They are
appropriations of profit. The cost of Muyambango's computer course should therefore be disallowed.
(g)
Employee's fines paid by the employer are allowed as payment made to and on behalf of employees.
Therefore, no adjustment will be made in respect of the parking fine.
(h)
Lease rentals are allowed if they are paid on business assets. A car provided for use by an employee is a
business asset. No adjustment will be made in respect of the lease rental paid on the car.
(i)
A relocation payment to an employee is allowed. No adjustment will be made in respect of the relocation
payment to an employee.
(j)
Costs incurred in connection with the agreement of a taxation liability will normally be allowed. Additional
accountancy fees incurred as a result of investigation revealing discrepancies are not allowed. No adjustment
will be made in respect of the cost of agreeing the tax liability.
2.2 Capital allowances on implements, plants and machinery
(a)
CAPITAL ALLOWANCES COMPUTATION
K
CHARGE YEAR 2018
Motor car
Wear and tear allowance
20%  K12,500
2,500
Fixtures & Fittings
Wear and tear allowance
25%  K10,500
Total capital allowances
2,625
5,125
CHARGE YEAR 2019
Motor car
Wear and tear allowance
20%  K12,500
2,500
Fixtures and fittings
Wear and tear allowance
25%  K10,500
2,625
81
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
2.1 Taxable profits
General plant
Wear and tear allowance
25%  20,000
Total capital allowances
5,000
10,125
Final taxable profits
2018
K
65,000
(5,125)
59,875
Tax adjusted profits
Less capital allowances
Final taxable profits
2019
K
95,000
(10,125)
84,875
2.3 Capital allowances on buildings
(a)
CAPITAL ALLOWANCES COMPUTATION FOR THE YEAR 2019
Asset
K'000
Capital allowance
K'000
Toyota Corona car
Income tax value b/f
Wear and tear (20%  K12,500)
Income tax value c/f
5,000
(2,500)  75%
2,500
1,875
Printing machine
Income tax value b/f
Wear and tear (25%  K12,000)
Income tax value c/f
9,000
(3,000)
6,000
3,000
18,000
(3,600)
14,400
3,600
New Motor Car
Cost
Wear and tear @ 20%
Income tax value c/f
Total capital allowances for the year
8,475
MR JAMES BANDA
COMPUTATION OF ADJUSTED BUSINESS PROFITS FOR THE YEAR ENDED 31 DECEMBER 2019
K
Net profit as per accounts
Add
Depreciation
Increase in general irrecoverable debt provision
Fine for speeding offence
Income tax penalty
K
125,000
21,000
580
75
350
22,005
147,005
Less
Profit on disposal of non-current assets
Capital allowances for the charge year
Taxable business profit
82
5,850
8,475
(14,325)
132,680
(i)
The total construction cost, excluding the cost of land is:
Total cost
Less cost of land
Total construction cost
10% of K186,000 =
K
211,000
(25,000)
186,000
18,600
The cost of general administrative offices does not qualify as part of the Industrial building because it
exceeds 10% of the total construction cost.
The qualifying cost is:
Total construction cost
Less cost of administrative offices
Qualifying cost
K
186,000
(35,000)
151,000
The administrative offices qualify for capital allowances on commercial buildings.
Capital allowances for the year 2019 are:
K
Original factory
Wear and tear allowance
5%  K99,000
Staff canteen
Wear and tear allowance
5%  K52,000
Factory extension
Initial allowance
10%  K80,000
Investment allowance
10%  K80,000
Wear and tear allowance
5%  K80,000
General administrative offices
Wear and tear allowance
2%  K35,000
Total capital allowances
(ii)
4,950
2,600
8,000
8,000
4,000
700
28,250
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(b)
The qualifying cost is:
Total cost
Less:
Cost of land
Government grant
Qualifying cost
K
500,000
(80,000)
(100,000)
320,000
CAPITAL ALLOWANCES FOR THE YEAR 2019
K
Initial allowance
10%  K320,000
Investment allowance
10%  K320,000
Wear and tear allowance
5%  K320,000
32,000
32,000
16,000
80,000
83
2.4 Partnership
(a)
PARTNERSHIP'S TAX ADJUSTED PROFIT FOR THE YEAR ENDED 31 DECEMBER 2019
K
Net profit as per accounts
Add
Partners' salaries:
Mutinta
Nyambe
K
105,200
12,000
5,000
28,097
Rent and Rates (1/3  K84,290)
Repairs:
Fitting fire safety equipment
Electricity for partners' house
Legal costs: New 55-year lease
Legal costs: Mutinta's speeding offence
Appeal against income tax assessment
Motor Car expenses:
Mutinta (25%  K2,210)
Nyambe (20%  K2,150)
Mbulo (40%  K1,890)
Donation to political party
Depreciation
Provision for income tax
3,000
691
1,200
865
1,000
552
430
756
2,500
8,150
10,180
74,421
179,621
Less
Capital allowances
Profit to be shared by the partners
(b)
DIVISION OF THE PARTNERSHIP'S PROFIT
(1.01.2019 – 31.03.2019)
Salaries (3/12)
Balance (2 : 3)
3 months' profit
(1.04.2019 – 31.12.2019)
Salaries (9/12)
Balance (5 : 3 : 2)
9 months' profit
Total
Less capital allowances
Mutinta's car
K14,000  20%  75%
Nyambe's car
K15,000  20%  80%
Mbulo's car
K18,000  20%  60%
Taxable profits
84
(12,000)
167,621
Total
K
20,000
21,905
41,905
Mutinta
K
10,000
8,762
18,762
Nyambe
K
10,000
13,143
23,143
67,500
58,216
125,716
167,621
24,000
29,108
53,108
71,870
22,500
17,465
39,965
63,108
(2,100)
(2,100)
(2,400)
(2,160)
160,961
Mbulo
K
–
–
21,000
11,643
32,643
32,643
(2,400)
69,770
60,708
(2,160)
30,483
2.5 Basis of assessment
JUSTIN
CAPITAL ALLOWANCES COMPUTATION
K
2018
Motor car
Wear and tear allowance
20%  K12,500
TAXATION OF INDIVIDUALS:
EMPLOYMENT, INVESTMENT AND
Fixtures & Fittings
FARMING INCOME
Wear and tear allowance
2,500
25%  K10,500
Total capital allowances
2,625
5,125
In this chapter we first look at income from employment and the important distinction between
2019
employment and
self-employment (income from businesses was looked at in earlier chapters). We then
cover the treatment of expenses incurred when working, the tax rules relating to payments made on
car such as redundancy payments, and the administration of employment through
termination ofMotor
employment,
Wear
and
tear allowance
the Pay As You Earn system.
20%  K12,500
2,500
Next we look at income from savings and financial investments, property investments and dividends. We
also look at the
withholding
tax system, whereby tax is deducted at source.
Fixtures
& Fittings
Wear
and
teartax
allowance
Finally, we look
at the
special
rules that apply to individuals receiving income from farming enterprises.
25%  K10,500
General Plant
Wear and tear allowance
25%  K20,000
Total capital allowances
2,625
5,000
10,125
Final Taxable Profits
2019
K
95,000
(10,125)
84,875
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Tax adjusted profits
Less capital allowances
Final taxable profits
2018
K
65,000
(5,125)
59,875
85
syllabus references
86
1 Taxation of employment income
1B(iii)
2 Taxation of investment income
1B(iii)
3 Taxation of farming income
1B(iii)
LEARNING OBJECTIVES

Explain the interaction of taxes, prepare relevant tax computations and advise when the taxes are payable,
dealing specifically with:
(iii)
Income Tax liabilities for sole traders, partners, employees and individuals with investment income
and farming income (1B)
. Taxation of employment income
……………………
In this section we deal with the tax rules that apply for taxing employment income.
……………………
.. Terminology
Tax is chargeable under the Pay As You Earn system (PAYE) on the emoluments of an office or
employment.
It is important to define the terms 'employment' and 'office' so as to establish whether they
exist or not. The existence of employment or an office will certainly indicate that the income
arising from it will be liable to income tax under the Pay As You Earn system.
The term EMOLUMENTS refer to all the payments that an individual receives by reason of being an
employee. Such payments include all salaries, wages, fees, bonuses, commissions, overtime pay, leave pay,
gratuity, benefits and advantages, allowances and all payments which an individual receives as a result of
being employed or being a holder of an office (see below).
As a general rule, all payments which are received by an individual who is in employment are taxable unless
they are specifically exempt under the provisions of the Income Tax Act.
OFFICE : a position that exists independently of the person presently occupying it. It must be capable of being
EMPLOYMENT exists where there is a legal relationship of master and servant. The master will be the
employer while the servant will be the employee.
The legal relationship of master and servant may be evidenced by a contract, which may be
an oral contract or written contract.
A contract may be implied from conduct if two parties conduct themselves towards one another in such a
manner that it would be clear to any third party that there exists a legal relationship of master and servant.
An example could be where a person agrees to carry out some work in return for a payment and that
payment is actually made as agreed upon.
..
Employment compared with self-employment
The Income Tax Act does not define the terms employment and self-employment. In order to distinguish
between employment and self-employment, reliance is placed on case law.
The ZRA consider the following factors in establishing whether someone is employed or is self-employed.
87
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
declared vacant.
... Type of contract
If there is a contract of service, it will indicate the existence of a legal relationship of master and servant. A
contract for services will indicate the existence of self-employment.
Where the contract is a written one, a copy should be obtained and the contents of that particular contract
should be studied. In the case of oral contracts, the parties to the contract should be interviewed to
establish what has been agreed upon.
... Work performance
Employees must perform the duties assigned to them themselves while the self-employed may hire other
people to perform the work for them.
In contracts of service, personal performance is always required while personal performance is not normally
a must in contracts for services. In the case of Hall v Lorimer, a vision mixer was engaged under a series of
short-term contracts. It was held that the vision mixer was self-employed because the nature of the factors
surrounding the case was that of self-employment.
... Control
The work of an employee is controlled by the employer who will normally stipulate working hours, the place
at which the duties are to be performed, how the work is to be performed and other conditions.
A self-employed person will decide when to perform the duties and how to perform them.
Where there is an absence of the right of control, employment may still be present. In certain employments,
it is not usually possible for the employer to tell the employee what to do, when to do it and the place at
which that is to be done. In the case of Mitchell and Edon v Ross, a doctor with a private practice also held a
part-time appointment with a regional hospital board. It was held that the income from the part-time
appointment was liable to income tax as emoluments. This was despite the fact that the income of the
practice itself was taxable as business profits.
... Payment and financial risk
Employees are paid an agreed salary on a monthly or weekly basis. In order to earn an extra sum, employees
will have to work overtime. Also, employees are going to get any other additional pay or variation in pay if
they meet a set target in which case they will receive a bonus or a commission.
Employees do not assume any form of financial risk and they cannot profit from sound management of the
business's affairs.
Self-employed persons are normally paid a proportion of the contract price based on the amount of work
performed. They will also bear the full financial risk of their business. If they manage their affairs well, they
are going to profit from them.
Care is required in handling certain types of employment as the absence of financial risk will not always
indicate that there is employment.
The fact that a casual worker runs the risk of being unable to find work when a particular engagement ceases
is not relevant to the determination of whether employment exists or not. This can be checked in the case of
Lee Ting Sang v Chung Chi-Keung.
... Place of work
Employees will normally be told where the duties are to be performed from. This is normally
at the employer's premises or at the premises of the client.
88
In most employments, the premises at which the duties are to be performed from are those
of the employer.
Self-employed persons will perform the duties at a place of their choice.
If the person performing duties can only do so at the employer's chosen premises, then that
person is an employee. If the person can choose a place from where to perform the duties, that
person is self-employed.
... Tools and equipment
An employer will provide the tools and equipment which the employees are to use. However, the fact that
the employer does not provide the tools and equipment will not be conclusive. In certain types of
employment, the employees will normally be required to provide their own tools and equipment.
Self-employed individuals will provide their own tools and equipment. In the case of Ready Mixed Concrete
Ltd. v The Minister of Pensions and National Insurance, drivers who were engaged provided their own
lorries. It was held that the drivers were self-employed. There existed contracts of carriage between them
and the company.
... Correction of work
Employees will normally rectify any faulty work during the normal working hours and they
will still be paid for those hours.
Self-employed persons will rectify any faulty work outside the contract time and they will not
be paid for that extra work.
If the person performing duties is not paid for the time spent on correcting work, then that
person is self-employed. On the other hand, if the person is paid for the time spent on
correcting work, then that person is an employee.
The employer will take on and dismiss employees. The employer will have a right or power to
terminate the contracts of employment by giving the employees an appropriate notice.
A self-employed person will normally enter into a contract with a client specifying the
beginning and end. The contract normally ends when the work has been performed
completely and accurately.
... Insurance
Employers will normally provide insurance cover for the actions of their employees. This is
because they are vicariously liable for the offences committed by their employees.
Self-employed persons will have to provide for their own insurance needs. The hirer is not
vicariously liable for the offences committed by the hired self-employed contractors.
If the person who is performing the duties takes insurance cover personally, then that person
is self-employed. But if insurance cover is not taken by the person performing the duties
personally, then that person is an employee. The employer will have taken insurance cover on
behalf of that employee.
89
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
... Engagement and dismissal
... Exclusivity
Employees normally work for only one employer. A self-employed person will normally work
for a number of clients.
The courts will also consider whether an individual's activity is fully integrated within the
organisation. If this were the case, it would be difficult for an individual to prove that they are
self-employed.
In order to come to a final conclusion as to whether an individual is an employee or is self-employed, all the
above factors are generally taken into account and weighed. There is no specific way of indicating which
points are more important than others or otherwise. It all depends upon the factors of each case. What may
indicate, on a weighting basis, the existence of employment may not indicate the same in another case.
If it is established that the individual performing duties is an employee, then all payments
made to him or her will be subjected to income tax under the Pay As You Earn system, after
deducting allowable expenses, if any. This means that the employer will be responsible for
deducting income tax from all the payments and for paying that tax to the Zambia Revenue
Authority.
On the other hand, if it is established that the person performing duties is self employed, then
the payments received will be assessed as business profits, after deducting allowable
expenses. The computation of business profits has already been covered earlier in this Study
Manual.
..
Basis of assessment for emoluments
Emoluments include all payments made to an employee or office holder, whether before the
commencement of employment or upon the cessation of employment.
The basis of assessment for emoluments from employment is the actual receipts basis. This means that
emoluments are chargeable to income tax in the tax year when they are received by the employee. However,
due to differences between the time when payments are actually made and when payments become due,
the emoluments are deemed to have been received on the earlier of:
(a)
(b)
The time when payment is actually made; and
The time when the employee becomes entitled to the emoluments
In case the case of directors, emoluments are deemed to be received by a director on the earliest of:
(a)
(b)
(c)
(d)
(e)
The time when payment is actually made and
The time when the director becomes entitled to the emoluments
The time when the amount payable is decided
The time when the amount payable is credited in the company's accounting records
The end of the company's accounting period.
It is therefore important to interpret the actual receipts basis correctly when dealing with payments made
shortly after the commencement of a tax year on 1 January.
..
Tax treatment of emoluments
The following are the tax treatments of the various payments which employees may be
entitled to.
90
... Salaries, wages, bonuses
These are taxable emoluments without any exemption. The actual amount received by an employee is
taxable in full on that employee. The exception is where the salary is equal to or less than the tax free pay,
which for the tax year 2019 is K39,600. If this is the case and the salary is the only entitlement that the
employee receives, then that salary will not be taxable.
... Allowances paid to employees
All allowances qualify as emoluments and as such, they are fully taxable. If an employee, however, is
reimbursed any expenditure incurred while performing the duties of employment, then only the excess of
the reimbursed amount over the actual expenditure incurred by the employee shall be taxable. This normally
occurs in cases where an employee is required to spend personal money when performing duties and then
submit receipts to the employer for reimbursement.
... Benefits in kind
A benefit in kind is a benefit of some sort which is not money. Benefits in kind include the benefits derived
from employment through the use of personal to holder vehicles and through the provision of free
residential accommodation by the employer.
Benefits which cannot be converted into cash are not treated as emoluments of the employees. These
benefits are taxable on the employer instead.
They include the accommodation benefit and the personal to holder car benefit. Details of these are covered
later in this Study Manual when we discuss company income taxation.
Benefits which can be converted into cash are taxable on the employees receiving them.
(a)
Maintenance of a residence by the employer
Any amounts paid by the employer to assist an employee in meeting the cost of the upkeep of the
residence are, as a general principle, taxable as emoluments of the employee.
(b)
Clothing or uniform allowance
If an employee receives an allowance for the purchase of uniforms for official functions, the
allowance received is taxable as an emolument of the employee.
Employees may, however, claim for expense relief in respect of any amounts incurred on the
purchase of uniforms for use in the performance of official duties.
(c)
Medical expenses
Expenses incurred by the employer on behalf of an employee, their family or household, for the cost
of medical treatment are not chargeable emoluments.
However, a medical allowance paid to an employee is a taxable emolument.
(d)
Funeral benefits
Payments made in respect of assisting an employee where there is a bereavement in the family are
not taxable emoluments.
(e)
Cash vouchers
A cash voucher is any document or stamp capable of being exchanged, either immediately or after a
time for a sum of money equivalent to the stipulated value.
91
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
If the employer undertakes to pay all the outgoings in respect of the house including rates, rent,
taxes, insurance, security, electricity, telephones, entertainment and the general maintenance of the
residence including the surroundings, then this constitutes money's worth and is taxable on the
employee as emoluments.
Where a cash voucher is provided to an employee by reason of employment, the employee is treated
as having received a taxable emolument.
(f)
Non-cash vouchers
A non-cash voucher is usually a document capable of being exchanged for goods or services. It may be
exchanged immediately or after some time. Examples are: Christmas vouchers, shopping vouchers,
fuel vouchers and so on.
Where an employee receives a non-cash voucher, the employee is taxable on the value of the goods
which that voucher can obtain.
(g)
Board, lodging and meals
Where an employee is provided with meals or board and lodging by the employer, there is no taxable
emolument on the employee concerned.
If, however, an employee receives an allowance in lieu thereof, the allowance received would be a
taxable emolument.
If an employee is required to work late at night such that it would be unreasonable to expect him to
use public transport for his journey home, then the cost to the employer of providing such an
employee with private transport home is not a taxable emolument of the employee.
(h)
Compulsory payments for board
Where arrangements exist to pay wages to employees gross, out of which a certain amount must go
towards the payment for board, then the gross amount payable to the employee is a taxable
emolument.
(i)
Restrictive undertakings
A payment made by an employer in respect of an agreement entered into by an employee, the effect
of which is to restrict the activities of the employee, or the ability of the employee to compete with
the employer is a taxable emolument of that employee.
(j)
Tips and service charges
If an employer operates a scheme under which he pays employees tips from customers or service
charges, the amounts paid to employees are taxable emoluments on those employees.
(k)
Allowances paid to employees
All allowances qualify as emoluments and as such, they are fully taxable. Examples include housing
allowance, educational allowance, utility allowance, travel allowance, lunch allowances etc. If an
employee, however, is reimbursed any expenditure incurred while performing the duties of
employment, then only the excess of the reimbursed amount over the actual expenditure incurred by
the employee shall be taxable. This normally occurs in cases where an employee is required to spend
personal money when performing duties and then submit receipts to the employer for
reimbursement.
..
Share option schemes
Share options scheme are schemes under which employees may be able to buy shares in their
employer companies. There are tax benefits associated with approved schemes.
An OPTION gives a right to its holder, not an obligation, to buy or sell the underlying asset at a predetermined
price in the future.
The predetermined price at which the underlying assets shall be bought or sold is known as
the exercise price or striking price.
92
Taking the necessary action to buy or sell the underlying assets is known as exercising the
option. If the option is not exercised, it lapses.
An option that gives a right to its holder to buy the underlying asset is known as a call option and one that
gives a right to its holder to sell the underlying asset is known as a put option.
Options are derivative instruments. They derive their name from the underlying asset. As such, an option on
shares is known as a share option. An option on a currency is known as a currency option and so on.
Share option schemes are schemes under which employees may be able to buy shares in their employer
companies. These options are share options. As they give rights to employees to buy shares, they are called
options.
The objective of the share option scheme is to encourage employers to set up schemes for employees to
own shares in the companies in which they are employed.
Employees join the scheme in the hope of making a profit as they expect the value of shares, when they
finally acquire them, to be substantially more than the price they will pay. Management hopes that as
employees have a stake in the company that employs them, their productivity and therefore profits for the
company will increase.
... Approval of share option schemes
Tax benefits only apply in cases where a share option scheme has been approved by the Commissioner
General. If a scheme is unapproved, there are no tax benefits for both the employer and the participating
employees.
An application for approval of a share option scheme should be made in writing to the Commissioner
General, accompanied by a copy of the instrument constituting the scheme and the rules of the scheme.
(a)
The scheme must be established in Zambia and the employer must be carrying on business wholly or
partly in Zambia.
(b)
The scheme should provide for the participation of all eligible employees (including directors).
(c)
An employee participating in the scheme should not acquire more than one fifth (20%) of the shares
to be issued under the scheme.
(d)
Only ordinary shares of the company may participate in the scheme.
(e)
The scheme entitles an employee to acquire a set number of shares at a fixed price.
(f)
The employee must be restricted to a set period of time to use an option to buy shares.
(g)
The employees must be citizens or permanent residents of Zambia regardless of where they perform
their duties.
Where a scheme has been approved by the Commissioner General for any charge year, the scheme shall be
deemed to be approved for each subsequent charge year unless otherwise agreed.
Where an alteration is made to the terms of an approved scheme, the trustees should inform the
Commissioner General in writing otherwise the approval of the scheme is suspended from the date of the
alteration.
The Commissioner General may withdraw approval from a scheme at any time if:
(a)
(b)
Any of the conditions necessary for approval ceases to be satisfied; or
Alterations are made to the terms of an approved scheme.
Where the approval of a scheme has been suspended or withdrawn, the Commissioner General shall
endeavour to safeguard the interests of the employees as regards transactions committed prior to the
notification of withdrawal or suspension.
93
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
For the Commissioner General to approve a share option scheme, the following requirements must be met:
... Eligible employees
An employee whose employer has an approved share option scheme shall be an eligible
employee if that employee meets any of the following requirements:
(a)
Has worked for the employer for a minimum of 20 hours per week during a period of two years.
(b)
Is a seasonal, full-time employee who has worked for at least five months during a period of two
years.
(c)
Is an employee of a holding, subsidiary or affiliated company of the employer.
... Constitution and rules of the scheme
(a)
The rules of the scheme should provide for the participation of all eligible employees with the
exception of:
(i)
Employees who are not individuals; or
(ii)
Employees who have worked for less than 20 hours per week during the period of two years;
or
(iii)
Full time seasonal employees who have worked for less than five months during the period
of two years.
(b)
The rules of the scheme should limit the number of shares an employee may acquire to one fifth
(20%) of the shares being offered under the scheme.
(c)
Employers should inform the employees of their eligibility in writing.
(d)
Employers should make available to employees the following.
(i)
A copy of the constitution and rules of the scheme.
(ii)
A statement of the results of the scheme over the last ten years of operation or since
inception if the scheme was established for less than ten years.
(iii)
The pricing formula and period over which the share option may be exercised.
(iv)
The risk and benefits to be associated with participation in the scheme.
(e)
The price of the shares should be fixed at the time the option is given.
(f)
The price of the shares shall not be less than their market value at that time.
(g)
Only ordinary shares of the company may participate in the scheme.
(h)
All shares acquired through the scheme are registered with the registrar of companies.
(i)
The price at which the shares are issued or disposed of should be stated.
(j)
The rules of the scheme should require that:
(k)
(i)
The employer bears all administrative and other expenses of the scheme.
(ii)
The scheme is independently audited by auditors or independent accountants.
The rules of the scheme should require that the eligibility and scope of participation in the scheme be
based on:
(i)
(ii)
(iii)
(iv)
The period of service with the employer.
Basic emoluments over a defined period.
Termination of service benefits from the employer.
A combination of some or all of these criteria applying equally to all employees.
However, the rules should exclude employees whose services are to be terminated at the date of
eligibility to the scheme, except where the rules permit participation on the basis of accrued terminal
benefits or other terminal benefits.
94
(l)
The rules of the scheme should require that where a scheme provides for the acquisition of shares or
interests in shares in a private company, the rules should include the following:
(i)
A participating employee, on termination of his services or on death, shall be deemed to have
given notice to sell or relinquish his shares.
(ii)
Where the shares were not fully paid on acquisition, the trustees shall dispose of the shares
and recover the amount outstanding from the sale proceeds.
(iii)
In the event that a participating employee is deceased, the recovery from the sale proceeds
shall be restricted to the amount unpaid.
(m)
Require the trustees and the employer to act as the taxpayer agent for a participating employee for
all tax matters relating to the scheme.
(n)
Permit that the employer could, at his instigation, terminate the scheme provided that:
(i)
(ii)
Unconditional arrangements for sale by participants at market value are in place.
The value be certified by the auditor of the scheme and the employer.
(o)
Provide that employees may sell shares after five years, except where the termination of services
with the employer or the death of the employee is earlier.
(p)
Not provide for the issue of preference shares in the scheme unless:
(i)
The preference shares participate in dividends declared on ordinary shares and;
(ii)
The preference shares confer equal rights of participation on dissolution or redemption as
ordinary shares.
(q)
Not require the employee to contribute any additional amounts beyond the amounts agreed upon in
the scheme.
(r)
Not permit changes to the rules or constitution which affect the employees adversely, without the
consent of the trustees and confirmation from the Commissioner General.
(s)
Not permit the granting of credit towards financing the exercise of an option to acquire shares.
... Tax benefits of approved share option schemes
Tax benefits of approved share option schemes to the employer
(i)
Costs incurred by the employer to set up and administer the scheme will be allowed as a
deduction in calculating the company's profits for tax purposes.
(ii)
The income of an approved share option scheme will be exempt from tax.
(iii)
The employer will be exempt from paying property transfer tax on shares transferred under
the terms of an approved share option scheme.
If the scheme is not approved then the costs incurred for offer of shares will not be an allowable
deduction in calculating the companies tax adjusted profits and the income arising will not be exempt
from tax and any transfer of shares will attract property transfer tax provided the company is not
listed on the Lusaka Stock Exchange.
(b)
Tax benefits of approved share option schemes scheme to the employee
(i)
Any gain which arises to that individual on allotment of shares under an approved share
option scheme is exempt from income tax.
(ii)
The above gain/benefit arises when the market value per share at the time when the option is
being exercised exceed the exercise price.
For employees any gains obtained from the unapproved scheme will be subject to income tax.
95
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(a)
A loss will arise when at the time of excise the market price is less than the striking price and the
employee will not exercise the option in such a case but will allow it to lapse.
..
Allowable expenses
Allowable expenses are revenue expenses which are incurred wholly and exclusively for the
purposes of the employment and include:
(a)
Travelling expenses incurred in the course of employment. These are expenses an employee incurs
while performing the duties of employment. They include the following:
(i)
Costs incurred in travelling between two places at which the duties are to be performed.
(ii)
Costs incurred in travelling between home and work if the duties commence at home, as in
the case of medical doctors who are on call. For doctors, duties commence when they get a
phone call that they are required at the hospital.
The following travelling expenses are not deductible:
(i)
Costs incurred in travelling between two employments, as in the case of employees working
on a full-time contract with one company and on a part-time contract with another. The costs
incurred in travelling between the premises of the full- time employment and the premises of
the part-time employment are not deductible.
(ii)
Costs incurred in travelling between home and work, unless duties commence at home as
explained above.
The distinction between deductible travelling expenses and those which would not be
deductible is illustrated in the following cases.
In Ricketts v Colquhoun (1925), a London barrister was also Recorder of Portsmouth. His
emoluments for this office were assessed under PAYE. He claimed deductions for expenses of
travel between London and Portsmouth, plus hotel expenses. The deduction was refused
because the expenses were not in the performance of the duties, which did not begin until he
arrived at the Court in Portsmouth, and were not necessary – he need not live in London but
could have lived in Portsmouth.
In Pook v Owen (1969), a doctor carried on a practice at his home and also had appointments
at a local hospital 15 miles from his home. He was at times required to be on standby duty.
When needed at the hospital, he was telephoned and usually gave instructions to the staff
before driving to the hospital. He received a mileage allowance from the hospital which
covered a journey of ten miles each way, and which was assessed on him as part of his
remuneration. He claimed that the mileage allowance was not assessable and that he was
entitled to deduct the excess of his actual car expenses over the hospital allowance. He
succeeded on both counts, on the basis that his duties began as soon as he was contacted by
the hospital and he gave instructions to the staff.
These cases show the vital point clearly. The doctor was in the performance of his duties
before he left home while the barrister was not.
96
(b)
Capital allowances on implements, plant and machinery used wholly and exclusively in the
performance of the duties of employment. This is in cases where employees are required to provide
their own tools and equipment as in the case of tradesmen. Employees who opt to use their own
tools when the employer has already provided suitable tools cannot claim capital allowances on those
tools.
(c)
Subscriptions to professional bodies which are relevant to the employment. Subscriptions to
professional bodies whose membership is not relevant to the employment are not deductible.
Subscriptions which would be deductible are those paid to the Zambia Institute of Chartered
Accountants by accountants who are members, those paid to the Law Association of Zambia by
lawyers who are members and subscriptions to all other bodies paid by members.
..
Payments made on termination of employment
Employment ceases when the employee or employer terminates it. The following payments
may be made on cessation of employment by way of dismissal, resignation, end of contract
term, redundancy/ retrenchment, retirement or death.
•
•
•
•
•
•
•
•
•
•
•
•
Pension;
Refund of employee's pension contributions;
Withdrawal of employer's pension contributions
Gratuity;
Redundancy pay;
Severance pay or compensation for loss of office;
Salary in lieu of notice;
Repatriation allowance;
Service bonuses eligible for payment only at the end of employment;
Monthly salary;
Commutation of accrued leave days; and
Accrued service bonuses linked to performance
Some of these payments are taxable while others may be exempt.
The following payments are exempt from tax as they fall within the definition of pension benefit.
Pension;
Refund of employee's pension contributions;
Withdrawal of employer's pension contributions;
Gratuity;
Redundancy pay;
Severance pay or compensation for loss of office;
Salary in lieu of notice;
Repatriation allowance; and
Service bonuses eligible for payment only at the end of employment;
On the other hand, the following payments are taxable under the applicable PAYE bands:
•
•
•
Monthly salary;
Commutation of accrued leave days; and
Accrued service bonuses linked to performance
EXAMPLE
Income from employment 1
Mr Chomba had been employed on a three year contract that commenced on 1 January 2017
and expired on 31 December 2019. His annual basic pay had been K120,000 during 2017,
K144,000 during 2018 and K160,000 during 2019. He was paid on a monthly basis. On the
expiry of his contract, he was paid a gratuity of 20% of his cumulative basic pay and his
accrued leave pay of K12,000 on 6 January 2020. He had received his final salary on 29
December 2019.
97
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
•
•
•
•
•
•
•
•
•
Required
SOLUTION
Calculate the total income tax paid by Mr Chomba for the tax year 2019.
Details of the basic pay applicable throughout the contract term are given to enable us to calculate the
contract gratuity.
The amount of gratuity receivable is = 20% × (120,000 + 144,000 + 160,000)
= 20% × K424,000
= K84,800
The whole gratuity received is exempt from income tax.
Income tax will be payable on the amount of salary for the period to 29 December 2019, being a period of 12
months in the tax year 2019.
Mr Chomba
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
K
Basic pay for 2019
Accrued leave pay
Chargeable income
Less tax-free pay
Income tax paid
25%  K9,600
30%  K25,200
37.5%  K97,600
K
160,000
12,000
172,000
(39,600)
132,400
2,400
7,560
36,600
46,560
EXAMPLE
Income from employment 2
Mrs Maambo who had been engaged on a four-year contract resigned from her position on
31 March 2019. Her contract commenced on 1 January 2018. Her annual salary was K544,000
during 2018 and K592,000 during 2019 and she was paid monthly.
When she resigned on 31 March 2019, she was paid her gratuity of 25% of the cumulative
basic pay up to the date of resignation and her accrued leave pay of K5,600, in addition to the
final salary.
Required
Calculate the total income tax paid by Mrs Maambo for the tax year 2019 and explain the tax treatment of
the gratuity.
98
The required income tax is for the tax year 2019 only. This means income tax will be
calculated on all the earnings she received in 2019 inclusive.
Mrs Maambo
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Salary (K592,000  3/12)
Accrued leave pay
Less tax-free pay
Income tax paid
25%  K9,600
30%  K25,200
37.5%  K79,200
Total income tax paid
..
K
148,000
5,600
153,600
(39,600)
114,000
2,400
7,560
29,700
39,660
The Pay As You Earn (PAYE) system
Under the PAYE system, the procedures relating to tax compliance are transferred from the employees to the
employer.
The employees receive their emoluments net of income tax. This reduces the number of
problems that would be encountered if employees were required to pay income tax on the
emoluments several months after those emoluments had been earned and consumed.
... Documentation required to operate PAYE
A person who sets up in business is required to contact ZRA if they are going to engage some
people. The inspector will then provide a package containing the following:
•
•
•
The employer's guide to PAYE
Tax tables
The main documents and forms required to operate PAYE which include:
–
–
–
–
–
–
The tax deduction cards, known as form ITF/P8
Employee leaving forms known as form ITF/P13 (part I)
Details of old employment known as form ITF/P13 (part II)
Particulars of employee commencing employment known as form ITF/P20
Certificate of pay and tax deducted known as form ITF/P22
Monthly remittance card known as form CF/P16
... Calculation of tax payable under PAYE
The following steps are followed in order to calculate income tax payable under the PAYE
system each time that emoluments are paid:
step 1
The total amount payable to the employee for the month should be
calculated. This is an employee's gross pay for the month.
99
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Mrs Maambo was initially employed on a four-year contract but she resigned after serving
only one year and three months. The gratuity received of 25% of the cumulative basic pay
does still qualify as a pension benefit and it is not taxable.
step 2
Allowable expenses are then deducted from the gross pay for the month.
step 3
The total chargeable emoluments paid to the employee since the
commencement of the tax year are added to the taxable emoluments for
the month in order to arrive at the chargeable emoluments for the year to
date.
step 4
The proportion of the employee's free pay to date should be determined
from the tax tables. This is the proportion of the total free pay applicable
since the beginning of the tax year on 1 January.
step 5
The amount of tax on the chargeable income to date is then worked out
using the tax tables.
step 6
The amount of tax already paid should then be deducted from the result
determined in Step 5 above to arrive at the amount of tax payable for the
current month. The amount of tax payable for the current month is the tax
that should be deducted from the employee's pay for the current month.
... Payment of tax deducted under PAYE
Tax deducted under the PAYE system is payable by the tenth day of the end of the month in
which the emoluments were paid.
If the tax is not paid by that date, penalties and interest on overdue tax are charged. These are borne by the
employer and not by the individual employees.
Employers are also required to give to each employee in respect of whom PAYE deductions have been made
an annual certificate of pay and tax deducted on form ITF/P22. The certificate should be given before 1
March following the end of the charge year to which the return relates.
... PAYE penalties
Penalties are charged under PAYE when all the procedures concerning payments of tax and
submission of the returns are not complied with.
If tax is not remitted by the due date, then a penalty of 5% per month or part thereof, of the
outstanding tax is charged. Interest is also charged from the due date to the date of payment
at the Bank of Zambia discount rate plus 2%.
If there is a loss of tax due to fraud, wilful default or negligence of an employer, the employer
may be liable to penalties mounting to 52.5%, 35% or 17.5% respectively of the omitted
income.
QUESTION
3.1 Emoluments from employment
100
You should assume that today's date is 15 December 2018.
Janet Phiri has been offered employment as an assistant accountant with Boating Limited, a
Zambian company. The terms of employment are as follows:
(1)
The employment contract is a three-year renewable contract commencing on 1 January 2019.
(2)
She will be paid a starting annual basic salary of K48,000. The salary will be payable monthly in arrears
on the last day of each month. At the beginning of each year, she will receive an annual increment of
K2,400. She will serve a probationary period of six months and upon confirmation, she will receive a
settling in allowance of 10% of her starting annual basic salary.
(3)
The gratuity payable at the end of the three-year contract is 20% of her cumulative basic pay for the
contract term.
(4)
Janet will be accommodated in a house owned by the company. She will not pay any rent. All
maintenance costs including the cost of electricity, water and general cleaning will be paid by the
company.
(5)
The company will reimburse all medical fees incurred by Janet and members of her family.
(6)
Janet is a member of a local recreation club. The company will pay her membership subscriptions
every year. The amount involved is K200 per annum.
Janet is a member of the Zambia Institute of Chartered Accountants. She pays annual
subscriptions to the Institute every year. The amount of annual subscription is K550 every
year.
Janet will be paying contributions to the National Pension Scheme Authority according to the
regulations of the Scheme at 5% of her basic pay.
Required
Explain the taxation implications of Janet's terms of employment, and of her payments.
Note. Calculation of income tax payable is not required. However, any calculation that may
assist in explaining the points should be included as part of the answer.
……………………
A series of tests applies to determine whether a person is an employee or is self-employed, the most
significant being whether the contract amounts to a contract of service or a contract for services.
If a person is an employee, income arising is taxable on the actual receipts basis as emoluments, with tax
paid under the Pay As You Earn system.
•
•
•
Benefits in kind that cannot be converted into cash
Medical expenses incurred by the employer
Board and lodging provided by the employer
Approved share option schemes enable employees to acquire shares in their employer companies. Any
benefit that arises when the share option is exercised is tax free.
Revenue expenses, which are incurred wholly and exclusively for the purposes of the employment, are
deductible from emoluments.
Emoluments (i.e. monthly salary; commutation of accrued leave days; and accrued service bonus linked
to performance) are taxable when employment ends.
Any pension benefit received on termination of employment is exempt. Pension benefit includes a
pension, compensation, gratuity, severance pay, repatriation and other similar allowances.
The Pay As You Earn system is used for collecting income tax on the emoluments from holding an office
or from employment.
……………………
. Taxation of investment income
……………………
In this section we cover the different types of investment income that individuals might receive.
……………………
101
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
All payments received by reason of employment are chargeable on employees except for:
..
Identifying investment income
The classification of income in the Act includes earned income and investment income, though this fact is not
expressly stated. Earned income is income that arises from employment and businesses. This income has
already been dealt with in the previous chapters of this Study Manual.
Investment income includes all income which an individual may be entitled to, other than earned income.
This income includes:
•
Income from the letting of properties (rent and premiums)
•
Interest from savings and deposit accounts held with financial institutions, treasury bill interest and
money lent
•
Royalties
•
Annuities
•
Dividends from Zambian companies
Income arising from savings and deposit accounts held with financial institutions, treasury bills, government
bonds, shares in Zambian companies (Dividends) may be referred to as income arising from savings and
financial investments. Income from letting of property may be referred to as income arising from
investments in real estate.
..
Withholding tax system
This is a system of collecting tax at source. Persons making payments of investment income are required to
deduct withholding tax (WHT) and only pay the net amount to the recipient of the income. This is so when
the person making the payment is one who is required to make the payment net of withholding tax.
Certain payments of investment income are paid gross by most mining companies which are engaged in the
mining of different minerals within Zambia. Withholding tax is also to be deducted from payments of
management and consultancy fees, public entertainment fees and commissions. This Study Manual,
however, concentrates only on the categories of investment income mentioned above, although it should be
appreciated that the principles relating to those categories of income apply in all cases where there is
withholding tax.
Where withholding tax is the final tax, the recipient individual is not subjected to further assessment on the
investment income received. In cases where withholding tax is not the final tax, the recipient individual is
subjected to further assessment in respect of the investment income received and the withholding tax is
given as a credit against the final income tax for the year.
... Rates of withholding tax
The rates of withholding tax in respect of payments of investment income to individuals, and whether the
withholding tax is the final tax, are as follows:
Type of income
102
Withholding rate
(%)
Final tax?
(Y – Yes, N- No)
Dividends paid by companies carrying on mining operations and
companies listed on the LuSE
0
Y
Dividends from other companies
15
Y
Interest on Government bonds
15
Y
Savings and deposit interest from accounts held with financial
institutions
0
Y
Treasury bill interest
15
Y
Other types of interest
15
Y
Royalties paid to non-residents
20
N
Royalties paid to residents
15
N
Management and consultancy fees to non-residents
20
N
Rent
10
Y
Winnings from betting, gaming and lotteries
20
Y
Details on how each of the types of investment income is dealt with are given below.
... Operation of withholding tax system
Withholding tax is deemed to have been deducted from the payment of investment income on the day when
the recipient becomes entitled to that investment income. This is the due date when the person making
payments is required to pay the income and also the date when the recipient has a legal right to claim the
payment.
Withholding tax is payable on the 14th day following the end of the month in which the deduction of the tax
was made.
For example, if a payment of investment income was due in January 2019, then withholding tax relating to
that payment must be paid not later than 14 February 2019. This would be the case whether the investment
income was actually paid in January 2019 or not. If withholding tax is paid after the due date, interest on
overdue tax and a monthly penalty become chargeable.
The penalty for late payments of withholding tax is 5% of the amount of withholding tax per month or part
thereof. The penalty covers the period from the due date of payment of the tax up to the date when the tax
is actually paid.
In addition to the penalty, interest on overdue tax is also chargeable at the Bank of Zambia discount rate plus
2%. The interest runs from the due date to the date when withholding tax is actually paid.
..
Income from letting of property
RENT is 'a payment in any form including a fine, premium or any like amount, made as a consideration for
the use or occupation of or the right to use or occupy any real property including personal property directly
connected with the use or occupation or the right to use or occupy such real property'.
The rate of withholding tax on rent from property situated in Zambia is 10%.
The payer (tenant) is responsible for deducting withholding tax from gross rentals on the date of accrual of
any amount due to the payee (landlord). The tenant should remit the amount so deducted to the Zambia
Revenue Authority. This is the final tax.
Where the tenant is a diplomat or any other person who by law is exempt from paying tax, the landlord must
pay the WHT themselves.
..
Interest
In respect of all types of interest, withholding tax is the final tax for individuals.
The treatment of interest is as follows:
(a)
All savings and deposit interest from accounts held with financial institutions received by individuals is
exempt from WHT, i.e. the withholding rate is 0%.
103
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The penalty and the interest on overdue tax are paid as part of the withholding tax and they have the same
status as the withholding tax.
(b)
In respect of loan and debenture interest, treasury bill interest receivable as well as interest from
other amounts lent out, the rate of withholding tax 15%. The individual will receive such amounts of
interest net of withholding tax.
..
Treatment of dividends from Zambian companies
The amount of withholding tax deducted at source from dividends is usually the final tax, except in the case
of dividends from mining companies. All other dividends are not included in the computation of final income
tax payable by an individual.
The rates of withholding tax on dividends are as follows:
(a)
0% if the company making the distribution is a company that:
•
•
Carries on mining operations, or
Is listed on the Lusaka Stock Exchange.
(b)
15% if the company making the distribution is any other company.
..
Royalties
The term ROYALTY has been defined in section 2 of the Income Tax Act as 'a payment in any form received as
consideration for the use of, or the right to use any copyright of literacy, artistic or scientific work, any
patent, trade mark, design or model, plan, secret formula or process, or for the use of, or the right to use
industrial, commercial or scientific equipment or for information concerning industrial, commercial or
scientific experience.'
The rate of withholding tax on royalties is 15%. This is not the final tax, so the individual taxpayer who
receives the royalties is still assessed on the gross amount. The amount of withholding tax deducted at
source is then given as a credit against the income tax charged on the total taxable income.
EXAMPLE
Royalties
Mr Lungu, a Zambian resident man, received the following amounts of income in the tax year 2019:
Consultancy fees
Royalties
Dividend from Exile Zambia Limited
K
95,625
38,250
4,250
In all the cases, the amounts shown are the actual amounts received by Mr Lungu. Neither the royalties nor
the dividends were received from a mining company.
Required
SOLUTION
Explain, with suitable calculations, how each of the amounts received by Mr Lungu should be dealt with in
the computation of his income tax payable for the tax year 2019.
Mr Lungu received each of the above amounts net of withholding tax at the rate of 15%. Withholding tax on
dividends received is the final tax payable. This will therefore not be included in the computation of the final
amount of income tax payable.
MR LUNGU
PERSONAL INCOME TAX COMPUTATION FOR 2019
104
Consultancy fees received (K95,625  100/85)
Gross royalties received (K38,250  100/85)
Less tax free income
Income tax payable
25%  K9,600
30%  K25,200
37.5%  K83,100
Less income tax already paid
Withholding tax on consultancy income (15%  K112,500)
Withholding tax on royalties (15%  K45,000)
Final income tax payable
K
112,500
45,000
157,500
(39,600)
117,900
2,400
7,560
31,163
41,123
(16,875)
(6,750)
17,498
……………………
Investment income consists of income from savings and financial investments as well as income from
letting of property and royalties.
The rate of withholding tax (WHT) is 0% in respect of bank and building society interest and dividends
received from companies carrying on mining operations. This WHT is a final tax, except in the case of
dividends from mining companies.
The WHT rate on other Zambian company dividends is 15% and is also a final tax.
The WHT rate on rental income from letting property in the Republic of Zambia is 10% and is also a final
tax.
WHT on royalties is not a final tax.
When withholding tax is the final tax, the amount received is net of tax and no further assessment is
made on that income.
. Taxation of farming income
……………………
In this section we discuss the tax treatment of farming income received by individuals.
……………………
..
Characteristics of farming enterprises
Farming enterprises include both unincorporated farming businesses and incorporated farming enterprises.
Farming has been defined in the Income Tax Act as any husbandry, pastoral, poultry, fish rearing or
agricultural activity but excludes the letting of property for such purpose.
Farming has been included as one of the business activities within the definition of business in Section 2 of the
Income Tax Act.
If a person lets property that is used for farming purposes, the income that arises from such property is not
farming income. It is still income from letting of property and shall be assessed as such. Only income that
arise from the various activities as mentioned in the definition above qualifies as farming and/or fishing
income.
105
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
..
Computing farming profits
Taxable profits from farming are determined in the same way as taxable profits from any other business.
Expenses incurred are allowed if they are of a revenue nature and they are incurred wholly and exclusively
for the purposes of farming.
Capital expenditure and all other expenses which are not allowed in respect of any other business are also
disallowed when they are incurred by a farmer.
The rules used for the determination of the tax adjusted business profits for unincorporated businesses were
covered earlier in this Study Manual. Those relating to the calculation of companies' tax adjusted business
profits will be covered later in this Study Manual. Using those rules, the farming profit chargeable to income
tax, before capital allowances may be determined in the normal way.
..
Capital allowances
Farming enterprises are entitled to capital allowances on the qualifying assets which are used wholly and
exclusively for the purposes of farming.
Farming enterprises can claim capital allowances in the following ways.
... Farm implements
These include the implements, plant and machinery which are used by a farmer for the purposes of farming.
Any implements, plant and machinery which are directly used by a farmer in farming qualify for a wear and
tear allowance of 100%.
Such implements are only those which are directly used in farming such as:
•
•
•
•
Tractors
Ploughs
Farming implements
Irrigation and harvesting implements
Implements which are not directly used in farming qualify for the wear and tear allowance at the rate of
25% and non-commercial vehicles qualify for the 20% wear and tear allowance.
... Farm improvements
Farm improvement is any permanent work including a farm dwelling and fencing appropriate to farming and
any building constructed for and used for the welfare of employees in relation to farming land owned or
occupied by the farmer claiming the allowance for ascertaining his profit.
A farm improvement allowance at the rate of 100% of the expenditure is given on the cost of the farm
improvements. The expenditure that qualifies for farm improvement allowance includes expenditure on:
•
•
•
•
Expenditure on construction of barns and other storage buildings
Expenditure on the construction of farm dwellings
Expenditure incurred on fencing
Expenditure on the construction of buildings for the welfare of employees
A FARM DWELLING is any permanent building, that is used as a dwelling, which is not used by the farmer
claiming the allowance as the homestead for himself and his family.
For the tax year 2019, the maximum amount qualifying for farm improvement allowance in respect of
expenditure incurred on the construction farm dwellings is K20,000. Therefore, if the cost of a farm dwelling
exceeds K20,000, the farm improvement allowance of K20,000 should be given.
106
Where expenditure is incurred partly in respect of farm improvement and partly for other purposes, then
only the part that the Commissioner General will determine as relating to farm improvement will qualify for
the farm improvement allowance.
If a farmer transfers farming land to another farmer in the year when he would have been entitled to claim
the farm improvement allowance, then the farm improvement allowance should be apportioned between
the outgoing farmer and the incoming farmer in a manner that the Commissioner General will consider
suitable.
If there is a transfer of ownership or occupancy of the whole of the land, the incoming farmer, as a farmer,
will be entitled to the whole of the allowance which the outgoing farmer would have claimed had there been
no transfer of the land from him.
... Farm works
FARM WORKS are all the works which are carried out on the farm. They do not include farm improvements
or industrial buildings or commercial buildings.
An allowance known as the farm works allowance is available at the rate of 100% on the expenditure
incurred on farm works.
Qualifying expenditure includes the following:
•
•
•
•
•
•
Expenditure incurred on works for the prevention of soil erosion
Expenditure incurred on carrying out aerial or geographical survey
Wells
Boreholes
Stumping and clearing
Expenditure incurred on water conservation
If expenditure on farm works is incurred in a charge year that is prior to the charge year in which he
commences business, then the farm works allowance will be given against the income of the charge year in
which the farmer commences business.
Any capital expenditure incurred on the development of a plantation qualifies for an allowance known as the
development allowance. The rate of development allowance is 10% of the expenditure and it is given as a
deduction against the profits of the charge year in which the expenditure is incurred.
If the expenditure is incurred in a charge year when there is no income, then the development allowance for
that year is given as a deduction against the income available in the following year.
Examples of plantations on which such expenditure may be incurred include:
(a)
(b)
(c)
Tea plantations
Coffee and cocoa plantations
Orange and other citrus fruit plantations
Expenditure incurred in the growing of rose flowers also qualifies for the development allowance.
EXAMPLE
Farming allowances
Mr Chomba is a farmer who always prepares accounts to 30 September each year. For the tax year 2019, he
incurred the following capital expenditure:
Bought a Toyota Hilux double cab
Constructed a farm dwelling for use by an employee
Bought tractor
K
90,000
28,000
78,000
107
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
... Development allowance
Bought furniture for use in his farm office
Expenditure on stumping
Digging a well
Fencing the farm
25,000
11,000
3,000
22,000
The tax adjusted profit before deducting capital allowances for the tax year 2019 amounted to K509,000.
Required
SOLUTION
Calculate the final taxable farming profits chargeable on Mr Chomba for the tax year 2019.
Mr Chomba has incurred various types of expenditure during the tax year 2019. It is important to identify the
types of capital allowances available and also the rates at which these capital allowances are given. In respect
of implements, plant and machinery, the wear and tear allowance is available at the rate of 100% on cost of
the implements actually used in farming such as tractors. Implements, plant and machinery acquired by a
farmer, but not actually used in farming on the farm land qualify for the normal wear and tear allowance of
25% on cost.
The rate of wear and tear allowance in respect of expenditure qualifying for the farm improvement and the
farm works allowance is 100% on cost and so the whole amount incurred is written off in full. Qualifying
expenditure for farm dwellings is restricted to K20,000 only.
The final taxable profit for Mr Chomba is as follows.
MR CHOMBA
COMPUTATION OF THE FINAL TAXABLE FARMING PROFIT FOR THE TAX YEAR 2019
K
Tax adjusted profit before capital allowances
Less capital allowances:
Implements, plant and machinery:
Toyota Hilux: 20%  K90,000
Furniture: 25%  K25,000
Tractor: 100%  K78,000
Total capital allowances on plant and machinery
Farm improvement allowances:
Farm dwelling (restricted)
Fencing the farm
Total farm improvement allowances
Farm works allowance:
Cost of stumping
Cost of digging a well
Total farm works allowance
Total capital allowances
Final taxable farming income
..
K
K
509,000
18,000
6,250
78,000
102,250
20,000
22,000
42,000
11,000
3,000
14,000
(158,250)
350,750
Averaging of farming income
S.62A of the Income Tax Act provides for averaging of farming income.
A farmer can make an irrevocable election to have farming or fishing income of two consecutive charge
years averaged. The irrevocable election should be made before the end of the charge year that follows the
second consecutive charge year.
Where there is a loss in one year and a profit in another, the election to average the profit and loss can still
be made by the farmer.
108
The final taxable income is the averaged income for each of the two consecutive charge years and if there is
a loss, the final loss in respect of each of the two consecutive charge years is the average loss .
EXAMPLE
Averaging profits
The following are the farming profits as adjusted for taxation purposes for Mrs Banda, a farmer:
Tax year
Profits
K
567,000
215,000
633,000
2017
2018
2019
Mrs Banda has made an irrevocable election to average the income of the tax year 2018 with that of 2019.
(a)
Calculate the final taxable profits for the tax years 2017, 2018 and 2019.
(b)
Explain whether Mrs Banda can make a further election to have the result for 2018 in part (a) above
averaged with that of 2017.
Farmers are able to make the irrevocable election to have farming income of two consecutive tax years
averaged. Mrs Banda has made such an election to have income of the two consecutive tax years 2018 and
2019 averaged.
After averaging the income for 2018 and that of 2019, she cannot then elect to average the resulting income
for 2018 with the actual profit for 2017 or the actual profits for the later years.
(a)
The average profit is:
K
215,000
633,000
Income for 2018
Income for 2019
Total income
Average profit is
848,000
Total income
=
2
K848 million
2
= K424,000
=
The final chargeable profits for the tax years mentioned are:
Tax year
Profit
K
2017
2018
2019
(b)
Actual profit made
Averaged with 2019
Averaged with 2018
567,000
424,000
424,000
Mrs Banda cannot make a further election to average the profit for the tax year 2017 with the
averaged amount for 2018. Such an election is not allowed. Furthermore, the tax year following the
second consecutive tax year after 2018, which is 2019, will have ended.
109
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Required
..
Personal income tax on farming profits
The maximum rate of income tax on farming profits made by individual farmers is 10% for the tax year 2019.
If a farmer has only farming profits, then the first K39,600 will be taxed at the rate of 0% (or simply, exempt
from income tax) and any excess over K39,600 will be taxed at the maximum rate of 10%.
EXAMPLE
Income on farming profits 1
Mrs Kalenga, a farmer, has farming profits of K98,000 for the tax year 2019. Her only other income is a
dividend of K33,000 (net) received from a Zambian company. In the tax year 2018, she had farming profits of
K40,000. She has now made an irrevocable election to average the income of the tax year 2018 with that of
the tax year 2019.
Required
SOLUTION
Calculate the income tax payable by Mrs Kalenga for the tax year 2019.
Mrs Kalenga has only farming income as the income to be subjected to assessment in 2019. The first K39,600
will be tax free while the balance will be taxed at the rate of 10%.
Dividends are subjected to withholding tax. The withholding tax deducted at source is the final tax and so,
there will be no further assessment.
As she has made the election to average the income of the two tax years 2018 and 2019 the amount
chargeable to income tax in the tax year 2019 is the average amount as included in the following
computation.
MRS KALENGA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Farming profits [(K40,000 + K98,000)/2]
Less tax free amount
Income tax payable
10%  K29,400
K
69,000
(39,600)
29,400
2,940
If a farmer has farming income and non-farming income, then the tax free band should be allocated to nonfarming income first.
If the non-farming income is more than K39,600 then the first K39,600 of that income will be taxed at 0%, the
next K9,600 at 25% and so on. The whole of the farming income will be taxed at the rate of 10%.
If the non-farming income is less than K39,600, then the whole of that amount will be taxed at 0% with part
of farming income also being taxed at 0%. The balance of the farming income will then be taxed at 10%.
EXAMPLE
Income tax on farming profits 2
Mwangaza runs a farming business in Zambia. When he is free, he conducts part time lectures in agriculture
at a local college. He has the following income for the tax year 2019:
Profits from farming
Salary from part time lecturing (gross)
110
K
110,540
7,200
Income tax deducted from his salary under the Pay As You Earn system was K2,520. At 1 January 2019, a
farming loss of K42,500 was brought forward. It arose from the same farming activity being carried on in the
previous year.
Required
SOLUTION
Calculate the final amount of income tax payable by Mwangaza for the tax year 2019.
Mwangaza has both non-farming and farming income. His non-farming income uses up part of K39,600 tax
free amount. The rest of the tax free amount (i.e. K39,600 – K7,200 = K32,400) is set against the farming
income.
MWANGAZA PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Income from part-time employment
Farming profits
Less loss relief
Less tax free income
Total
K
7,200
110,540
117,740
(42,500)
75,240
(39,600)
35,640
Non-farming
income
K
7,200
7,200
7,200
(7,200)
Nil
Income tax on farming income
10%  K35,640
Less Pay As You Earn
Final income tax payable
Farming
Income
K
110,540
110,540
(42,500)
68,040
(32,400)
35,640
3,564
(2,520)
1,044
(a)
Mr Chilikwela has been in business for many years, preparing accounts annually to 31 December. His
businesses include retail trade and farming. He also has property that is being let on a commercial
basis.
For the tax year 2019, the turnover figures from the businesses exceeded K800,000. The final trading
results were as follows:
K
Profit from retail trading
567,870
Profit from farming
298,800
The following additional information has been made available:
(i)
The figures of profit from the retail trade and from farming are the final taxable results after
capital allowances.
(ii)
On 1 January 2019, there was a trading loss from the retail trade that had been incurred in
2018. The amount available for relief at 1 January 2019 was K66,000.
(iii)
Provisional income tax paid in respect of the tax year 2019 is K9,700.
Required
Prepare a computation of the final amount of income tax payable by Mr Chilikwela for the tax year
2019 and state the due date when this tax must be paid.
111
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
3.2 Retail, farming and property income
(b)
Mr Chamunda is a farmer in the Mukushi farming block of Zambia. He always prepares his accounts
for years ending on 31 December. For the tax year 2019, Mr Chamunda's taxable profit from farming
was K32,000. This profit was low due to unfavourable weather conditions during that farming season.
For tax year 2018, Mr Chamunda produced a taxable farming profit of K98,000. This profit was higher
than that of 2019 as the weather conditions in 2018 were more favourable than those for 2019.
Mr Chamunda now wishes to make an irrevocable election to average the income of the tax years
2018 and 2019.
Required
(c)
(i)
Explain the circumstances under which income from farming may be averaged.
(ii)
State, with explanation, the date by which the irrevocable election to average farming income
in the circumstances given above should be made by Mr Chamunda.
(iii)
Assuming that Mr Chamunda is successful in making the election, calculate the income tax
payable on the farming income for the tax year 2019.
(iv)
Assuming that Mr Chamunda expects to earn a farming profit of only K18,000, in the tax year
2020, explain whether this profit can be averaged with the profit on which income tax for the
tax year 2019 was based.
Farming enterprises are entitled to accelerated (higher) capital allowances on implements, plant and
machinery, and on other expenditure such as farm improvements and farm works, such that the
whole expenditure is normally written off in the tax years when it is incurred.
Required
(i)
Explain the circumstances under which capital allowances on implements, plant and
machinery are available to farming enterprises at higher rates.
(ii)
Explain what is meant by farm improvements and farm works, giving two examples of each.
……………………
Farming is any husbandry, pastoral, poultry, fish rearing or agricultural activity but excludes the letting
of property for such purpose.
The tax adjusted profits of farming enterprises are calculated in the same way as for other business
enterprises, so they can claim capital allowances on implements, plant and machinery at the rate of 25%
and 20% in the case of non-commercial vehicles.
If the implements, plant and machinery are used directly in farming, capital allowances are available at
the rate of 100%.
Traders can make an irrevocable election to have the farming income of two consecutive years averaged
if income of one year is substantially lower than that of the other year, or if one year has produced a loss
while the other year has produced a profit.
The rate of income tax on income from farming for individuals is 10%.
If the farmer also has non-farming income, the tax-free amount is first allocated to the non-farming
income to minimise the amount of income tax payable.
……………………
112
Chapter Roundup

A series of tests applies to determine whether a person is an employee or is self-employed, the most
significant being whether the contract amounts to a contract of service or a contract for services.

If a person is an employee, income arising is taxable on the actual receipts basis as emoluments, with tax
paid under the Pay As You Earn system.

All payments received by reason of employment are chargeable on employees except for:
Benefits in kind that cannot be converted into cash
Medical expenses incurred by the employer
Board and lodging provided by the employer

Approved share option schemes enable employees to acquire shares in their employer companies. Any
benefit that arises when the share option is exercised is tax free.

Revenue expenses, which are incurred wholly and exclusively for the purposes of the employment, are
deductible from emoluments.

Emoluments (i.e. monthly salary; commutation of accrued leave days; and accrued service bonus linked to
performance) are taxable when employment ends.

Any pension benefit received on termination of employment is exempt. Pension benefit includes a pension,
compensation, gratuity, severance pay, repatriation and other similar allowances.

The Pay As You Earn system is used for collecting income tax on the emoluments from holding an office or
from employment.

Investment income consists of income from savings and financial investments as well as income from letting
of property and royalties.

The rate of withholding tax (WHT) is 0% in respect of bank and building society interest and dividends
received from companies carrying on mining operations. This WHT is a final tax except in the case of
dividends from mining companies.

The WHT rate on other Zambian company dividends is 15% and is also a final tax.

The WHT rate on rental income from letting property in the Republic of Zambia is 10% and is also a final tax.

WHT on royalties is not a final tax.

When withholding tax is the final tax, the amount received is net of tax and no further assessment is made
on that income.

Farming is any husbandry, pastoral, poultry, fish rearing or agricultural activity but excludes the letting of
property for such purpose.

The tax adjusted profits of farming enterprises are calculated in the same way as for other business
enterprises, so they can claim capital allowances on implements, plant and machinery at the rate of 25% and
20% in the case of non-commercial vehicles.

If the implements, plant and machinery are used directly in farming, capital allowances are available at the
rate of 100%.

Traders can make an irrevocable election to have the farming income of two consecutive years averaged if
income of one year is substantially lower than that of the other year, or if one year has produced a loss while
the other year has produced a profit.

The rate of income tax on income from farming for individuals is 10%.

If the farmer also has non-farming income, the tax-free amount is first allocated to the non-farming income
to minimise the amount of income tax payable.
113
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
•
•
•
Quick Quiz
114
1
How do courts and ZRA distinguish between and employee and self-employed contractor?
2
What is the basis of assessment for emoluments from employment?
3
What types of benefits in kind are assessable on the employees?
4
Why are certain benefits in kind not assessable on employees?
5
Describe the expenses that are allowable as deductions against emoluments from employment?
6
What are the criteria an employee must meet to be an eligible participant in an employer share option
scheme?
7
Explain how the payments made on termination of employment due to early or normal retirement are dealt
with for tax purposes.
8
Explain how the amount of income tax payable under the Pay As You Earn system is calculated?
9
What are the classifications of investment income?
10
What is the due date for payment of withholding tax deducted from a payment made on 25 March 2019?
11
How is withholding tax on rent received dealt with when computing personal income tax payable?
12
What types of allowances on capital expenditure are available to farming enterprises and on what types of
expenditure are they available?
13
Under what circumstances can income from farming and fishing be averaged? What is the time limit for
making the election to average income from farming and fishing?
14
What are the rates of income tax on farming income for individual farmers?
1
By applying a series of tests related to the performance of work and where the control for that performance
lies. Refer to the full list under Sub-section 1.2.
2
The actual receipts basis.
3
Benefits which can be converted into cash are taxable on employees receiving them.
4
Benefits in kind not assessable on employees are benefits in kind which cannot be converted into cash,
medical expenses incurred by the employer, and board and lodgings provided by the employer.
5
Travelling expenses incurred in the course of employment (but not in the commute between work and home
unless duties commence at home, such as in the case of doctors). They must be revenue expenses which are
incurred wholly and exclusively for the purposes of employment.
6
(a)
Has worked for the employer for a minimum of 20 hours per week during a period of two years.
(b)
Is a seasonal, full-time employee who has worked for at least five months during a period of
two years.
(c)
Is an employee of a holding, subsidiary or affiliated company of the employer.
(a)
The final salary and leave pay are added together and are taxable under the normal PAYE system at
the time when they are paid to the employee.
(b)
Any pension benefit is exempt.
7
8
Refer to the six-step procedure in Sub-section 1.8.2.
9
Income from savings, financial investments, property and royalties.
10
14 April 2019
11
Rent is received net of 10% withholding tax, which is the final tax. It is not subject to further assessment.
12
Farmers can claim capital allowances on implements, plants and machinery by way of wear and tear
allowances if they are used wholly and exclusively for the purpose of farming. Qualifying capital expenditure
includes expenditure on farm improvements, farm works and the development of plantations.
13
The election is made if income in one year is substantially lower than that of the other year, or if one year
has produced a loss while the other year has produced a profit. The irrevocable election should be made
before the end of the charge year that follows the later charge year.
14
The rate of income tax on income from farming for unincorporated businesses is 10%.
115
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Answers to Quick Quiz
Answers to Questions
3.1
Emoluments from employment
The taxation implications of Janet's offer of employment are as follows:
(1)
Any pension benefit received on the cessation of employment will be exempt.
(2)
The starting annual salary will be taxable under the PAYE system. The settling in allowance of 10% of her
starting basic salary will be taxable as an additional emoluments since all allowances receivable by
employees in the course of employment are taxable as emoluments. The amount of settling allowance will
be 10%  K48,000 = K4,800.
The annual increments will be spread throughout the relevant tax years when they will be available and will
result in a higher salary from one year to another. This higher salary shall be the taxable amount in each tax
year. The annual salary in 2020 will be K48,000 + K2,400 = K50,400. In 2021, the final year of the contract, the
annual salary will be K50,400 + K2,400 = K52,800.
(3)
The gratuity payable at the end of the contract will be exempt, since it is included in the definition of pension
benefit.
The actual gratuity that she will receive, assuming she serves the three years, will be:
Gratuity receivable
= 20%  (K48,000 + K50,400 + K52,800)
= 20%  K151,200
= K30,240
(4)
In respect of accommodation that will be provided by the employer, Janet will be assessed on the
maintenance costs, cost of electricity, water and general cleaning that the employer will incur on her behalf.
(5)
No assessment will arise in respect of the reimbursement of medical expenses that Janet will incur. This is
because the amount actually incurred by Janet will be set off in full against the amount that the employer
will reimburse.
(6)
The payment of Janet's recreation club subscription will be treated as an emolument and chargeable to
income tax on Janet. So K200 payable by the employer will be subjected to tax under PAYE system in the
month when paid.
(7)
The subscription of K550 payable to the Zambia Institute of Chartered Accountants (ZiCA) will be deductible
from Janet's emoluments as it appears that membership of ZiCA is relevant to her employment. She is being
employed in the accounts department of the company.
National Pension Scheme Authority (NAPSA) contributions are not deductible from emoluments.
3.2
Retail, farming and property income
(a)
MR CHILIKWELA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Profit from retail trade
Trading loss b/f
Profit from farming
Less tax free income
Total
K
567,870
(66,000)
501,870
298,800
800,670
(39,600)
761,070
116
Nonfarming
K
567,870
(66,000)
501,870
501,870
(39,600)
462,270
Farming
K
298,800
298,800
298,800
Tax on non-farming income:
25%  K9,600
30%  K25,200
37.5%  K427,470
Tax on farming income
10%  K298,800
2,400
7,560
160,301
170,261
29,880
200,141
Less tax already paid
Provisional income tax
Final income tax payable
(9,700)
190,441
The final income tax of K190,441 for the tax year 2019 should be paid not later than 21 June 2020.
(i)
(ii)
(iii)
Income from farming or fishing may be averaged if:
(1)
It is for two consecutive tax years and it is such that one year's income is substantially greater
than the income of the other year, or
(2)
One year has a loss while the other has a profit.
Mr Chamunda should make the irrevocable election to average the income of the tax years 2018 and
2019 not later than 31 December 2020, which is the end of the tax year following 2019.
Income tax is payable on the average farming income. The average farming income is:
Profit for 2019
Add profit for 2018
Total profit
Average profit
Less tax free amount
Income tax payable @ 10%
(iv)
(c)
K
32,000
98,000
130,000
65,000
(39,600)
25,400
2,540
The income of the tax year 2019 cannot be averaged with that of the tax year 2020 because the 2019
taxable income is already an averaged figure. It is not possible to average the income of 2019 further.
Capital allowances for farming enterprises:
(i)
Capital allowances are available at a higher rate of wear and tear of 100% on cost in respect of all
implement, plant and machinery that are used directly in farming such as ploughs, tractors, combine
harvesters and so on.
(ii)
Farm improvements are permanent works that are used for farming purposes. Examples are farm
dwellings, fencing and buildings used for the welfare of employees.
Farm works are works in respect of which expenditure is incurred on farming land for farming
purposes. Examples are aerial and geographical surveys, boreholes, stumping and clearing and so on.
117
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(b)
TAXATION OF COMPANIES AND SMALL
BUSINESSES
In this chapter we turn our attention to company income tax and turnover tax.
A company's income from various sources is aggregated to arrive at the total taxable income. The expenses
that would be allowed if incurred by an individual sole trader are also generally allowed if incurred by a
company. However, there are some exceptions and you should be aware of what these are.
The aim behind turnover tax is to improve tax collection rates in respect of small businesses through
implementing simple and fair tax administration procedures.
syllabus references
118
1 Corporate taxation
1B(iv)
2 Turnover tax
1B(vii)
LEARNING OBJECTIVES

Explain the interaction of taxes, prepare relevant tax computations and advise when the taxes are payable,
dealing specifically with:
(iv)
(vii)
The interaction of corporate taxation and withholding taxes
Presumptive taxes, capital allowances and losses (1B)
. Corporate taxation
..
Company residence
A company that is resident in the Republic of Zambia is liable to company income tax in Zambia on its
worldwide income.
A company is resident in Zambia for taxation purposes if (Section 2 of the Income tax Act):
•
•
The company is incorporated or formed in Zambia, or
The effective management of that company is exercised in Zambia.
A company is effectively managed in Zambia if its board of directors or other central management board
meets in Zambia.
..
Company income tax
Company income tax is a form of income tax that is chargeable on the income of Zambian resident
companies. Since the tax is a form of income tax, it can be referred to as company income tax.
In order to calculate a company's income tax payable, the income is aggregated and any deductions are
made from the aggregate income to arrive at the final amount of taxable income.
It is a responsibility of the company to compute the appropriate amount of company income tax payable and
remit it to the Commissioner General.
The income of a company includes the following:
•
•
•
•
•
Business profits
Rental income
Royalties
Interest received
Dividends
Unlike individuals, a company does not have emoluments from employment. All of the income arising in
cases where a company offers a service to other companies is taxable business income as opposed to being
emoluments from employment. For tax purposes, a company cannot be treated as an employee of any other
person.
119
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Company income tax is then charged on the total taxable income. The income tax is then reduced by any tax
withheld from income taxed at source (withholding tax (WHT)) and any provisional income tax already paid
to arrive at the final income tax payable or repayable.
The format of the computation is as follows:
COMPANY INCOME TAX COMPUTATION FOR THE CHARGE YEAR 2019
K
X
X
X
X
(X)
X
Business profits
Interest income
Royalties received
Total income
Less allowable deductions
Taxable income
Income tax on chargeable income
Less income tax already paid
Income tax payable
..
K
X
(X)
X
The rates of company income tax
Company income tax is chargeable at the following rates:
Income source
Income tax rate (%)
Profits from manufacturing and other sources
35
Hedging income
35
Income from farming
10
All companies pay tax at the same rate irrespective of their size and income. The tax is therefore a burden to
small companies since they are taxed at the same rate as the large companies.
Companies that list their shares on the Lusaka Stock Exchange (LuSE) are entitled to a 2% discount in the
year in which they list the shares. Thereafter, the company continues to pay tax at 35% or 10% as normal.
If such companies offer one third of their shares to indigenous Zambians, they are entitled to a further 5%
reduction on their applicable corporate tax rate for as long as they maintain the qualification threshold. This
means that the 5% reduction of the applicable corporate income tax for companies whose shares are listed
on LuSE, is applicable for as long as the one third of the shares are held by indigenous Zambians.
EXAMPLE
Company income tax 1
Maazan Plc is a Zambian company that produces motor vehicle spares. The company prepares accounts to 31
December each year. On 1 January 2019, the company listed its shares on the Lusaka Stock Exchange. For the
year ended 31 December 2019, the company had taxable business profits of K987,000.
Required
SOLUTION
Calculate the company income tax payable by Maazan Plc for the year ended 31 December 2019.
Maazan Plc listed its shares on the Lusaka Stock Exchange at the start of the accounting period in question.
As a result of this, the company's income tax rate should be reduced by 2% only for the current year. The tax
rate will therefore be 35% – 2% = 33%. Thereafter, the company will continue to pay company income tax at
the rate of 35%.
The computation of the company's income tax payable is as follows.
120
MAAZAN PLC
COMPANY INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Taxable profit
Company income tax (33%  K987,000)
K
987,000
325,710
EXAMPLE
Company income tax 2
Kandu Plc is a Zambian company that supplies building materials. The company listed its shares on the Lusaka
Stock Exchange on 1 January 2019 and offered one third of its shares to indigenous Zambians.
For the year ended 31 December 2019, the company's taxable business profit was K865,000.
Required
The company is listed on the Lusaka Stock Exchange. In the year of listing the shares, the tax rate is reduced
by 2%. As a result of offering at least one third of the company's shares to indigenous Zambians, the tax rate
is reduced by a further 5%. The company income tax rate applicable to Kandu Plc is computed as follows:
Standard company income tax rate
Listing reduction
Share offering reduction
%
35
(2)
(5)
Tax rate for Kandu Plc
28
The company income tax payable by Kandu Plc is therefore computed as follows.
KANDU PLC
COMPANY INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Total taxable profit
Company income tax (28%  K865,000)
..
K
865,000
242,200
Computing taxable income
A company's income from various sources is aggregated to arrive at the total taxable income. The rate of
company income tax is then applied on the total income to arrive at total tax payable. The rules governing
the computation of taxable income from various sources are as follows.
... Business profits
A company's business profits are computed in the same way as for individual sole traders and partnerships.
The taxable business profit is the tax adjusted profit after deducting capital allowances on the assets that are
used wholly and exclusively for the purposes of the business.
121
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate the company income tax payable by Kandu Plc for the tax year 2019.
When computing business profits, the format of the computation is as follows:
COMPUTATION OF TAXABLE BUSINESS PROFITS FOR THE CHARGE YEAR 2019
K
Profit before taxation as per accounts
Add:
(a) Expenses charged in the A/Cs but
not deductible for tax purposes
(b) Taxable income not credited to
accounts
K
X
X
X
Less:
(c) Income credited to accounts but
not taxable
X
(d) Capital allowances
X
Taxable business profits
X
X
(X)
X
The expenses that would be allowed if incurred by an individual sole trader would also generally be allowed
if incurred by a company. However, the following are specific examples of the expenses where the treatment
for individuals differs from the treatment for individual sole traders:
(a)
There is no apportionment of expenses between business and private use. It is either the whole
expense is for business purpose and therefore allowed or the whole expense is not for business
purposes and therefore not allowed. Therefore, if a director or employee uses a company motor
vehicle or other asset partly for business and partly for private purposes, then the whole expenditure
incurred on that motor vehicle or asset will be incurred wholly and exclusively for the purposes of the
business and will be allowed if it is of a revenue nature.
(b)
Where the company employs an individual who is differently abled, then the company will be allowed
to deduct from its business profits the allowance for employing a differently abled person. For the
tax year 2019, this allowance is K1,000. The differently abled person should be registered with the
Zambia Agency for persons living with disabilities and the following conditions should be met:
(i)
The differently abled person must be employed on a full time basis, and
(ii)
The employment must be for the whole of the charge year or for a substantial portion thereof,
in respect of which the deduction is claimed. Substantial portion means a period of not less
than 274 days in the relevant charge year.
If the differently abled person dies or the infirmity increases during the tax year in question,
then the qualifying period is reduced to between 183 days and 274 days in the relevant tax
year.
122
(c)
If employees and/or directors are provided with free accommodation by the company, the amount
on which the company is assessed in respect of each employee or director who is accommodated is
30% of the taxable emoluments of that employee or director. No taxable amount arises on the part
of the employee or director. The value is added to the business profits since it is taxed as part of the
business profits of a company.
(d)
When employees and directors are provided with personal to holder cars, i.e. a car that is available
for use by the employee or director without unnecessary restrictions imposed by the employer as the
owner of the motor car, the fixed amounts that must be added back in the company's tax
computation in respect of each motor car are as follows:
(i)
Car with cylinder capacity of less than 1,800cc: K18,000 per annum
(ii)
Car with cylinder capacity from 1,800cc, but less than 2,800cc: K30,000 per annum
(iii)
Cars with cylinder capacity of 2,800cc and over: K40,000 per annum.
The above values are assessed on the company as part of business profits. They should therefore be
added to the business profits as taxable income not credited to the accounts.
There are no taxable values in respect of the use of pool motor cars as well as the use of motor
vehicles other than motor cars. For this purpose, a pool car is one:
(i)
That is not available for use by one employee or director to the exclusion of others
(ii)
That is not normally kept overnight at, or near the residence of one employee or director
(iii)
That is specifically meant for business use, any private use being incidental to the business use
A car that does not satisfy the definition of a pool car is a personal to holder car.
(e)
A skills development levy is charged on an employer at the rate of 0.5% of the gross emoluments
payable to an employee, including a casual employee, during a month.
Gross emoluments for the purposes of computing the skills development levy excludes any pension
benefit. The meaning of the terms 'emoluments' and 'pension benefit' were explained earlier in this
study manual.
The levy is due in the same month in which the emolument is paid or becomes payable and is
payable whether or not the employer has settled the wage bill for the relevant month. The levy must
be remitted to the ZRA not later than the 10th day following the end of the month in which the levy
becomes due.
The amount of levy payable by the employer cannot be recovered by the employer from the
emoluments of the employee. However, the amount of levy payable and paid in respect of a charge
year is allowable when computing the taxable business profits of the employer. However, if the
employer has accrued the expenditure without making any payment, the deduction is not allowed.
(f)
Dividends paid are appropriations of profit and are therefore not allowed for taxation purposes.
Similarly, dividends received from Zambian companies are not taxable as business profits. These
dividends are subjected to withholding tax. The withholding tax paid by the company making the
payment is the final tax and the recipient company is not assessed on that same dividend, as we saw
earlier in this Study Manual.
Zamlan Plc is a Zambian resident company that is listed on the Lusaka Stock Exchange. The company
obtained a listing on the LuSE on 1 May 2017.
For the year ended 31 December 2019, the company reported a profit figure before taxation of K956,000.
This profit figure was arrived at after charging the following expenses:
(a)
Depreciation of plant and machinery of K8,000.
(b)
Wages, salaries and other labour related costs for employees of K198,000.
(c)
The Managing Directors' emoluments of K224,000 and the Finance Directors' emoluments of
K216,000.
(d)
Motoring expenses, including servicing and insurance of motor vehicles of K90,000
(e)
General expenses of a revenue nature which are all allowable for taxation purposes.
The following additional information has also been made available:
1
The company's Managing Director and the Finance Director are each accommodated in company
owned houses. They do not pay any rent to the company. If the houses were let, the gross rent
payable would be K54,000 per annum for each house.
123
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
EXAMPLE
Taxable company income
2
The company's Managing Director has been provided with a company owned motor car for both
business and private use. The motor car is a Nissan Maxima that has a cylinder capacity of 3,000cc.
The Managing Director's private mileage in the car for 2019 was 70% of the total mileage done.
The Finance Director has been provided with a Nissan Cefiro car for both business and private use.
The car has a cylinder capacity of 2,000cc. The Finance Director's private mileage in the tax year was
65% of the total mileage done.
The cost of maintaining the motor cars is incurred by the company and is included in the motoring
expenses of K90,000 charged to the statement of profit or loss. Of the total motoring expenses,
K24,000 relates to the Nissan Maxima while K22,000 relates to the Nissan Cefiro.
3
The company has employed one differently abled person who has been working as its telephone
operator since 2015. His salary is included in the figure of K198,000 for wages and salaries for
employees.
4
Capital allowances on the company's assets used in the trade have been agreed at K25,000. for the
tax year 2019.
Required
SOLUTION
Calculate the company income tax payable by Zamlan Plc for the tax year 2019.
Tutorial comment. This Example brings out some complications that may be encountered when dealing with
company income tax computation questions but ignores the skills development levy. Some challenges here
include the treatment of the private element of the motoring expenses relating to personal to holder motor
cars. As a matter of fact, when computing tax adjusted profits for companies, there are no expenses which
are partly allowable and partly disallowable as is the case with sole traders and partnerships. For companies,
it is either the whole expense is allowed, or entirely disallowed. As a result, the whole expenditure incurred
by the directors as motoring expenses are allowed in full and therefore, no adjustment will be made when
computing taxable profits for the company.
In the case of the provision of free accommodation by the employer, the amount chargeable on the
employer is 30% of the chargeable emoluments payable to the two directors who were accommodated by
the company.
The allowable deduction for employing differently abled persons is a straightforward adjustment.
The computation of the company income tax payable by Zamlan Plc is as follows.
ZAMLAN PLC
COMPANY INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
K
Profit before taxation as per accounts
Add back:
Depreciation
Accommodation benefit
Managing Director (30%  K224,000)
Finance Director (30%  K216,000)
K
K
956,000
8,000
67,200
64,800
132,000
Personal to holder car benefit
Managing Director
Finance Director
40,000
30,000
70,000
210,000
1,166,000
124
K
Less:
Differently abled person deduction
Capital allowances
K
K
1,000
25,000
(26,000)
1,140,000
Taxable profit
Company income tax payable (35%  K1,140,000)
399,000
Although the company reported a profit of K956,000 in the accounts, the taxable profit is much higher at
K1,140,000 due to the disallowance of depreciation charged in the accounts and the taxation of the
accommodation and the motor car benefits provided by the company to the two directors.
... Capital allowances
These are available on qualifying assets that are used wholly and exclusively for the purposes of the
business. The qualifying assets are the same as those which would qualify if used by a sole trader or a
partnership and they include the following:
(a)
Implements, plant and machinery where a wear and tear allowance of 25% on cost applies, with the
rate of 20% applying on non-commercial vehicles. If a motor car is used for both business and private
purposes by an employee or a director of the company, the wear and tear allowance is available in
full.
(b)
Industrial buildings including low cost housing on which annual wear and tear allowance of 5% on
cost applies and 10% on cost apply for low cost housing. Investment allowances are available on
newly constructed buildings at the rate of 10% on cost. In addition, initial allowances are available on
newly constructed industrial buildings at the rate of 10% on cost in the first year of use for qualifying
purposes. Capital allowances on industrial building are claimed on the construction and incidental
costs, excluding the cost of land.
(c)
Commercial buildings on which annual wear and tear allowances are claimed at the rate of 2% on
cost.
On disposal of an asset on which capital allowances have been claimed, a balancing allowance or a capital
recovery/balancing charge arise. For these as well, there is no apportionment between business and private
use. The computation of balancing allowances and capital recoveries follow the same rules that apply to
individual sole traders.
EXAMPLE
Capital allowances
Merchants Ltd, a Zambian company that is not listed on the Lusaka Stock Exchange prepares its accounts
annually to 31 December. In the year ended 31 December 2019, the company's profits before tax shown in
the statement of profit or loss was K125,000. The profit was arrived at after dealing with the following items:
(a)
General expenses of K16,000. This figure included K10,000 being the travelling expenses of staff,
including directors, and K6,000 being expenditure incurred on entertaining suppliers.
(b)
Repairs and renewals, which were made up as follows:
Redecorating existing business premises
Renovations to new premises to remedy wear and tear
of previous owner
K
3,000
5,000
125
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
There is no adjustment for private use of motor vehicles and other assets owned by the company.
8,000
The premises were usable before the renovations were made.
(c)
Legal and accountancy charges
K
2,000
5,000
9,500
10,900
27,400
Debt collection service
Staff service agreements
Parking fines on company cars
Audit and accountancy fees
(d)
Subscriptions and donations included the following:
K
8,000
9,850
9,500
9,900
37,250
Donation to UGG, a political party
Sports facilities for staff
Donation for scientific research at UNZA
Subscription to Chamber of Commerce
(e)
Depreciation of plant and machinery amounting to K35,400 as well as depreciation of land and
buildings of K25,000 were charged in the statement of profit or loss.
(f)
Irrecoverable debts charged in the statement of profit or loss and other comprehensive income were
arrived at as shown in the irrecoverable debts accounts below:
K
12,500
8,500
Trade debts w/off
Loan to employee w/off
Balances c/f
General provision
Specific provision
5,800
3,000
29,800
K
Balances b/f
General provision
Specific provision
1,850
2,500
Profit and loss
25,450
29,800
(g)
A profit on the disposal of a motor van of K21,000 was credited to the statement of profit or loss.
(h)
Dividends received from another Zambian company of K15,000 net, were credited to the statement
of profit or loss.
Assets which the company owned as at 1 January 2019 were as follows:
Motor van: The income tax value as at 1 January 2019 was K93,750. The original cost as at 30 June 2018 was
K125,000. The motor van was sold on 31 December 2019 for K130,000.
The company's Sales Manager had private use of 25% in the motor van.
Other assets: These included the following.
Date of purchase
1 May 2007
1 August 2009
1 June 2018
1 October 2018
Asset
Industrial building
Motor car (1)
Motor car (2)
Fixtures and fittings
Original purchase cost
K
890,000
75,000
126,000
350,000
Required
Calculate the amount of final tax payable by Merchants Ltd for the year ended 31 December 2019.
126
K
K
Net profit as per accounts
Add:
Entertaining suppliers
Parking fines
Donation to political party
Depreciation:
Plant and machinery
Land and Buildings
Loan to employee w/off
Increase in General provision
(5,800 – 1,850)
K
125,000
6,000
9,500
8,000
35,400
25,000
8,500
3,950
96,350
221,350
Less:
Profit on disposal
Dividends received
Capital allowances:
Motor van;
ITV b/f
Proceeds (limited to cost)
Capital recovery
Motor car (1)
Motor car (2)
20%  K126,000
Fixtures and fittings
25%  K350,000
Industrial building
5%  K890,000
21,000
15,000
93,750
(125,000)
(31,250)
Nil
25,200
87,500
44,500
125,950
Final taxable income
Company income tax payable
35%  K59,400
(161,950)
59,400
20,790
... Investment income
This is income from savings and financial investments. It includes bank interest, building society interest,
treasury bill discounts, interest on government bonds (GRZ bonds), dividends from Zambian companies,
royalties and rent and premiums from letting of property.
When a Zambian company receives bank interest, building society interest, treasury bill interest, GRZ bond
interest and royalties, withholding tax of 15% will usually have been deducted, so the amount received is
grossed up and included in the computation of the total taxable income. Any withholding tax is not the final
tax.
Income from the letting of property is subject to withholding tax of 10% which represents the final tax.
Consequently, rental income is not included in the company income tax computation.
127
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
MERCHANTS LTD
COMPANY INCOME TAX COMPUTATION FOR THE YEAR ENDED 31 DECEMBER 2019
Dividends received from Zambian companies are net of final withholding tax of either 0% for mining and
LuSE listed companies, or 15% for all other types of company, so no further assessment should be made.
EXAMPLE
Investment income
Investatech Ltd is a Zambian resident company that specialises in the provision of computer repairs services
to large manufacturing companies. The company always prepares its accounts to 31 December each year. For
the year ended 31 December 2019, the company made a tax adjusted trading profit of K760,000. In addition,
the company also received debenture interest of K85,000, Dividends from other Zambian companies of
K42,500 and royalties of K93,500. The amounts of debenture interest received, dividends received and
royalties received are the actual cash amounts received during the year ended
31 December 2019.
Required
SOLUTION
Calculate the company income tax payable by Investatech Ltd for the tax year 2019.
The tax adjusted trading profit has already been determined and is given above. In arriving at the tax
adjusted trading profit figure, the amounts of dividends, debenture interest and royalties which had been
credited to the statement of profit or loss were deducted, so that they are properly accounted for in the tax
computation as investment income.
Withholding tax is the final tax in respect of dividends received from other Zambian companies. The
dividends will therefore not be subjected to any further assessment.
In the case of royalties and debenture interest, withholding tax is not the final tax. These two amounts will
be included in the computation of the total taxable profits since they are subjected to further assessment.
The amounts which will be assessed further are the gross amounts, with the withholding tax being given as
credits against the final company income tax for the year 2019.
The computation is as follows.
INVESTATECH LTD
COMPANY INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Business profits
Debenture interest received (K85,000  100/85)
Royalties received (K93,500  100/85)
Company income tax
35%  K970 ,000
Less withholding tax already paid:
Debenture interest (15%  K100,000)
Royalties (15%  K110,000)
Company Income tax payable
K
760,000
100,000
110,000
970,000
339,500
(15,000)
(16,500)
308,000
The amounts of withholding tax being credited against the company income tax could also be calculated as
follows:
128
Debenture interest:
= K100,000 – K85,000
= K15,000
Royalties:
= K110,000 – K93.500
= K16.500
..
Relief for tax losses incurred by companies
A tax loss is a tax adjusted loss incurred by a taxable person. When a company incurs a tax loss, that loss is
carried forward and set off against the first available profits of the company arising from the same source as
that which produced the loss. That loss can be carried forward for a maximum of five years. If at the end of
the fifth year there is still an outstanding loss, that outstanding loss cannot be relieved in any other way.
The Income Tax Act however permits a loss incurred by one company to be transferred to another
company in certain circumstances.
The company that has incurred a loss from a particular a source:
(a)
Must have been incorporated outside the Republic, and
(b)
Must have carried on its principal business within the Republic, and
(c)
Is about to be wound up voluntarily in its country of incorporation for the purposes of transferring
the whole of its business and property wherever situated, to a new company which has been or will
be incorporated in the Republic for the purposes of acquiring that trade and property of the original
company (being wound up), and the only consideration for the transfer will be the issue to the
members of the old company of shares in the new company in proportion to their shareholdings in
the old company.
The new company after the transfer referred to above is allowed the old company's loss as a deduction from
income from the same source as that in which the old company's loss was incurred to the extent that the
loss has not been allowed as a deduction for any charge year. Such a loss can be carried forward for a
maximum period of five years. The five year period is a combined period for both the old company and the
new company.
Fashion Facilities Ltd, is a Zambian resident company that designs and sews fashionable clothing for ladies, in
addition to small scale manufacturing. The company has been trading for many years making up accounts to
31 December each year.
The company's statement of profit or loss and other comprehensive income for the year ended 31 December
2019 was as follows.
Notes
K
K
Gross trading profit
568,000
Add:
Trade discounts received
1,250
Insurance recovery – flood damage to inventory
9,450
Rent received (gross)
12,590
Gain on sale of plant
2,180
Debenture interest received
1
3,000
Royalties received
2
2,580
31,050
599,050
Less expenses:
Premium paid
3
12,000
Depreciation
5,250
Loss on sale of lorry
1,540
Irrecoverable debts
4
5,000
Entertainment
5
13,450
General expenses
6
18,640
Repairs and renewals
7
25,850
Legal fees
8
13,250
Donations and subscriptions
9
14,000
Wages and salaries
10
101,250
Expenses incurred on property let (all revenue)
4,850
129
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
4.1 Computation of company income tax
Notes
Profit before taxation
Provision for taxation
Profit after taxation
11
K
K
(215,080)
383,970
(153,588)
230,382
The following notes are relevant to the calculation of the company's taxable business profits and other
taxable income.
Notes
1 – Debenture interest received
The gross amount of debenture interest received is shown in the statement of profit or loss and other
comprehensive income. Withholding tax had been withheld at source at the appropriate rate. The debenture
interest was received from a Zambian company.
2 – Royalties received
The company received royalties from another Zambian company. The gross amount is shown. Withholding
tax had been withheld at source at the appropriate rate.
3 – Premium paid
The company obtained a right for the use of a trade mark on 1 January 2019. The company paid a premium
of K12,000 as consideration for the grant of the right. The right will be exploited by the company over a 40year period so only an appropriate proportion should be deducted each year.
4 – The figure for irrecoverable debts was arrived at as follows:
Trade Debts written off
Increase in specific irrecoverable debt provision
Less decrease in general irrecoverable debt provision
Charge to statement of profit or loss and other comprehensive income
K
4,000
2,000
6,000
(1,000)
5,000
5 – Entertainment
This includes the following:
Entertaining customers
Staff dance
Gifts to customers of foods and drinks
K
5,800
4,650
3,000
13,450
6 – General expenses
The figure for general expenses includes:
Parking fines on company cars
Penalty for late VAT return
Fees for employees attending courses
Other general allowable expenses
K
2,450
5,980
9,500
710
18,640
7 – Repairs and renewals
The figure for repairs and renewals includes K6,800 incurred on fitting new windows in a recently acquired
second hand warehouse. This building had suffered fire damage resulting in all of its windows being blown
out shortly before it was acquired by Fashion Facilities Ltd. Other repairs were carried out on existing
buildings, all of which are owned by the company.
8 – Legal fees
These included the following:
130
Cost connected with acquisition of non-current assets
Cost associated with drafting employees' service contracts
Cost associated with the recovery of loan from a former employee
Other general legal expenses (all allowable)
K
2,540
3,250
2,850
4,610
13,250
9 – Donations and subscriptions
The figure for donations and subscriptions includes a subscription of K1,500, paid to a Zambian trade
association of which the company is a member. The balance is made up of the subscriptions to clubs in
respect of directors and employees.
10 – Wages and salaries
Included in the figure for wages and salaries are the following amounts:
Directors' emoluments
Casual employees' wages
Irrecoverable loans to employees
General wages and salaries (all allowable)
K
26,540
11,250
10,280
53,180
101,250
11 – Provision for taxation
The provision for taxation is based on the total company income tax paid in respect of the year ended
31 December 2018. The amount of company tax already paid under the provisional system of payment of tax
for the year ended 31 December 2019 is K116,590.
12 – Capital allowances
The building in which design work is undertaken was built in 2019. Its cost is made up as follows:
Cost of land
Mini-factory
Staff canteen
Administrative offices
Engineering design offices
K
12,450
99,500
10,500
11,800
14,700
148,950
The total qualifying expenditure incurred on the warehouse referred to in note 7 above was K98,600. The
warehouse does not qualify as an industrial building. There was an extension to the Administrative offices
which cost K9,850 during the year. This is not included in the K11,800.
Required
(a)
Calculate the taxable business profit for the company for the year ended 31 December 2019.
(b)
Calculate the final amount of company income tax payable by the company for the charge year 2019.
131
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
All the items of implement, plant and machinery (including motor vehicles) owned by the company at
1 January 2019 had been acquired more than six years ago, mainly from South Africa and Europe. During the
year ended 31 December 2019, plant was sold for K4,850 resulting in a profit on disposal of K2,180 shown in
the statement of profit or loss and other comprehensive income. In addition, a lorry was sold in the year for
K6,000 resulting in a loss on disposal of K1,540 shown in the statement of profit or loss and other
comprehensive income. The company bought two delivery vans at a cost of K30,000 each during the year.
The delivery vans were acquired for use in the business.
..
Company income tax on farming profits
A company with farming profits pays income tax at the rate of 10% on its farming profits.
Any income that is not farming profit is taxable at the rate applicable to that type of income. If it is the
normal income from manufacturing and other general types of business, it is taxable at the standard rate of
35%.
EXAMPLE
Company income tax on farming profits
Neha Ltd is a Zambian resident company for taxation purposes. For the tax year 2019, the company has
produced the following results:
K
Profits from farming
209,000
Profits from manufacturing
102,550
Royalties (gross)
90,000
The company does not have any other income apart from the ones stated above.
Required
SOLUTION
Calculate the company income tax payable by Neha Ltd for the tax year 2019.
The company has both farming and non-farming income. It is not necessary to do the computation in
columnar form as is the case with individual farmers. All the non-farming income will simply be charged to
income tax at the rate of 35% while all the farming income will be chargeable at the rate of 10%.
The computation is as follows:
NEHA LTD
COMPANY INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Profits from manufacturing
Royalties
Total non-farming income
Farming profits
Total taxable income
Company income tax on non-farming income
35%  K192,550
Company income tax on farming income
10%  K209,000
K
102,550
90,000
192,550
209,000
401,550
67,393
20,900
88,293
Less: withholding tax on royalties
15%  K90,000
Final company income tax payable
(13,500)
74,793
.. Loans to effective shareholders
If a company makes a loan, either directly or indirectly, to an 'effective shareholder' of the company (or their
nominee), the company must pay an amount equal to the difference between the amount of the grossed up
equivalent of the loan (i.e. the loan grossed up at the highest rate of income tax for an individual) and the
actual amount of the loan.
132
An effective shareholder is an individual who is the beneficial owner of a company or is able to control,
either alone or with his nominees, 5% or more of the issued share capital of or 5% of more of the voting
powers in such a company.
An effective shareholder's nominee includes:
(a)
The spouse of the individual.
(b)
The children of the individual, including a biological child, step child or legally adopted child.
(c)
A person who holds shares in a company directly or indirectly on behalf of the individual.
(d)
A person who can be required to exercise, or a person who can require the exercise of voting power
in the affairs of a company in accordance with directions of the individuals, unless the Commissioner
General determines that the spouse, child or other person is a person who can at all times exercise
than in accordance with the directions of the individual.
The amount of loan for the purposes of these provisions under the Income Tax Act include:
(a)
The amount of money advanced.
(b)
The extent of credit facilities provided.
(c)
The difference between the cost of providing any benefit or advantage and the amount paid for
such benefit or advantage when provided, whether such is convertible into cash or not.
(d)
The difference between the open market value, as determined by the Commissioner General, of an
asset transferred and the amount paid for that asset at the date of transfer, as the case may be, if an
asset is transferred to an affective shareholder.
The company must provide details of the loan and the effective shareholder to the Commissioner General by
way of a certificate, which must also be provided to the effective shareholder receiving the loan.
The due date for this tax is by the 14th day of the end of the month when the loan was made.
The late payment penalty for this tax is 5% of the amount of tax per month or part thereof. In addition,
interest at the bank of Zambia discount rate plus 2% annum is also payable.
If the loan or part of the loan is written off by the company, it is treated as part of the effective
shareholder's taxable income. Any tax relating to the amount written off can be applied to reduce the tax
due from the effective shareholders in respect of the written off loan.
133
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
If the effective shareholder repays the loan, the tax is refunded to the company if it makes a repayment
claim. If only part of the loan is repaid by the effective shareholder any excess tax relating to the repaid part
of the loan may be refunded.
……………………
Companies that are resident in Zambia are liable to Zambian company income tax.
The standard rate of company income tax is 35% while income from farming is taxable at the rate
of 10%.
Companies that list their shares on the Lusaka Stock Exchange have the tax rate reduced by 2% in the
year when they list the shares on the Exchange. If such companies offer one third of their shares to
indigenous Zambians, there is a further reduction in the tax rate by 5%.
A company's income from various sources is aggregated to arrive at the total taxable income. The
expenses that would be allowed if incurred by an individual sole trader would also generally be allowed if
incurred by a company (although there are some exceptions).
A company's taxable business profit is its tax adjusted profit after deducting capital allowances. Capital
allowances are available on implements, plant and machinery and on buildings that are used wholly and
exclusively for the purposes of the business.
Companies can carry forward tax losses for up to five years.
A company with farming profits pays income tax at the rate of 10% on farming profits.
A company making a loan to an effective shareholder must pay a penalty tax, which will be refunded
once the loan is repaid.
……………………
. Turnover tax
……………………
In this section we focus on turnover tax, a presumptive tax that applies to small businesses with an
annual turnover that does not exceed K800,000.
……………………
Turnover tax is a presumptive tax (see earlier in this Study Manual).
It is a direct tax on the turnover of companies and other enterprises whose annual turnover is K800,000 or
less.
TURNOVER refers to earnings, income, revenue, takings, yield and proceeds.
.. Persons who are liable to turnover tax
These include:
(a)
Any person carrying on a business with an annual turnover of K800,000 or less.
(b)
Any person whose income consists of amounts which are subject to withholding tax, where
withholding tax is not the final tax.
.. Persons who are not liable to turnover tax
The following persons are excluded from turnover tax:
134
(a)
Any person carrying on a business where the annual turnover is over K800,000.
(b)
Any individual or partnership carrying on the business of public service vehicle for the carriage of
persons.
(c)
Any partnership carrying on business irrespective of whether the annual turnover is over K800,000
or not.
(d)
Income of partners arising from the partnership since the partnership producing that profit is
excluded from turnover tax.
(e)
Any person whose business earnings are subjected to withholding tax where the withholding tax is
the final tax.
(f)
Any person running a business where the annual turnover is not over K800,000 but is voluntarily
registered for Value Added Tax.
(g)
Any person who is involved in mining operations as provided under the Mines and Minerals
Development Act.
.. Payment of turnover tax
Turnover tax is chargeable at a rate of 4% on gross turnover.
The amount of turnover tax is based on the actual monthly turnover and it is due for payment on the 10th
day following the end of the month to which the tax relates.
A taxpayer can make an election to pay turnover tax on a quarterly basis. If this is the case, the due date for
payment of turnover tax is the 10th day following the end of the quarter to which the tax relates. Persons
who are required to pay turnover tax are excluded from payment of provisional tax.
At the end of the tax year, a taxpayer who pays turnover tax gets a repayment of any withholding tax
suffered in the tax year where such a taxpayer provides the necessary evidence to the effect.
EXAMPLE
Turnover tax
Gwembe Ltd is a small Zambian company that offers secretarial services to the mining industry. The company
expects its turnover for the year ending 31 December 2019 to be K123,000. The turnover will be earned
evenly throughout the year.
The company receives debenture interest of K15,000 (gross) every year. This debenture interest is subjected
to withholding tax at the rate of 15%.
(a)
Calculate the monthly amount of turnover tax payable by Gwembe Ltd.
(b)
Explain how the withholding tax on debenture interest will be dealt with at the end of the tax year
2019.
Turnover tax is payable at a rate of 4% on gross turnover. Since we are told that the annual turnover will be
earned evenly throughout the tax year, then monthly turnover will be computed on that basis.
The solution is as follows:
(a)
Monthly turnover is one twelfth of the annual turnover given above. The amount of monthly turnover
is 1/12  K123,000 = K10,250.
Monthly turnover tax
(b)
= 10,250 x 4% = K410
As Gwembe Ltd pays turnover tax, the withholding tax suffered on the debenture interest will be
repaid. The amount of withholding tax to be repaid to the company is the whole amount which is 15%
 K15,000 = K2,250
135
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Required
.. Turnover tax, capital allowances and business losses
If a taxpayer who pays turnover tax has assets on which capital allowances are claimed, then the assets are
written down notionally for the purposes of computing the income tax values of such assets only. The wear
and tear allowances computed are not deductible from the turnover in arriving at the taxable amount.
If a taxpayer who pays turnover tax has tax losses brought forward, the losses can only be carried forward
for set off against future profits of the same trade. They cannot be set off against the turnover. This means
that if a business that has incurred a loss in one year has turnover of K800,000 or less in each of the following
five years, then the loss cannot be relieved, it is simply lost. Such losses can only be relieved against the
trading profits in the year when a trader is required to pay income tax on profits, as long as it is within the
five-year period for which losses can be carried forward.
EXAMPLE
Turnover tax and capital allowances
Chingola Ltd commenced trading on 1 January 2019 and prepared the first accounts for the
12 months ended 31 December 2019 making a net profit as per accounts of K36,000 from a turnover of
K160,000. The turnover was earned evenly throughout the year (i.e. monthly turnover was K13,333). The
company had acquired the following assets at the start of business.
Assets
Printing machine
Toyota car
Delivery van
Cost
K
12,500
33,000
36,000
Required
SOLUTION
Explain the tax implications for the company arising from the level of turnover and the transactions in noncurrent assets. The answer should include relevant calculations where appropriate.
The annual turnover for Chingola Ltd does not exceed K800,000. As such, the company is not liable to
company income tax. It must pay turnover tax. The amount of turnover tax payable on the monthly turnover
of K13,333 will be computed as follows:
K13,333 x 4% = K533.32
This turnover tax will have been paid on a monthly basis on the 10th day following the end of each month.
Since the company paid turnover tax in the year ended 31 December 2019, capital allowances cannot be
claimed against the turnover. However, all the assets held at the end of the year will be written down
notionally for the purpose of calculating the income tax values to carry forward to the following year.
The amounts of notional allowances and the income tax values of the assets are as follows.
Asset
K
136
Printing machine
Cost
Wear and tear (25%  K12.500)
Income tax value carried forward
12,500
(3,125)
9,375
Toyota car
Cost
Wear and tear (20%  K33,000)
33,000
(6,600)
Allowance
K
3,125
6,600
Income tax value carried forward
Delivery van
Cost
Wear and tear (25%  K36,000)
Income tax value carried forward
Total notional allowances
Asset
26,400
36,000
(9,000)
27,000
Allowance
9,000
18,725
If during the following year the company will have a turnover in excess of K800,000, then capital allowances
will be available for deduction from the tax adjusted profit. The printing machine and the delivery van have
three more years for wear and tear allowance purposes while the Toyota car has four more years. After
these periods, there will be no more allowances.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
If, during the tax year, a business's turnover exceeds K800,000, when at the start of the year there was no
evidence to such an effect, it is not possible to change the status from turnover tax to company income tax.
Changes of status can only take place at the end of a tax year.
137
QUESTION
4.2 Turnover taxes
(a)
Describe the types of persons who are required to pay turnover tax and state the types of income on
which turnover tax is chargeable.
(b)
Choobe is a Zambian resident trader who has always prepared accounts for years ended on
31 December. For the year ended 31 December 2019, his turnover from trading activities was
K160,000. Prior to 1 January 2019, his turnover had always been in the range of K900,000. Choobe
expects the turnover for the year ending 31 December 2020 to be around K190,000. The reduction in
turnover is due to business cycle changes and he has therefore planned to cease trading on 31
December 2021.
As at 1 January 2019, the income tax values and original costs of business assets were as follows:
Asset
Office furniture
Delivery van
Toyota motor car
Income tax value at
1 January 2019
K
10,000
24,000
7,500
Original cost
K
20,000
32,000
18,750
In addition, a trading loss of K25,000 was brought forward at 1 January 2019. This is the remainder of
the trading loss incurred in the year ended 31 December 2017.
Required
(i)
Explain to Choobe whether he will be assessed to income tax or turnover tax for the tax year
2019.
(ii)
Explain, with appropriate calculations, the implications for capital allowances in respect of the
tax years 2019 and 2020.
……………………
Turnover tax is a tax on the turnover of business where the amount of annual turnover is not over
K800,000.
It is payable at a rate of 4% on gross turnover.
……………………
138
Chapter Roundup
Companies that are resident in Zambia are liable to Zambian company income tax.

The standard rate of company income tax is 35% while income from farming is taxable at the rate of 10%.

Companies that list their shares on the Lusaka Stock Exchange have the tax rate reduced by 2% in the year
when they list the shares on the Exchange. If such companies offer one third of their shares to indigenous
Zambians, there is a further reduction in the tax rate by 5%.

A company's income from various sources is aggregated to arrive at the total taxable income. The expenses
that would be allowed if incurred by an individual sole trader would also generally be allowed if incurred by a
company (although there are some exceptions).

A company's taxable business profit is its tax adjusted profit after deducting capital allowances. Capital
allowances are available on implements, plant and machinery and on buildings that are used wholly and
exclusively for the purposes of the business.

Companies can carry forward tax losses for up to five years.

A company with farming profits pays income tax at the rate of 10% on farming profits.

A company making a loan to an effective shareholder must pay a penalty tax, which can be refunded once
the loan is repaid.

Turnover tax is a tax on the turnover of business where the amount of annual turnover is not over K800,000.

It is payable at a rate of 4% on gross turnover.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system

139
Quick Quiz
140
1
What are two criteria to determine whether or not a company is resident in Zambia?
2
How are the benefits in kind on free accommodation and personal to holder cars provided for employees
dealt with when computing taxable business profits?
3
What types of persons are required to pay turnover tax?
4
If a taxpayer's turnover increases above K800,000 in the course of the tax year, will that taxpayer be allowed
to change the registration from turnover tax to income tax?
5
How are the assets qualifying for capital allowances dealt with for taxpayers who pay turnover tax?
6
How are trading losses b/fwd dealt with for taxpayers who pay turnover tax?
Answers to Quick Quiz
1
A company is resident in Zambia for taxation purposes if:
(a)
(b)
2
The company is incorporated or formed in Zambia; or
The effective management of that company is exercised in Zambia.
Accommodation: the company is assessed in respect of each employee or director who is accommodated at
30% of the taxable emoluments of that employee or director. No taxable amounts arise on the part of the
employee or director.
Personal to holder car: When employees and directors are provided with personal to holder cars, the values
on which the company is assessed in respect of each motor car are as follows.
(i)
(ii)
(ii)
3
Car with cylinder capacity of less than 1,800cc: K18,000 per annum
Car with cylinder capacity from 1,800cc, but less than 2,800cc: K30,000 per annum
Cars with cylinder capacity of 2,800cc and over: K40,000 per annum
Any person carrying on a business with an annual turnover of K800,000 or less.
Any person whose income consists of amounts, which are subject to withholding tax, where withholding tax
is not the final tax.
No
5
Capital allowances are not available to persons who pay turnover tax. Assets are written down notionally in
the years when a taxpayer is required to pay turnover tax.
6
Losses brought forward cannot be relieved against turnover in a year when a taxpayer is required to pay
turnover tax. Such losses can only be relieved against the trading profits in the year when a trader is required
to pay income tax on profits, as long as it is within the five-year period for which losses can be carried
forward.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
4
141
Answers to Questions
4.1 Computation of company income tax
(a)
FASHION FACILITIES LTD
COMPUTATION OF TAXABLE BUSINESS PROFITS FOR THE YEAR ENDED 31 DECEMBER 2019
K
Profit before taxation
Add:
Premium on lease
Entertaining customers
Gifts to customers of food and drink
Parking fines on company cars
Penalty for late VAT return
Repairs and renewals
Legal fees – acquisition of non-current assets
Recovery of loan
Irrecoverable loans to employees
Depreciation
Loss on sale of lorry
Expenses of letting property
Balancing charges: Plant
Lorry
K
383,970
12,000
5,800
3,000
2,450
5,980
6,800
2,540
2,850
10,280
5,250
1,540
4,850
4,850
6,000
74,190
458,160
Less
Rent received
Gain on sale of plant
Debenture interest received
Royalties received
Decrease in general irrecoverable debt provision
Premium allowance (K12,000/40)
Capital allowances:
Industrial building; (W4)
Wear and tear allowance: K124,700  5%
Investment allowance: K124,700  10%
Initial allowance: K124,700  10%
Commercial building: (warehouse)
Wear and tear allowance: K98,600  2%
Commercial building: (administrative office – W4)
Wear and tear allowance: K21,650  2%
Delivery vans:
Wear and tear allowance: K30,000  2  25%
12,590
2,180
3,000
2,580
1,000
300
6,235
12,470
12,470
1,972
433
15,000
(70,230)
387,930
Taxable business profit
Workings
1
Original cost of the building, excluding the cost of land
Total cost
Less cost of land
Original cost less the cost of land
2
142
Cost of the building after adding the extension
K
148,950
(12,450)
136,500
Original cost (W1)
Cost of extension to administrative office
Total revised cost
Cost of administrative offices
3
Original cost
Cost of extension
Total cost
4
K
136,500
9,850
146,350
K
11,800
9,850
21,650
Cost for each of the industrial buildings and commercial buildings allowance
Note. The cost of administrative offices of K21,650 exceeds 10% of the total cost of the building.
Therefore, the cost of administrative offices will qualify for commercial buildings allowance.
K
Total cost (W2)
146,350
Less cost of commercial building (W3)
(21,650)
Cost of industrial building
124,700
(b)
FASHION FACILITIES LTD
COMPUTATION OF COMPANY INCOME TAX PAYABLE FOR 2019
Business profits
Debenture interest received
Royalties received
Total taxable income for the year
Company income tax @ 35%
Less:
Tax withheld from debenture interest @ 15%
Tax withheld from royalties @ 15%
Provisional tax paid
Final company income tax payable
K
387,930
3,000
2,580
393,510
137,729
(450)
(387)
(116,590)
20,302
4.2 Turnover taxes
Persons who are required to pay turnover tax are:
(i)
Any person carrying on a business with an annual turnover of K800,000 or less and
(ii)
Any person whose income consists of amounts, which are subjected to withholding tax, where
withholding tax is not the final tax, provided the total income is not over K800,000 per annum.
For the purposes of turnover tax, the term turnover refers to earnings, income, revenue, takings, yield and
proceeds.
(b)
Choobe:
(i)
Choobe should have been subjected to normal income tax in the year ended 31 December 2019. This
is because it would not have been possible for a change to be made to turnover tax, as at the start of
the year, the evidence available was that turnover would exceed K800,000.
For 2020, there is evidence that the turnover would not exceed K800,000. As a result, Choobe would
be assessed to turnover tax starting in the tax year 2020.
(ii)
Choobe should have claimed capital allowances on implements, plant and machinery for the tax year
2019. In the tax year 2020 when he will be assessed to turnover tax, capital allowances on
implements, plant and machinery cannot be claimed against turnover. However, all the implements,
plant and machinery would be notionally written down at the normal wear and tear allowance rate
applicable. The results would be as follows for 2020:
143
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(a)
Asset
K
Office furniture
Income tax value brought forward
Wear and tear allowance
25%  K20,000
Income tax value carried forward
Delivery van
Income tax value brought forward
Wear and tear allowance
25%  K32,000
Income tax value carried forward
Toyota motor car
Income tax value brought forward
Wear and tear allowance
20%  K18,750
Income tax value carried forward
Total notional allowances
144
Notional
allowance
K
5,000
(5,000)
5,000
0
16,000
(8,000)
8,000
8,000
3,750
(3,750)
3,750
0
16,750
TAXATION OF OTHER BUSINESS SECTORS
In this chapter we continue our study of income tax by exploring how it applies to mining operations and
financial institutions.
Mining is very important to the Zambian economy so we'll first cover the special rules that apply to the
taxation of its income along with the allowances available to help stimulate mining activity.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
In the second part of this chapter we will look at the taxation of banks, building societies, insurance
companies and pension companies and managers.
syllabus references
1 Taxation of mining operations
3A(i) – (ix)
2 Taxation of financial institutions
3B(i) – (v)
145
LEARNING OBJECTIVES

(3A)
Calculate taxes payable on mining income and gains computed using applicable tax law, dealing
specifically with:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)

(3B)
Introduction to mining operations
Treatment of revenue and capital expenditure, including environmental expenditure
Mining Tax losses and their indexation
Tax incentives for mining operations
Capital allowances and their indexation
Thin capitalisation and tax treatment of hedging income
Income Tax computations for mining operations
Mineral Royalty Tax
Variable Profit Tax
Calculate taxes payable by enterprises in the financial services sector, dealing specifically with:
(i)
Nature of the financial services sector
(ii)
Meaning of bank and insurance company for taxation purposes
(iii)
Computing taxable income and Income Tax payable by banks
(iv)
Computing Income Tax payable by insurance companies on both general insurance and life
insurance business
(v)
Computing taxable income and Income Tax payable on management of pension
. Taxation of mining operations
……………………
In this section we discuss the taxation rules that apply to mining enterprises.
……………………
..
Introduction to mining operations
Mining is governed by the Mines and Minerals Development Act 2016.
MINING is defined in the Act as the extraction of solid, liquid or gaseous material from beneath the surface
of the earth in order to win minerals, or any operations directly or indirectly necessary or incidental thereto.
A MINERAL is any substance occurring naturally in or on the earth or in or under water, formed by or
subjected to a geological process, excluding:
(a)
Water (other than water taken from the land or any water body for the extraction of any mineral
from such water).
(b)
Petroleum.
This means that water being extracted on its own for domestic or industrial use is not a
mineral and any person involved in its extraction will not be classified as a miner.
Mining operations are only permitted after obtaining a mining right. It is an offence for any
person to carry on mining operations without a mining right.
Mining rights that may be granted are as follows:
•
146
An exploration license
•
A mining license
Non-mining rights that may be granted include the following:
•
•
•
•
A mineral processing license
A mineral trading permit
A mineral import permit
A mineral export permit
..
Allowable expenses
When determining the taxable profits or gains from mining operations, revenue expenses that are incurred
wholly and exclusively for the purposes of carrying on the mining operations are allowable.
.. Capital expenditure
Mining companies can claim a number of deductions for capital expenditure.
... Capital allowances
Capital allowances are available on the qualifying capital expenditure that mining companies
incur.
The rate of wear and tear allowance for mining companies is 25% on all capital expenditure that is incurred
for the purposes of mining as long as the expenditure has not already been written off elsewhere.
As a result, a portion of the amount of capital expenditure incurred by mining companies is
written off in the year when it is incurred. This measure was introduced as an incentive to
mining companies considering the cash flow problems they normally encounter, especially
when the prices of metals fall.
Other capital expenditure incurred on implements, plant and machinery qualifies for capital
allowances at the normal rates of wear and tear as any other business.
If the accounting records are maintained by a mining company in the United States Dollar,
(USD or US $), then capital allowances may be indexed in a manner that is similar to the
indexation of losses described below. The formula used to index the capital allowances is:
I+
Where:
(R2 - R1 )
R1
 Capital allowance
R1 is the Kwacha per US Dollar at the average exchange rate for the accounting year
preceding that in which the capital allowance is being claimed; and
R2 is the Kwacha per US Dollar at the average exchange rate for the accounting year in which
the capital allowance is being claimed.
The Kwacha against the United States dollar exchange rate to be used is the average Bank of Zambia mid rate
for the relevant accounting years.
... Expenditure in mining townships
Mining companies can also claim capital allowances at the rate of 25% on the cost of any capital expenditure
that is incurred in mining townships to provide services to the mining communities, such as:
147
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
... Indexation of capital allowances
•
•
•
The construction or rehabilitation of roads
Street lighting systems
The construction of community schools
This has been allowed as mining companies are generally expected to provide such services,
especially in the areas where the mining companies took over a mining division of the Zambia
Consolidated Copper Mines. Such a division will have been involved in providing community
services and the communities expect such services to continue.
... Environmental expenditure
Environmental expenditure for mining purposes is generally allowable in computing taxable mining profits.
Due to the nature of mining operations, mining companies create provisions for environmental costs during
the economic life of the mine but only pay out the actual cash in respect of these costs after the closure of
the mine, when mining operations cease. As no revenue is normally generated during the period of closure,
no tax relief may be available in respect of such costs. Mining companies are therefore generally allowed to
deduct such expenditure when computing taxable mining profits during the economic life of the mine.
.. Mining losses
When a mining company incurs a loss, that loss is carried forward and relieved against the future profits
arising from the same business.
However, the loss is restricted to 50% of the income of the person from the mining operation.
Where a loss exceeds 50% of the income from a mining operation for a charge year, the excess shall, as far as
possible, be deducted from 50% of that person's income from the mining operation in the following charge
year. Such a loss can be carried forward for a maximum period of ten years compared to the five-year
period allowed for other businesses.
In order to maintain the real values of losses for the mining sector, there are provisions to index the losses
by using the formula below:
I+
Where:
(R2 - R1 )
R1
 Mining loss brought forward
R1 is the Kwacha per US Dollar at the average exchange rate for the accounting year preceding
that in which the loss relief is being claimed; and
R2 is the Kwacha per US Dollar at the average exchange rate for the accounting year in which
the loss relief is being claimed.
The Kwacha against the United States dollar exchange rate to be used is the average Bank of Zambia mid rate
for the relevant accounting years.
EXAMPLE
Mining losses
148
During the year ended 31 December 2018, Mangochi mining company involved in industrial
mining operations incurred a loss from mining of K9,560,000 and for the year ended 31 December
2018, the average Bank of Zambia mid rate was K5.40 per $1. During the year ended 31
December 2019, Mangochi mining company earned a tax adjusted profit from mining of
K3,350,000 and the average Bank of Zambia mid rate for the year ended 31 December 2019 was
K6.35 per $1.
Required
The amount of mining loss that can be relieved in the year ended 31 December 2019 will be
restricted to 50% of the amount of mining profits available. However, in order to determine
the amount of loss still to be carried forward, it is necessary to index the loss by using the
indexation formula for the purpose.
The indexed mining loss is = 1+
= 1+
(R2 -R1 )
R1
 Mining loss brought forward
6.35 – 5.40
 K9,560,000
5.40
= K11,241, 852
The amount of taxable profits for the tax year 2019 will be computed as shown below:
MANGOCHI MINING COMPANY
K'000
3,350
(1,675)
1,675
Mining profits for the year
Less mining loss relief (W)
Taxable income
The mining loss still being carried forward is:
Indexed mining loss brought forward
Less loss relieved in 2019 (50% × K3,350,000)
K
11,241,852
(1,675,000)
Mining loss carried forward as at 31 December 2019
9,566,852
.. Tax incentives
A number of tax incentives are available to the mining sector. These are covered in a later chapter.
.. Thin capitalisation
Where a Zambian resident mining company is part of a group, with companies resident abroad, it may be
said to be thinly capitalised when it has excessive debt in relation to its arm's length borrowing capacity.
This can lead to excessive interest deductions being made.
An important parallel consideration is whether the rate of interest is one which would have been obtained at
arm's length.
The thin capitalisation rules are anti-avoidance measures aimed at preventing companies from using
excessive debt from within the group to reduce taxable profits.
In order to ensure that mining companies are not financed by excessive debt relative to their equity base,
interest on debt where the Debt : Equity ratio exceeds 3:1 is not an allowable expense. This means interest
is only allowed in full if the mining company's Debt : Equity ratio is 3:1 or below. In addition, a deduction shall
not be allowed on gross interest expense that exceeds thirty percent of the tax earnings before interest, tax,
149
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate the amount of mining loss that will be relieved against the mining profits of the year
ended 31 December 2019, and the amount of loss still to be carried forward as at
31 December 2019.
depreciation and amortisation. The interest on which a deduction is not allowed based on the thirty percent
threshold may be carried forward and treated as incurred during the next charge year, except that interest
shall not:
(a) exceed thirty percent of the tax earnings before interest, tax, depreciation and amortisation; and
(b) be carried forward for more than five years.
Similar rules apply to multinational companies with permanent establishments in Zambia (see
later in this Study Manual).
.. Hedging
Mining companies can purchase derivative contracts (similar to futures and options) to guarantee a specific
price for their future output. This 'hedging' acts as an insurance against a future fall in prices. Although this
is a legitimate business activity, mining operations with overseas operations can also use it to purposely lose
money in a subsidiary facing a higher tax rate and to gain in another subsidiary facing a lower tax rate.
As a result, any hedging income is treated as a separate source of income from the mining operations being
carried on, and is taxable separately, albeit using the mining tax rate of 30% applicable to all other mining
income.
When a loss is incurred in any tax year on hedging, that loss can only be deducted from future hedging
income. The loss can be carried forward for up to ten years, as it is still treated as a loss from mining.
..
Company Income tax for mining operations
Mining companies are expected to contribute a great amount of revenue to the Zambian economy. This is so
because the country had always depended on copper when all the mines were State-owned and controlled.
As a result of privatisation, taxes from mining companies are expected to be substantial. In the tax year 2019,
income from mining operations is taxable at a flat rate of 30%. The company income tax rate for companies
engaged in mineral processing is also taxable at the rate 30%. For companies that add value to copper
cathodes, the company income tax rate is 15%.
EXAMPLE
Company income tax – mining operations
Zwanzi Mining Limited is a Zambian resident mining company, engaged in the extraction and sale of copper.
The company made a profit before taxation of K3,920,000 for the year ended 31 December, 2019. The gross
sales revenue of the company for the year was K19,500,000. Mineral royalty was paid at the appropriate
rates, on the relevant due dates during the year and has been properly accounted for.
The profit before taxation was arrived at after crediting a dividend received from a Zambian company which
is listed on the Lusaka Stock Exchange, of K90,000 (gross) and also after charging the following expenses:
K
Depreciation of non-current assets (fixed assets)
1,350,000
Gifts of Zwanzi calendars, costing K90 per calendar
125,000
Irrecoverable trade debts, written off
850,000
Other operating expenses
5,400,000
Other operating expenses include expenditure of K1,200,000, incurred on constructing boreholes for the
local community, in the mine township. The remaining balance comprises general operating expenses which
are allowable for tax purposes.
Additional information:
(1)
150
The company purchased new mining equipment at a cost of K6,200,000, in February 2019, which was
immediately brought into use.
(2)
Capital allowances on other assets used wholly and exclusively for business purposes have been
determined to be K850,000 for the tax year 2019.
(3)
The provisional income tax paid during the tax year 2019 was K939,000.
Required
We start by computing the taxable profit for year ended 31 December 2019 as shown below:
ZWANZI MINING LIMITED
COMPUTATION OF TAXABLE PROFIT FOR THE TAX YEAR 2019
K
Profit before taxation as per accounts
Add:
Depreciation
Construction of boreholes
Less:
Dividend received
Capital allowances (W)
Taxable mining income
K
3,920,000
1,350,000
1,200,000
2,550,000
6,470,000
90,000
2,700,000
(2,790,000)
3,680,000
COMPUTATION OF COMPANY INCOME TAX PAYABLE
Company income tax
(K3,680,000  30%)
Less Provisional Income Tax Paid
Company Income Tax payable
K
1,104,000
(939,000)
165,000
Workings
COMPUTATION OF CAPITAL ALLOWANCES
K
Boreholes
Wear and tear allowance (K1,200,000  25%)
300,000
Mining equipment
Wear and tear allowance (K6,200,000  25%)
1,550,000
Other capital allowances
Total
850,000
2,700,000
..
Mineral royalty
A MINERAL ROYALTY is a payment made by a person in possession of mineral rights, e.g. a mineral processing
license, for the extraction of minerals.
151
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate the company income tax payable on the mining profits for the tax year 2019.
It is charged on the quantity of mineral extracted and sold per month rather than profit, so is
payable as soon as production begins, providing an income stream for the Government even
though an operation may never be profitable.
... Minerals
The Act classifies minerals into base metals, industrial minerals, energy minerals, precious
metals and gemstones:
(a)
A base metal is a non-precious metal that is common or chemically active, or both common and
chemically active. Base metals include: iron, copper, nickel, aluminium, lead, zinc, tin, magnesium,
cobalt, manganese, titanium, scandium, vanadium, molybdenum, chromium, tungsten, tantalum,
bismuth, cadmium, zirconium, antimony, beryllium, germanium and rare earth elements;
(b)
An industrial mineral is a rock or mineral other than gemstones, base metals, energy minerals or
precious metals used either in their natural state or after physical or chemical transformation.
Industrial minerals include: barites, dolomite, feldspar, fluorspar, graphite, gypsum, ironstone when
used as a fluxing agent, kyanite, limestone, phyllite, magnesite, mica, nitrate, phosphate, pyrophyllite,
salt, sand, clay, talc, laterite, gravel, potash, potassium minerals, granite, marble, clay, silica,
diatomite, kaolin, bentonite or quartz, including any other mineral that the Minister by statutory
order may classify so.
(c)
An energy mineral is a naturally occurring substance in the earth's crust used as a source of energy
and includes, coal, uranium and any other minerals used to generate energy but does not include
petroleum.
(d)
Precious metals include gold, platinum, palladium, indium, osmium, rhodium, iridium, ruthenium,
selenium and silver or any other relatively scarce, highly corrosion resistant metal of high economic
value;
(e)
Gemstones includes amethyst, aquamarine, beryl, corundum, diamond, emerald, garnet, ruby,
sapphire, topaz, tourmaline and any other non-metallic mineral substance used in the manufacture of
jewellery.
... Mineral royalty rates
In the tax year 2019, the mineral royalty is chargeable with reference to the type of mineral extracted or sold
under mining licence as explained below:
(a)
Copper
The rate of mineral royalty chargeable on copper depends on the norm price of copper as follows:
152
(i)
5.5% of the norm value, when the norm price of copper is less than 4,500 United States dollars
per tonne
(ii)
6.5% of the norm value, when the norm price of copper is 4,500 United States dollars per
tonne or greater, but less than 6,000 United States dollars per tonne, and
(iii)
7.5% of the norm value, when the norm price of copper is 6,000 United States dollars per
tonne, or greater, but less than 7,500 United States dollars per tonne.
(iv)
8.5% of the norm value, when the norm price of copper is 7,500 United States dollars per
tonne, or greater, but less than 9,000 United States dollars per tonne; and
(v)
10% of the norm value, when the norm price of copper is 9,000 United States dollars per
tonne, or greater.
(b)
Cobalt or vanadium
The rate of mineral royalty chargeable on cobalt or vanadium is 8% of the norm price of cobalt or
vanadium produced or recoverable.
(c)
Other minerals
The rates of mineral royalty are as follows for other minerals:
(i)
5% of the norm value of the base metals produced or recoverable under the licence, for base
metals other than copper, cobalt or vanadium.
(ii)
5% of the gross value of the energy and industrial minerals produced or recoverable
the licence
(iii)
6% of the gross value of the gemstones produced or recoverable under the licence, and
(iv)
6% of the norm value of precious metals produced or recoverable under the licence.
under
Norm value means:
(a)
The monthly average London Metal Exchange Cash price per metric tonne multiplied by the quantity
of the metal or recoverable metal sold.
(b)
The monthly average Metal Bulletin cash price per tonne multiplied by the quantity of the metal sold
or recoverable metal sold to the extent that the metal price is not quoted on the London Metal
Exchange.
(c)
The monthly average cash price per metric tonne of any other exchange market approved by the
Commissioner-General multiplied by the quantity of the metal or recoverable metal sold to the extent
that the metal price is not quoted on the London Metal Exchange or Metal Bulletin.
Gross value means the realised price for a sale free-on-board (FOB), at the point of export from Zambia or
point of delivery within Zambia.
The total amount of mineral royalty paid in respect of a charge year is not an allowable deduction in
computing the taxable mining profits for the year.
EXAMPLE
Mineral royalty 1
Example 1
ABC Plc is a mining company engaged in the mining of copper in Zambia. The company extracted and sold the
following quantities of copper each month, in the first quarter of 2019:
Month
Quantity (tonnes)
January 2019
15,000
February 2019
20,000
March 2019
25,000
The norm price of copper was US$4,000 per tonne in January 2019, US$4,600 in February 2019 and US$6,500
in March 2019. The relevant exchange rates were as follows:
Month
January 2019
ZWW/Per US$
K9.95
153
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Mineral royalty is due and payable 14 days after the end of the month in which the sale of minerals took
place. A penalty of 5% per month or part thereof is charged on late payments of mineral royalty. Additionally,
interest is charged on the overdue mineral royalty at the rate of 2% above the Bank of Zambia discount rate
per annum.
February 2019
K9.90
March 2019
K9.80
Required
SOLUTION
Compute the amount of mineral royalty paid by ABC Plc for each of the following months:
(a)
(b)
(c)
January 2019
February 2019
March 2019
(a)
Mineral Royalty for January 2019:
The norm price of US$4,000 per tonne in January 2019, was less than US$4,500 and therefore, the
relevant rate of mineral royalty is 5.5% of norm value.
(b)
Norm value
= US$4,000per tonne  15,000 tonnes
= US$60 million.
Mineral royalty
= ($60,000,000  5.5%)  K9.95
= K32.835 million
Mineral Royalty for February 2019:
The norm price of US$4,600 per tonne in February 2018, was between US$4,500 and US$6,000,
therefore, the relevant rate of mineral royalty was 6.5% of norm value.
(c)
Norm value
= US$4,600per tonne  20,000 tonnes
= US$92 million
Mineral royalty is
= ($92,000,000  6.5%)  K9.90
= K59.202 million
Mineral Royalty for March 2019:
The norm price of US$6,500 per tonne in March 2019, was above US$6,000 but less than $7,500 and
therefore, the relevant rate of mineral royalty is 7.5% of norm value.
Norm value
= US$6,500per tonne  25,000 tonnes
= US$162.5 million
Mineral royalty is
= ($162,500,000  7.5%)  K9.80
= K109.688 million
EXAMPLE
Mineral royalty 2
XYZ Ltd is a mining company engaged in the mining of limestone and other industrial minerals in Zambia. The
company's gross sales from industrial minerals in the month of March 2019, was K10,500,000. The value of
the sales was the gross value for the purposes of mineral royalty.
Required
SOLUTION
Compute the amount of mineral royalty paid by XYZ Ltd, in the month of March 2019.
154
Since XYZ is engaged in the mining of industrial minerals, the relevant rate of mineral royalty will be 5% of
gross value of the industrial minerals sold. We have been told in the question that the gross sales for the
month of March 2019, represent the gross value for the purposes of mineral royalty. The amount of mineral
royalty paid by XYZ Ltd, will therefore be computed as follows:
Mineral royalty = K10,500,000  5%
= K525,000
……………………
When computing taxable mining profits, all revenue expenses that are incurred wholly and exclusively
for the purposes of mining are deductible. In addition, a 25% wear and tear allowance on qualifying
capital expenditure is deductible.
Mining losses are carried forward for a maximum period of ten years. They are relieved against future
mining profits.
Thin capitalisation rules prevent interest payable on a Debt : Equity ratio in excess of 3:1 to be deducted
when computing taxable mining profits.
Hedging losses can only be carried forward against hedging income, which is treated as a separate
source of mining income.
The standard rate of company income tax on mining profits is 30%
A mineral royalty is a payment made by a person in possession of mineral rights, e.g. a mineral processing
license, for the extraction of minerals.
……………………
. Taxation of financial institutions
……………………
In this section we define what we mean by a financial institution, review the income tax rules that apply
to their taxable profits, which are generally computed using the same rules applicable to any other type
of business, and discuss the tax treatment of insurance businesses as well as pension management.
.. Financial institutions and services
Financial institutions participate in the provision of financial services within the economy. Financial services
include:
•
•
•
•
Taking deposits
Making loans to customers
Giving investment advice
Asset financing etc.
Any financial institution that holds a licence to operate as a commercial bank issued under the Banking and
Financial Services Act is a bank.
A financial institution holding any other type of certificate or licence may fall in any of the following
categories:
•
•
•
Insurance company
Pension company or pension manager
Building society etc.
155
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
Building societies take deposits like banks but for a different reason. Banks normally use the deposits to
make many types of investments. Building societies take deposits and use them to fund loans for home
purchase, home construction or home improvement by a mortgage on the property.
As far as the taxation of financial institutions is concerned, banks and building societies have similar
characteristics and are therefore taxable in the same way.
Other financial institutions such as insurance companies are taxable like any other company carrying on a
business. The income of insurance companies is not mainly made up of interest earned from its various
investments but from insurance premiums from clients.
In the case of banks and related financial institutions, the income is mainly in the form of interest. Similarly,
expenses include interest payments made as well as some non-interest expenditure. The restriction on the
deductibility of interest to thirty percent of the tax earnings before interest, tax, depreciation and
amortisation does not apply to an institution registered under the Banking and Financial Services Act, 2017,
the Pensions Scheme Regulation Act, or the Insurance Act, 1997.
Non-business income would rarely be found as part of the income of a bank or any related financial
institution as banks do not normally engage in activities that are not related to taking deposits and making
loans and advances.
..
Computing taxable income and income tax payable by banks
Banks are taxable on their taxable profits, which are generally computed using the same rules applicable to
any other type of business.
A statement of profit or loss of a bank would normally include the following items.
BANK A LTD
STATEMENT OF PROFIT OR LOSS FOR THE YEAR ENDED 31 DECEMBER 2019
Interest income
Interest expense
Net interest income
Provision for losses on loans
Net interest income after provision for losses on loans
Non-interest income
Net interest income and other income
Non-interest expenses
Income before taxation and extra-ordinary items
Taxation
Income after taxation but before extra-ordinary items
Extraordinary items
Net income for the financial year
K'000
X
(X)
X
(X)
X
X
X
(X)
X
(X)
X
X
X
The taxable income is the income before taxation and extra-ordinary items, as adjusted for tax purposes,
including deducting any capital allowances.
When computing the tax adjusted profit, all expenses of a revenue nature that are incurred wholly and
exclusively for the purposes of the banking services are allowed. Therefore, no adjustment should be made
to the income in the financial statements in respect of such income.
Capital expenditure is not allowed and any amounts written off as capital expenditure such as depreciation
are not allowed, together with any losses on the disposal of non-current assets. Profits on disposal of noncurrent assets are not taxable.
In general, the rules applicable to any other type of business apply.
However, there are the following differences:
156
(a)
Any amounts of loans written off are allowable expenses because the business that is run is that of
making loans.
(b)
Provisions for losses on loans are allowed if they are a representation of specific amounts of loans
that may be written off.
(c)
Loans previously written off and now recovered are taxable in the year when they are recovered
and no adjustment should be made in respect of such loans.
(d)
General provisions made for losses on loans are not allowed and as such, any increase in provision
should be added back to the profits while a decrease should be deducted.
The company income tax rate for banks and other financial institutions is just the same as for other
companies. The rate applied on taxable income is 35%.
EXAMPLE
Banking profits
For the year ended 31 December 2019, NSD Banking Corporation has net income before taxation as per the
accounts of K800,000. This income has been arrived at after charging depreciation on non-current assets of
K185,000, writing off an irrecoverable loan of K250,000, an increase in general provision against loan losses
of K50,000 and a specific provision against loan losses of K80,000.
Of the total net income of K800,000, 50% was in the form interest income which had been subjected to
withholding tax at the rate of 15%. The bank's capital allowances for the tax year 2019 have been agreed at
K350,000.
Required
The bank's income includes interest which has been subjected to withholding tax. From the expenses which
have been deducted in arriving at the net income in the accounts, the non-allowable expenses should be
added back and capital allowances deducted in order to arrive at the final taxable income of the bank as
follows:
NSD BANKING CORPORATION
COMPANY INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Net income as per accounts
Add back:
Depreciation
Increase in general loan provision
Less capital allowances
Taxable income
Company income tax payable
K685,000  35%
Less withholding tax on interest income
50%  K800,000 = K400,000  15%
Company income tax payable by the bank
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
SOLUTION
Calculate the bank's income tax payable for the tax year 2019.
K
800,000
185,000
50,000
1,035,000
(350,000)
685,000
239,750
(60,000)
179,750
157
..
Insurance businesses
Insurance companies provide various insurance products to their clients. The business of insurance is sub
divided into:
•
•
General insurance, and
Life insurance
GENERAL INSURANCE is insurance against loss of, or damage to property and it includes motor insurance,
home and contents insurance, cover for businesses and so on.
LIFE INSURANCE is insurance of human life. This takes the form of life insurance products which fall into the
two categories of protection products and savings products.
Protection products are those which provide protection for individuals or businesses against the adverse
financial effects, death or illness.
Savings products are forms of endowment assurance which are regular savings schemes that pay out a lump
sum at the end of specified term.
The computation of taxable profits depends on the types of insurance provided and the tax rate applicable is
35% like any other company.
The determination of taxable profits is described in the third schedule of the Income Tax Act CAP 323 of the
laws of Zambia. Because of the complexities of making actuarial valuations, detailed knowledge of the actual
computations of income tax payable is not required. However, candidates should be able to compute the
taxable profits in the normal way after making adjustments applicable to businesses generally, with not
more than two specific insurance business adjustments. Any actuarial values that may be required in
answering any question will be provided.
... Insurance other than life insurance
The profits of a company carrying on insurance business other than life insurance depend on whether it is
resident or not resident in Zambia, as follows:
(a)
Resident companies
The profits of a Zambian resident company are ascertained by:
(b)
(i)
Taking the gross premiums, interest, and other income, less premiums refunded or paid on
reinsurance
(ii)
Adding a reserve for unexpired risks at such reasonable percentage as is adopted by the
company at the beginning of the year's business
(iii)
Deducting a reserve for unexpired risks at such reasonable percentage as is adopted by the
company at the end of the year's business
(iv)
Deducting the actual losses (less the amounts received under reinsurance), and other
expenses, including deductions that are allowable as a deduction in calculating any business
profits.
Non-resident companies
The profits of a company that is not resident in Zambia are ascertained by:
158
(i)
Taking the gross premiums, interest, and other income, received in the Republic, less
premiums refunded or paid on reinsurance
(ii)
Adding a reserve for unexpired risks at such reasonable percentage as is adopted by the
company in relation to its business as a whole at the beginning of the year's business
(iii)
Deducting a reserve for unexpired risks at such reasonable percentage as is adopted by the
company in relation to its business as a whole at the end of the year's business
(iv)
Deducting the actual losses (less the amounts received under reinsurance), agency expenses
and deductions allowed as business expenses incurred in the Republic, and such proportion of
the company's head office expenses as the Commissioner General determines.
... Life insurance
The profits of a company carrying on life insurance business also depend on whether it is resident or not
resident in Zambia, as follows:
(a)
Resident companies
The profits from the life insurance business of a Zambian resident insurance company is the excess of
the total investment income over 3.5% of the total mean actuarial liabilities, reduced in the
proportion which the total mean actuarial liabilities less the mean actuarial liabilities in respect of
policies constituting approved funds (as defined in the Income Tax Act CAP 323 of the laws of Zambia)
and annuity policies issued in the Republic under which annuities are being paid bear to the total
mean actuarial liabilities.
(b)
Non-resident companies
The profits from the life insurance business of a non-resident insurance company is the proportion of
the company's total investment income that the actuarial liabilities in respect of local taxed life
policies bear to the company's total actuarial liabilities less 3.5% of the mean actuarial liabilities in
respect of local taxed life policies.
(a)
Local taxed life policies means those policies falling within the definition of local policy and within the
definition of life policy in terms of the insurance legislation of the Republic, but excluding policies
constituting an approved fund (as defined in the Act) and annuity policies under which annuities are
being paid.
(b)
Actuarial liabilities means the actuarial liabilities determined on the basis used by the company for
making returns of actuarial liabilities in terms of the insurance legislation of the Republic.
(c)
Mean actuarial liabilities means one half of the sum of the actuarial liabilities calculated at the
beginning and end of the company's financial year for which the Commissioner General has, in
respect of the charge year concerned, accepted the accounts of the company.
The tax on the profits of a company that carries on life insurance business in conjunction with any other
insurance business is charged in one sum, but the profits of the life insurance business are calculated
separately.
... Insurance premium levy
The insurance premium levy is a levy that is charged on insurance premiums. It is paid by a purchaser of an
insurance premium.
The Insurance Premium Levy Act, 2015 provides for the imposition, payment and collection of insurance
premium levy by insurers, insurance agents or brokers in respect of insurance policies for all classes of
insurance business.
Insurance levy is charged at the rate of 3% on the value of the premium (i.e. VAT exclusive value as
insurance policies are exempt supplies for VAT purposes).
The commissions that are earned on insurance brokerage are not subject to a charge of the levy because
commissions are not classified as insurance business. The brokers merely facilitate or act on behalf of the
insurer and the insured.
159
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
For the purposes of this paragraph:
The obligation to remit the levy lies with the insurer, insurance agent or broker who acts as agents of the ZRA
for the collection of the levy.
The levy must be remitted to the Zambia Revenue Authority not later than the eighteenth day of the month
following the month in which the levy is paid or becomes payable.
The following persons are exempt from Insurance Premium Levy:
(a)
(b)
(c)
Diplomats
A donor in Zambia to whom insurance is supplied for official purposes
Any person who the Minister, by statutory instrument, shall so exempt.
SOLUTION
EXAMPLE
Computation of Insurance Levy
Zimba took out an insurance policy on his motor vehicle with Xcel Insurance Company on 10 January 2019.
The insured value of the vehicle was K150,000. The cost of the insurance premium was K10,500.
Required
(a)
Compute the amount of the Insurance levy charged on the premium and show the total amount Xcel
Insurance Company should invoice Zimba in respect of the premium.
(b)
State the date by which Xcel Insurance Company should remit the levy to the ZRA.
(a)
The insurance levy payable is computed as follows:
Insurance premium payable
Insurance levy (K10,500  3%)
Total invoice value
K
10,500
315
10,815
(b)
Xcel Insurance Company must remit the insurance levy of K 315 not later than 18 February 2019.
..
Pension management
In Zambia, a business can only operate as a pension manager, administrator or be a custodian of a pension
fund if that business is registered and holds a valid certificate of registration issued under Pensions Scheme
Regulation Act.
... Pensions and Insurance Authority
The Pensions and Insurance Authority (PIA) is the regulatory and supervisory body for the pensions and
insurance industry in Zambia. The Authority falls under the Ministry of Finance and derives its mandate from
the Pension Scheme Regulation Act No 28 of 1996 (amended by Act No. 27 of 2005) and the Insurance Act
No. 27 of 1997.
... Pension managers
A pension manager is defined in the Pension Scheme Regulations Act as:
A company or institution registered under the Act whose business includes:
160
(a)
Undertaking, pursuant to a contract or other arrangement the management of the funds and
other assets of a scheme fund for purposes of investment, or
(b)
Providing professional services on the investment of the scheme funds, or
(c)
Reporting or disseminating information concerning the assets available for investment of
scheme funds.
... Pension scheme
A pension scheme under the Act means any scheme or arrangement other than a contract for life
assurance, whether established by a written law for the time being in force or by any other written
instrument, under which persons are entitled to benefit in the form of payments determined by age, length
of service, amount of earnings or otherwise and payment primarily upon retirement, or upon death,
termination of service, or upon the occurrence of such other event as may be specified in such written law or
other instrument.
... Income and expenditure
The income and expenditure statement of a pension fund comprises contributions from the employer and
employees, investment income and transfers from other funds, benefits paid and administration expenses.
Contributions from the employers and employees usually form the bulk of total income.
Pension Schemes that are approved for tax purposes are generally exempt from income tax.
Pension schemes which are not approved for tax purposes are taxable on the income of the scheme. The
tax is charged on the income earned from investing funds contributed into the scheme in various
investments. Such investments generally yield income which is subjected to withholding tax. The withholding
tax is charged at source at the relevant applicable rates.
……………………
The taxable profits of banks and building societies are generally computed using the same rules
applicable to any other type of business.
Insurance business is divided into general insurance and life insurance.
The third schedule to the Income Tax Act deals with the computation of taxable profits from both life
insurance and general insurance for resident insurance companies as well as for non-resident insurance
companies.
Actuarial valuations are required in order to enable computations of taxable income to be made. These
valuations will be provided if required.
Purchasers of insurance pay the insurance premium levy on their insurance premiums.
Non-approved pension schemes are taxable on the income of the scheme.
……………………
161
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Approved pension schemes are exempt from income tax.
Chapter Roundup
162

When computing taxable mining profits, all revenue expenses that are incurred wholly and exclusively for
the purposes of mining are deductible. In addition, a 25% wear and tear allowance on qualifying capital
expenditure is deductible.

Mining losses are carried forward for a maximum period of ten years. They are relieved against future
mining profits.

Thin capitalisation rules prevent interest payable on a Debt : Equity ratio in excess of 3:1 to be deducted
when computing taxable mining profits.

Hedging losses can only be carried forward and relieved against hedging income, which is treated as a
separate source of mining income.

The standard rate of company income tax on mining profits is 30%.

A mineral royalty is a payment made by a person in possession of mineral rights, e.g. a mineral processing
license, for the extraction of minerals.

The taxable profits of banks and building societies are generally computed using the same rules applicable to
any other type of business.

Insurance business is divided into general insurance and life insurance.

The third schedule to the Income Tax Act deals with the computation of taxable profits from both life
insurance and general insurance for resident insurance companies as well as for non-resident insurance
companies.

Actuarial valuations are required in order to enable computations of taxable income to be made. These
valuations will be provided if required.

Purchasers of insurance pay the insurance premium levy on their insurance premiums.

Approved pension schemes are exempt from income tax.

Non-approved pension schemes are taxable on the income of the scheme.
1
What piece of legislation determines the taxation of mining enterprises in Zambia?
2
What does the term 'gross value' mean in the context of collection of mineral royalties?
3
For what period can mining losses be carried forward?
4
How are banks taxed?
5
Define general insurance and life insurance.
6
Give two of the four differences in the taxation of financial institutions compared with other sectors.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Quick Quiz
163
Answers to Quick Quiz
1
Mines and Minerals Development Act 2016.
2
Gross value means the realised price for a sale free-on-board (FOB), at the point of export from Zambia or
point of delivery within Zambia.
3
Ten years.
4
Financial institutions are taxed like any other business.
5
General insurance is insurance against loss of, or damage to property and it includes motor insurance, home
and contents insurance, cover for businesses and so on.
Life insurance is insurance of human life. This takes the form of life insurance products which fall into two
categories of protection products and savings products.
6
164
Two from:
(a)
Any amounts of loans written off are allowable expenses because the business that is run is that of
making loans.
(b)
Provisions for losses on loans are allowed if they are a representation of specific amounts of loans
that may be written off.
(c)
Loans previously written off and now recovered are taxable in the year when they are recovered and
no adjustment should be made in respect of such loans.
(d)
General provisions made for losses on loans are not allowed and as such, any increase in provision
should be added back to the profits while a decrease should be deducted.
INDIRECT TAXES
This chapter deals with the indirect taxes: Value Added Tax (VAT), customs duty and excise duty.
We begin with Value Added Tax, in particular the accounting procedures associated with it and the special
schemes available which may be of benefit to traders.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
We then turn to the duties which apply on the import and export of goods. Duties are one way a
government can control the flow of goods in and out of the country to stimulate international trade, secure
vital goods or protect domestic industries.
syllabus references
1 Value Added Tax
1B(v)
2 Customs and excise duty
1B(v)
165
LEARNING OBJECTIVES

Explain the interaction of taxes, prepare relevant tax computations and advise when the taxes are payable,
dealing specifically with:
(v) Value Added Tax, Customs and Excise, Capital Allowances and Income Tax (1B)
. Value Added Tax
……………………
In this section we begin by discussing the circumstances in which VAT is charged and the requirements
relating to VAT registration and deregistration. We then look at how output VAT is assessed and input
VAT is recovered, before turning to the special VAT schemes available. Finally we cover the regulations
affecting the payment of VAT and the penalties charged.
……………………
.. Scope of Value Added Tax (VAT)
... Introduction to VAT
Value Added Tax (VAT) is not a tax on income. It is a tax that is levied on expenditure. The supplier of goods
and services will charge the tax on the turnover. The tax will be borne by the final consumer of the goods
and services supplied.
Value added tax is a tax on the turnover of taxable supplies of goods and services made in Zambia by a
taxable person in the course or furtherance of any business carried on by him. A non-registered trader
cannot charge VAT. Only those traders who make taxable supplies can register for value added tax.
Value added tax is administered by the Domestic Taxes Division of the Zambia Revenue Authority (ZRA). The
registered traders collect the tax from their customers and pay it over to ZRA on the due date.
The principal source of VAT law is the Value Added Tax Act and the Statutory Instruments.
... Supplies
Supplies are either supplies of goods and services or supplies of neither goods nor services.
(a)
Supplies of goods
These include the following:
(b)
•
Transferring the ownership and possession of goods, either immediately or at a specified
future date
•
Applying a treatment or process to another person's goods
•
Supplying any form of power, heat, refrigeration or ventilation
Supplies of services
These include all things done for a consideration which are not supplies of goods. An example is the
assignment, grant or surrender of any right.
(c)
Supplies of neither goods nor services
These are generally those items which fall outside the scope of VAT. No VAT is calculated on them.
For the purposes of VAT, supplies of goods and services are classified into taxable and exempt
supplies.
166
(d)
Taxable supplies
Taxable supplies are those on which value added tax is charged. They consist of standard rated
supplies and zero rated supplies.
STANDARD RATED SUPPLIES are those on which value added tax is at the rate of 16% on the VAT exclusive
amount. If the amount is VAT inclusive, the VAT fraction is used to calculate the tax. The VAT fraction is 4/29.
If the figure is VAT inclusive, the amount of VAT is calculated at the rate of 4/29. The VAT fraction of 4/29 is
the simplified form of the fraction 16/116.
ZERO RATED SUPPLIES are those on which VAT is charged at the rate of 0%. For the zero rated supplies, the
VAT inclusive and VAT exclusive amount are the same.
(e)
Exempt supplies
These are supplies of goods and services to which the following apply:
•
•
•
No VAT is charged on them
They are not taken into account in determining whether a trader is a taxable person
Input tax attributed to them is not normally available for credit
... Input and output tax
OUTPUT TAX is VAT on the turnover. It is the potential amount of VAT payable by a VAT registered trader.
INPUT TAX is VAT incurred on expenses. It is normally recoverable by way of credit against output tax if that
input tax is incurred on supplies used to make taxable supplies. The amount of VAT payable by a VAT
registered trader is therefore the excess of output tax over input tax.
Jane Maambo has been trading for many years and is registered for VAT. For the month of January 2019, she
made the following transactions:
K
Sales
58,000
Purchases
20,000
Expenses
11,000
The sales are made up standard rated supplies and are VAT inclusive. Only 70% of the purchases are standard
rated and are VAT exclusive. The remaining amount of purchases is zero rated supplies. All the expenses are
standard rated and are VAT exclusive.
Required
SOLUTION
Calculate the amount of VAT payable by Jane for the month of January 2019.
In respect of supplies that are VAT inclusive as in the case of sales, VAT will be computed at the VAT fraction
of 4/29. In the case of purchases and expenses, VAT will be calculated using the standard rate of 16% as
these amounts are VAT exclusive. All input VAT is recoverable as it is attributed to taxable turnover. The VAT
computation is as follows:
K
Output tax
Sales (K58,000  4/29)
Less recoverable input tax
Purchases (K20,000  70%  16%)
Expenses (K11,000  16%)
Total recoverable input tax
K
8,000
2,240
1,760
(4,000)
167
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
EXAMPLE
VAT payable
4,000
..
Registration for VAT
A trader may be required to register for value added tax compulsorily with reference to the level of turnover
or voluntarily if he makes taxable supplies of goods and services.
... Statutory or compulsory registration
A trader is required to compulsorily register for VAT if the turnover of his taxable supplies, excluding VAT, for
the 12 month or 3-month period just ended exceeds registration threshold. The current threshold is
K800,000 per 12 months or K200,000 per 3 months.
A trader who expects the turnover of taxable supplies, excluding VAT, for the following 12 months to exceed
K800,000 or for the following 3 months to exceed K200,000 must register for VAT immediately under this
same rule.
Notification of liability to register is to be made on the VAT form known as form VAT1. The date when a
business becomes registerable for VAT is as follows:
(a)
A new business whose VAT exclusive turnover of taxable supplies is likely to exceed
K800,000 becomes registerable from the date of commencement of trading.
(b)
A continuing business whose VAT exclusive turnover has exceeded the registration thresholds
becomes registerable either:
(i)
Within one month of an application being made or from the date the application was
received or,
(ii)
Where the application is not made within one month of first becoming liable to register, on
the day following the first period during which the limits were exceeded.
Late registration for VAT attracts automatic penalties consisting of 10,000 fee units for each standard tax
period the supplier remains unregistered after meeting the registration threshold.
A supplier may make an application for the requirement to register to be waived if the business deals solely
in zero rated supplies. Where the Commissioner General is satisfied that all supplies of such a supplier are
indeed zero rated they may by notice waive the requirement of the business to register. However, the
Commissioner General reserves the right to rescind the decision any time they deem necessary.
In waiving the requirement for registration, the business must forego the entitlement to reclaim input tax
on those goods and services used in connection with making zero rated supplies.
... Voluntary registration
A trader who makes taxable supplies whose VAT exclusive taxable turnover is below the registration
threshold can register for VAT voluntarily.
A person may decide to become VAT registered for VAT even when their VAT exclusive turnover of taxable
supplies is below the registration limit. It is advantageous to traders who are charged VAT to be registered
voluntarily so that they are able to claim the VAT on their purchases and expenses.
168
The advantages of voluntary registration are:
The disadvantages of voluntary registration are:
The trader will be able to reclaim input VAT on
expenses as long as that input VAT is recoverable.
VAT registration results in increased administration.
The trader's administrative costs will rise as a result
of registering for VAT purposes.
The advantages of voluntary registration are:
The disadvantages of voluntary registration are:
The impression of a substantial business will be
given since traders should only register if the
turnover is substantial.
Non-registered customers who get supplies from
the trader will have an increased cost.
The business will compete well with other businesses
which are registered for VAT in that their costs will
not be distorted by being VAT inclusive.
Penalties will be charged if the trader fails to pay
VAT or to submit the VAT return.
... Businesses with branches
Normally only legal entities are registered for VAT and not their individual outlets or branches. This means
that businesses with a number of branches or outlets will normally have a single registration and make one
return and payment for each tax period, keeping administration burdens to a minimum.
However, where for some practical reasons it is more convenient, a branch or division of a business may
separately be registered and carry on the obligations of a registered supplier if:
(a)
(b)
It maintains an independent system of accounting; and
It can be separately identified in terms of the nature of the activities carried on or location thereof.
If this is done VAT has to be charged on supplies between separately registered divisions. It results in
increased administrative work for the business.
EXAMPLE
VAT payable
Mr Chella intends to commence a business in the near future, but within the tax year 2019. The business may
be run in any business sector.
The business sectors which are being considered are where all the sales will be:
•
•
•
Standard rated for Value Added Tax purposes
Zero rated for Value Added Tax purposes
Exempt for Value Added Tax purposes
Required
In respect of each of the three business sectors that are being considered
SOLUTION
(a)
(b)
State whether Mr Chella will be required or be permitted to register for Value Added Tax, and
Calculate the monthly amount of Value Added Tax payable or repayable.
Mr Chella's position in respect of each of the three business sectors is as follows:
(a)
Position regarding registration for Value Added Tax:
(i)
If all the sales are standard rated, Mr Chella will be required to register for VAT as the turnover
for the next 12 months will exceed K800,000.
(ii)
If all the sales are zero rated, Mr Chella will be permitted to register for VAT as his sales are all
taxable supplies.
(iii)
If all the sales are exempt supplies, Mr Chella will not be required and cannot be permitted to
register for VAT.
169
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
In any sector that will be chosen, monthly sales will be K70,000 (excluding Value Added Tax) and monthly
standard rated expenses will be K5,800, (including Value Added Tax).
(b)
Payments and repayments of VAT in each of the three business sectors would be:
(i)
If all sales are standard rated:
K
Output tax
(K70,000 @ 16%)
Less input tax
(K5,800, @ 4/29)
Value Added Tax payable
(ii)
11,200
(800)
10,400
If all the sales are zero rated
K
Output tax
(K70,000 @ 0%)
Less input tax
(K5,800 @ 4/29)
VAT repayable
(iii)
..
Nil
(800)
(800)
If all the sales are exempt, there would be no payments and repayments of VAT. All the input
tax would be attributed to exempt supplies and it would not be recoverable.
Deregistration
Deregistration is the cancellation of a trader's VAT registration. A trader can be de-registered if any of the
following occur, while that trader is registered for VAT:
(a)
If the business is sold or ceases to trade permanently.
(b)
If ZRA is satisfied that the trader is no longer making taxable supplies nor intending to make taxable
supplies, then they would be de-registered.
(c)
If there is a change in the legal status of the trader. This may be a situation where a sole trader
incorporates their business.
(d)
If a trader had applied for registration before commencing to trade and that trader fails to
commence trading on the expected date.
(e)
If a trader submits nil returns for 12 consecutive standard periods.
(f)
When a trader voluntarily applies for deregistration as a result of the VAT exclusive turnover of
taxable supplies falling below the registration threshold. The 3-month threshold is K200,000 while the
12-month threshold is K800,000.
Cancellation of registration will normally take effect from the last day of the month in which the
cancellation application is approved by the Commissioner General. However, if a trader voluntarily applies
for deregistration, they must continue charging VAT until the registration is formally cancelled.
..
Accounting for output tax
Output VAT is charged by the business on the taxable goods or services it supplies.
Where the consideration for a supply is in the form of money, and a cash discount is granted, VAT is charged
on the undiscounted cash value. However, where a trade discount is granted, VAT is based on the discounted
price.
Open market value is used to calculate the VAT in the following situations:
(a)
(b)
170
Where the consideration is in the form of something other than money.
The consideration is partly in the form of money and partly in the form of something else.
(c)
The supply is made to a connected person for a consideration that is below the market value.
Output VAT is the amount of VAT that the trader should pay to ZRA. The tax is based on the turnover of
taxable supplies. The amount on which output VAT is determined may be influenced by the following:
(a)
If the goods have been returned and a credit note has been issued, then that will reduce the value of
the supply.
(b)
If the customer is bankrupt, or insolvent, then the trader can be able to claim irrecoverable debt
relief.
(c)
If the customer has not made payment for any acceptable reason, relief may be available.
... The tax invoice
Registered traders are required to issue tax invoices when they make supplies of goods and services. The tax
invoice should be issued not later than 30 days after the time when a supply of goods and services is treated
as having been made.
The tax invoice is the normal commercial invoice that should contain certain information that is particularly
important for the purposes of VAT. These details are:
•
•
•
•
•
•
The words tax invoice in a prominent place
The name, address and VAT registration number of the supplier
The name or business name and address of the customer (purchaser)
The serial number of the invoice and date of issue
The quantity or volume of the goods or services supplied
A description of the goods or services supplied
and either:
•
•
•
The selling price, excluding VAT and any trade discount
The total amount of the VAT charged
The selling price including VAT
or:
•
The total charge on the invoice inclusive of VAT, any trade discount and the rate of VAT.
This is the time when the supply is deemed to have taken place. It is important to establish the tax point in
respect of supplies for VAT purposes because:
(a)
The tax point is used for determining the tax period in which VAT relating to the supply should be
accounted for.
(b)
The tax point is used to decide which scheme or VAT rate will apply to a supply when there is a
change in the VAT scheme or VAT rate.
A change in the VAT scheme occurs when supplies are reclassified from being exempt to zero rated or from
being standard rated to zero rated and so on. A change in the rate of VAT occurs when the standard rate is
increased or reduced.
The basic tax point is the time when goods are delivered, collected or made available to the customer, or
when the services are performed.
The basic tax point is amended in the following situations:
(a)
Where a tax invoice is issued or payment is made before the basic tax point, the date of issue of the
invoice or the date when payment is made is the tax point.
(b)
Where a tax invoice is issued within a period of 14 days after the basic tax point, the tax point is the
time when the invoice is issued.
171
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
... The tax point
VAT legislation provides special rules for certain supplies of goods. These special rules include the following:
(a)
Sale or return consignments
The tax point for these goods is the earliest of the time when the sale is adopted by the customer, the
date of the tax invoice being issued and payment being made.
(b)
Continuous supplies
The tax point is the earliest of the time when a tax invoice is issued, the time when the services are
rendered and the time when payment is made.
(c)
Staged payments and part payments
The tax point is the time of receipt of the staged payment or the part payment.
(d)
Sales under hire purchase
The time of supply for the full value of the goods is determined on the basis of the normal rules. This
time will be one of the following: when goods are collected, when goods are delivered, when goods are
made available to the customer, when payment is made or when the tax invoice is issued.
... Bad (i.e. irrecoverable) debt relief
Irrecoverable debt relief is claimed by including the amount to recover as part of the input VAT on the
return. The relief is given where:
•
•
•
•
A supply of goods or services has been made for consideration in money or by barter
Output VAT has been accounted for and paid by the supplier
The whole or part of the debt has been written off as bad in the records of the supplier
At least 18 months have elapsed since the time when the payment was due
..
Accounting for input tax
Input VAT is the tax that is incurred on supplies made to a taxable person. Input VAT is recoverable from the
Commissioners if certain conditions are satisfied.
... Recovery of input VAT
Input VAT is recoverable if the following conditions are met:
172
(a)
At the time the supply was made, the trader was a registered trader for VAT purposes.
(b)
The supply must have been made to the taxable person making the claim.
(c)
The supply must be supported by evidence. The evidence is normally in the form of the tax invoice.
The validity of supporting documentation is three months.
(d)
The person making the claim must use the goods or services for business. Personal expenses do not
qualify for relief.
(e)
The amount available for recovery is that which is accurately calculated. The tax must be the amount
that accurately relates to the supply.
(f)
The VAT should not be that which is irrecoverable.
... Irrecoverable input VAT
Certain input VAT is excluded from credit. This is the irrecoverable input VAT and it is the input VAT on any
of the following:
(a)
Business entertainment.
(b)
Motor cars that are not wholly for business use is not recoverable unless the motor car is:
(i)
(ii)
(iii)
Acquired new for resale by a car dealer.
Acquired for use in a taxi business or for leasing to a taxi business.
Acquired for use in a self-drive car hire business or a driving school.
(c)
Expenses incurred on domestic accommodation for directors.
(d)
Telephone bills.
(e)
Cost of petrol: Input VAT on petrol is not recoverable. However, if the petrol is bought for resale,
then input VAT will be recoverable.
(f)
Cost of diesel: Input VAT on the cost of diesel is not fully recoverable. Only 90% of the input VAT
incurred can be recovered; the remaining 10% is not recoverable. However, if the diesel is bought for
resale, then input VAT will be fully recoverable.
(g)
Domestic refrigeration equipment, air conditioners, mobile phones, motor vehicle parts, television
sets, digital satellite TV, decoders, video players, window blinds and curtains.
However, where such products are meant for resale or are a main input in the business, then input
VAT can be claimed.
... Partial exemption
A taxable person can only recover input VAT on supplies made to him if that VAT is attributable to the
taxable supplies made by him. Where a person makes a mixture of taxable and exempt supplies, he cannot
recover in full the input VAT as some of it will be attributable to the exempt supplies. Input VAT that is
attributable to the exempt supplies is not generally recoverable.
Recoverable non-attributable input VAT =
Total taxable supplies
× 100%
Total supplies
The resulting percentage is multiplied by the non-attributable input VAT in order to determine how much of
that VAT is attributable to the taxable supplies. The amount that is attributable to the taxable supplies using
the above formula is then recovered while the rest is treated as being attributable to exempt supplies and
therefore not recoverable.
..
Special schemes under VAT
Some special schemes are available under VAT to ensure that the tax is administered fairly. Voluntary
registration is normally considered as a special scheme. This scheme has already been covered under
registration for VAT. Other special schemes include the following.
... Extended tax periods
Value Added Tax is normally accounted for on a monthly basis. Periods of a month are the tax periods for
which VAT should be accounted for.
Certain traders are granted extended tax period of three months. This is normally in situations where the
trader's business is not continuous on a daily basis. Where these types of trader follow the normal tax
173
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
In order to attribute non-attributable input VAT to the taxable supplies, various methods are used. One of
the methods that can be used is the one where the basis of apportionment is the turnover of the supplies
made. The formula that is used is as follows:
periods, there could be several months when they would submit returns where there are no supplies on
which VAT payments or recoveries might be based.
... Cash accounting scheme
A trader who is under the scheme accounts for VAT on the basis of the receipts and payments of cash. As
such, the tax point for cash accounting scheme is the time when payment is made. VAT payments and
recoveries are dealt with in the return for the tax period in which cash is paid and received.
Only members of the Association of Building and Civil Engineering Contractors (ABCEC) are eligible to use the
Cash Accounting basis for VAT purposes. Such traders can only join the scheme following a written
application to the Commissioner General.
Suppliers engaged in mineral prospecting, mining and intending traders are required to recover input VAT
based on Cash Accounting. This measure is intended to ensure that such suppliers only claim, as input VAT,
the VAT payments they have actually made on their supplies. This means that VAT refunds are based on
amounts actually paid. Output VAT however is based on the invoices they issue to their customers.
Advantages of cash accounting
Disadvantages of cash accounting
VAT is only payable if the customers have made
payments.
Input VAT cannot be reclaimed until payment has
been made to the suppliers. This means that input
VAT credit will be delayed if payments are not made
early enough to the suppliers.
It is easy to prepare the VAT return as the cash book
can be used to do so.
The scheme is not open to all kinds of traders and
therefore small scale traders in sectors other than
the members of the ABCEC cannot benefit from it.
Bad (i.e. irrecoverable) debt relief occurs
automatically since no VAT is payable if the
customers have not made payments.
..
Administration of VAT
VAT is administered as part of the domestic taxes if it relates to supplies made within Zambia by Zambian
VAT registered traders. Import VAT arises when imports are made into the country and is accounted for
together with the related customs and excise duties as the case may be.
... VAT inspection visits
Since VAT is a self-assessed tax, the inspectors will make visits from time to time in order to check on
whether the traders are performing their obligations properly. These types of visits are known as VAT control
or inspection visits. VAT inspection visits serve as a deterrent to fraud. They provide an opportunity for any
problems which might have arisen as regards VAT to be sorted out.
The inspectors have power to enter the premises and inspect documents, the financial statements, take
samples and inspect the computers and other machines that are being employed in the preparation of
accounting records and the financial statements.
An officer who finds that an assessment is incomplete or incorrect can issue an assessment to collect the tax
that has been underpaid by the trader or that has been overpaid to the trader.
Records of account which are used for the purpose of VAT computations should be kept by a trader for a
minimum period of six years.
174
... Due dates and penalties
The due date for payment of VAT and submission of the VAT returns is the 16th day following the end of the
tax period to which the VAT and the return relate. For example, if the tax period in question is the month of
May 2019, then any VAT for that month must be paid on or before 16 June 2019. In the same way the VAT
return for the month of May 2019 should be submitted on or before 16 June 2019. The month of May 2019
will be the tax period ended 31 May 2019.
The daily penalty for late submission of VAT returns is the higher of:
•
•
1,000 penalty units (K300); and
0.5% of the amount of VAT payable.
Interest is charged on overdue tax at a prescribed rate of interest. This rate is normally the Bank of Zambia
discount rate plus 2%.
... Appeals
Appeals in connection with VAT are made to the Tax Appeals Tribunal. An appeal is considered only if the
necessary returns which the trader is required to make have been made and the VAT has been paid. The
normal time limit for making an appeal is 30 days from the time that a decision had been made by the
Commissioner General.
Joyce has been self employed since 1 January 2017, when she retired from the prisons service. Her sales from
the date of commencement of trade to 31 December 2017 had been K27,000 per month. Her monthly
standard rated expenses were K10,500.
On 1 September 2018, she increased the sales prices and the monthly sales figure went up to K70,300. All her
sales are standard rated supplies for VAT purposes and both of these figures are VAT exclusive.
Joyce is required to register for Value Added Tax (VAT) from 1 September 2019 as a result of the price increase.
Since all her customers are members of the general public, Joyce is unable to increase the prices further as a
result of VAT registration. She therefore continued earning a monthly turnover of K70,300, but now inclusive of
VAT. Her VAT inclusive standard rated expenses are K35,500 per month.
Joyce has also heard that if she incorporated her business, she could be able to reward some of her
employees by way of share options.
Required:
(a)
Explain why Joyce was required to register for VAT from 1 September 2019 and state the action that
she had to take as regards VAT registration. You should ignore registration with reference to quarterly
turnover.
(b)
Calculate the total amount of VAT payable by Joyce for the year from 1 January 2019 to 31 December
2019.
(c)
Calculate the increase or decrease in Joyce's net profit for the year ending 31 December 2019 as a
consequence of the price increase and subsequent VAT registration.
175
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
6.1 Value Added Tax
……………………
VAT is charged on all taxable supplies made by a VAT-registered trader.
Standard rated supplies are taxable supplies on which VAT is chargeable at the standard rate. The current
standard rate is 16%. Zero rated supplies are supplies on which VAT is chargeable at the rate of 0%.
Exempt supplies are supplies on which VAT is not chargeable.
A trader who makes only zero rated supplies may register for VAT while one who makes only exempt
supplies cannot register for VAT.
Input tax is recoverable by way of credit against output tax if that input tax is attributed to taxable
supplies made by the trader.
A trader whose VAT exclusive taxable turnover exceeds the registration threshold of K800,000 for any
period of 12 months or K200,000 for any period of three months must register for VAT.
A trader who makes taxable supplies whose VAT exclusive taxable turnover is below the registration
threshold may register for VAT voluntarily.
Registered traders must issue tax invoices when they make supplies of goods and services.
Output VAT is charged by the business on the taxable goods or services it supplies.
A tax point is the time of supply. It is used to determine the tax period in which the VAT should be
accounted for.
A trader who writes off a bad debt can be able to claim bad debt relief under which VAT on the amount
of bad debt written off is credited against output VAT in the period when the bad debt is written off.
Input VAT is the tax that is incurred on supplies made to a taxable person. It is generally recoverable
with certain exceptions.
Some special schemes under which VAT is dealt with slightly different from the normal VAT accounting
procedure include the use of extended tax periods and the use of the Cash Accounting scheme.
VAT is payable by the 16th day following the end of the tax period to which the VAT relates. In the same
way, the VAT return must be submitted by the 16th day following the end of the month to which the
return relates.
Penalties are chargeable for late submission of VAT returns and for late payments of VAT. In addition, for
late payments of VAT, interest on overdue tax is chargeable.
VAT inspection or control visits are made in order to check and obtain assurance as to whether traders
are properly accounting for VAT and whether traders who are required to register for VAT have done so
or are in the process of doing so.
……………………
. Customs and Excise duty
……………………
In this section we discuss how customs and excise duties are administered, the liability of imported goods
to customs duties and the goods that are subject to excise duty. We also cover how goods liable to the
duty provisions are valued.
……………………
.. Administration of customs and excise duties
Customs and Excise duties are administered by the Customs Services and Domestic taxes Divisions
respectively of the Zambia Revenue Authority (ZRA). The legislation is the Customs and Excise Act CAP 322 of
the laws of Zambia. Excise duty on imported goods and services is collected by Customs Officers.
176
The Customs Services division of ZRA has the following functions in connection with imported goods:
(a)
Collection and management of Customs and Excise duties and other duties, licensing and control of
warehouses and premises for the manufacturing of certain goods.
(b)
Regulation and control of imports and exports.
(c)
Facilitation of trade, travel and movement of goods.
(d)
Providing statistical data to the Government on imports and exports.
The Division's main role is to collect the following duties on behalf of the Government:
•
•
•
Customs duty
Import VAT
Excise duty
Customs duty is payable on imported goods and on exports. It is based on the customs value of the goods
which is known as the Value for Duty Purposes.
Excise duty is payable on certain imported goods and on locally manufactured goods. It is based on the
Value for Duty Purposes for excise duty. Import VAT is payable on the imported goods. It is determined at
the standard rate of VAT on the sum of Value for Duty Purposes and Customs duty as well as Excise duty, if
any.
..
Customs duty
CUSTOMS DUTY is a duty on imported goods. The customs duty rates fall within the following bands
depending on the type of goods imported:
•
•
•
For raw material, medicines and most capital equipment: 0% – 5%
For intermediate goods and semi-finished goods:
15%
For finished goods
25%
... Importation of goods
Liability for the payment of customs duty and Import VAT arises at the point of importation, but at the
discretion of a Station Manager, certain consignments may be removed under bond to an inland Custom
House where final clearance can be done.
All imported goods must be cleared and the relevant duties paid within 30 days of importation. A Bill of
Entry, together with supporting documents, has to be submitted by the importer or agent in order to effect
Customs clearance.
... Restrictions and prohibitions
Stills and similar apparatus capable of being used for the production or refining of alcohol may be imported
only with a written permission from the Commissioner General.
Certain other items are prohibited from importation. These include the following:
(a)
Base or counterfeit coins.
(b)
Any goods which are indecent, obscene or objectionable.
(c)
Any goods which may tend to corrupt the morals of the inhabitants, or any class of the inhabitants of
Zambia.
(d)
Any goods, the importation of which is prohibited by, or under the authority of any law.
177
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
It is a legal requirement that all goods imported are fully declared at the point of entry.
Special permits are required for the importation of firearms, live plants and animals. These permits are
issued by the Ministry of Home Affairs, Ministry of Agriculture and Ministry of livestock and Fisheries
respectively.
... Motor vehicle clearance
When motor vehicles are imported into Zambia, the importer is required to clear them properly. The
clearance of motor vehicles involves payment of all the appropriate taxes and duties. The importer should
submit certain documents in respect of each motor vehicle imported.
... Documentation required at importation
The following documents are required at time of importation:
(a)
Invoice or letter of sale indicating the price paid
(b)
Bill of lading (for overseas imports) and/or road/rail consignment note/manifest (for overland
transportation)
(c)
Freight statement (including overland costs from port)
(d)
Insurance certificate
(e)
Any other documents relevant to the purchase, acquisition, shipment or importation of the vehicle.
These may include certificate of registration and police clearance certificate.
... Value for Duty Purposes (VDP)
The acceptable Value for Duty Purposes (VDP) is always based on the total cost of the vehicle up to the point
of entry into Zambia. This includes:
(a)
(b)
(c)
(d)
The price paid or payable for the vehicle which is referred to as FOB (Free On Board)
Insurance charges
Transport costs
Any other incidental cost incurred in importing the vehicle into Zambia.
The customs value for imports is thus based on Cost, Insurance and Freight (CIF).
... Valuation
Under the following circumstance, the Zambia Revenue Authority reserves the right to revalue vehicles to
determine the equitable transaction value in the country of supply:
(a)
(b)
The importer or Customer Clearing Agent provides insufficient or unsatisfactory information.
The vehicle is acquired in circumstances other than in normal course of trade.
The revaluation process aims at arriving at values which, in the opinion of the Commissioner General, form
the VDP and this is achieved with references to the values of similar or identical vehicles.
... Duty rates
The customs duty rates are applied on the VDP in order to arrive at the customs duty payable. The rates
applicable depend on the type of motor vehicle. The specific duties for motor vehicles are provided for in
the Customs and Excise Amendment Act No.17 of 2018.
In Appendix III of the Amendment Act, used motor vehicles have been split into two categories namely;
Vehicles aged below 5 years and those aged 5 years and above. The two categories have different applicable
specific duty rates. The relevant specific amounts of duty payable on each type of imported used vehicle are
shown in the appendix of this study manual.
178
Different rates of customs duty apply for brand new motor vehicles. The relevant rates of duty applicable on
the brand new motor vehicles are also shown in the appendix of this study manual.
1
Motor cars and other motor vehicles (including station wagons) principally designed for the transport
of less than ten persons, including the driver:
Customs duty:
Minimum Specific Customs Duty
Excise duty:
Cylinder capacity of 1500 cc and less
Cylinder capacity of more than 1500 cc
2
15%
K6,000
10%
Buses/coaches for the transport of more than ten persons
Customs duty:
Minimum Specific Customs Duty
Excise duty:
Seating capacity of 16 persons and less
Seating capacity of 16 persons and more
4
20%
30%
Pick-ups and trucks/lorries with gross weight not exceeding 20 tonnes:
Customs duty
Minimum Specific Customs Duty
Excise duty
3
30%
K6,000
15%
K6,000
25%
0%
Trucks/lorries with gross weight exceeding 20 tonnes
Customs duty:
Excise duty:
15%
0%
The minimum amount of customs duty on motor vehicles, apart from trucks/lorries with gross weight
exceeding 20 tonnes, is K6,000.
Import VAT is added to the sum of VDP, customs duty and excise duty. It is determined at the standard rate
of 16%.
Surtax
On all motor vehicles aged more than five years from year of manufacture
K2,000
... Clearance procedure
Complete customs clearance of a motor vehicle is granted only after all the requirements under the customs
law and other related laws have been fulfilled. This includes:
(i)
(ii)
(iii)
(iv)
Presentation of genuine import documents
Revaluation by customs, if necessary
Payment of customs duty, VAT and processing fee
Processing of the declaration in form CE 20 by Customs
Motor vehicles allowed to be cleared at inland ports are Removed Under Bond (RIB) from the entry ports
and are taken/driven straight to the appointed customs area where they are kept until they are finally
cleared.
All imports, including motor vehicles, must be cleared within 30 days after importation otherwise interest
for the late clearance/payment of duty is charged.
179
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
5
..
Excise duty
EXCISE DUTY is a tax on particular goods or products whether imported or produced domestically, imposed at
any stage of production or distribution, by reference to weight, strength or quantity of the goods or
products, or by reference to their value. Goods and products on which excise duty is charged are known as
excisable items.
They include:
(a)
(b)
(c)
(d)
(e)
Cigarettes
Pipe tobacco
Clear beer
Opaque beer
Carbonated soft drinks.
... Excise duty rates
Excise duty rates range from 3% on electricity to 125% on ethyl alcohol and spirits. The rate of 125% also
applies to tobacco and wine.
... Licensing
In order for any person to manufacture any of the goods set out in the Excise Tariff in quantities above the
minimum quantities specified in the Customs and Excise Act, one must apply to the Commissioner General
for a licence. However, any person may produce without a licence for domestic use, but not for sale or
disposal for profit to any other person, the following goods:
(a)
Fermented liquor, other than opaque beer, containing not more than 2% of alcohol by volume.
(b)
Tobacco in form of cigars, cigarettes, pipe tobacco or snuff when made from manufactured tobacco
on which duty has already been paid or raw tobacco.
(c)
Opaque beer being not more than 23 decilitres in volume in any period of four consecutive days.
..
Further aspects of Value for Duty Purposes
Most duties are calculated as a percentage of the value of imported or locally manufactured goods for the
purpose of assessing the amount of any customs duty or excise duty payable. Therefore, it is important that
the importers and manufacturers establish accurate values of their imported or locally manufactured goods.
The VDP of imported is derived from cost, insurance and freight (CIF). There are six methods that can be
used to determine the VDP. The first method is always used unless there is insufficient information to enable
the assessments to be made. The other methods will be used in the order in which they are listed below.
... Transaction value
This is based on the price actually paid or payable including insurance, freight and other incidental costs to
the extent that they are paid. The following conditions should be met:
•
•
•
•
There should be no restrictions to the use of the goods
There should be no conditions to deter determination of the VDP
No part of the proceeds on resale would accrue to the seller, unless included in the value
No relationship exists to influence the value
The VDP for leased/hired goods should be the rental charge paid or payable if it meets the requirement of a
transaction value including insurance, freight and other incidental costs.
180
... Transaction value of identical goods
This is the price of identical goods imported by another importer into Zambia from the same source,
including insurance freight and other incidental costs.
... Transaction value of similar goods
This is the price of similar goods imported by another importer into Zambia from the same source, including,
insurance, freight and other incidental costs.
... Deductive value
This is the price at which identical or similar goods are sold in their quantity in Zambia.
... Computed value
This is the price based on cost of production, insurance, freight and other costs incurred in the delivery of
the goods to Zambia.
... Residual basis of value (fall-back)
This is the price arrived at by going through the above five methods flexibly.
The importer should ensure that the VDP arrived at using the first method is supported by evidence that is
acceptable and genuine.
Costs that should not be included in the VDP include the following:
(a)
(b)
(c)
Installation or technical aid after the goods are imported
Transportation or insurance of the goods within Zambia
Taxation payable in Zambia
... Conversion of values from foreign currency into Kwacha
Where values have been expressed in the currency of another country, the Commissioner General
determines the rate of exchange to be used.
(a)
Importation of the goods if final clearance is to be effected immediately at the entry port (border)
(b)
Making of first entry report order or removal in bond (RIB) for goods allowed to be removed from the
border to another customs port for final or further clearance, or
(c)
First assessment for other goods.
... VDP for excise duty on imported goods
The value for the purpose of assessing excise duty on imported goods is the sum of VDP for customs duty
purposes and customs duty payable on the goods, if any.
... VDP for excise duty on goods manufactured in Zambia
Similar to the calculation of VDP of imported goods, there are seven methods that can be used to determine
the VDP and these are as follows:
(a)
The price at which a licensed manufacturer of excisable goods offers the goods for sale on the open
market
181
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Values in foreign currency are to be converted into Kwacha at the rate applying on the date of:
(b)
The lowest price at which identical goods in the same quantity (or almost the same quantities) are
sold within Zambia by another licensed manufacturer in the open market
(c)
The lowest price at which identical goods in different quantities are sold within Zambia by another
licensed manufacturer in the open market
(d)
The lowest price at which similar goods in the same quantity (or almost the same quantities) are sold
within Zambia by another licensed manufacturer in the open market
(e)
The lowest price at which similar goods in different quantities are sold within Zambia by another
licensed manufacturer in the open market
(f)
The price which the goods would fetch, less profit and other costs beyond the manufacturing level
(g)
The computed value comprising the cost of production, profit and other costs to the manufacturing
level.
A sale in the open market means that:
(a)
(b)
(c)
The price is the sole consideration.
The price is not influenced by any condition or relationship between the buyer and the seller.
No part of the proceeds on resale would accrue to the seller.
... Value of exported goods
The value for customs purposes of exported goods from Zambia is the Free On Board (FOB) at the place of
dispatch or customs port of shipment.
QUESTION
6.2 Customs and excise duties
(a)
For the purposes of determining the Value for Duty purposes for customs duty on imported goods,
there are six methods that are used. The basic method used is known at the transaction value
method.
Required
(b)
(i)
Explain what is meant by transaction value for customs duty purposes.
(ii)
State four conditions that should be met in order for the transaction value method to be used.
(iii)
Describe three other methods that may be used to value imported goods.
Mr Twapia imported a second hand saloon car (sedan) in January 2019 from Singapore at a cost of
$2,500. The saloon car was 4 years old at the time of importation. He paid insurance charges of $200
and transportation costs of $1,100. Both the insurance charges and the transportation costs cover the
saloon car up to Livingstone border post. Once cleared, the registration cost for the car in Ndola has
been estimated at K950 and the comprehensive insurance charge has been estimated at K1,500. The
car had a cylinder capacity of 1,500 cc.
The car reached Livingstone border post on 22 February 2019 and all the import taxes were paid. The
Commissioner General had advised that for the period from 16 January 2019 to
28 February 2019, the exchange rate to be used was K10.56 per $. However, the Kwacha depreciated
around 22 February 2019 and on that date, the exchange rate quoted in one of the Bureau De
Changes was K10.65 per $.
Required
182
(i)
Calculate the Customs Value (Value for Duty Purposes) of the saloon car.
(ii)
Calculate the total amount of import taxes paid at Livingstone border post on the saloon car.
(iii)
State two of the documents that Mr Twapia presented at the time of importation of the motor
car at the Livingstone border post.
(c)
Njamvwa Transport limited imported a second hand 65 seater coach (including the drivers seat) from
Japan in January 2019 at a cost of $10,000. The coach was more than 5 years old at the time of
importation. The company paid insurance of $1,000 and freight of $2,100. Other incidental costs paid
by the company were $1,500.
The coach arrived at Chirundu boarder post on 14 January 2019 and all import taxes were paid by the
company on that date. The Commissioner General provided an exchange rate of K10.58 per $. There
was no other foreign exchange rate available at the time.
Required
(i)
(ii)
Calculate the customs value (Value for Duty Purposes) of the coach.
Calculate the import taxes that were paid by Njamvwa Limited at Chirundu boarder post.
……………………
Customs and excise duties are administered by the Customs Services Division and Domestic Taxes
Divisions of ZRA respectively.
Customs duty is payable on imported goods as well as on exports.
It is computed on the customs value known as the Value for Duty Purposes (VDP). The VDP is the sum of
the Free on Board (FOB), the transportation costs, insurance charges and any other incidental costs
relating to the importation of goods.
Excise duty is chargeable on both imported goods and certain locally manufactured goods.
It is chargeable on the VDP for excise duty purposes. This is the VDP for customs duty plus customs duty
payable, if any.
In arriving at an appropriate value on which customs duty is to be based, there are several methods used
which include the use of the transaction value method, the use of transaction value of identical or similar
goods, the use of deductive value, computed value or the residual value basis.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
183
Chapter Roundup
184

Standard rated supplies are taxable supplies on which VAT is chargeable at the standard rate. The current
standard rate is 16%. Zero rated supplies are supplies on which VAT is chargeable at the rate of 0%.

Exempt supplies are supplies on which VAT is not chargeable.

A trader who makes only zero rated supplies may register for VAT while one who makes only exempt
supplies cannot register for VAT.

Input tax is recoverable by way of credit against output tax if that input tax is attributed to taxable supplies
made by the trader.

A trader whose VAT exclusive taxable turnover exceeds the registration threshold of K800,000 for any period
of 12 months or K200,000 for any period of three months must register for VAT.

A trader who makes taxable supplies whose VAT exclusive taxable turnover is below the registration
threshold may register for VAT voluntarily.

Registered traders must issue tax invoices when they make supplies of goods and services.

Output VAT is charged by the business on the taxable goods or services it supplies.

A tax point is the time of supply. It is used to determine the tax period in which the VAT should be
accounted for.

A trader who writes off a bad debt can be able to claim bad debt relief under which VAT on the amount of
bad debt written off is credited against output VAT in the period when the bad debt is written off.

Input VAT is the tax that is incurred on supplies made to a taxable person. It is generally recoverable with
certain exceptions.

Some special schemes under which VAT is dealt with slightly different from the normal VAT accounting
procedure include the use of extended tax periods and the use of the Cash Accounting scheme.

VAT is payable by the 16th day following the end of the tax period to which the VAT relates. In the same
way, the VAT return must be submitted by the 16th day following the end of the month to which the return
relates.

Penalties are chargeable for late submission of VAT returns and for late payments of VAT. In addition, for
late payments of VAT, interest on overdue tax is chargeable.

VAT inspection or control visits are made in order to check and obtain assurance as to whether traders are
properly accounting for VAT and whether traders who are required to register for VAT have done so or are in
the process of doing so.

Customs and excise duties are administered by the Customs Services Division and Domestic Taxes Divisions
of ZRA respectively.

Customs duty is payable on imported goods as well as on exports.

It is computed on the customs value known as the Value for Duty Purposes (VDP). The VDP is the sum of the
Free on Board (FOB), the transportation costs, insurance charges and any other incidental costs relating to
the importation of goods.

Excise duty is chargeable on both imported goods and certain locally manufactured goods.

It is chargeable on the VDP for excise duty purposes. This is the VDP for customs duty plus customs duty
payable, if any.

In arriving at an appropriate value on which customs duty is to be based, there are several methods used
which include the use of the transaction value method, the use of transaction value of identical or similar
goods, the use of deductive value, computed value or the residual value basis.
1
What are taxable supplies and exempt supplies?
2
What are the two categories of taxable supplies for VAT purposes?
3
What types of persons can register for VAT purposes?
4
What are the two types of VAT registration?
5
When would a trader's VAT registration be cancelled by ZRA?
6
What is a tax point and what is its importance for VAT purposes?
7
Under what circumstances can input VAT not be recovered?
8
When is VAT payable and what are the consequences of late payment?
9
List four functions of the Customs Services Division of the ZRA.
10
How is the Value for Duty Purposes (VDP) on imported goods determined?
11
Under what circumstances would the ZRA revalue an imported motor vehicle?
12
What further methods can the ZRA use to determine the VDP of imported goods?
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Quick Quiz
185
Answers to Quick Quiz
1
Taxable supplies are those on which Value Added Tax is charged. Exempt supplies are supplies on which VAT
is not chargeable.
2
Standard rated and zero rated.
3
A trader can register for Value Added Tax compulsorily with reference to the level of turnover or voluntarily
if he makes taxable supplies of goods and services.
4
Statutory (compulsory) or voluntary.
5
If ZRA are satisfied that the trader is no longer making taxable supplies nor is intending to make taxable
supplies.
6
The tax point is the point of supply and is used to determine the period in which VAT should be accounted
for as well as to establish the particular scheme of VAT or VAT rate in case of changes.
7
The trader must be registered for VAT, the supply must be to a taxable person making the claim, supply must
be supported by sufficient evidence (VAT invoice); person making the claim must use the goods or services
for business purposes; the amount of recovery must be calculated accurately; the VAT must not be
irrecoverable.
8
18th day following the tax period (monthly) to which the VAT relates.
The daily penalty is the higher of 1,000 penalty units (K300) and 0.5% of the amount of VAT payable, plus
interest at the Bank of Zambia discount rate plus 2%.
186
9
Collection and management of customs and excise duties and other duties; licensing and control of
warehouses and premises for the manufacturing of certain goods; regulation and control of imports and
exports; facilitation of trade, travel and goods; and providing statistical data to the Government.
10
VDP is the sum of the Free On Board, transportation costs, insurance charges and any other incidental costs
relating to the importation of goods.
11
If the importer or Customs Clearing Agent provides insufficient information or if the vehicle is acquired other
than in the ordinary course of trade.
12
Transaction value or transaction value of identical or similar goods; deductive value; computed value;
residual value.
Answers to Questions
6.1 Value Added Tax
(a)
A trader who makes taxable supplies is required to register for VAT when the taxable supplies during any
period of 12 months exceeds K800,000 (or exceeds K200,000 during any period of three months).
Throughout the period of trading up to 31 December 2017, Joyce's turnover had been below the registration
threshold. The turnover during the year to 31 December 2018 has therefore been as follows:
Period up to 31 December 2017 (27,000  12)
January 2018 to August 2018 (27,000  8)
September 2018
October 2018
November 2018
December 2018
Total turnover for the year to 31 December 2018
K
324,000
216,000
70,300
70,300
70,300
70,300
497,200
The turnover for the year up to July 2019 (27,000 + (70,300  11) =
K800,300. Joyce was required to register for VAT from 1 September 2019 as
this is the start of the period following the 12-month period whose turnover
exceeded the registration threshold of K800,000 for 12 months.
The action Joyce is expected to take as regards registration for VAT is to make an application for VAT
registration within one month following the year ended 31 July 2019.
JOYCE'S VAT PAYABLE FOR THE YEAR ENDED 31 December 2019
Output VAT [4/29  (K70,300  12 months)]
Less input VAT [4/29  (K35,500  12 months)]
VAT payable
(c)
K
116,359
58,759
57,600
If Joyce had not increased the prices, her profit for the year ending 31 December 2019 would have been as
follows:
K
324,000
Turnover (K27,000  12 months)
(126,000)
Less expenses (K10,500  12 months)
Net profit
198,000
As a result of increasing the prices and registering for VAT, the profit for the
year ending 31 December 2019 is:
K
Turnover (K70,300  12 months  25/29)
Less expenses: (K35,500  12 months  25/29)
Net profit
727,241
(367,241)
360,000
The increase in net profit is: = K360,000 – K198,000
=
K162,000
6.2 Customs and excise duties
(a)
Customs and excise matters:
187
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(b)
(i)
The term transaction value is used to refer to the actual price paid or payable in respect of imported
goods, including insurance, freight and other incidental charges to the extent that they have been
paid.
(ii)
In order for the transaction value to be used for customs duty purposes, the following conditions
should be met:
(1)
(2)
(3)
(4)
(iii)
There should be no restrictions to the use of the goods
There should be no conditions to deter determination of the VDP
No part of the proceeds on resale would accrue to the seller, unless included in the value
No relationship exists to influence the value.
Three other methods that may be used to value imported goods include (only three are required):
(1)
Transaction value of identical goods
This is the price of identical goods imported by another importer into Zambia from the same
source, including insurance freight and other incidental costs.
(2)
Transaction value of similar goods
This is the price of similar goods imported by another importer into Zambia from the same
source, including, insurance, freight and other incidental costs.
(3)
Deductive value
This is the price at which identical or similar goods are sold in their quantity in Zambia; or
(4)
Computed value
This is the price based on cost of production, insurance, freight other costs incurred in the
delivery of the goods to Zambia.
(5)
Residual basis of value (fall-back)
This is the price arrived at by going through the above five methods flexibly.
(b)
Importation of the saloon (sedan) car (1,600 cc and 4 years old):
(i)
The customs value is:
$
2,500
200
1,100
3,800
Cost
Insurance
Freight
CIF charge
K
VDP: CIF  Exchange rate
$3,800  K10.56/$
(ii)
40,128
Computation of import taxes paid:
Since the saloon car is 4 years old from the date of manufacture and has a cylinder capacity of 1,600
cc, the total amount of import taxes paid will be determined as follows:
VDP
Customs duty (specific duty)
Excise duty (specific duty)
Value Added Tax @ 16%
Total value
188
Values
K
40,128
16,545
56,673
21,508
78,181
12,509
90,690
Taxes
K
16,545
21,508
12,509
Total import taxes paid
Documents presented at the border post include:
(1)
(2)
(3)
(c)
(i)
The bill of lading
The insurance certificate
The invoice from the country of origin
Customs value for the coach (65 seater and more than 5 years old):
$
10,000
1,000
2,100
1,500
14,600
Cost
Insurance
Freight
Incidental costs
CIF value
Value for Duty Purposes:
(ii)
= $14,600  K10.58
= K154,468
Computation of import taxes paid:
Since the coach is more than 5 years old from the date of manufacture and has a seating capacity of
65 persons, including the driver, the total import taxes paid will be determined as follows:
Values
Tax paid
K
K
Value for Duty Purposes
154,468
Customs Value (specific duty)
43,248
43,248
197,716
Excise duty (specific duty)
0
0
31,635
31,635
Value Added Tax @16%  K197,716
Carbon surtax (coach over 5 years old)
2,000
Total values
229,351
76,883
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(iii)
50,562
189
TAXATION OF ASSET TRANSFERS
Property transfer tax is chargeable on any person who transfers property to another person. Property
under the terms of the relevant legislation means land and buildings or the shares of companies not listed
on the Lusaka Stock Exchange or mining rights. Tangible moving property (chattels) does not fall under the
Property Tax Transfer Act.
Tax is also charged on income received from assets transferred into a trust and also on income received
from assets left after someone dies.
syllabus references
190
1 Property transfer tax
1B(vi)
2 Taxation of trusts
1B(vi)
3 Taxation of estates
1B(vi)
LEARNING OBJECTIVES

Explain the interaction of taxes, prepare relevant tax computations and advise when the taxes are payable,
dealing specifically with:
(vi) Property Transfer Tax, estates and trusts (1B)
. Property transfer tax
……………………
In this section we discuss when property transfer tax is charged, when taxpayers are allowed to object to
property transfer tax assessments and the documents that must be provided when a property
transaction takes place.
……………………
..
Scope of property transfer tax
Property transfer tax is chargeable on any person who transfers property to another person. The source of
law for property transfer tax is the Property Transfer Tax Act, CAP 340 of the laws of Zambia which provides
that whenever property is transferred, Property Transfer Tax (PTT) is charged upon and collected from, the
person transferring the property. The person transferring the property is known as the transferor and the
person to whom the property is transferred is known as the transferee. Property transfer tax is chargeable
on the realised value of the property transferred.
PTT is chargeable at the rate of 5% of the realised value of the property (land, buildings or shares)
transferred. The rate is 10% for mining rights. This tax is payable by the transferor of property. It is not
payable by the transferee. The tax should be paid within 14 days from the date when the transaction is
completed.
... Property
CHATTELS are tangible movable property. Most implements, plant and machinery are chattels. Whether the
chattels are used in a business and capital allowances have been claimed on them does not change the
position.
The categories of property chargeable are:
(a)
Any land in Zambia (including any building on that land)
(b)
Any building, structure, or other improvements thereon
(c)
Any share issued by a company in Zambia that is not listed on the Lusaka Stock Exchange (LuSE); all
LuSE listed shares are therefore exempt from PTT
(d)
Mining rights (or interest in a mining rights)
... Transfer of property
A transfer of property occurs when there is a change in the ownership of that property. Therefore, a transfer
includes the following:
•
•
•
A disposal of property
A disposal of a part of the property (a part disposal as in the case of shares)
A gift of the property (in the case of family members generally)
191
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
For the purposes of PTT, there are specific categories of assets that qualify as property. They are all
immovable property, which means that PTT does not apply on the transfer of chattels.
... Realised value
This is the amount on which PTT is charged. It is the price at which the property could, at the time of the
transfer be sold on the open market.
As a general rule, the realised value of any property is the higher of:
•
•
The contract price agreed upon by the transferor and the transferee; and
The open market value.
For a transfer of mining rights, the realised value is the higher of:
•
•
The actual price of the mining right or an interest in mining rights at the time of the transfer; and
The value as determined by the Commissioner General.
For shares, the realised value is the higher of:
•
•
The open market value of those shares; and
The nominal value of the shares.
As only shares in private limited companies are chargeable property, there is need to agree upon an
appropriate valuation method to use when attaching a value to these shares.
... Valuation of shares
Various methods may be used to value companies for the purposes of determining the realised value of
shares in unquoted companies. The methods of valuation of shares which may be used may include the
following:
(1)
(2)
(3)
(4)
Asset based valuation method (Net asset method)
Earnings based valuation method
Dividend based valuation method
Discounted cash flows valuation method
.... Net Asset Valuation Method
The net asset valuation method can be used to provide a lower limit for the value of a company. Using this
method of valuation, the value of an ordinary share in a company is calculated as the net tangible assets
divided by the number of ordinary shares.
The Net tangible assets and hence the value of the company as a whole is the value of the total tangible noncurrent assets (net of depreciation) plus current assets, less the total liabilities.
Intangible assets such as goodwill and development expenditure are excluded in determining the value of
the total assets, unless they have a market value (for example patents and copyrights, which could be sold).
Valuation bases used to establish the value of net assets include:
(1)
Historical cost basis (net book value basis) – This uses the historical costs of assets to determine the
value of the business and is unlikely to give a realistic value as it is dependent upon the entity's
depreciation, amortisation and other accounting policies.
(2)
Realisable value basis (Break up basis) – The assets are valued at the amount they would realise if
they were sold, or the business as a whole broken up. Hence the value of the equity of the business is
equal to the realisable value of its net assets. This basis is therefore only appropriate when valuing a
company which is being broken up or liquidated. The basis will not be relevant if a minority (noncontrolling) shareholder is selling his stake, as the assets will continue in the business's use.
(3)
Replacement value basis (deprival value basis) – this values the company's equity based on the
maximum amount that any purchaser should pay for the whole business and represents the total cost
of forming the business from scratch. Assets are valued on the basis that they are to be used on an
ongoing basis.
Strengths of asset valuation methods
192
The main strengths of assets valuation methods include:
(i)
(ii)
Valuation information is readily available.
They provide a minimum value of the business.
Weaknesses of asset valuation methods
The main weaknesses of assets valuation methods include:
(i)
(ii)
(iii)
Valuations are influenced by the choice of accounting policies used by the business.
Difficult to incorporate the value of intangible assets such as intellectual property.
Net assets valuation methods ignore future expectations of profitability.
.... Earnings Based Valuation method
Earnings (income) based valuation methods are normally of use when valuing a controlling interest in the
shares of a company, where the owner can decide on dividend and retentions policy.
The two methods used to determine the value of equity using income based valuation methods include the
Price Earnings (P/E) ratio method of valuation and the Earnings Yield valuation method.
(i)
P/E ratio method of valuation
The P/E ratio produces an earnings-based valuation of shares by obtaining a suitable P/E ratio and
multiplying this by the EPS for the shares which are being valued. The calculation can be performed as
follows:
Market value per share = P/E ratio x Earnings per share, or
Market Value of company's equity = P/E ratio x Total earnings
When determining the value of shares in an unquoted company a PE ratio for a similar but quoted
company or industry average is used. To reflect the non- marketability of the unquoted company's
shares as well as the higher risk in such a company, the PE figure of a similar quoted company or
industry average is scaled down by between one half and two-thirds of the industry average and then
used to value the equity of the unquoted company,
(ii)
Earnings Yield valuation Method
Value per share =
Earnings per share
Earnings Yield
Value of a company =
Total Earnings
Earnings Yield
As is the case with the P/E valuation method the earnings yield of a similar quoted company or
industry average is used when valuing an unquoted company. Again, the Earnings yield selected to
value the unquoted company may need to be scaled down just as is the case with the P/E ratio.
Strengths of Earnings based valuation methods
The main strengths of earnings based valuation methods include:
(i)
(ii)
There are relevant when valuing a majority interest.
They are widely used and therefore widely understood.
Weaknesses of earnings valuation methods
The main weaknesses of earnings valuation methods include:
(i)
It may be difficult to identify a suitable PE or Earnings yield when valuing unquoted companies.
(ii)
Earnings based valuation methods are based on accounting profits and not cash flows and are
therefore subjective.
193
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The earnings yield is the inverse of the PE ratio: The value of a company using the earnings yield
method can be calculated as follows:
(iii)
It may be difficult to establish the suitable level of earnings to use for valuation purposes.
.... Dividend Based Valuation Method
The Dividend Valuation Method is based on the theory that an equilibrium price for any share on a stock
market is:
(1)
(2)
The future expected stream of income from the security
Discounted at a suitable cost of capital
The market price of an ordinary share is thus equal to the present value of a future expected income stream
from the shares. The annual income stream for a share is the expected dividend every year in perpetuity. The
suitable cost of capital is taken as the cost of equity.
The value of equity can therefore be determine as follows:
(i)
If the future dividends are expected to be constant in amount in perpetuity, then the value of each
share or the value of the total equity is computed as;
Value of equity =
(ii)
Constant Dividend
Cost of Equity
If future dividends are expected to grow annually at a constant rate, then the value of each share or
the total value of equity can be computed as:
Po =
Do (1+ g)
Ke − g
Where :
Po is the current market price (ex div)
Do is the current net dividend
Ke is the cost of equity capital
g is the expected annual growth in dividend payments
Strengths of the dividend based valuation methods
The main strengths of the dividend based valuation methods include:
(i)
Considers the time value of money as the value of the company is based on the present value of
expected future dividend cash flows.
(ii)
Dividend valuation methods are useful for valuing non-controlling interests in a business.
Weaknesses of the dividend based valuation methods
The main weaknesses of the dividend based valuation methods include:
(i)
it assumes that growth will be constant in the future, this is not true of most companies.
(ii)
The market price of shares is affected by other variables apart from future dividend payments.
(ii)
The model fails to take capital gains into account, however it is argued that a change of share
ownership does not affect the present value of the dividend stream.
.... Discounted cash flow basis of valuation
This method calculates the value of a company as being equal to the present value of expected future annual
after tax cash flows discounted using a suitable of capital, which is a cost of capital that reflects the
systematic risk associated with those cash flows.
Strengths of discounted cash flow basis of valuations
The main strengths of discounted cash flow basis of valuations include:
(i)
(ii)
194
The discounted cash flow basis can be used to place a maximum value on the business.
The method takes into account the time value of money.
Weaknesses of discounted cash flow basis of valuations
The main weaknesses of discounted cash flow basis of valuations include:
(i)
It relies on estimates of both cash flows and discount rates which may be unavailable or difficult to
forecast.
(ii)
It is also difficult to choose an appropriate time horizon and there are further difficulties in valuing a
company's worth beyond that time horizon.
(iii)
It assumes that the discount rate, tax and inflation rates are constant throughout the period.
.... Suitable Valuation Method used
The Net asset valuation method is normally preferred to other methods of valuation because it is the
simplest and the information required for valuation is readily available from the financial statements of the
company. The other methods of valuing shares require information to be obtained from external sources in
most cases. All cases involving valuation of shares will normally therefore require the use of the net asset
basis of valuation. Notwithstanding this, the other methods of share valuation can also be used if there is
sufficient time to gather the required information and where realistic assumptions can be made if needed.
Even though different methods can be used to value shares, only one value will be chosen for the purposes
of determining the amount of property transfer tax payable on the transfer of shares in an unquoted
company.
EXAMPLE
Valuation of Shares- Net Asset Method
On 31 May 2019, Mwansa Bweupe sold 60,000 ordinary share she held in GFB Ltd, a company that is not
listed on the Lusaka Stock Exchange (LuSE). The market value of the shares in GFB Ltd on that date was
determined using the Net Asset Valuation method. The Commissioner General agreed to this method of
share valuation for the purposes of assessing property transfer tax.
The summarised statement of financial position of GFB Ltd, as at 31 May 2019 was as shown below:
EQUITY AND LIABILITIES
K1 ordinary shares
Reserves
Liabilities (non-current)
6% loan notes
500,000
625,000
250,000
1,375,000
The following information was obtained at 31 May 2019
(1)
(2)
All assets were estimated to be realisable at their book value.
The loan notes are redeemable at par in five years' time.
SOLUTION
Required
(a)
Calculate the value of the 60,000 shareholding of ordinary shares, using the net asset valuation basis.
(b)
Calculate the amount of property transfer tax arising on the disposal of the shares.
(a)
Calculation of the value of 60,000 shares on a net assets basis, as at 31 May 2019
K
195
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
K
1,125,000
250,000
1,375,000
ASSETS
Non-current assets (carrying value)
Net current assets
Total assets as per statement of financial position
Less: Payable to loan note holders on redemption
Total value of equity
Valuation of each ordinary share:
1,375,000
(250,000)
1,125,000
K1,125,000/500,000 = K2.25 per share
The value of 60,000 shares will therefore be:
60,000  K2.25 = K135,000
(b)
The realised value of the shares will be taken to be K135,000 as this is higher than their nominal value
The amount of property transfer tax payable will therefore be :
K135,000  5% = K6,750
... Transfers to members of the immediate family
A member of the immediate family is any of the following:
(a)
(b)
(c)
(d)
A spouse
Own blood child
Duly adopted child
Step-child.
Where a person transfers property to a member of the immediate family, the realised value of such property
is the actual price received by the transferor, if any. This means such transfers will be treated as having a
realised value of nil if no price has been charged. As a result, when a person makes a gift of property to a
member of the immediate family, PTT would not be payable.
... Internal reorganisation within a group of companies
Where, within a group of companies, a company transfers property to another company (other than a company
which is not resident in Zambia) within the same group for the purposes of internal reorganisation of the group,
the Commissioner General may treat such a transfer as having no realised value.
A 'group of companies' means a holding company together with all its subsidiaries.
A 'holding company' means a company that:
(a)
Holds the majority of the voting rights in another company, or
(b)
Is a member of another company and controls the majority of the voting rights on its own or
pursuant to an agreement entered into with the other members, or
(c)
Is a member of another company and controls and has the right to appoint or remove a majority of
the board of directors in that other company.
The definition excludes situations where companies are under the common control of an individual and also
excludes any group members that are not resident in Zambia.
... Exempt organisations
The following organisations are exempt from property transfer tax:
196
(a)
The Government of the Republic of Zambia.
(b)
Any foreign government.
(c)
Such international organisations, foundations or agencies as the Minister of Finance approves for this
purpose.
(d)
Charitable organisations or trusts registered under Section 41 of the Income Tax Act Cap 323 as a
Charitable organisation, as the Minister of Finance approves for the purpose.
(e)
Any Cooperative society registered under the Cooperative Societies Act.
(f)
Local authorities.
(g)
Registered trade unions.
(h)
Club, Society or Association registered under Section 41 of the Income Tax Act Cap 323 as a Charitable
organisation, as the Minister of Finance approves for the purpose.
(i)
Approved pension fund or Medical aid society.
(j)
Approved employees' savings scheme or fund.
(k)
Political party registered as a statutory society under the Societies Act.
... Exempt transactions
The following transactions are exempt from PTT:
(a)
The transactions as a result of the sale or other disposal of any stock or share listed on the Lusaka
Stock Exchange (LuSE).
(b)
Contribution towards the equity for a company. The Commissioner General may treat a transfer of
property by a shareholder of a company incorporated under the Companies Act, if such transfer is his
contribution towards the equity of that company as qualifying for exemption.
(c)
A transfer is not liable to PTT if it is occasioned by death of the transferor to a member of the
immediate family.
For exemptions involving transfers of property between related persons, a deed of gift or deed of transfer
should be attached to the PTT returns.
For exemption applications involving the transfer of shares or other properties in a reorganisation, proof of
the number of shares through a share certificate should be attached.
EXAMPLE
Property transfer tax
Gabriel Nkumbwa made disposals of assets as follows during the tax year 2019
Shares in Zomu Plc
He sold 100,000 ordinary shares of K1.00 each in Zomu Plc for K25,000 on 31 January 2019. He acquired
200,000 ordinary shares of K1.00 each in Zomu Plc through a public offer for sale at a price of K1,20 per share
in May 2015. Zomu Plc was listed on the Lusaka Stock Exchange in May 2015.
Farming plot in Mkushi
He sold a five acre plot of land in January 2019 for K22,500 This plot was part of a 20 acre farming plot that
he bought for K40,000 in January 2017. The plot was sold at a price that the government valuers estimated
as the open market value.
Shares in LR Ltd
He sold 2,000 ordinary shares of K1.00 each in LR Ltd for K10,000 during February 2019. He bought 5,000
ordinary shares of K1.00 each in the company in May 2017 when the company was formed by him with a
friend. Gabriel paid K5,000 for the shares on acquisition.
197
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
A group of companies exist where there is a holding or parent and subsidiary company relationship as
mentioned above. This should be established and proved. Mere assertion of existence of a group does not
suffice; neither is an application by 'sister companies' under common ownership or shareholding a basis of
qualification for approval.
Required
SOLUTION
Calculate the property transfer tax paid by Gabriel Nkumbwa and state when it should have been paid.
When determining the amount of property transfer tax paid, the first thing to determine is whether that
property is chargeable and then the amount of realised value for each property.
Shares in Zomu Plc
Zomu Plc is a company that has listed its shares on the Lusaka Stock Exchange. Shares that are listed on the
Lusaka Stock exchange are not chargeable property. Therefore, property transfer tax is not payable on the
disposal of shares in Zomu Plc.
Farming plot in Mkushi
Land is a chargeable property. The realised value is the greater of the open market value and the actual sales
price. As the plot was sold at the open market value, the price paid by the buyer is the realised value.
Property transfer tax paid is
= 5%  K22,500
= K1,125
The amount of Property Transfer Tax of K1,125 should have been paid within 14 days following the
conclusion of the transaction.
Shares in LR Ltd
Shares in LR Ltd are chargeable as this company is not listed on the Lusaka Stock Exchange. The realised value
is the greater of the nominal value and the open market value. It is difficult to value unlisted shares. The
sales price can be assumed to be the open market value as it is more than the nominal value.
Property transfer tax paid is
= 5%  K10,000
= K500
This property transfer tax of K500 should have been paid within 14 days after completion of the transaction.
..
Objections to values and refunds of tax paid
Objections against PTT assessments are settled based on their merit. More details about the property and
the reasons for dispute will be requested. If the grounds of objection are not satisfactory, the assessment will
be upheld. A professional valuation report is always handy for this purpose. The taxpayer has recourse
through an appeal to the Tax Appeals Tribunal (TAT).
There will be instances when the transaction is aborted for various reasons well after the tax has been paid
and a tax clearance has been issued. Such cases will be refunded upon application. Applications for refunds
will be scrutinised to ensure that the tax was actually paid. The following documents will be needed:
•
Original tax receipt voucher
•
Original tax clearance certificate
•
Original PTT return
•
Any proof that the transaction did not take place, (e.g. Confirmation from Registrars at the Ministry of
Lands or Local Authorities, though confirmation will not be restricted to this)
•
Formal letter of sale from the vendor, or their legal representatives
..
Documents required
For all property transactions, the following documents are required:
198
•
•
•
•
•
•
•
NRC/Certificate of incorporation of both the buyer & seller
State/council consent
Seller's TPIN
Contract of sale/deed of gift or transfer
Lawyer's stamp (where dealing as an advocate of either party)
Order of appointment of administrator/court order (for all deceased cases)
Valuation report for all transactions involving amounts exceeding K500,000
In the case of share transfers, the following would be required:
•
•
•
Share transfer form 27
Latest financial statements of the company in which the shares are held
Shareholders' resolutions
Group companies seeking nil transfers via internal reorganisations will have to prove a group structure
through share ownership certificates.
……………………
Property transfer tax is chargeable on the realised value of any property that is transferred. The rate of
property transfer tax is 5% (10% for mining rights).
Property includes any land and buildings in Zambia and shares in companies that are not listed on the
Lusaka Stock Exchange and mining rights.
A transfer includes a disposal, a part disposal or a gift of property.
The realised value is the higher of the actual price paid and the amount at which the property could be
sold in an open market.
Objections against PTT assessments are settled based on their merit.
To complete a property transaction or share transfer, a number of documents have to be supplied.
……………………
For the purposes of property transfer tax:
(a)
Explain the general rule used to determine the realised value.
(b)
Explain how the realised value is determined in respect of transfers made to members of the
immediate family.
(c)
Describe three exempt transactions.
(d)
How would a transferor of property make an objection to values?
. Taxation of trusts
……………………
In this section we explain what constitutes a trust, take a look at the three main types of trust, and look
at what determines the residency status of a trust in Zambia.
……………………
..
Trust basics
A TRUST is created when one person, known as the settlor transfers the legal ownership of property to other
persons known as the trustees who hold the property for the benefit of third persons called the
beneficiaries.
199
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
7.1 Property transfer tax
A trust has been defined as: 'An equitable obligation, either expressly undertaken or constructively imposed
by the court, under which the trustee is bound to deal with certain property over which he has control for
the benefit of certain persons (beneficiaries), of whom he may or may not be one.'
This means that the trustees may also be beneficiaries. If the trustees are also beneficiaries, they will carry
out their functions as trustees for their own benefits and the benefit of the other beneficiaries who are not
also trustees.
The interest of a beneficiary may be vested or contingent.
A vested interest may be either:
(a)
(b)
Absolute, i.e. free from limitation and so vested in the beneficiary immediately, or
Limited, e.g. a life tenancy, which only lasts for the lifetime of the beneficiary.
A contingent interest is one that waits or depends on the happening of an event, e.g. the amount paid to a
beneficiary if, and only if, they attain the age of 21.
The trust may be created either in the donor's will when they die, or during their lifetime. In addition,
following an individual's death, a trust can be created via a deed of variation.
If the trust is created by a will, it is usual for it to state the particular assets in the estate which form the capital
of the trust, to name the beneficiaries and to appoint the trustees who are to administer that trust.
If the trust is created during the lifetime of the settlor, the donor agrees under a contract to transfer property
for the benefit of third parties (the beneficiaries).
A transfer to a trust differs from an outright gift because the ownership of the assets vests in the trustees and
not in the beneficiaries. In this way the settlor has given up all rights to any income which may arise from such
assets and cannot be taxed on it.
If there has not been a genuine alienation of income by the settlor, it will remain taxable in his hands. A
genuine alienation has not taken place if, for example:
(a)
The settlor has the right to revoke the terms of the settlement and obtain either the property or
income for themselves
(b)
The settlor can revoke the terms of a settlement through their spouse
Any tax paid by the settlor in these circumstances can be recovered by him from the trustee.
Where a beneficiary is entitled to the whole or part of the income of a trust, that income may be taxed in
their hands instead of being taxed as the income of the trust. If any tax has already been paid on such
income before it reaches the hands of the beneficiary, it will be set off against any tax raised on them.
In practice, the beneficiary and not the trust is assessed on:
(a)
Income in which the beneficiary has a vested interest where this is paid to them or accumulated.
(b)
Sums applied for the benefit of the beneficiary under the terms of the trust; and sums paid to or
applied for the benefit of the beneficiary in exercise of a discretion.
..
Types of trusts
... Trusts with an interest in possession
Where a beneficiary is entitled under the trust deed to the income from the property or to use the property,
the trust is an interest in possession trust and the beneficiary is known as the life tenant.
The person who receives the trust property on the death of the life tenant is known as the remainderman
and their interest is known as a reversionary interest.
This form of trust is often used in a will where there is a surviving spouse and children. The surviving spouse
(life tenant) is entitled to the income generated by the assets but does not have access to the assets
200
themselves. The children (remainder men) will receive the assets on the death of the surviving spouse. Under
this arrangement, where for example the spouse remarries, the capital is protected and will eventually be
transferred to the children.
... Discretionary trusts
Where the trustees have discretion as to the distribution of trust income and assets such that a particular
beneficiary only has the possibility, rather than a right, of receiving a benefit under the trust, the trust is
known as a discretionary trust.
For the sake of simplicity, the term discretionary trust is being used to refer to all discretionary trusts apart
from accumulation and maintenance trusts.
... Accumulation and maintenance trusts
An accumulation and maintenance trust is a special type of discretionary trust for children or young people.
For a discretionary trust to qualify as an accumulation and maintenance trust it must satisfy certain
conditions.
These conditions are satisfied where:
(a)
The income generated is to be accumulated or used for the young persons' maintenance, education
or benefit.
(b)
The beneficiaries must become absolutely entitled to the property, or to an interest in possession in
the property, before they are 25.
(c)
The trust period cannot normally be more than 25 years unless all of the beneficiaries have at least
one common grandparent.
..
Residence status of a trust
A trust is chargeable to tax in Zambia if it is resident in Zambia. A trust that is not resident in Zambia may be
still be charged on all its income that is generated from sources which are within Zambia, or deemed to be
from sources that are within Zambia.
•
•
It is formed or created in Zambia
It is effectively managed in Zambia
Effective management of a trust is exercised in Zambia if the board of trustees hold their meetings in
Zambia.
Fees payable to a trustee are a deduction from the income of trust, in the same way as any other relevant
expenses.
Trusts are charged to tax at 35%, which is the same tax rate as for deceased and bankrupt estates (see
below). The tax is payable by the trustees as the taxpaying agents of the trust.
..
Commissioner General powers
In certain circumstances, the Commissioner General may determine that the income attributable to the trust
should instead be taxed on the person who is beneficially interested in the trust, i.e. the beneficiary.
This is an anti-avoidance provision that can be used where a taxpayer attempts to use a trust to minimise
their tax liability.
201
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
A trust is resident in Zambia if:
EXAMPLE
Taxation of trust income
Joachim transferred his business to be held in trust for the benefit of his only child. All the income of the
business should be paid to his child until death.
For the tax year 2019, the profit from the business was K123,000 after adjustments for tax purposes but
before deducting capital allowances. Capital allowances on implements, plant and machinery have been
agreed with the Commissioner General as K40,000. The trustees incurred trust administration expenses
amounting to K15,000. These expenses have not yet been deducted from the profit.
Required
SOLUTION
Calculate the income tax payable by the trustees and show the amount payable to Joachim's child for the tax
year 2019.
The income of the trust is all payable to Joachim's child for life. The child has an interest in possession. This is
an interest in possession trust.
The child is chargeable to tax on the income as he/she is entitled to the whole of it.
The amount chargeable to tax and the tax payable are as follows:
Tax adjusted profit
Less:
Capital allowances
Trustees' expenses
Taxable income
Income tax payable: 35%  K68,000
The net amount of income received by the child is:
Trust income
Less: Trustees' expenses and income tax paid (15,000 + 23,800)
Beneficiary's income
K
123,000
(40,000)
(15,000)
68,000
K23,800
123,000
(38,800)
84,200
……………………
A trust is formed when one person (the settlor) transfers property to another person (the trustee) to
administer that property for the benefit of a person (beneficiary).
The three main types of trusts are a trust with an interest in possession, a discretionary trust and an
accumulation and maintenance trust.
A trust is resident in Zambia if it is formed in Zambia. A trust that is not formed in Zambia is still resident
in Zambia if it is effectively managed in Zambia.
Trusts are taxable at the rate of 35% on the amount of trust income.
……………………
. Taxation of estates
……………………
In this section we explain the tax treatment of a deceased person's estate and also a bankrupt individual's
estate.
……………………
202
..
Estates of deceased individuals
The estate of a deceased person is a taxable 'person' in its own right. Any income tax due on income
received by the estate is payable by the executor or administrator of the deceased's estate as the taxpaying
agent. They are the taxpaying agent of two persons: the deceased individual and the estate of that
deceased individual.
There is no tax on the value of the assets left in the estate.
... Taxation of the deceased individual
An individual ceases to be a 'person' for tax purposes on the date of their death. The last assessment to be
made on them will be on the income which accrued to them from the beginning of the charge year to the
date of death.
Although the period covered by the assessment will be usually less than a year, full tax relief will be given
because the charging schedule makes no provision for apportioning the tax relief in such situations. Tax
reliefs arise because the annual tax bands and rates will be applied when computing income tax, although
the income will not relate to the whole tax year.
If the individual has made a will before their death, it may have appointed persons to carry out their
intentions about the disposal of their property. These persons are then called executors.
If no executor is appointed in the will or if there is no will (i.e. the individual dies 'intestate'), persons called
administrators are appointed to carry out the disposal of the property which the individual left behind on
their death.
This property is called the estate of the deceased. The estate comes under the control of the executor or
administrator from the moment of the individual's death, in most cases.
... Taxation of the deceased individual's estate
If, however, income is received after the date of death, and it was not due and payable to the deceased
individual before that date, it belongs to the estate. Emoluments earned by the deceased during their
lifetime are excluded from this treatment.
It should be noted that, in practice, income accruing after death from the estate of a deceased person is
interpreted to also include the market value of all assets left behind by the deceased person upon death
and is taxable at 35%.
Any tax due in respect of the assessment for the period up to the date of death must be paid by the
deceased person's executors or administrators as their taxpaying agents. The taxpaying agent is assessed in
their own name on the income of the deceased person and has the same duties, responsibilities and
liabilities as if that income were received by them beneficially.
However, the assessment is actually made on the executor or administrator as an agent. The deductions
granted in the assessment are those applicable to the deceased person.
... Time limit for assessments
An assessment may only be made on a deceased individual in the three years from the end of the charge
year in which the individual died. This prevents delays in winding up estates, because the tax due on the
assessment on the deceased individual will be paid from the assets of the estate.
203
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Income may be received after the individual's death even though they were entitled to it, or it was due and
payable to them, before they died. Such income must be included in the assessment on the deceased individual
for the period before their death from the beginning of the tax year to the date of death.
As a result, for example, if an individual is deceased on 1 May 2019, then an assessment cannot be made
after more than three years following the end of the tax year of death, i.e. it must be made by 31 December
2022.
EXAMPLE
Death estate
Jones Chikampa, who died on 30 September 2019, left the following assets:
Bank deposit accounts
Shares in Juju Plc
K
100,000
45,000
Prior to the date of death, he received the following income:
Salary from employment
Tax adjusted profit from trading activities
Bank deposit interest
Dividends from Juju Plc
K
180,000
74,000
11,000
18,000
Income tax of K60,530 had been deducted from the salary under the Pay As You Earn system. The amounts
of bank deposit interest and dividends are the gross amounts. Withholding tax had been deducted at source
from each of the two payments.
Jones left a will specifying how the estate should be distributed.
Required
SOLUTION
Calculate the amount of income tax payable by Jones and by his executors for the tax year 2019.
The assets left at the date of death form part of the estate. Any income that arises after the date of death
also forms part of the estate. In the case of Jones, there was no income received after the date of death. All
the income was received prior to the date of death. This income is chargeable to income tax on Jones as his
own income. Although the income relates to only part of the tax year 2019, the annual income tax bands and
rates will be applied. Withholding tax deducted at source from bank deposit interest and dividends is the
final tax and so no further assessment will be made.
The computation of income tax payable is as follows:
JONES
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
Salary from employment
Business profits
Less tax free pay
Income tax payable
25%  K9,600
30%  K25,200
37.5%  K179,600
Less income tax already paid
Pay As You Earn
Income tax payable
K
180,000
74,000
254,000
(39,600)
214,400
2,400
7,560
67,350
77,310
(60,530)
16,780
INCOME TAX ON THE ESTATE
K
204
Bank deposit accounts
Shares in Juju Plc
Deceased's estate
Income tax payable
35%  K145,000
100,000
45,000
145,000
K50,750
The total amount of income tax payable by the executors is the sum of income tax on Jones' income and
income tax on the estate as follows:
K
Jones' income tax
Income tax on the estate
Total income tax payable
..
16,780
50,750
67,530
Estates of bankrupt individuals
A bankrupt individual's estate includes his property that is in and under the control of the trustee in
bankruptcy.
Upon the voluntary or compulsory sequestration of the estate of a person during the tax year, the person is
assessed to tax in respect of all income accruing from the beginning of that year up to the date of
bankruptcy.
From the date of bankruptcy, the bankrupt is regarded as a new taxable person and if they receive any
income in their own right, they are assessable to tax on the income. It follows, therefore, that in the year in
which the bankruptcy takes place, two assessments are raised on the bankruptcy:
•
•
One covering the period from the beginning of the tax year to the date of the bankruptcy
One covering the period from the date of the bankruptcy until the end of that tax year
Where a trustee carries on a bankrupt's business for the benefit of the payables (creditors), the income
received from such business is the income of the bankrupt's estate and is assessed to tax in the hands of the
estate.
The rate of income tax on the estate of the bankrupt is 35%, the same as for trusts and the estates of
deceased individuals.
QUESTION
7.2 Income tax on the deceased's estate and trusts
For the purpose of this question, you should assume that today's date is 20 August 2019.
Chisenga died on 1 August 2019, aged 87 years. His will leaves his assets split in equal shares to his son,
Chibuye and his daughter, Mwape. The assets comprised in Chisenga's estate were as follows:
House
Building Society account
National Savings Bank savings account
Zambia National Building Society deposits
Various chattels
Shares in Uvalo (Zambia) Ltd
Shares in Lewanika (Zambia) Plc
Other quoted investments
Market value at
1 August 2019
K
475,000
15,000
55,000
180,000
40,000
(Note 1)
(Note 2)
115,000
205
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The trustee in bankruptcy is the taxpaying agent for the estate. They make returns on behalf of the estate
and is responsible for payment of the tax. They generally represent the estate in all matters relating to
taxation.
Notes
1
Uvalo Ltd is an unquoted trading company. Chisenga bought his 24,500 ordinary shares (representing
35% of the issued shares) in September 2016 for 85ngwee per share. The shares were worth K1.10
per share at the time of his death.
2
Lewanika Plc is a quoted company in which Chisenga held 20,000 shares (representing less than 1% of
the issued shares) at the time of his death. On 1 August 2019, the shares were listed ex div at K6.26. A
dividend of K1.80 per share was declared on 1 May 2019, and was received on 11 August 2019 by the
executors.
Chisenga had made two lifetime gifts. The first was a house situated in Southern province. This was given to
Brian in July 2015. The value at that time was K271,000. In addition, Chisenga settled an equal amount on a
discretionary trust in September 2015. Chisenga paid the property transfer tax on both gifts.
Prior to his death, Chisenga had the following income in 2019:
K
Salary from part time employment
(gross – PAYE deducted at source K1,230)
Building society interest received
Bank deposit interest received
Dividends received (other than from Lewanika Plc (note 2 above))
88,500
1,280
300
8,100
Chibuye, Chisenga's son, is aged 58, is in poor health, and is not expected to live more than a few years. His
wife died ten years ago, and since then, he has lived alone. He owns a house, currently worth K400,000 with
an K80,000 mortgage outstanding and has other assets in the form of cash investments worth K80,000, and
personal belongings worth K50,000. Consequently, Chibuye has no need of his inheritance from Chisenga and
so intends to gift his share of his father's estate to his two children, Kangwa and Chituta, in equal shares.
Kangwa, who is 19, is in his first year at the University of Zambia, but Chibuye is worried that his son will
spend all of the money at once. Chituta, who is 15, is still at secondary school but is likely to go to university
in the near future. Again, Chisenga worries about the money being spent unwisely, and therefore wishes to
use some form of trust to control the capital sums gifted to both his children.
Required
(a)
Calculate Chisenga's income tax payable/repayable for the tax year 2019.
(b)
Calculate the tax payable on the estate left by Chisenga, and calculate the inheritance (after tax) due
to Chibuye and Mwape.
(c)
Identify the different types of trust which Chibuye could use to maintain control of the capital he
intends to gift to Kangwa and Chituta following Chisenga's death and the tax treatment of each. State
clearly which of the trust options identified you would advise Chibuye to use.
……………………
The executors are responsible for the administration of the estate of the deceased if that person dies
having left a will. If a person dies intestate (i.e. without a will), then the administrators deal with the
estate.
The executors and the administrators are the taxpaying agents for both the deceased and the estate of
the deceased.
The rate of income tax on the estate of the deceased is 35%.
When a person is declared bankrupt, the existing assets at that time form the estate of the bankrupt.
The estate of the bankrupt is chargeable to tax as a separate person in the same way that the estate of
the deceased is charged.
The rate of income tax on the estate of bankrupts is 35%.
……………………
206
Chapter Roundup
Property transfer tax is chargeable on the realised value of any property that is transferred. The rate of
property transfer tax is 5% (10% for mining rights).

Property includes any land and buildings in Zambia and shares in companies that are not listed on the
Lusaka Stock Exchange and mining rights.

A transfer includes a disposal, a part disposal or a gift of property.

The realised value is the higher of the actual price paid and the amount at which the property could be sold
in an open market.

Objections against PTT assessments are settled based on their merit.

To complete a property transaction or share transfer, a number of documents have to be supplied.

A trust is formed when one person (the settlor) transfers property to another person (the trustee) to
administer that property for the benefit of a person (beneficiary).

The three main types of trusts are a trust with an interest in possession, a discretionary trust and an
accumulation and maintenance trust.

A trust is resident in Zambia if it is formed in Zambia. A trust that is not formed in Zambia is still resident in
Zambia if it is effectively managed in Zambia.

Trusts are taxable at the rate of 35% on the amount of trust income.

The executors are responsible for the administration of the estate of the deceased if that person dies having
left a will. If a person dies intestate (i.e. without a will), then the administrators deal with the estate.

The executors and the administrators are the taxpaying agents for both the deceased and the estate of the
deceased.

The rate of income tax on the estate of the deceased is 35%.

When a person is declared bankrupt, the existing assets at that time form the estate of the bankrupt.

The estate of the bankrupt is chargeable to tax as a separate person in the same way that the estate of the
deceased is charged.

The rate of income tax on the estate of bankrupts is 35%.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system

207
Quick Quiz
208
1
What qualifies as property for the purpose of property transfer tax?
2
At what rate is property transfer tax chargeable and when is the tax payable?
3
What constitutes a transfer for the purpose of property transfer tax?
4
List four organisations that are exempt from property transfer tax.
5
What are the conditions that make an accumulation and maintenance trust a particular form of discretionary
trust?
6
When an individual is deceased their executor or administrator becomes the taxpaying agent of two persons.
Who are these two persons?
7
In the year of bankruptcy two income tax assessments are made on the bankrupt. What periods do these
two assessments cover?
Answers to Quick Quiz
Land and buildings and shares from companies that are not listed on the Lusaka Stock Exchange.
2
5% payable within 14 days of the transaction triggering the change.
3
A disposal, a part disposal or a gift of property.
4
Any four from the list under 1.1.7.
5
Where a trust is created for the benefit of children or young people, and the income generated is to be
accumulated or used for their maintenance, education or benefit. The beneficiaries must become absolutely
entitled to the property, or to an interest in possession in the property, before they are 25.
6
The deceased individual and the estate of that deceased individual.
7
The beginning of the charge year up to the date of bankruptcy, and the period from the bankruptcy to the
end of the tax year.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
1
209
Answers to Questions
7.1 Property transfer tax
(a)
The general rule used to determine the realised value of any property transferred is that the realised value is
the greater of:
(i)
(ii)
The open market value of the property transferred, and
The actual price paid, if any.
This means that where there is no price paid, the realised value is the open market value of the property
transferred.
(b)
In respect of transfers made to members of the immediate family, the realised value of such property is the
actual price received by the transferor, if any. This means such transfers will be treated as having a realised
value of nil if no price has been charged. As a result, when a person makes a gift of property to a member of
the immediate family, PTT would not be payable. Members of the immediate family for this purpose are the
spouse, own blood child, duly adopted child or step-child.
(c)
Exempt transactions include the following:
(d)
(i)
Any transaction involving the sale or other disposal of any stock or share listed on the Lusaka Stock
Exchange,
(ii)
Any transaction involving the transfer of property to a company in order to satisfy the transferor's
contribution towards that company's equity if that company is incorporated under the Companies
Act. It is a matter for judgment for the Commissioner General to determine that the transfer is
exempt.
(iii)
Any transfer of property that is occasioned by death of the transferor to a member of the immediate
family.
If a transferor of property wishes to make an objection to any value, that transferor should make the
objection to the Commissioner General in writing. The Commissioner General would then make a ruling on
the matter. If the transferor is not satisfied with that ruling, they can make an appeal to the Tax Appeals
Tribunal.
7.2 Income tax on the deceased's estate and trusts
Income earned by Chisenga prior to the date of his death will be chargeable to income tax in the normal way. The
income arising thereafter forms part of Chisenga's estate and will be chargeable to tax separately.
(a)
CHISENGA
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
K
Emoluments
Less tax free amount
Income tax payable:
25%  K9,600
30%  K25,200
37.5%  K14,100
Less PAYE
Income tax payable
88,500
(39,600)
48,900
2,400
7,560
5,288
15,248
(1,230)
14,018
Income tax is payable on the income earned up to the date of death. The income tax of K14,018, is payable
by the personal representatives, also known as the executors or administrators.
210
(b)
CHISENGA
TAX PAYABLE ON THE ESTATE FOR 2019
K
House
Building Society account
National Savings Bank savings account
Zambia National Building Society deposits
Various chattels
Shares in Uvalo (Zambia) Ltd
Shares in Lewanika (Zambia) Plc
Other quoted investments
475,000
15,000
55,000
180,000
40,000
26,950
125,200
115,000
1,032,150
Tax on the estate: 35%  K1,032 150
K361,253
The net amount of Inheritance available for Chibuye and Mwape to share is:
Total estate
Less tax
Net amount of estate
K
1,032,150
(361,253)
670,897
The inheritance available for Chibuye is 50%  K670,897 = K335,448.50
Mwape's inheritance is the other 50% which is = K335,448.50
A 'trust' arises when one person, called a settlor, transfers property to another person known as the trustee,
for that trustee to manage it for the benefit of a person known as the beneficiary. It has been defined as:
'An equitable obligation, either expressly undertaken or constructively imposed by the court, under which
the trustee is bound to deal with certain property over which he has control for the benefit of certain
persons (beneficiaries), of whom he may or may not be one'.
The interest of a beneficiary may be vested or contingent. A vested interest may be absolute (i.e. free from
limitation and so vested in the beneficiary immediately) or limited (e.g. a life tenancy).
A contingent interest is one that waits or depends on the happening of an event (e.g. the amount paid to a
beneficiary if, and only if, they attain the age of 21).
The trust may be created either by a will or during the lifetime of a donor. If the trust is created by a will, it is
usual for it to state the particular assets in the estate which form the capital of the trust, to name the
beneficiaries and to appoint the trustees who are to administer the trust.
If the trust is created during the lifetime of the settlor, the donor agrees under a contract to transfer
property for the benefit of third parties (the beneficiaries). Such a trust differs from an outright donation
because the ownership of the assets vests in the trustees and not in the beneficiaries. In this way the settlor
has given up all rights to any income which may arise from such assets and cannot be taxed on it.
For taxation purposes, trusts may fall in the following categories:
(i)
An interest in possession trust
An interest in possession trust must have one or more beneficiaries (life tenant(s)) who have an
absolute right to the income of the trust. However, the right to capital need not necessarily be held
by the same beneficiaries or in the same proportion and can be deferred to a future date or event e.g.
attaining a specific age, marriage or even the death of the life tenant. By deferring the vesting age for
the capital to a future date, by which time Kangwa and Chituta should be more mature (and so more
responsible in their use of the inheritance), Chibuye can retain control of the capital assets comprising
the inheritance in the hands of the trustees, of which he himself could be one.
(ii)
A discretionary trust
The trustees of a discretionary trust have the discretion (hence the name) over how the funds will be
used. They can thus control the assets comprising the inheritance, while allowing Kangwa or Chituta
211
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(c)
access to some or all of the income. Again, it is likely that Chibuye himself would wish to be a trustee
and he could therefore control how his children accessed the money.
(iii)
An accumulation and maintenance trust
An accumulation and maintenance trust is a special form of discretionary trust which can be used for
children/grandchildren. One or more of the beneficiaries must become absolutely entitled to the
trust assets (or at least the income from them) not later than the age of 25. Prior to this point, the
trust assets (and the income generated) can be used to maintain the child beneficiaries.
The trust that Chibuye wishes to create would qualify as an accumulation and maintenance trust and the use
of such a trust would enable him to retain control of both the capital and income. If, however, he wishes to
retain control of the capital assets beyond the relevant agreed age of normally 21, then an interest in
possession trust could be considered, as this will enable control of the capital to be retained to a later date
than this, but not of the income.
212
INTERNATIONAL ASPECTS OF TAXATION
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
In this chapter we study the international aspects income of income tax, including anti-avoidance
provisions.
syllabus references
1 Systems of international taxation
2 Resident and non-resident income tax
4A
4A(i)
3 Liability of overseas income to income tax
4A(ii)
4 Trading within Common Market for Eastern and Southern Africa (COMESA)
4A(iii)
5 COMESA and Southern Africa Development Community (SADC)
4A(iv)
6 Indirect taxes on overseas operations
4A(v)
7 Double taxation conventions and the OECD model
4A(vi)
8 Double taxation relief (DTR)
9 Transfer pricing and thin capitalisation
10 International tax avoidance
4A(vii)
4A(viii), 4A(ix)
4A(ix), 4A(x)
213
LEARNING OBJECTIVES

Advise Zambian individuals and businesses, including multinational enterprises, on international dimension
relevant to their taxation circumstances, dealing specifically with:
(i)
Liability of residents and non-residents to Income Tax
(ii)
Liability of foreign income to Income Tax and basis of assessment
(iii)
Trading within Common Market for Eastern and Southern Africa
(iv)
(COMESA) and Southern Africa Development Community (SADC)
(v)
Indirect taxes on overseas operations
(vi)
Double taxation conventions and the Organisation for Economic Co-operation and Development
(OECD) model
(vii)
Methods of giving double taxation relief
(viii)
Transfer pricing and thin capitalisation
(ix)
Taxation of multinational enterprises
(x)
International tax avoidance (4A)
. Systems of international taxation
……………………
We start by discussing the main systems of international taxation governments use to deal with the
complexities of international taxation.
……………………
Governments usually limit the scope of their income taxation territorially or provide for offsets to taxation
relating to extraterritorial income. The manner of limitation generally takes one of three forms.
.. Territorial taxation
Under a territorial taxation system, only income that arises from sources actually or deemed to be within the
country is taxable for everyone. A territorial taxation system therefore, allows companies to exclude or
deduct foreign profits that they receive from foreign subsidiaries from domestic taxable income, thus
exempting those profits then from domestic tax.The main drawback for this system is the ability to avoid
taxation on portable income by moving it offshore. This has led governments to enact hybrid systems (see
below) to recover lost revenue.
.. Residency taxation systems
In a residency taxation system, persons resident in the country are taxable on their worldwide income. On
the other hand, non-residents are only taxable on certain income that arises from within the country.
Residency taxation systems are based on the principle that people and firms should contribute towards the
public services provided for them by the country where they live, on all their income wherever it comes
from. Countries with a residence-based system of taxation usually allow deductions or credits for the tax that
residents already pay to other countries on their foreign income.
214
.. Exclusionary taxation systems
Exclusionary systems specifically include or exclude certain classes or items of income arising from within and
outside the country. This system generally applies when dealing with income received from foreign
subsidiary companies. In most jurisdictions, dividends received from certain foreign subsidiary companies are
exempt from tax while income received by way of interest and royalties from foreign subsidiaries is taxable.
.. Hybrid taxation systems
Some governments have attempted to mitigate the limitations of each of these three systems by enacting a
hybrid system with characteristics of two or more systems. For example, they may tax based on residency
but provide a specific amount of exclusion for certain foreign income. Alternatively, they may tax income
sourced in the country as well as that remitted to the country. Most countries tax gains on dispositions of
realty within the country, regardless of residency or their system of taxation.
……………………
Governments worldwide attempt to tax as much income as they can so as to maximise their public
revenue. Systems used in connection with international taxation include territorial, residency,
exclusionary and hybrid.
……………………
. Resident and non-resident income tax
……………………
In this section we discuss the impact of an individual's residency status on their income tax position.
……………………
Zambia uses a residency taxation system to determine the tax liability of its residents.
Persons resident in Zambia are taxable on their worldwide income.
On the other hand, non-residents are only taxable on certain income that arises from within Zambia.
……………………
Zambian residents are taxed on their worldwide income, while non-residents are only taxed on certain
Zambian source income.
……………………
. Liability of overseas income to income tax
……………………
In this section we look at the liability of individuals and companies to income tax when they receive
foreign income.
……………………
215
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The rules for determining the residency status of an individual and a company were discussed earlier in this
Study manual.
.. Foreign income
The basis of assessment for foreign income (i.e. income from overseas sources) is the actual receipts basis.
This is because income from overseas sources cannot be enjoyed by a Zambian resident until it is actually
received in Zambia.
Foreign income is chargeable to income tax in Zambia if it is not exempt. That income may also have been
taxed in the foreign country. As a general rule, the amount of foreign income that is chargeable to Zambian
income tax is the gross amount. The gross amount of foreign income is the net amount received plus the
foreign tax charged by the foreign tax authorities.
To avoid double taxation where the income is taxed both in Zambia and the overseas country, double
taxation relief is available to eliminate the effects of this double taxation, as we shall see later in this
Chapter.
.. Foreign income received by resident individuals
An individual who is resident and ordinarily resident in the Republic of Zambia is chargeable to Zambian
income tax on their worldwide income, i.e. both income that arises from Zambian sources as well as foreign
income.
They are also taxable on certain sources that are deemed to be Zambian sources, for example:
(a)
Where an agreement has been made in Zambia for the sale of goods, even if those goods are never
brought into Zambia.
(b)
Income from a Zambian employment, even if the salary is paid outside Zambia.
... Income tax treatment of foreign income for resident individuals
The various types of foreign income and their income tax treatment, if received by individuals who are
ordinarily resident in Zambia are as follows.
(a)
Dividends received from foreign sources are chargeable to Zambian income tax. The chargeable
amount is the gross amount. A dividend is received from a foreign source if it is received from an
investment in shares that are deemed to be located in a foreign country. Shares are located in a
country where the company that has issued them is incorporated or registered.
If a dividend is received from a non-Zambian resident company carrying on operations in Zambia,
that dividend is deemed to be from a source within Zambia and it is subjected to Zambian
withholding tax as discussed earlier in this study manual.
(b)
Rent received from foreign sources is any rent that a Zambian resident individual receives from
letting of property that is situated outside Zambia. Such rental income is exempt from Zambian
income tax.
(c)
Interest received from foreign sources is taxable. These include interest from foreign debentures,
foreign loans and other forms of foreign investments.
(d)
Income earned from employment outside Zambia is chargeable to Zambian income tax if it is
received in Zambia. If an individual receives this income outside Zambia, then that income cannot fall
within the framework of Zambian taxation.
(e)
Profits of businesses that are situated outside Zambia are chargeable on Zambian ordinarily resident
individuals if they effectively manage such businesses from within Zambia. This is because the profits
of the businesses will be received in Zambia.
Profits of overseas businesses that are effectively managed from outside Zambia are not taxable in
Zambia as they cannot be received in Zambia.
If the foreign business is a partnership in which an individual who is ordinarily resident in Zambia has
a share of profits, that share of profits will be taxable in Zambia.
216
.. Foreign income received by non-resident individuals
Aa we saw earlier in this Study Manual, an individual who is not resident is one who is physically in Zambia in
any tax year for a period of less than 183 days, or any individual who is in Zambia for a temporary purpose.
Such individuals are still liable to Zambian income tax on income that they derive from sources that are
within Zambia (or deemed to be within Zambia).
As such, a non-resident who takes up employment is liable to income tax on the emoluments from
employment in Zambia. Similarly, a non-resident who sells goods in Zambia would be liable to income tax on
the profits realised and so on.
Foreign income of a non-resident individual is not liable to Zambian income tax. This is because that income
is not from a Zambian source.
.. Foreign income received by resident companies
A Zambian resident company is liable to Zambian income tax on its worldwide income received as dividends
and interest.
Foreign interest is received net of foreign withholding tax, in the same way that local interest is received.
Similarly, foreign dividends are also received net of foreign withholding tax. As dividends are paid out of
profits that have already suffered corporate income tax (or corporation tax), an underlying tax could be
attributed to them when determining how much foreign tax should be available for double taxation relief. In
Zambia however, relief for this underlying tax is not available.
If a Zambian company that has received foreign dividends and foreign interest is taxed both in Zambia and in
the foreign jurisdiction, double taxation relief may be available (see below). Foreign rental income received
by a Zambian resident is exempt from Zambian Income Tax.
.. Foreign income received by non-resident companies
Non-Zambian resident companies are chargeable in Zambia on the income they derive from Zambian
sources. This is the case when a non-resident company sets up operations in Zambia through a permanent
establishment.
... Permanent establishment
A building site or construction or installation project constitutes a permanent establishment only if it lasts
more than 12 months.
However, the following shall not be deemed to be operations through permanent establishments:
(a)
The use of facilities solely for the purpose of storage, display or delivery of goods or merchandise
belonging to the enterprise.
(b)
The maintenance of an inventory (stock) of goods or merchandise belonging to the enterprise solely
for the purpose of storage, display or delivery.
(c)
The maintenance of an inventory (stock) of goods or merchandise belonging to the enterprise solely
for the purpose of processing by another enterprise.
(d)
The maintenance of a fixed place of business solely for the purpose of purchasing inventory of goods
or merchandise or of collecting information, for the enterprise.
217
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
PERMANENT ESTABLISHMENT is defined in the Organisation for Economic Co-operation and Development
(OECD) model convention as 'a fixed place of business through which the business of an enterprise is wholly
or partly carried on. In particular this includes a place of management, a branch, an office, a factory, a
workshop, a mine, an oil or gas well, a quarry or any other place of extraction of natural resources'.
(e)
The maintenance of a fixed place of business for the sole purpose of carrying on, on behalf of the
enterprise, any other activity of a preparatory or auxiliary character.
(f)
The maintenance of a fixed place of business solely for any combination of activities mentioned in
subparagraphs (a) to (e), provided that the overall activity of the fixed place of business resulting from
this combination is of a preparatory or auxiliary character.
An enterprise is not treated as having a permanent establishment in Zambia merely because it carries on
business in that State through a broker, general commission agent or any other agent of an independent
status, provided that they are acting in the ordinary course of their business.
……………………
Income received from foreign sources by Zambian resident individuals is chargeable to income tax in
Zambia, unless it is rent.
Non-resident individuals are only taxable on income with Zambian sources.
Withholding tax applies to foreign interest and dividends received by Zambian resident companies.
Non-resident companies are taxable if they have a permanent establishment in a country.
……………………
. Trading within the Common Market for Eastern and Southern
Africa (COMESA)
……………………
In this section we discuss trade within COMESA.
……………………
The Common Market for Eastern and Southern Africa (COMESA) is the largest regional economic
organisation in Africa, providing free trade areas for its 19 member states.
It provides a fully integrated, internationally competitive and unified single economic space which
comprises a number of elements, including the following:
(a)
A regional market without internal frontiers within which goods, services, capital and labour can
move freely (these are known as the 'four freedoms').
(b)
Competition policy and other measures aimed at strengthening market mechanisms.
(c)
Full integration of banking and other financial markets.
This programme of cooperation aims to achieve the removal of all physical, technical, fiscal and monetary
barriers to intra-regional trade and commercial exchanges through the following stages of integration:
(a)
A Preferential Trade Area (PTA) with lower tariffs applied to intra-regional trade originating in
member countries than to extra-regional trade.
(b)
A Free Trade Area (FTA), in which no tariffs are levied on goods from other member States whilst
each member State applies its own regime of tariffs to goods imported from outside the region.
(c)
A Customs Union (CU) involving free trade amongst the member States but with a Common External
Tariff (CET) according to which every member State applies the same tariffs on goods from outside
the region.
(d)
A Common Market (CM) with free movement of capital and labour, considerable harmonisation of
trade, exchange rate, fiscal and monetary policies, internal exchange rate stability and full internal
convertibility.
(e)
An Economic Community (EU) with a common currency and unified macroeconomic policy.
……………………
COMESA is a programme of cooperation which aims to remove of all physical, technical, fiscal and
monetary barriers to intra-regional trade, providing free trade areas for its 19 member states.
……………………
218
. COMESA and Southern Africa Development Community (SADC)
……………………
In this section we discuss the collaboration of COMESA and the SADC.
……………………
COMESA joined forces with the South African Development Community and the Eastern African
Development Community to establish a Tripartite Free Trade Area, i.e. a single market for 26 African
countries.
.. Aim of the collaboration
It aims to bolster intra-regional trade by creating a wider market, increase investment flows, enhance
competitiveness and encourage regional infrastructure development as well as pioneer the integration of the
African continent.
Both COMESA and SADC offer opportunities for member countries to gain policy credibility for trade
reforms and tariff liberalization and to address structural weaknesses.
.. Acceptable goods from Member states
COMESA and SADC treaties provide that goods shall be accepted to be eligible for preferential treatment if
they originate in Member states.
(a)
The goods are wholly produced in a Member State (that is, no raw materials from outside the regions
have been used in their manufacture, or
(b)
Goods produced in a member state and the CIF value of any foreign (that is non COMESA or SADC)
materials used does not exceed 60% of the total cost of all materials used in the production, or
(c)
Goods produced in a member state whose value added resulting from the process of production
accounts for at least 35% of the ex-factory cost of goods, or
(d)
Goods produced in a member state designated in a list by the Council to be of particular importance
to the economic development of the member state and containing not less than 25% value added
notwithstanding the provision explained in point (2) above,
(e)
Goods which, in the process of manufacture, have become reclassified under a different tariff heading
from the one under which they were originally imported, where some raw materials are imported.
.. Goods from non-Member states
For goods to be admitted into the COMESA or SADC Member State as originating in another Member State,
the importer/exporter of the goods concerned must present to the customs Authority alongside with a Bill
of Entry, a certificate of origin duly completed and signed in the exporting Member State and certified by
designated certifying authority of the Member State. The application of the COMESA Protocol between
member States is on reciprocal basis.
219
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Goods shall be accepted as originating from member states if they are consigned directly from another
member state and comply with one of the following five origin conferring criteria:
.. Rules of Origin
The purpose of the above Rules of Origin are:
(a)
To distinguish between goods sufficiently processed in the region and goods of other Countries
merely being trans-shipped through or undergoing only minor processing in COMESA. In the absence
of well-defined Rules of Origin, there is a danger that goods will enter the COMESA FTA through a low
tariff member and then pass duty free into the market of a higher tariff member. Rules of Origin are a
guard against trade deflection.
(b)
To promote economic growth and development by encouraging trade in goods that have undergone
sufficient processing within the region. Processing within the region contributes, among other things,
to creating or sustaining employment in the region and to improving the competitiveness of regional
producers.
(c)
To give equal treatment in terms of market access to goods produced in any part of the region
thereby encouraging intra-regional cross-border investment.
(d)
To enhance foreign direct investment into the region as they offer an incentive for foreign
manufacturers to localize their operations within the region.
(e)
To enable producers to source raw materials and other production inputs from the most
competitive sources within the region thereby encouraging efficient and competitive manufacturing
activities.
(f)
To define the origin of goods for the purpose of such matters as trade statistics and import quotas.
They also help in the implementation of measures and instruments of commercial policy such as antidumping duties and safeguard measures.
.. Trade facilitation
In order to reduce the cumbersome, time-consuming and costly procedures that are faced by the business
community in the conduct of international trade, COMESA has adopted and implemented a number of
measures on the simplification and harmonization of trade documents and customs procedures.
Some of the key trade facilitation mechanisms in use include the following:
(a)
The Harmonized Commodity Description Coding System
Member States adopted the Harmonized Commodity Description and Coding System (HS). Apart from
providing a practical approach for integrating customs tariffs and trade statistics classifications to
avoid re-coding in compiling statistics, the adoption of the Harmonized System also provided the basis
for the development and eventual establishment of a common external tariff and a common tariff
classification.
(b)
Common Valuation System
Member States have undertaken to 'adopt' a standard system of valuation of goods based on the
principles of equity, uniformity and simplicity of application in accordance with internationally
accepted standards and guidelines.
(c)
COMESA Customs Declaration Document (COMESA-CD)
The COMESA-CD is an integral part of the COMESA Trade and Transit Transport Facilitation
Programme. The document was adopted in 1997 to replace the Road Customs Transit Declaration
Document (RCTD) which had been used under the PTA from 1985. The RCTD had replaced a
multiplicity of customs bills of entry and related documentation which had led to delays in the
clearing of goods through customs.
The COMESA-CD is implemented as part of customs modernization and automation requirements.
The document caters for imports, exports, transit and warehousing. Hence, it is no longer necessary
for freight forwarders, importers, exporters and other users to raise different documents for specific
customs transactions.
220
(d)
COMESA Customs Bond Guarantee Scheme
COMESA introduced in 1990 a Customs Bond Guarantee Scheme to facilitate transit traffic by
eliminating the avoidable administrative and financial costs that are associated with the practice of
nationally executed customs bond guarantees for transit traffic. The scheme enables transit operators
to execute bonds from Countries where they are based to guarantee customs duties on transit goods
in other COMESA Countries through which the goods may pass. The system saves foreign exchange
and does away with the cumbersome procedures of entering separate customs bonds in every transit
Country.
(e)
COMESA Carrier's License
The COMESA Carrier's License was introduced in 1991. This allows commercial goods vehicles to be
permitted, with one license which is valid throughout the region, to operate in all member States.
This means that vehicles can pick up back-loads in other Countries which makes more efficient use of
the region's transport fleet, thereby reducing the cost of trade.
(f)
COMESA Yellow Card Scheme
The COMESA Yellow Card is a motor vehicle insurance scheme which covers third-party liabilities and
medical expenses, with a Yellow Card issued in one COMESA Country which is valid in all other
Countries participating in the scheme.
(g)
Advance Cargo Information System
The Advance Cargo Information System (ACIS), is an integrated transport logistics management tool for
tracking transport equipment and cargo on railways (Rail Tracker), through ports (Port Tracker), on roads
(Road Tracker) and on lakes (Lake Tracker). The fifth component, the Backbone Information System (BIS)
links the modal tracking systems to form a regional tracking system.
Implementation of ACIS helps the business community and transport operators to track movements
of transport equipment and cargo throughout the COMESA region and enables COMESA to generate
statistics on the movement of freight on a regional basis. These statistics are of use to planners and
policy makers, at institutional, national and regional levels.
Automated System of Customs Data and Management (ASYCUDA)
COMESA also introduced the Automated Systems for Customs Data (ASYCUDA) for computerization of
customs and international trade statistics. The implementation of ASYCUDA has enabled Customs
administrations to facilitate trade within and outside COMESA without compromising the objective of
maximizing revenues as ASYCUDA enhances the capacity of customs to compute and collect the
correct amount of revenue for each transaction; perform risk analysis for specific commodities
including profiles of importers, control and monitor the movement of transit goods; and reduce the
time required to clear goods.
.. Benefit of regional agreements
The benefits of regional agreements include:
(a)
More secure access to major export markets and improvement of that access through the
opportunity to negotiate elimination of lingering tariff peaks and other serious barriers in sectors
where the region has a strong comparative advantage, e.g. agriculture.
(b)
Given that regional agreements incorporate a spectrum of comparative advantage that reflects the
world economy, they help to reduce the threats of trade and investment diversion which can be
exceptionally costly for the smaller member economies.
(c)
Empirical studies have shown that regional agreements are an important magnet for attracting
foreign direct investment, especially from the industrialized member of a new agreement.
221
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(h)
(d)
They can serve as an anchor for structural reforms by adding credibility and locking-in policy
commitments as well as directly and indirectly promoting institutional modernisations such as
transparent dispute settlement, more efficient regulatory frameworks, business facilitation and
effective customs procedures, etc.
(e)
Regional agreements can also be the handmaiden of broader cooperation between Countries of
differing industrial capacities.
……………………
The collaboration of COMESA and the SADC provides further assistance to intra-regional trade.
……………………
. Indirect taxes on overseas operations
……………………
In this section we discuss indirect taxes on overseas operations.
……………………
..
VAT on overseas operations
The following VAT issues must be considered when dealing with overseas customers and suppliers.
... Reverse Tax
Reverse Tax, also known as Reverse VAT, is a transfer of liability to account for and pay VAT on imported
services from the person making the supply (i.e. the supplier) to the person receiving the supply (i.e. the
recipient).
It is levied on all imported services provided by a non-resident supplier where a tax agent (see below) has
not been appointed.
A service will be considered imported if it is:
(a)
Performed or undertaken in Zambia.
(b)
Utilised (or if the benefit of its supply is for a recipient) in Zambia regardless of where it is performed.
The recipient of an imported service must raise a tax invoice based on the value of the service received from
a non-resident supplier. The value of the service is the taxable value on which VAT at 16% is to be added and
declared as output VAT on the return.
The reverse charge cannot be claimed back as input tax.
The tax point for Reverse VAT is the earliest of the following events:
(a)
(b)
(c)
Time when a payment is made.
Time when an invoice is received from the supplier.
Time when the services are actually rendered or performed.
Reverse VAT can be avoided by the non-resident supplier appointing an independent tax agent who will act
on their behalf in invoicing the recipient of the service in Zambia.
The tax agent takes on any tax obligations of the non-resident supplier (other than any obligations that
existed before his appointment).
The tax agent will charge the non-resident supplier agency fees that will attract VAT at 16% for the services.
This VAT will not be eligible as input tax on the return raised on behalf of the non-resident supplier.
222
... Export of goods
The export of taxable goods is zero rated for VAT purposes.
The goods must be supplied/sold direct to a business abroad and the exportation of the goods made by or on
behalf of the supplier.
There must be proof of exportation which will include:
(a)
(b)
(c)
(d)
Commercial invoices
Certified copies of documents presented to Zambian Customs at exportation
Certified copies of customs import at the country of destination
Proof of payment (settlement) if applicable.
The value for customs purposes of exported goods from Zambia is the free on board price at the place of
dispatch or customs port of shipment.
..
Customs and excise duty on overseas operations
Commercial consignments can only be exported after completion of the relevant customs forms.
Certificates of origin are required for exports into member countries that have ratified particular preferential
trade agreements with Zambia.
……………………
Reverse VAT is a transfer of liability to account for and pay Value Added Tax on imported services from
the person making the supply to the person receiving the supply.
The export of goods is zero rated for VAT purposes.
Commercial consignments can only be exported after completion of the relevant customs forms.
……………………
. Double taxation conventions and the OECD model
……………………
In this section we examine how individuals and companies can avoid being taxed twice in different
countries on the same income.
Income that is chargeable to income tax in Zambia is the gross amount of foreign income received. If the
income also suffered tax in the foreign country there is 'double taxation'.
A relief known as double taxation relief is given to eliminate the effects of double taxation where income
that has suffered tax in one country is also subjected to tax in another country.
The Organisation for Economic Cooperation and Development (OECD) has developed a model double
taxation convention which may be used to determine how double taxation is avoided. Countries may refer to
the model double taxation convention when making their own double taxation agreements.
The main principles of the model convention are as follows:
(a)
Total exemption from tax is given in the country where income arises in the hands of certain persons
such as visiting diplomats and teachers on exchange programmes.
(b)
Preferential rates of withholding tax are applied to payments of investment income whereby the
usual rate would be replaced by the rate of 15% or less.
(c)
Double taxation relief is given to taxpayers in their country of residence by way of a credit for tax
suffered in the country where income arises. This may be in the form of relief for withholding tax only
or for underlying tax on profits out of which a dividend is paid as well.
(d)
There is exchange of information so that tax evaders can be pursued internationally.
223
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
(e)
There are rules to determine a person's residence and to prevent dual residency.
(f)
There are rules which render certain profits taxable in only one country of the two contracting
countries.
(g)
There is a non-discrimination clause so that a country does not tax foreigners more heavily than its
own nationals.
……………………
Relief is given for tax that has been charged in one country when it is also taxed in a second.
……………………
. Double taxation relief (DTR)
……………………
In this section we look at the ways in which double taxation relief can be given.
……………………
The three main ways in which double taxation relief may be given to both Zambian resident individuals and
companies are as follows.
.. Treaty relief
A double taxation agreement may provide for full recovery of any foreign tax covered by the agreement, by
means of a tax credit to a Zambian resident individual, against the Zambian income tax, as long as the relief
does not exceed the equivalent Zambian tax charge.
Treaty relief is available in cases where the President of the Republic of Zambia has entered into such an
agreement with the foreign countries.
Where there is a treaty, then DTR is given according to the provisions of that treaty. In some cases, the
treaty may provide that income is only charged to income tax in one of the two countries, or income is
charged to tax in one country, with the tax being apportioned between the two countries.
Treaty relief does not exist in all cases as the President of the Republic of Zambia has not entered into
treaties with all the countries from which Zambian residents may derive income.
.. Unilateral relief (unilateral credit relief)
This applies where there is no treaty relief. Relief is given for foreign tax unilaterally in the Republic of
Zambia. Under this relief, the amount of foreign tax suffered is credited against Zambian income tax on the
foreign income, limited to a maximum of the Zambian tax on that foreign income.
As a result, the amount of foreign tax available for credit is the lower of:
(a)
(b)
The actual amount of foreign tax paid to foreign tax authorities, and
The Zambian tax chargeable on the foreign income calculated using the formula:
Gross amount of foreign income
 Zambian tax charge
Total assessable income
.. Unilateral expense relief
An alternative to credit relief where treaty relief is not available, is expense relief whereby the foreign tax is
deducted from the foreign income, as if it were an expense, before including it in the Zambian tax
computation. In other words, the amount of foreign income net of foreign taxes paid, is charged to income
tax in Zambia.
224
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Usually credit relief is more beneficial as it provides higher relief. However, the expense relief method of
giving double taxation relief is a good choice where the individual or company has no tax charge against
which to set a DTR credit. This will, for example, increase the amount of any loss.
225
EXAMPLE
Double taxation relief
Kapalamoto is ordinarily resident in Zambia. In the tax year 2019, he earned emoluments of K125,000 from
employment in Zambia. He did not pay any pension scheme contributions as he is over the normal
retirement age provided for in Zambia. In addition, he also received the following income from foreign
sources:
K
28,500
32,750
9,450
Dividends from WTM Inc, a company resident in a country called Zumbu
Rent from letting property in Zumbu
Interest from savings with a Zumbu bank
All of the amounts of foreign income are net of withholding tax charged by the tax authorities in Zumbu. The
rate of withholding tax on dividends and rent is 20% while that on interest is 10%.
There is no double taxation treaty between Zambia and Zumbu. Double taxation relief is given in Zambia
unilaterally.
Required
SOLUTION
Calculate the income tax paid by Kapalamoto in the tax year 2019.
Note. In this example, Kapalamoto is ordinarily resident in Zambia and he has received income from both
Zambian sources and foreign sources. The emoluments from employment in Zambia are chargeable under
the Pay As You Earn system and income tax will have been deducted and paid accordingly. However, the
question asks for the calculation of income tax paid and not income tax still to be paid by Kapalamoto.
Foreign dividends and foreign interest are taxable in Zambia with the taxable amounts being the gross
amounts. Foreign rent is specifically exempt from Zambian income tax.
The appropriate amount of double taxation relief will be computed and deducted from the total income tax
liability to arrive at the income tax paid in total for the tax year 2019.
The personal income tax computation is now set out below.
KAPALAMOTO
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
K
Emoluments from employment
Foreign income
Dividends (K28,500  100/80)
Interest (K9,450  100/90)
Total foreign income
Less tax free income
Income tax
K9,600  25%
K25,200  30%
K96,725  37.5%
Less double taxation relief (W)
Income tax paid
226
K
125,000
35,625
10,500
46,125
171,125
(39,600)
131,525
2,400
7,560
36,272
46,232
(8,175)
38,057
Working
Double taxation relief is the lower of:
(a)
Foreign tax paid calculated as follows:
On dividend (K35,625  20%)
On interest (K10,500  10%)
(b)
K
7,125
1,050
8,175
Zambian tax on the foreign income calculated as follows:
Zambian tax =
Gross amount of foreign income
 Zambian tax charge
Total assessable income
On dividend
Zambian tax =
35,625
 46,232 = K9,625
171,125
Therefore, DTR is the lower figure; in this case the foreign tax of K7,125.
On interest
Zambian tax =
10,500
 46,232 = K2,837
171,125
Therefore, DTR is the lower figure; in this case the foreign tax of K1,050.
Actual foreign tax paid is lower than the Zambian tax charged on the foreign income. The amount of double
taxation relief is therefore K8,175.
……………………
Double taxation relief is given to eliminate or mitigate the effects of double taxation. It can be given
using treaty relief where an agreement exists between Zambia and the overseas country, or by unilateral
credit or expense relief where there is no agreement in place.
. Transfer pricing and thin capitalisation
……………………
Multinational companies, i.e. companies that operate in more than one country, often use tax planning
to help reduce their tax liabilities in the different locations. However, when such companies use tax
avoidance methods the Zambian Government uses the rules on transfer pricing and thin capitalisation to
reduce their ability to manipulate profits and reduce their tax liabilities.
……………………
.. Multinational companies
Multinational companies have the flexibility to have companies and activities throughout the world. They
often transfer goods and services within their own multinational corporate group in 'intra-group
transactions', taking advantage of group-driven forces and tax reliefs available for such groups. This provides
an advantage over smaller independent companies, which instead must rely solely on market forces.
Where the Zambian Government feels that such treatment is unfair or result in tax avoidance, it can use the
transfer pricing and thin capitalisation anti-avoidance rules to ensure a more even playing field.
227
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
.. Transfer pricing
Multinational companies normally produce goods in one country which they transfer for sale to other
countries. The price at which such goods should be transferred from where they are produced to where they
are sold is the transfer price. Such companies would be able to manipulate the transfer price so that profits
arise in a country where the rates of taxation are lower so that the overall tax liability of the group is
minimised.
The transfer pricing rules prevent a company from transferring goods out of a country at a price that is lower
than the market price of those goods. As such, when a Zambian company is required to transfer goods
produced in Zambia to a company that is resident abroad, then the transfer price should be equal to at least
the market value of the goods. Similarly, when a Zambian resident company makes a loan to a foreign
related company, it must charge interest on that loan at a commercial rate.
When transfer prices are lower than the actual market values of the goods being transferred, then the profit
element must be added when calculating the taxable profits. Similarly, when loan interest is charged at less
than the commercial lending rate, the company receiving the loan interest is deemed to have received
interest at the commercial rate.
.. Thin capitalisation
Internationally, most tax jurisdictions provide that taxable income may be reduced by amounts paid as
interest on loans. By contrast, most do not provide tax relief for distributions to owners made to
shareholders by way of dividends. As a result, multinational enterprises are motivated to finance their
foreign subsidiary companies through loans rather than share capital. When the subsidiary is financed
heavily by debt finance, its taxable profits would be substantially reduced by interest payments.
To prevent huge reductions of taxable profits by way of interest deductions, thin capitalisation rules apply.
These rules limit the amount of interest that would be allowed as a deduction when computing taxable
business profits. This is done by not allowing as an expense the amount of interest paid when the company's
Debt to Equity ratio exceeds a certain limit.
As we saw earlier in this Study Manual, some Zambian mining companies are subsidiary companies of foreign
companies, which often finance the subsidiaries through high levels of debt. Interest paid by such a company
is allowed as an expense only where the Debt to Equity ratio is less than 3 to 1. When debt is excessive, then
interest on the excessive debt is not an allowable expense.
……………………
International tax avoidance by multinational companies is prevented through the application of thin
capitalisation and transfer pricing rules.
……………………
. International tax avoidance
……………………
International tax avoidance by multinational companies is prevented through the application of thin
capitalisation and transfer pricing rules.
……………………
As we have seen, multinational companies attempt to avoid tax through the use of excessive debt to finance
their foreign subsidiaries and use transfer pricing policies to transfer taxable profits to countries where the
rates of taxation on profits are lower.
Multinational companies no longer find it easy to avoid taxation in this way. The principles of thin
capitalisation prevent tax avoidance by limiting the Debt to Equity ratio to some standard proportion on
which interest paid would be allowed as an expense for taxation purposes. Similarly, transfer pricing rules
require that the transfer prices should be equal to the market values of the goods being transferred.
228
Further provisions exist in other countries that require that profits of certain foreign subsidiaries should be
taxable in the country of residence of the holding company. Such provisions are incorporated in the tax
legislation of the countries where the holding companies are resident.
EXAMPLE
Controlled foreign companies' legislation (UK)
Under this legislation, the profits of a company that is resident in a country where tax rates are low, but
controlled by United Kingdom residents, should be apportioned between the United Kingdom resident
shareholders according to their shareholdings, and taxed on them. The company that is resident outside the
United Kingdom is a controlled foreign company if it is controlled by United Kingdom residents.
This legislation does not apply in Zambia, although it may be required in order to prevent Zambian
companies from avoiding tax internationally by investing abroad in countries where taxes are lower.
(a)
Describe the three types of double taxation relief and explain when each one of them applies
(b)
Josephine was born in Zambia on 1 June 1971 and had always lived here until 31 December 2017
when she left Zambia for the United States. She took up employment with a US multinational
corporation that has a permanent establishment in Zambia. The contract of employment was for a
period of 18 months ending 30 June 2019.
She worked in the US at an annual salary of K240,000 payable to her in US dollars through a US bank.
Average annual amounts of US income tax on the annual salary amounted to K38,500. None of the
amounts were paid into a Zambian Bank. Upon the expiry of her contract on 30 June 2019, she
received a gratuity of K300,000 US income tax of K49,500 was paid out of this gratuity. The gratuity
was credited to her Zambian Bank account on 31 July 2019, net of US income tax.
On 1 August 2019, Josephine took up employment with ZTX Ltd, a Zambian company, at an annual
salary of K220,000 as well as the following annual allowances:
K
Housing allowance
28,000
Entertainment allowance
15,500
Income tax paid on the emoluments from employment with ZTX Ltd for 2019 was K50,000.
Required
(i)
Explain whether Josephine would be regarded as being resident and ordinarily resident in
Zambia for each of the tax years 2017, 2018 and 2019.
(ii)
Assuming that under the double taxation treaty between Zambia and the US, US emoluments,
net of US income tax, are chargeable to Zambian income tax at the rate of 3.75%, calculate the
final amount of income tax payable by Josephine for the tax year 2019.
(iii)
Advise Josephine as to how her tax position would have been for the tax year 2019, if she had
received her US salary through her Zambian bank.
……………………
Other countries have tax avoidance rules which the Zambian Government may implement in the future.
……………………
229
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
QUESTION
8.1 Double taxation relief
Chapter Roundup
230

Zambian residents are taxed on their worldwide income, while non-residents are only taxed on certain
Zambian source income.

Income received from foreign sources by Zambian resident individuals is chargeable to income tax in Zambia,
unless it is rent.

Non-resident individuals are only taxable on income with Zambian sources.

Withholding tax applies to foreign interest and dividends received by Zambian resident companies.

Non-resident companies are taxable if they have a permanent establishment in a country.

COMESA is a programme of cooperation which aims to remove of all physical, technical, fiscal and monetary
barriers to intra-regional trade, providing free trade areas for its 19 member states..

The collaboration of COMESA and the SADC provides further assistance to intra-regional trade.

Reverse VAT is a transfer of liability to account for and pay Value Added Tax on imported services from the
person making the supply to the person receiving the supply.

The export of goods is zero rated for VAT purposes.

Commercial consignments can only be exported after completion of the relevant customs forms.

Relief is given for tax that has been charged in one country when it is also taxed in a second.

Double taxation relief is given to eliminate or mitigate the effects of double taxation. It can be given using
treaty relief where an agreement exists between Zambia and the overseas country, or by unilateral credit or
expense relief where there is no agreement in place.

International tax avoidance by multinational companies is prevented through the application of thin
capitalisation and transfer pricing rules.

Other countries have tax avoidance rules which the Zambian Government may implement in the future.
1
What are three main methods of giving double taxation relief?
2
Is rent received from foreign sources chargeable to or exempt from Zambian income tax?
3
What does the term 'permanent establishment' mean?
4
What is Reverse Tax?
5
What is the tax point for Reverse VAT?
6
What are the rules on thin capitalisation designed to prevent?
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Quick Quiz
231
Answers to Quick Quiz
232
1
Treaty relief, Unilateral relief (unilateral credit relief), Unilateral expense relief
2
Rent received from foreign sources is exempt from Zambian income tax.
3
Broadly, a permanent establishment is a fixed place of business through which the activities of an enterprise
are wholly or partly carried on. However, certain activities are excluded for this purpose.
4
Reverse VAT is a transfer of liability to account for and pay VAT on imported services from the person making
the supply to the person receiving the supply.
5
The tax point for Reverse VAT is the earliest of the time when a payment is made, the time when an invoice
is received from the supplier and the time when the services are actually rendered or performed.
6
Companies reducing their exposure to tax through interest deductions from excessive debt finance.
Answer to Question
8.1 Double taxation relief
(a)
Where the same income is taxable in the Republic of Zambia as well as overseas, then double taxation relief
may be available.
Double taxation relief for foreign tax suffered may be available in one the following ways:
(i)
Treaty relief
A double taxation agreement may provide for full recovery of any foreign tax covered by the
agreement, by means of a tax credit to a Zambian resident taxpayer, against the Zambian tax liability,
as long as the relief does not exceed the equivalent Zambian tax charge.
This form of double taxation relief is only available if there is an agreement in force made between
Zambia and a foreign country.
(ii)
Unilateral credit relief
Relief is given for foreign tax unilaterally in the Republic of Zambia. The relief is given by deducting
from the Zambian income tax, the lower amount of the foreign tax paid that is attributed to Zambian
income and the Zambian income tax payable on that source.
This applies where there is no treaty relief because Zambia has not signed an agreement with the
foreign country involved.
(iii)
Unilateral expense relief
Relief is given by deducting the foreign tax from the foreign income before including it in the Zambian
income tax computation.
This relief applies where there is no treaty in place and using credit relief is not beneficial.
Josephine
(i)
Income tax is chargeable on the income of persons who are resident and ordinarily resident in
Zambia.
For this purpose, an individual is resident in Zambia in any tax year when he or she is physically
present in Zambia for a period of at least 183 days. An individual who normally lives in Zambia in the
normal course of their life is ordinarily resident in Zambia for tax purposes.
For the tax year 2017, Josephine will be regarded as having been resident in Zambia since she was
physically present in Zambia for at least 183 days between 1 January 2017 to 31 December 2017.
Josephine will not be treated as having been resident in Zambia for the tax year 2018 as she was not
physically present in Zambia for at least 183 days in the tax year.
For the tax year 2019, Josephine will be regarded as being resident as her period of physically staying
in Zambia would be of at least 183 days.
As Josephine will have gone to the US with an intention of coming back to Zambia upon the expiry of
her employment contract, she will remain ordinarily resident in Zambia for all the three tax years
2017, 2018 and 2019.
233
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(b)
(ii)
JOSEPHINE
PERSONAL INCOME TAX COMPUTATION FOR THE TAX YEAR 2019
K
Zambian emoluments:
Salary (5/12  K220,000)
Housing allowance (5/12  K28,000)
Entertainment allowance (5/12  K15,500)
Less tax free amount
91,667
11,667
6,458
109,792
(39,600)
70,192
Income tax
25%  K9,600
30%  K25,200
37.5%  K35,392
Tax on US emoluments:
Salary:
(K240,000 – K38.500)  6/12  3.75%
Gratuity
(K300,000 – K49.500)  3.75%
Less Zambian PAYE
Income tax payable/(repayable)
(iii)
234
2,400
7,560
13,272
23,232
3,778
9,394
36,404
(50,000)
(13,596)
Josephine still remains ordinarily resident in Zambia. As she is domiciled in Zambia, income arising
from sources from all over the world is chargeable on her where applicable, subject to double
taxation relief. This would be all her foreign income that would be deemed to have arisen from
Zambian sources. As such, the position would still be the same as it is when the payments were made
through US banks.
TAX AUDITS AND INVESTIGATIONS
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
A tax audit (Revenue audit) is different from other forms of business audit which serve to increase reliance
on the financial systems or the operational controls of a company. It may include an examination of a tax
return, a declaration of liability or a repayment claim, a statement of liability to stamp duty, or the
compliance of a business with tax and duty legislation. In this chapter we look at how tax audits and
investigations are carried out.
syllabus references
1 Introduction to tax audits
2A(i)
2 Incomplete taxpayer records
2A(iv)
3 Basis of accounting, ratio analysis and preliminary review of financial
statements
2A(ii)
4 Uncovering hidden income
2A(v)
5 Perpetual tax loss position
2A(vi)
6 Types of tax defaults
2A
7 Taxpayer disclosure options
2A
235
LEARNING OBJECTIVES

Explain the approaches to carrying out tax audit and investigations, and explain appropriate tax investigation
methods, dealing specifically with:
(i)
(ii
(iii)
(iv)
(v)
(vi)
Introduction to tax audits
Basis of accounting, ratio analysis and preliminary review of financial statements
The statement of financial position/balance sheet
Incomplete records of taxpayers
Uncovering hidden income
Perpetual tax loss position and loss harvesting (2A)
. Introduction to tax audits
……………………
In this section we look at the tax audit.
……………………
A TAX AUDIT is the examination of a tax return, a declaration of liability or a repayment claim, a statement of
liability to stamp duty, or the compliance of a business with tax and duty legislation. A tax audit may also be
referred to as a Revenue audit.
The intention is to establish the correct level of tax liability.
Any chargeable person may be selected for audit. This includes persons who are subjected to income tax selfassessment (individuals and companies) as well as employers who account for employees' income tax under
the Pay As You Earn (PAYE) system, traders who are registered for Value Added Tax and all persons who may
be required to make a one-off tax payment because of having engaged in a taxable transaction. The most
common tax audits are the PAYE audit and the VAT audit.
A tax audit is not the same as a tax investigation, which is carried out due to some tax evasion or tax fraud
that has been reported in connection with a taxpayer. A tax investigation would be carried out also where a
taxpayer carrying on a business consistently reports losses (see below).
A chargeable person may be selected for a tax audit randomly. Audit cases may also be selected based on a
particular economic sector. It may be possible to conduct a tax audit, for example on legal practitioners,
financial services sector, practising accountants, medical practitioners, or from risks identified using risk
analysis profiling methods.
A tax audit may be comprehensive and therefore examine compliance under a wide range of taxes which
persons may be liable to, or it may be restricted so that it examines compliance under a specific tax, such as
Pay As You Earn or Value Added Tax.
The tax audit will examine the books and records of the taxpayer to establish if there is any tax default and if
so, to reach a settlement with the taxpayer and ensure future compliance to the tax code.
A system of negotiation is in place to ensure that a fair amount of tax is agreed upon following the conduct
of an audit that reviews non-existence of proper accounting records from which reliable information could
be derived.
The audit may take the form of either:
(a)
A desk audit involves reviewing the accounting records and other records as well as any tax returns
already submitted by taxpayers.
(b)
A field audit would involve a visit at the premises of the taxpayer in order to obtain further
knowledge relating to the business being conducted by the taxpayer.
The two types of audit would normally corroborate one another.
236
The Customer Service Charter sets out how the taxpayer can expect to be treated by ZRA and, similarly, the
ZRA's expectations from the taxpayer. The taxpayer has the right to seek a review of the conduct of the
audit. If the taxpayer still considers that the proposed settlement is unacceptable, they may formally appeal
to the Taxation Appeals Tribunal.
During the course of an audit, the auditor may suspect that serious tax offences have occurred and can
reconstitute the audit as an investigation. In this case, the auditor's powers are enhanced and include access
to a business premises without a search warrant to inspect documents, remove business records and seek
further documentation.
……………………
A tax audit enables the Commissioner General to be assured that the correct amounts of taxes are being
collected from taxpayers.
……………………
. Incomplete taxpayer records
……………………
In this section we look at the situation where there are incomplete taxpayer records.
……………………
Taxpayers will often argue that they have no records of account. Sometimes, they say the accounting records
have been stolen by their previous cashier, or they have been destroyed. In such cases, there may appear to
be no basis for making as assessment.
An estimated assessment would be used in such a case. When making the estimated assessment, the
taxpayer's lifestyle may act as the basis. Only persons with income of a certain level may be able to afford
certain types of lifestyle, not everybody.
It may be necessary to constitute a statement of financial position based on the existing non-current assets,
inventories and some information obtained about money owing to suppliers. Using financial ratios, a
statement of profit or loss and other comprehensive income and statement of cash flows may be derived.
It may also be possible to uncover some income which a taxpayer would not have voluntarily disclosed
during an interview.
Where there are no accounting records, or where the available accounting records are inadequate, an
estimated assessment may be made.
……………………
. Basis of accounting, ratio analysis and preliminary review of
financial statements
……………………
In this section we look at how analysis of financial statements can help in determining risk areas for tax
audits.
……………………
Preliminary review of financial statements involves reviewing financial statements to obtain basic
information about the financial performance, position and cash flows of a taxpayer as well as analytical
review of the taxpayer's performances using ratio analysis to obtain an understanding of the nature of the
taxpayer's business and highlighting risk areas for the tax audit exercise to determine areas of tax audit
focus.
237
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
This exercise can also help determine the appropriate tax audit strategies to be adopted which include,
recommendation of the audit approach, allocation of time to be spent , level of experience and technical
skills required etc.
Ratio analysis can further be used to make a determination of the tax liability of a taxpayer when the actual
development of a case leads the tax auditor to the conclusion that a taxpayer's return and supporting books
and records do not accurately reflect the total taxable income received or the auditor has established a
reasonable likelihood of unreported income.
When using ratio analysis, industry benchmarks, business standards, and profiles will be useful tools in
ascertaining the reasonableness of a taxpayer's declaration, performing risk assessment and in negotiations
with taxpayers.
Industry benchmarks for tax audit purposes are used on the basis of the principle that businesses of
comparable size and nature should have similar financial performance. Using the benchmarks will
therefore, assist the auditor in planning the audit and determining whether the taxpayer's figures are
reasonable or whether there is a need to undertake further work to establish evidence of understatements
thus enabling the tax auditors gauge the extent of compliance or potential evasion.
The following categories of ratios may be computed:
(a)
Profitability ratios such as the gross profit margin, net profit margin, return on investment or capital
employed, ratio of tax assessed to net profits etc. may be used to assess the taxpayer's ability
generate taxable profits.
(b)
Liquidity ratios such as the current ratio, acid test (quick) ratio, working capital ratio etc. can be used
to assess the taxpayer's ability to meet his obligations.
(c)
Efficiency ratios such as accounts receivables collection period, inventory turnover period, payables
payment period, working capital ratio etc. can be used to assess the taxpayer's effectiveness in using
his or her assets.
(d)
Capital structure ratios such as the gearing ratio, debt to equity ratio, interest cover etc. may be used to
measure the balance between the resources provided by lenders and owners of the company.
……………………
Ratio analysis helps to determine whether a taxpayer is compliant or potentially involved in tax evasion.
……………………
. Uncovering hidden income
……………………
Taxpayers may not always report all of their income. It is up to the auditor to uncover any hidden income.
……………………
When conducting an audit, the auditor should consider all possible sources of information as well as the fact
that not all sources may have been revealed by the taxpayer. In order to uncover any hidden income they
may need to consider third parties who have dealings with the taxpayer.
The auditor can request:
(a)
The taxpayer to provide a statement of affairs setting out all of their assets and liabilities on a
specified date.
(b)
Third parties, such as suppliers and customers, to deliver or to make available for inspection any
books and records or information and explanations in relation to a taxpayer that may be relevant to
the taxpayer's liability to tax.
(c)
Financial institutions to make available details of accounts and financial transactions, which may be
material in determining the taxpayer's liability.
The auditor should ensure that:
238
(a)
The taxpayer's accounts and records will be reviewed in sufficient depth to reach a supportable
conclusion regarding all items of a material tax consequence.
(b)
Appropriate income tests will be performed where necessary to ensure the proper and complete
reporting of income regardless of the source.
(c)
The responsibilities of the taxpayer regarding the filing of all tax returns have been ascertained.
(d)
The conclusions expressed are documented in sufficient detail to enable the reader to comprehend
the process used to arrive at such conclusions.
The auditor would normally seek to:
(a)
Ascertain the nature of the business, identify those responsible for maintenance of the records and
list the records kept.
(b)
Examine the books and records, in whatever format held, both for completeness and the treatment
of transactions having regard to tax and accounting principles. Either the cash basis or the accruals
basis of accounting may be used by taxpayers.
(c)
Check that all relevant returns have been made and are complete in accordance with the records.
(d)
Make whatever enquiries are necessary for the audit.
(e)
Advise the taxpayer of any errors, omissions or irregularities in the tax returns submitted (including
those in the taxpayer's favour), determine liability if it arises, request settlement and specify any
action that may be required to place the taxpayer on a compliant footing.
(f)
Conduct a physical and documentary walkthrough of premises to verify ongoing compliance with
criteria or conditions laid down in authorisation for certain customs procedures.
……………………
An auditor may need to uncover hidden income that the taxpayer has not reported.
……………………
. Perpetual tax loss position
……………………
……………………
Tax losses are caused by a number of factors, such as a business posting a normal business loss, the total of
non-tax deductible items being lower than the loss as per accounts thus resulting in a tax loss when making
adjustments for tax purposes, or deductible items such as capital allowances pushing a company into a tax
loss position.
Under the Income Tax Act, when a business incurs a tax loss, that loss is carried forward and set off against
the first available profits of the company arising from the same source as that which produced the loss. That
loss can be carried forward for a maximum of five years.
This may result in business not declaring any taxable profits for a number of years in such cases. There are no
specific rules under the Income Tax Act on how often a business may declare a tax loss, but where a
taxpayer carrying on a business consistently reports tax losses, this may be taken as an indicator of
possible abuse of tax loss relief and tax evasion, as on financial grounds, a business that is in position of
perpetual loss would not be a going concern.
……………………
A business with perpetual losses would not be a going concern so the taxpayer may be denied loss relief.
……………………
239
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
In this section we look at the situation of a taxpayer with tax losses.
. Types of tax defaults
……………………
In this section we look at the different types of tax defaults that may be discovered during tax audits and
investigations.
……………………
There are many types of tax defaults that could be uncovered after an audit has been completed. The main
categories into which tax defaults could fall are as follows.
.. Deliberate behaviour
In general, deliberate behaviour involves a breach of a tax obligation where there is intent on the part of the
taxpayer and so does not qualify as careless behaviour. Examples of deliberate behaviour include failure to
maintain books and records, omission of transactions from the books and records, providing false or
misleading information.
.. Careless behaviour with significant consequences
Careless may be defined as a failure to take reasonable care. Significant consequences applies where the tax
underpaid is significant with reference to the correct tax payable for the relevant period. Examples of
careless behaviour include failure to take advice, neglecting to categorise expenditure into allowable and
disallowable categories for tax purposes, insufficient standard of record keeping in the business and so on.
.. Careless behaviour without significant consequences
This category relates to defaults of a minor nature that are discovered during a tax audit, for example,
computational errors and inadequate adjustments for personal expenditure in the statement of profit or loss
and other comprehensive income. This category arises where the tax underpaid is not significant with
reference to the amount of tax liability ultimately due.
……………………
Taxpayers may default in some way and the main types of tax default include: deliberate behaviour,
careless behaviour with significant consequences and careless behaviour without significant
consequences.
……………………
. Taxpayer disclosure options
……………………
On discovery of an error there are a number of different options available to a taxpayer. These are
discussed in the section below.
……………………
Where a taxpayer has identified an error in their returns, there are a number of options available to them to
regularise this. They can self-correct without incurring a penalty within a specified timeframe. For income
tax, the self-correction must take place within six years following the date when the return was due for
submission.
The taxpayer must apply in writing to the Commissioner General setting out the adjustment to be made,
attaching a corrected computation of the tax liability and enclosing payment of tax, plus statutory interest.
This option is not available if the taxpayer has already been notified of a tax audit or investigation.
Alternatively, the taxpayer may declare an innocent error. Where an auditor is satisfied that the
underpayment of tax arose through innocent error, no penalty will apply.
240
Similarly, a penalty will not apply to a technical adjustment, described as adjustments to a tax liability, arising
from differences in the interpretation or the application of legislation. The auditor must be satisfied that the
taxpayer had taken due care, and the treatment used was based on a reasonable interpretation of the law.
Where a taxpayer has not paid a tax liability which in future would be refunded, the Commissioner General
may decide not to collect this tax, or interest on this tax, where the taxpayer can prove that there is no loss
of revenue. This treatment is concessional and the Commissioner General is mandated to ensure the correct
operation of the tax so as to maintain the integrity. In determining whether to allow this concession, the
Commissioner General would consider the taxpayer's compliance record and level of co-operation with the
tax auditors.
……………………
A taxpayer may disclose errors and omission voluntarily and may reach an agreement with auditor as to
what amount of tax shall be payable. In case the taxpayer should correct the errors on a return, then any
under-paid tax together with statutory interest should accompany a revised return.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
241
Chapter Roundup
242

A tax audit enables the Commissioner General to be assured that the correct amounts of taxes are being
collected from taxpayers.

Where there are no accounting records, or where the available accounting records are inadequate, an
estimated assessment may be made.

Ratio analysis helps to determine whether a taxpayer is compliant or potentially involved in tax evasion.

An auditor may need to uncover hidden income that the taxpayer has not reported.

A business with perpetual losses would not be a going concern so the taxpayer may be denied loss relief.

Taxpayers may default in some way and the main types of tax default include: deliberate behaviour, careless
behaviour with significant consequences and careless behaviour without significant consequences.

A taxpayer may disclose errors and omission voluntarily and may reach an agreement with auditor as to what
amount of tax shall be payable. In case the taxpayer should correct the errors on a return, then any under
paid tax together with statutory interest should accompany a revised return.
1
Who may be the subject of a tax audit?
2
What techniques are used when the taxpayer claims they have insufficient records on which to form an
assessment?
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Quick Quiz
243
Answers to Quick Quiz
1
Any chargeable person.
2
An estimated assessment is used, based on available data whereby accountants reconstruct the financial
statements from currently available information, using financial ratios. The tax authorities may also make
assumptions as to level of income and tax liability based on the taxpayer's lifestyle, expenditure and so on.
TAXATION AND INVESTMENT POLICY
In this chapter we look at how governments use taxation and investment policy to bring about socially
desirable objectives. Incentives such as low rates of taxation or tax holidays can attract foreign investment
into Zambia and stimulate local industry, particularly mining, agriculture and manufacturing.
244
1C(i), 1C(iv)
2 Taxation of inward and outwards investments
1C(ii), 1C(iii)
3 Taxation incentives under the Zambia Development Agency Act
1C(iv)
4 Negotiating fiscal incentives with government
1C(v)
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
syllabus references
1 Types of business investment in Zambia
245
LEARNING OBJECTIVES

Evaluate the tax implications of the various investment opportunities and calculate the taxes payable,
dealing specifically with:
(i)
(ii)
(iii)
(iv)
(v)
Types of business investment in Zambia
Taxation of inward investments
Taxation of outward investments
Taxation incentives under the Zambia Development Agency Act
Negotiating fiscal incentives with government (1C)
. Types of business investment in Zambia
……………………
In this section we look at the different types of business investment opportunities available in Zambia
and the tax incentives available in each sector.
……………………
Prime growth sectors for investment are manufacturing, agriculture and agro-processing, tourism, and
mining. Others offering potential investment opportunities include construction, transportation, energy,
telecommunication and IT services. All of these investment opportunities have some form of taxation
incentives. The key taxation incentives in the main sectors are explained below.
.. Manufacturing
The manufacturing sector accounts for nearly 11% of Zambia's Gross Domestic Product (GDP) and has been
consistently growing.
The sector is one of the most attractive sectors for investment as it has all the vital required elements in
place such as raw materials, required labour force, abundant land and a good banking and financial system.
Measures have been put in place to support growth within the sector including the creation of Multi-Facility
Economic Zones (MFEZs), credit provision and industrial skills training. However, the sector needs
diversification to produce a wide variety of high quality value added intermediate and final products
principally for the export markets.
Potential areas of investment include cement production, textiles and clothing, agro-processing, processed
and refined foods, leather products, wood processing, plastics, vehicle parts and assembly, chemicals,
refining of petroleum, and metal and engineering works.
The tax incentives available to investors in the manufacturing sector include the following:
246
(a)
Exemptions from customs duty on the importation of most capital machinery and equipment used
for manufacturing.
(b)
Guaranteed input tax claim for two years prior to commencement of production.
(c)
Capital allowances on implements, plant and machinery that are used in manufacturing are available
at an accelerated rate of 50% on cost.
(d)
Capital allowances on industrial buildings used for the purposes of manufacturing shall be entitled to
a deduction of 10% in case of low cost housing and 5% for other industrial buildings.
(e)
Persons who incur capital expenditure on an industrial building are entitled to claim a deduction
called Initial Allowance at 10% of the cost incurred in the charge year in which the industrial building
is first brought into use.
(f)
Any person who incurs capital expenditure on an industrial building is entitled to an investment
allowance at 10% of such expenditure in the first year that the building is used for manufacturing
purposes.
(g)
Refund of Zambian VAT on export of Zambian products by non-resident businesses under the
Commercial Exporters Scheme.
(h)
Income from chemical manufacturing of fertilizers, and manufacture of products made out of copper
cathodes, is taxed at a reduced rate of 10% and 15% respectively.
(i)
Reduced Import Duty on selected raw materials and inputs used in manufacturing.
.. Agriculture
Zambia has plenty of arable land for farming using modern technology as appropriate. The Government of
the Republic of Zambia has allocated plenty of land near rail and road networks for prospective investors and
electrification of these blocks is ongoing. Surface and underground water is in abundance.
Climatic conditions are ideally suited for a wide variety of exportable crops including horticulture and
floriculture. Agro-processing of wheat, soya beans, cotton, tobacco, spices, sugar and vegetables is
encouraged to add value to local produce. Special incentives are offered to commercial and small-holder
farmers.
(a)
Reduced rate of income tax at only 10% of the taxable income, with the first K39,600 of income for
individual farmers being tax free for the tax year 2019.
(b)
A farm work allowance at the rate of 100% is available on expenditure qualifying as farm works.
(c)
A farm improvement allowance at the rate of 100% is available on expenditure qualifying as farm
improvements.
(d)
A development allowance at the rate of 10% is available in the year that a business develops a
qualifying plantation.
(e)
Accelerated wear and tear allowance at the rate of 100% is available on implements used directly in
farming.
(f)
The company income tax rate on farming profit is 10% for companies engaged in farming as opposed
to the 35% which apply to other companies.
(g)
Farming enterprises are allowed to make an election to have farming and fishing income for a period
of two consecutive years averaged.
(h)
Guaranteed input VAT claim for four years prior to commencement of production for taxable
agricultural businesses.
(i)
Zero rating agricultural products and supplies when exported.
(j)
VAT deferment on importation of some agricultural equipment and machinery.
(k)
Dividends paid out of farming profit are exempt from tax for the first five years the distributing
company commences farming.
(l)
Reduced customs at 5% on pre-mixes, being vitamin additives for animal feed.
.. Mining
Mining has been the main driver of the Zambian economy for many years. Following the privatisation of the
mines, it is expected that more revenue should be contributed to the national treasury by way of taxes.
247
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Tax incentives available to farming enterprises include:
Mining incentives include the following:
(a)
Reduced standard rate of company income tax of 30%. For companies that add value to copper
cathodes, the income tax rate is 15%.
(b)
25% deduction of capital expenditure incurred for the purposes of mining, as well as capital
expenditure incurred on the provision of services in a mining township.
(c)
Dividends paid subjected to withholding tax at the rate of 0%. This eliminates the potential penalty
that would arise for late payment or non-payment of withholding tax.
(d)
10 year period carry forward of tax losses (five years for prospecting and exploration companies).
(e)
Remission of duty on special mining vehicles and machinery specified as:
•
•
•
•
(f)
Dump trucks – off high way
Mine – locomotives
Transmission or conveyor belt
Conveyors
Guaranteed input tax claim for ten years on pre –production expenditure for exploration companies
in the mining sector.
……………………
The main sectors where tax incentives are available to the investor in Zambia include manufacturing,
agriculture and mining.
……………………
. Taxation of inward and outward investments
……………………
In this section we discuss inward and outward investments.
……………………
.. Inward investments
When a foreign enterprise makes an investment in Zambia, this is a foreign direct investment known as an
inward investment.
... Foreign direct investment
FOREIGN DIRECT INVESTMENT is the form of investment made in a foreign country by a multinational
enterprise.
Foreign direct investment (FDI) normally involves the commitment of substantial amounts of capital and
significant risk. It may occur either by establishing a new subsidiary or by acquiring an existing local
company, although some countries restrict foreign acquisitions.
An example of inward FDI is the acquisition of the mining companies in Zambia following the demerger of
the Zambia Consolidated Copper Mines.
There are many possible motives for foreign direct investment including to:
248
(a)
Establish new markets and attract new demand.
(b)
Benefit from economies of scale and to take advantage of relatively cheap foreign labour, land,
buildings and other resources.
(c)
Avoid tariffs and trade restrictions and to achieve international diversification (although the benefits
to shareholders of this motive are debatable).
(d)
Use foreign raw materials, avoiding high transportation costs, reaction to overseas investment by
competitors and to take advantage of what is perceived to be an undervalued foreign currency.
(e)
Exploit monopolistic or competitive advantage. The process of internalisation whereby
multinationals maintain competitive advantage through the internal possession and control of
information, technology, marketing or other commercial expertise, is often cited as an important
reason for FDI.
... Taxation of inward investments
When a multinational enterprise invests in Zambia, it becomes liable to Zambian income tax if it sets up a
permanent establishment here.
The whole amount of profits arising from the operations of the permanent establishment would be liable to
income tax in Zambia subject to any double taxation conventions.
The principles of overseas aspects of taxation covered earlier in this Study Manual apply here.
.. Taxation of outward investments
When Zambian enterprises make investments abroad, that type of FDI is called an outward investment.
When a Zambian company makes an outward investment, it will be taxable on its income from the foreign
operations in Zambia if it remains a Zambian resident company for income tax purposes.
Such a company would only cease to be a Zambian resident company if its board of directors decides to hold
board meetings abroad, i.e. its effective management would be taking place outside Zambia.
The profits earned from overseas operations of a Zambian resident company are chargeable to income tax in
Zambia, subject to any double taxation convention. As with inward investment, the principles of overseas
aspects of taxation covered in an earlier chapter apply.
Special tax incentives may be available in the foreign country where a Zambian company may have invested.
……………………
Inward investment results in income taxable on the multinational enterprise.
Outward investment results in income from the foreign operations being taxable in Zambia if the
investing company remains a Zambian resident company, subject to any double taxation treaties.
……………………
. Taxation incentives under the Zambia Development Agency Act
Investors used to face great challenges associated with setting up enterprises in Zambia and obtaining
documentation relevant for various compliance and operational issues.
The Zambia Development Agency Act 2006 introduced tax incentives for investors in new Zambian
businesses who invest an amount not less than the investment threshold (currently $500,000 USD).
The tax incentives available to investors in a priority sector (for example horticulture, certain textiles
production and certain engineering product manufacturing) are:
(a)
(b)
(c)
(d)
(e)
An income tax rate of 0% for a period of 5 years starting from the first year of operations.
The reduction of the income tax rate by 50% from the 6th to the 8th year of operations.
The reduction of the income tax rate by 25% from the 9th to the 10th year of operations.
A 0% tax rate on dividends for a period of five years from the date of commencement of operations.
0% import duty on capital goods and machinery including specialized motor vehicles for five years.
249
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Foreign direct investment is investment made in a foreign country by a multinational enterprise. It may
be inward investment or outward investment.
Businesses in a priority sector or dealing in a priority product additionally qualify to claim an improvement
allowance of 100% on any industrial building or commercial building constructed in an area designated a
multi-facility economic zone or industrial park under the ZDA Act.
Incentives are also available for investors making major investments (i.e. not less than $10 million USD) in
non-priority sectors.
……………………
Investors can qualify for tax incentives if they make investments of a certain level in certain sectors.
……………………
. Negotiating fiscal incentives with government
……………………
In this section we briefly discuss Government strategies for ensuring that multinational companies
operating in Zambia contribute the desired level of investment.
……………………
The Government of the Republic of Zambia enters into negotiations with multinational enterprises wishing
to invest in any sector in Zambia. In particular, negotiations are made in order to arrive at development
agreements that make it an obligation for the investor to make the desired investment and appropriate
contributions to the national treasury through payments of appropriate taxes.
In order to attract foreign direct investment, the Government gives a number of incentives to the foreign
investors which include tax holidays. This approach holds some risk on the part of the Government as at the
expiry of the tax holiday, the investor may decide to close down. Measures should be put in place to prevent
such action by the investor.
The Government also ensures that no exchange controls or remittance restrictions are imposed on the
investor. These would ordinarily limit the ability of a multinational enterprise to transfer funds to its home
country.
The Government imposes a withholding tax rate of 0% on dividends being paid out by mining companies
but charges a 15% withholding tax on payments of management expenses and ensures that any transfers of
goods outside the country to related companies are charged at the price that would apply in an arm's length
transaction.
……………………
The Government gives a number of incentives to foreign investors but also does not place restrictions on
multinationals transferring funds out of Zambia.
……………………
250
Chapter Roundup
The main sectors where tax incentives are available to the investor in Zambia include manufacturing,
agriculture and mining.

Foreign direct investment is investment made in a foreign country by a multinational enterprise. It may be
inward investment or outward investment.

Inward investment results in income taxable on the multinational enterprise.

Outward investment results in income from the foreign operations being taxable in Zambia if the investing
company remains a Zambian resident company, subject to any double taxation treaties.

Investors can qualify for tax incentives if they make investments of a certain level in certain sectors.

The Government gives a number of incentives to foreign investors but also does not place restrictions on
multinationals transferring funds out of Zambia.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system

251
Quick Quiz
252
1
What tax incentives are available to investors in the manufacturing sector?
2
What are the tax implications of (a) inward investment (b) outward investment?
3
How much income tax does a business enterprise operating in a priority sector pay in (a) the first five years
after profits are returned? (b) in years six to eight after profits are returned?
Answers to Quick Quiz
1
(a)
There is exemption on customs duty on the importation of most capital machinery and equipment
used for manufacturing.
(b)
Capital allowances on implements, plant and machinery that are used in manufacturing are available
at an accelerated wear and tear allowance rate of 50% on cost.
Inward investment results in income taxable on the multinational enterprise. Outward investment results in
income from the foreign operations being taxable in Zambia if the investing company remains a Zambian
resident company, subject to any double taxation conventions.
3
In Years 1 to 5 the income tax rate is 0%; in Years 6 to 8 it is reduced to 50% of the current rate.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
2
253
INVESTMENT PLANNING
In this chapter we look at the taxation implications of the various financial arrangements available to
individuals and companies
syllabus references
254
1 Income Tax treatment of financial instruments
3C(i)
2 Zambian tax law applicable to financial instruments
3C(ii)
3 Debt-financing techniques
3C(iii)
4 Personal financial planning
3C(iv)
5 Collective investment plans
3C(v)
6 Deposit based investments
3C(vi)
7 Pension scheme planning and the role of the National Pension Scheme
Authority (NAPSA)
3C(vii)
LEARNING OBJECTIVES

Advise on the taxation implications of financial arrangements for individuals and enterprises, dealing
specifically with:
(i)
General tax policy and financial principles relevant to the Income Tax treatment of financial
instruments
(ii)
Zambian tax law applicable to financial instruments including debt/equity rules, hire purchase, leasing
and sale and lease back
(iii)
Debt-financing techniques, particularly the treatment of interest surrogates and hybrid debt
instruments
(iv)
Personal financial planning
(v)
Collective investment plans
(vi)
Deposit based investments
(vii)
Pension scheme planning and the role of the National Pension Scheme Authority (3C)
. Income tax treatment of financial instruments
……………………
We start this chapter looking at the income tax treatment of the various financial instruments available.
This revises some of the of material on the taxation of income covered earlier in this Study Manual.
……………………
Financial instruments are monetary assets that entitle the owner to either:
(a)
(b)
Part ownership (or 'equity') in an asset, for example shares in a company; or
Payment of interest with return of the principal (the asset's face value), for example a bond.
.. Tax treatment for individuals
As we saw earlier in this Study Manual, when an individual receives income from financial instruments that
they have invested in, income tax applies to that income as follows:
(a)
Interest from bank and building society accounts is not taxable. The withholding tax rate is 0%, and
as this is the 'final' tax, there is no tax charge on such income and no need to include the income in
the individual's tax computation.
(b)
Interest from loan notes and debentures, such as Government Bonds has tax withheld at source at
the rate of 15%. As this is the final tax, there is no further liability and again no need to include the
income in the tax computation.
(c)
Dividends received from a mining company or a company listed on the LuSE have withholding tax
deducted at 0%. This is the final tax so the dividends do not need to be included in the tax
computation.
(d)
Dividends received from any other type of company have WHT deducted at 15%. This is the final tax
so they do not need to be included in the tax computation.
255
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The income tax treatment of income from financial instruments depends on whether the investor is an
individual and the type of investment. Often the tax charge is covered by withholding tax deducted by the
payer before the income reaches the investor.
.. Tax treatment for companies
When a Zambian company receives bank interest, building society interest or bond interest, withholding tax
of 15% will usually have been deducted. This WHT is not the final tax, so the company must include the
grossed up amount in its tax computation.
When a Zambian company receives dividends from another Zambian company they are subject to
withholding tax, in the same way as for an individual. This WHT is the final tax so the recipient company does
not need to include the dividends in its tax computation.
……………………
Financial instruments can either provide the investor with part ownership of an asset or pay interest and
return the principal value.
Investment income is subject to withholding tax which is often the final tax, so the income does not need
to be included in the taxpayer's tax computation
……………………
. Zambian tax law applicable to financial instruments
……………………
In this section we discuss the tax law that applies to financial instruments.
……………………
Finance is a resource that may be obtained to enable a person make payments for other resources as well as
to enable a person take advantage of investment opportunities. The sources of finance are broadly equity
and debt. Equity finance consists of a company's ordinary share capital plus all the reserves while debt
finance consists of a company's short- and long-term borrowings.
.. Equity finance
... Original equity finance
When a business is first set up, the first (probably main) source of finance will be equity injected by the
owner, and possibly by family and friends. The owner may have to re-mortgage his home to obtain funds.
Since the business will have few tangible assets at this stage, it will be difficult to obtain equity from
elsewhere.
... Additional equity finance
Once the business becomes more established, equity finance will become more readily available. Shares can
be sold privately to investors. Since equity owners also have the right to participate in the running of the
business, through voting, the initial owner may wish to sell a small number of shares to a number of
investors so as to maintain control.
Additional equity finance may be obtained through making a rights issue. A rights issue is an offer made to
existing shareholders in a company to buy additional shares in proportion with their existing shareholdings.
As long as all the existing shareholders exercise their rights, there are no changes in the percentage
shareholdings. A rights issue does not give shareholders an obligation to participate in the acquisition of new
shares. It merely gives them a right to do so, and therefore, shareholders may either exercise it, or let it
lapse. Alternatively, some shareholders may renounce their rights and sell them. If shareholders allow the
rights to lapse or sell them, there are changes in the percentage shareholdings of all the shareholders in the
company.
256
... Taxation implications of equity finance
The following are the taxation implications of using equity as a source of finance from the company's point
of view:
(a)
(b)
(c)
Fees incurred in issuing ordinary share capital are not allowable for tax purposes.
The cost of making distributions to shareholders is not allowable for tax purposes.
Dividends paid are not allowable for tax purposes.
.. Preference shares
Preference shares are another form of shares which companies may issue. They may be issued as
redeemable or irredeemable preference shares. If they are redeemable, they are normally classified as debt
while if they are irredeemable, they are classified as equity.
Holders of preference shares receive preference dividends if a company has declared them. These dividends
have priority over ordinary dividends. As such a company can only be able to pay ordinary dividends out of
the residue of profits after payment of preference dividends.
Preference shares may be cumulative preference shares or non-cumulative preference shares. Cumulative
preference shares are those in respect of which the entitlement to dividends accumulates, such that if a
dividend is not paid in one year, that entitlement is carried forward to the following year. Non-cumulative
preference shares are those in respect of which the entitlement to dividends is not cumulative. If a dividend
is not paid in one year, the entitlement lapses.
(a)
Preference shares do not carry voting rights. This means that they do not give the purchaser any
control over the decisions made by the company. Hence, the issue of preference shares does not
dilute control.
(b)
Preference share capital is not secured on the assets of the company like debt. It does not therefore
restrict the company's borrowing power or use of its assets.
(c)
Preference dividends do not have to be paid if the company cannot afford it, although they will often
carry the right to cumulative dividends, i.e. if the dividend is not paid in one year, it is carried forward
to the next year and so on.
(d)
Irredeemable preference shares lower the company's gearing ratio, which is generally seen as a good
thing. However, redeemable preference shares are usually treated as debt for the purpose of
calculating the gearing ratio, so they will increase gearing.
.. Debt and other forms of loan capital
At many different stages of their development (including at the business start up stage) companies will need
to borrow funds to expand and grow. These borrowed funds (from whatever source) will need to be paid
back and the cost of debt is simply the amount that has to be paid back (to the lender) for those funds that
have been borrowed. This cost would typically include interest and capital repayments at a rate determined
by the particular contract concerned, although in some cases there may be other elements involved in the
repayment – for example, shares in the company.
Interest payments and capital repayments will be spread over an agreed timescale until the debt has been
repaid or be liable at the end of an agreed period. The cost of debt is generally cheaper than the cost of
equity (ordinary shares). This is largely because there are high costs associated with raising equity finance,
such as: arrangement fees, bank, accountants' and solicitors' fees, issuing house fees, advertising and
marketing fees, Stock Exchange fees and underwriting fees.
257
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The reasons for issuing preference shares include the following:
Advantages of debt finance
Disadvantages of debt finance
(i)
Debt finance is cheaper than equity finance.
This is because, first it is less risky for the lender
and, second, interest on debt is deductible
(subject to anti-avoidance rules) for tax
purposes whereas dividend payments are not.
(i)
As the level of debt increases with each debt
issue, the cost of equity will also increase to
reflect the increased financial risk of the
company.
(ii)
Issuing debt is relatively cheap compared to
issuing equity. This is because there is no need
to issue a prospectus for a debt issue.
(ii)
Debt, unlike equity, has to be repaid at the end
of its term. This can cause financial difficulty
for the company if they have insufficient funds.
If a company cannot pay its debts it faces the
risk of bankruptcy.
(iii) The issue of debt does not affect ownership
and control of the company because debt
holders are not owners of the company.
(iii) Interest must be paid on debt whereas
dividend payments on ordinary shares are
discretionary. Unlike with dividends, if the
company is having a bad year it must still pay
its interest charges.
(iv) It is easier to arrange debt finance than equity
finance. The company law requirements and
the Stock Exchange rules (if it is a listed
company) make the issue of equity quite a
lengthy procedure.
(iv) If the company has borrowed at a floating rate
of interest, the company is subject to interest
rate risk. This means it risks having to pay
increased interest charges if the interest rates
go up.
(v)
Security for the debt may be required by the
lender. This can restrict the company's use of
the assets on which the debt is secured.
(vi) Loan agreements may make the company
subject to restrictive covenants. These are
effectively promises to keep, e.g. the current
ratio at a certain level.
.. Loans
If an organisation’s dependence on an overdraft becomes too permanent, the bank may suggest that it is
converted into a medium-term loan. In this way, the business is forced to start repaying some of it. The bank
may also provide loans for the purchase of non-current assets or for expansion of the business. In general
terms, overdrafts are more suitable for the financing of working capital and loans are more suitable for
longer-term assets or projects.
Interest on a loan used to acquire non-current assets is treated as capital expenditure and therefore not
allowed as a deduction when computing business profits. If the loan is not used to acquire non-current
assets, then interest payable on it is an allowable expense in the computation of business profits for tax
purposes.
.. Overdrafts
An overdraft is a deficit on a bank current account. Overdrafts are suitable for short-term borrowing only.
This is because they are usually expensive, both in terms of arrangement fees and in terms of interest
charges. Also, they are repayable on demand. This means that the bank can withdraw the facility at any
time, usually at a time when the business most needs the cash because of financial difficulties. Although
overdrafts are not suitable for long-term borrowing, they are often used as a permanent source of finance.
258
.. Mortgages
While not an investment, mortgage loans are often used to purchase property. It is important to realise that
the only way to ensure that a mortgage loan is repaid within the mortgage term is by using a repayment
mortgage. Each mortgage payment under this type of arrangement contains an element of capital and an
element of interest. The interest element starts large and gradually decreases over the term of the loan,
while the capital element works in the reverse manner. Other types of mortgage arrangement, for example
an interest only agreement leave the repayment of capital to chance. Often the aim is to repay the capital
element through a regular savings vehicle such as an endowment policy. It would be pure coincidence if the
maturity proceeds of an endowment plan happened to equal the capital outstanding on the mortgage loan
on the day of maturity and redemption.
Mortgage lenders are often prepared to offer fixed rate loans for a fixed term. Sometimes they will offer a
cash back as an inducement to switch lenders. Care should be taken to read the small print, particularly
concerning lock in periods after the fixed rate term has expired.
A question that clients often ask in practice when they have spare cash to invest is whether they should use
that surplus cash to reduce their outstanding mortgage loan, or they should invest in their pension plan or
other investments products? Tax considerations aside, the decision comes down to relative returns. If the
client can achieve a growth rate of 20% by investing that spare cash elsewhere he would be better advised to
make this investment rather than making a mortgage repayment where the interest rate is only 15%. Tax
relief is available for mortgage interest paid.
.. Trade credit
Trade credit is often used as a source of finance for small and medium-sized enterprises (SMEs), particularly
when the business is first starting up. Ironically, this is the time when finance can be difficult to obtain, due
to lack of the business's reputation and credit history. The cost of trade finance has to be weighed up, taking
into account both loss of early payment discounts and loss of supplier goodwill.
Business angels may be either individuals or groups of individuals. They are characterized by their wealth.
This form of financing tends to be informal and it is very much a question of knowing the right people. The
informal nature of this type of financing can be both a strength and a weakness. It is a strength because
many of the onerous formalities relating to provision of information to financers are avoided. However, it is a
weakness because of the lack of a formal business angel market through which finance can be sought.
.. Venture capital
Venture capitalists tend to invest in new businesses and specific expansion schemes. They tend to be
attracted to businesses that will eventually be listed on the stock exchange, both because businesses of this
size will generate the largest profits and because this also gives them an exit route in the future. Many of the
smaller SMEs will simply not be big enough for venture capital finance. Also, venture capitalists will want to
become involved in running the business because of their need to protect their investment.
.. Leasing
Leasing is an attractive source of finance for SMEs. Instead of outright purchase, an SME may consider
leasing a capital asset in order to maintain the strength of its cash flow position. The two types of leases are
the finance leases and the operating leases. The main characteristics of each type of lease are as follows.
... Finance lease
.... What is a finance lease?
259
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
.. Business angel financing
(a)
This is an agreement between the lessor, who provides finance for the asset, and the lessee.
(b)
The person supplying the equipment is usually a third party; the lessor just finances the asset.
(c)
The lessee is responsible for the service and maintenance of the asset.
(d)
The lease has a primary period which covers all/most of the expected useful economic life of the
asset.
(e)
The lease usually has an indefinite secondary period whereby the lessee continues to lease the asset
for a nominal rent.
.... Taxation implications of finance leasing
(a)
The lessee is entitled to claim capital allowances on the cost of the leased asset despite not being the
legal owner of the leased asset.
(b)
The lessee will additionally be able to recover any input VAT on the cost of the asset provided the
input VAT is the type which is recoverable and the business is registered for VAT.
(c)
The finance cost (interest) implied in the finance lease agreement is allowable when computing the
taxable business profits
... Operating lease
.... What is an operating lease?
(a)
This is a rental agreement between two parties, whereby the lessor supplies equipment to the lessee.
(b)
The lessor usually retains the responsibility for servicing and maintaining the leased equipment.
(c)
The period of the lease is usually shorter than the asset's expected useful economic life.
.... Taxation implications of operating leases
(a)
The lessor continues to claim the capital allowances on the leased asset. The lessee cannot claim any
capital allowances in respect of the leased asset.
(b)
For tax purposes, the lessee will be able to claim lease rentals as allowable deductions when
computing taxable profits.
(c)
Input VAT on lease rentals will also be recoverable provided the VAT is the type which is recoverable
and the business is registered for VAT.
.. Sale and lease back transactions
... What is a sale and lease back transaction?
In a sale and leaseback transaction, an asset (land or buildings) is sold by a vendor and then the same asset
is leased back to the same vendor.
It is one way of raising finance whilst retaining the use of the related assets.
The lease payment and sale price are normally interdependent because they are negotiated as part of the
same package.
... Taxation implications of a sale and lease back transaction
For tax purposes VAT will be chargeable on the sale of the asset provided the asset is taxable for VAT
purposes. Property transfer tax will additionally arise if the asset sold is chargeable property for property
transfer tax purposes. A balancing charge or allowance will arise on the disposal of the asset by the seller
which will be computed in the normal way.
260
If the asset is subsequently leased back under a short lease (i.e. a lease that does not exceed a period of 50
years) then, the lease rentals will be allowable in computing the taxable business profits. Input VAT on the
lease rentals will also be recoverable provided the business is registered for VAT.
Where the asset is leased back under a lease that covers a period of more than 50 years, then tax treatment
will follow the substance of the transaction and the lessee (original seller) will continue claiming any
available capital allowances on the asset.
.. Hire purchase
... What is hire purchase?
Acquisitions under hire purchase agreements are treated as outright purchases but the hire purchase
company effectively provides the finance.
(a)
The asset is capitalised in the books of the purchaser.
(b)
The amount outstanding after making an initial deposit towards the purchase price of the asset is
accounted for as payable in the books of the purchaser.
(c)
Each instalment paid comprises two components, a capital repayment towards the cost of the asset
and a hire purchase finance charge.
(d)
Title to the asset passes to the purchaser on payment of the final instalment.
... Taxation implications
If a business acquires an asset under a hire purchase agreement the taxation implications are:
(a)
The interest element is tax deductible in the computation of taxable business profits.
(b)
The business will be able to claim input VAT on the asset provided the VAT is the type which is
recoverable and the business is registered for VAT.
(c)
There is no VAT on the instalments as they effectively relate to financing which is an exempt activity.
……………………
The main sources of finance for business are classified into equity finance and debt finance. Equity
consists of ordinary share capital and reserves while debt consist of borrowing, whether on a short term
or otherwise.
Shareholders in a company receive dividends which are declared at the discretion of directors when a
company has distributable profits. Dividends are not allowable expenses in the computation of taxable
trading profits. The company making the distribution deducts withholding tax at source and this is the
final tax.
Holders of debt receive interest from the company. Interest is payable on the agreed due dates and it is
deductible when computing the company's taxable trading profit. The company deducts withholding tax
at the rate of 15%. This is the final tax if the recipient is an individual. If the recipient is a person other
than an individual, withholding tax is not the final tax.
Other sources of finance include loans, bank overdrafts, trade credit and leasing.
……………………
261
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The business will claim capital allowances on the cost of the asset (excluding interest), which will be
allowable deductions when computing the taxable business profits.
. Debt financing techniques
……………………
In this section we look at debt financing techniques, in particular the treatment of interest surrogates and
hybrid debt instruments.
……………………
.. Financial Instruments
The tax treatment of most financial instruments generally follows their accounting treatment.
For the issuer of financial instruments which are financial liabilities, interest measured in accordance with
accounting principles is generally allowable in computing taxable business profits provided the finance raised
by issuing the financial instrument is not used for capital purposes.
Where the financial instruments are required to be measured at fair value at each year end under the
relevant IFRSs, gains or losses that arise from measuring fair value at each year end may be recognised in
profit or loss.
For tax purposes unrealised gains are not taxable, and unrealised losses are not tax deductible. This means
that gains on such financial instruments will normally be only taxable in the charge year in which such gains
are realised. Similarly, losses on financial instruments measured at fair value will be only deductible in the
charge year in which such losses are realised.
By exception, the tax treatment of gains and losses on financial instruments held by an entity for hedging
purposes, is different as explained later in this chapter.
We now discuss the characteristics of the main types of financial instruments used in debt financing
techniques.
.. Hybrid financial instruments
A hybrid financial instrument is a financial instrument that combines two or more different financial
instruments. Hybrid financial instruments typically have both a liability and equity component. Examples
include convertible debt and convertible preference shares.
IAS 32 requires compound financial instruments be split into two components:
(a)
(b)
A financial liability (the liability to redeem the debt by paying the holder in cash)
An equity instrument (the option to convert into shares).
... Convertible bonds
Convertible bonds are bonds that give the holder the right (but not an obligation) to convert their bonds at a
specified future date into other securities, normally ordinary shares, at a pre-determined price and a
conversion rate that is also specified when the bonds are issued. Convertible bonds are normally fixed rate
bonds and carry a coupon rate of interest that is lower than on similar conventional bonds.
The lower coupon rate allows for a low stress on liquidity and are seen as a way of issuing deferred equity.
Before conversion, the security will represent debt finance and thus increase gearing and on conversion will
reduce the level of gearing.
While convertibles remain debt, the interest is tax deductible. As the convertible stock carries the right of
conversion into the underlying ordinary shares, its price will be directly linked to that of the equity for as long
as the conversion option exists.
262
... Convertible preference shares
These are similar to convertible bonds in that, they give the holder the right to convert the preference
shares into a set number of ordinary shares, generally at any time after a pre-determined date. Under
normal circumstances, convertible preference shares are exchanged in this way at the shareholder's request.
However, a company may have a provision on such shares that allows the shareholders or the issuer to force
the issue.
.. Warrants
Warrants give the holder the right to subscribe at a future date for a certain number of ordinary shares at a
pre-determined price.
Where warrants are issued with loan notes, the loan notes are not converted into equity. Instead bond
holders:
•
•
Make a cash payment for the shares
Retain the loan notes until redemption
Warrants are normally used as sweeteners on debt issues and have the following additional features:
(a)
Interest rate on the loan is low and the loan may be unsecured.
(b)
Carries a right to buy equity at an attractive price.
(c)
Bond holders can sell the warrants after buying the loan notes thereby decreasing the cost of buying
the loan notes.
Share warrants issued in combination with a debt security will put the holder in an overall position which is
very similar to that of a convertible holder. Thus it follows that the holder has both debt and equity interest
in the issuing firm.
The warrant, like the conversion option, will enable the coupon rate to be reduced on the debt instrument.
Unlike a convertible, the debt issued with warrants will run to maturity, thus maintaining the tax
deduction. The warrant, if exercised, will also result in new capital being raised. This may be useful if
expression of the payment originally undertaken is being contemplated.
The use of both convertibles and warrants represent an attempt to make debt capital more attractive to the
investors. They also have characteristics which may make them useful to a company as part of its financing.
.. Derivatives
A derivative is a financial instrument that derives its value from the price or rate of some underlying item
(called 'the underlying'). A derivative contract gives the right and sometimes the obligation, to the holder to
buy, or sell a quantity of the underlying or benefit in some other way from a rise or fall in the value of the
underlying.
A derivative financial instrument has all of the following characteristics:
(a)
Its value changes in response to the change in a specified interest rate, security price, commodity
price, foreign exchange rate, index of prices or rates, a credit rating or credit index or similar variable.
(b)
It requires little or no initial net investment relative to other types of contract that have a similar
response to changes in market conditions.
(c)
It is settled at a future date.
The most common underlying items are commodities, shares, bonds, share indices, currencies and interest
rates.
263
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Debt issued with warrants is not self-liquidating and thus additional finance will be needed for redemption.
Derivative financial instruments include forward contracts, futures, options, swaps and forward rate
agreements.
Derivatives can be traded on a market or can be purchased and created specifically for a particular business
or transaction. They are used for different reasons, the most common one being for risk minimisation and
hedging purposes. Derivatives are also widely used by banks and financial institutions for trading and short
term profit speculation.
On initial recognition, derivatives are required to be measured at fair value under IFRS 9. Transaction costs
are expensed to the statement of profit or loss.
At each reporting date, derivatives are re-measured to fair value. Movements in fair value are recognised in
profit or loss.
.. Hedging
Hedging is a technique used by companies to manage risks. Entities hedge to reduce their exposure to risk
and uncertainty, such as changes in prices, interest rates or foreign exchange rates. There are commercial
hedging and accounting hedging methods.
... Commercial hedging
Commercial hedging occurs when a company deliberately takes out financial instruments (typically
derivatives) to manage a risk. Entering into a forward contract for currency is one example. Companies use
forward contracts to fix the exchange rate for a future foreign currency transaction at a particular rate,
thereby by reducing the company's risk of potential loss resulting from fluctuations in the exchange rate.
... Accounting hedging
Hedge accounting involves designating one or more hedging instruments so that their change in fair value
is offset, in whole or in part, by the change in fair value or cash flows of a hedged item. Hedge accounting
recognises hedging relationships by allowing (for example) losses on a hedged item to be offset against gains
on a hedging instrument.
A hedged item is an asset or liability that exposes the entity to risks of changes in fair value or future cash
flows (and is designated as being hedged).
A hedging instrument is a designated derivative, or a non-derivative financial asset or financial liability,
whose fair value or cash flows are expected to offset changes in fair value or future cash flows of the
hedged item.
Under IFRS 9, hedge accounting rules can only be applied if the hedging relationship meets the following
criteria:
(a)
The hedging relationship consists only of eligible hedging instruments and hedged items.
(b)
At the inception of the hedge there must be formal documentation identifying the hedged item and
the hedging instrument.
(c)
The hedging relationship meets all effectiveness requirements described in the standard.
... Income Tax Treatment of hedging
The Income Tax Act recognises hedging is as a separate source of income for tax purposes. However, the Act
gives no detailed legal guidance on the measurement of gains and profits arising from hedging and as s a
result, accounting principles are normally followed in determining profits and losses arising from hedging.
Any profits or gains arising from hedging are subject to tax on the same basis as income from other
sources. The gain credited to the statement of profit or loss is the taxable amount.
264
If a loss is incurred from hedging, that loss will be carried forward and be set of against future profits from
hedging arising in the following five years. A tax loss from hedging is taken as the loss charged to profit for
the year for accounting purposes.
……………………
A number of financial instruments are available for debt financing.
Hedging can be used to reduce exposure to risk.
……………………
. Personal financial planning
……………………
In this section we look at financial planning for individuals – that is how to make the most of their
financial resources throughout the different stages of their lives.
……………………
FINANCIAL PLANNING can be defined as the establishment and development of a comprehensive financial
plan that is tailored to an individual's needs and which maximises and protects financial resources, and is
adapted to meet that individual's changing circumstances during the various stages of their life.
While each individual's circumstances are unique and therefore each financial plan is therefore different,
there are typical planning opportunities that arise at particular stages in an individual's life cycle.
Generic financial services protection products fall into five broad categories:
•
•
•
•
•
Life assurance
Permanent health insurance
Critical illness insurance
Redundancy insurance
Long term care insurance
.. Life assurance policies
... Life assurance
LIFE ASSURANCE is the cover taken out to protect financial dependants in the event of death
The sum assured would typically be set at a level sufficient to repay all borrowings plus a multiple of income
at least equal to the number of years the dependants are likely to remain financially dependent.
The need for life assurance is found in many different circumstances, some of which are: family protection,
debt protection, tax mitigation and business protection.
... Whole of life assurance
A whole of life policy pays out the sum assured as a lump sum on the death of the life/lives assured to the
grantee, who need not necessarily be the life assured or their beneficiaries, whenever death occurs. The
policy may be written on single or joint lives and on first death or last survivor basis. There is no tax relief on
the premiums and the policy proceeds are tax free if the policy is qualifying. Such a policy might be used on
a last survivor basis to provide funds to meet the tax liability of the deceased's estate.
265
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
In respect of each generic product it is important to have knowledge of the risk event insured against, the
form in which proceeds are paid upon a valid claim being made and the tax treatment of the premiums and
proceeds.
... Term assurance
Payments are made as for whole of life assurance except the policy only pays out the lump sum death
benefit where the life/lives assured die within the policy term. The policy can be written on a decreasing
sum assured basis and used to redeem a repayment mortgage or other loan which would otherwise be
outstanding on the deceased's death. Where the term is not beyond a specified number of years and the
insurance is for trade purposes e.g. insuring the life of a key employee in respect of loss of profits, the
premiums will be a tax deductible expense but the proceeds would be taxed as trading receipts.
... Family income benefit
Similarly, payments are made as for whole of life assurance except that the policy pays out where the
life/lives assured die within the policy term, the benefit being paid as instalments of capital over the
remaining policy term. Such a policy might be used where there is a need to keep premiums low or where
budgeting for lump sum proceeds would present a problem.
.. Permanent health insurance
Permanent health insurance provides income replacement, payable in the event of the inability to perform
own or suited or any occupation or activities of daily living following the expiration or a predetermined
deferral period due to illness or disability.
Usually written to retirement age and payable until then or full or partial recovery. Premiums can be indexed
as can benefits in payment. Typically, with most insurance companies, maximum insurable benefit does not
exceed between 50% and 75% of gross pre disability income. This is to provide an incentive to return to
work.
When paid personally premiums receive no tax relief and benefits are not taxable.
Where an employer insures the cost of his employee's salaries, the premium would be a tax relievable
trading expense but the policy proceeds would be taxable trading receipts.
.. Critical illness insurance
Critical illness insurance provides a lump sum benefit, payable on the diagnosis of one from a list of life
threatening conditions.
Critical illness cover is sometimes referred to as dread disease cover. The seven core conditions are: cancer,
coronary artery bypass surgery, heart attack, kidney failure, major organ transplant, multiple sclerosis and
stroke. Many policies cover other serious conditions as well including permanent and total disability – the
inability to perform own/suited/any occupation or activities of daily living.
Most policies will only pay out once the patient has survived specified number of days following diagnosis.
When paid personally premiums receive no tax relief and benefits are not taxable.
Where an employer insures the cost of their employee's salaries, the premium would be a tax relievable
trading expense but the policy proceeds would be taxable trading receipts. The sum assured would typically
be set at the very minimum at a level sufficient to repay all borrowings plus a sum sufficient to provide for
convalescence and possible adaptations to home and lifestyle.
……………………
As part of financial planning, individuals need to plan ahead of time for retirement, sudden death, loss of
employment and so on. Various protection products may be used. These protection products include: life
assurance, whole of life assurance, term assurance and critical illness cover.
……………………
266
. Collective investment plans
……………………
In this section we look at collective investments.
……………………
.. Collective investment schemes
A Collective Investment Scheme is an arrangement that enables a number of investors to pool their assets
and have these professionally managed by an independent professional investment manager (fund
manager) or a management company.
Investments may typically include deposits, bonds and equities, but depending on the type of scheme may
go wider.
... What is a collective investment scheme?
The Securities Act (2016) defines a Collective Investment Scheme as:
A scheme in whatever form, including an open-ended investment company, where members of the public
are invited or permitted to invest money or other assets in a portfolio and in terms of which:
(a)
Two or more investors contribute money or other assets to, and hold a participatory interest in, a
portfolio of the scheme through shares, units or other form of participatory interest, and
(b)
The investors share the risk and the benefit of investment in proportion to their participatory
interest in the portfolio of the scheme or as determined in the trust deed.
... How does a collective investment scheme work?
The total value of the pool of invested money is split into equal portions called participatory interests or
units. For one to invest in the scheme, they buy a portion of the participatory interests or units. The price of
a unit is based on the value of the investments the scheme has invested in. One can be making regular
payments, e.g. monthly, quarterly towards the acquisition of these units. Once an investment is made, the
investors at the end of the year expect to register growth on their investments through capital
appreciation and income in the form of dividends and interest income.
Collective investments schemes take various forms such as Unit Trusts, Investment companies (or trust),
Open Ended Investment Companies (OEICs) and Exchange Traded Funds (ETFs).
... Unit trusts
A unit trust is an investment fund shared by lots of different investors. It is defined in the act as any scheme
or arrangement in the nature of a trust where members of the public are invited or permitted, as
beneficiaries under the trust, to acquire an interest or undivided share in one or more groups or blocks of
specified securities and to participate proportionately in the income or profits derived under the trust.
It is an 'open-ended fund' which means the fund gets bigger as more people invest and gets smaller as
people withdraw their money.
... Investment trust
An investment trust or company is a company whose line of business is investing in other companies. It is a
company having, as its purpose, the investment of its funds with the aim of spreading investment risk and
267
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The scheme investment manager or management company is tasked with the responsibility of investing
funds pooled on behalf of the owners into different assets such as equities, bonds, real estates and other
money and capital markets instruments.
giving its members the benefit of the results of the management of those funds by or on behalf of the
company.
The investment trust company has shares and is quoted on the stock market. Investors obtain a stake in
such a fund by buying the shares of the company.
It is a 'close-ended fund' because there are a set number of shares and this number does not change
regardless of the number of investors. The price of the shares of the fund reflects the value of the
investments in the fund, but is affected by other factors too. Investment trusts often issue different types
('classes') of shares to suit different types of investor.
... Open Ended Investment Company (OEIC)
An OEIC is a company whose business is managing an investment fund. Investors obtain a stake in this type
of fund by buying the shares of the OEIC. An OEIC is defined in the act as a company whose articles of
association authorise the acquisition of its own shares structured in such a manner that it provides for the
issuing of different classes of shares to investors, with each class of shares representing a separate portfolio
having a distinct investment policy;
It is an 'open-ended fund' which means that the fund gets bigger and more shares are created as more
people invest. The fund shrinks and shares are cancelled as people withdraw their money.
The price of the shares is based on the value of the investments the company has invested in.
An initial charge is normally charged when investors buy and sell OEIC shares, but otherwise there is no
difference between the buying and selling price of shares. Because of this OEICs are referred to as being
'single priced'.
Some OEICs have no initial charge – sometimes there is an 'exit charge' instead when you withdraw your
money.
The company takes a yearly management fee direct from the investment fund.
... Exchange Traded Fund (ETF)
An exchange traded fund (ETF) is an investment fund, usually designed to track a particular index. This
could be a stock market index, or an index for a particular sector. Investors obtain a stake in the fund by
buying shares in the ETF which are quoted on the stock exchange.
Unlike investment trusts, ETFs are 'open-ended funds'. This means the fund gets bigger as more people
invest and gets smaller as people withdraw their money, so the ETF share price just reflects the value of the
investments in the fund. In other words, ETF shares do not trade at a premium or discount.
The return from the fund takes form of dividends and capital gains (or loss) made on the sale of shares.
... Examples of collective investment schemes
In Zambia all organisations operating Collective Investment Schemes are required to be registered under the
Securities Act of 2016.
The main examples of Collective Investment Schemes in Zambia include the following:
268
(a)
African Banking Corporation Unit Trust (managed by African Banking Corporation Investment Services
Limited).
(b)
Mpile Unit Trust Umbrella Fund (managed by African Life Financial Services Limited).
(c)
Kukula Fund 1 (managed by Kukula Capital Plc)
(d)
Equity Capital Resources Unit Trust (managed by Equity Capital Resources Plc)
(e)
Madison Unit Trust Fund (managed by Madison Asset Management Company Limited)
(f)
Laurence Paul Unit Trust (managed by Laurence Paul Investment Services Limited)
... Tax treatment of collective investment schemes
For taxation purposes income of a Collective Investment Schemes is exempt from income tax to the extent
to which the income is distributed to participants in the collective investment scheme.
This means that income generated from such a scheme by the fund manager is exempt from income tax on
condition that the income is paid out to the investors.
Any income not paid out to the investors will be subject to normal company income tax at the rate of 35%.
The participating investors are however liable to pay tax on the income received on distribution. Since the
funds contributed into the fund are invested in various types of investments such as deposits, bonds, equities
and so on, they generate income, for participating investors, which is generally subjected to withholding tax.
The withholding tax is deducted at source at the applicable rates.
……………………
Collective Investment Schemes enable investors to pool their assets and have these professionally
managed by an independent professional investment manager.
……………………
. Deposit based investments
……………………
In this section we look at various deposit based investments.
……………………
.. Certificates of deposit (CDs)
Repayment is obtained by presenting the CD to the issuer on the designated date. Alternatively, since CDs
are negotiable, they can be sold at any time by the holder. CDs usually offer an attractive rate of interest and
a low credit risk. They are useful for investing funds in the short term since they can be sold at any time on
the secondary market.
For an individual any interest receivable on these investments is subject to withholding tax at the rate of
15% which is a final tax. There are no property transfer tax on the on the transfer of CDs as they do not fall
under for the scope property transfer tax.
.. Government Bonds (GRZ Bonds)
Government Bonds (GRZ bonds) are marketable Zambian Government securities. The Government issues
the bonds (also known as gilts) to finance its spending, but also uses them to control the money supply.
Most GRZ bonds have a face value of K100 at which the Government promises to buy the gilt back on a
specific date in the future.
GRZ bonds usually have fixed interest rates, although there are also various index-linked bonds. Where they
are the index-linked type, both the interest and the redemption value are linked to inflation, ensuring that a
decent real return is gained. GRZ bonds may be short term (repaid in less than five years), medium term
(repaid in 5 to 15 years), or long term (repaid in more than 15 years). If a person buys a GRZ bond and holds
it until it is repaid by the Government, the return the person gets will be fixed from the outset. As the
Government will not default on the debt and the interest to be earned is known in advance, this makes it a
low risk investment.
269
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Certificates of deposit (CDs) are negotiable instruments in bearer form. Title belongs to the holder and can
be transferred by delivering the certificate to the buyer. Banks and building societies issue these CDs, which
will state on them the amount of the deposit and the date of repayment. The deposit amount will usually be
quite large and the repayment date will be anything from one week to five years.
GRZ bonds can also be traded on the stock market, where their price can go up or down, depending on what
people think will happen with interest rates. When interest rates are expected to fall, the price of the GRZ
bonds rises, and when interest rates are expected to rise, the GRZ bonds price falls. Using GRZ bonds in this
way makes them a more risky investment, but still relatively safe when compared with buying shares on the
Stock Exchange.
For an individual, any interest receivable from these investments is subject to withholding tax at the rate of
15% which is a final tax. There is no property transfer tax on the transfer of government bond as they do fall
under for the scope property transfer tax.
.. Bills of exchange
A bill of exchange is an unconditional order in writing to pay money. There are two types of bills of
exchange:
(a)
(b)
Sight bills, whereby the money is payable on demand
Term bills, whereby the money is payable at a future date
The maturity of term bills can vary from two weeks to six months and they can be denominated in any
currency.
The drawee is the party liable to pay the money; the payee is the person who receives the money.
Banks and non-banking institutions are the main buyers of bills on the secondary market. The buyer makes
a profit by purchasing the bill at a discount to its face value, then receiving the full value at maturity, or
reselling it before this time. The level of risk attached to bills depends on the credit quality of the drawer. If
the drawer is a large company or institution, the risk will be lower than if the drawer is relatively small and
unknown.
……………………
Deposit based investment opportunities include certificates of deposit, GRZ bonds and bills of exchange.
……………………
. Pension scheme planning and the role of the National Pension
Scheme Authority (NAPSA)
……………………
In this section we look at pension scheme planning for both the employed and self-employed and the
role of the National Pension Scheme Authority (NAPSA).
……………………
Individuals who are in employment normally take advantage of pensions schemes arranged for them by
their employers. Self-employed individuals must plan for their own pensions.
Pensions are an important tax efficient way of investing for the future.
.. The National Pension Scheme Authority
In the Republic of Zambia, every employer must make arrangements to register their employees with the
National Pensions Scheme Authority (NAPSA), which is a statutory body set for providing retirement
benefits to individuals.
It is a contributory scheme into which the employee makes a contribution out of the earnings, with the
employer also making a contribution based on the earnings of the employees. The employee's contribution is
5% of the earnings and the employer also contributes another 5% of the employees' earnings.
270
There is an upper limit of earnings on which the 5% is applied and this upper limit varies from one
contributions year to another. A contributions year for this purpose is a calendar year from 1 January to 31
December. The earnings ceiling for NAPSA contributions is adjusted every year.
The amount of contributions actually paid by an employee is not deductible from emoluments. In the case of
the employer, the actual amounts of contributions paid on behalf of employees are deductible when
computing taxable trading profits.
Contributions are deducted from earnings on a monthly basis together with income tax under the PAYE
system, and other statutory deductions and payable to NAPSA and ZRA respectively by the tenth day
following the end of the month when the earnings were paid.
.. Group pension scheme
A GROUP PENSION SCHEME is a pension scheme provided by employers.
The employees agree to pay regular contributions from their earnings depending upon what they consider
to be reasonable. The employer also makes a contribution on behalf of the employees.
The employer can deduct contributions paid in respect of the employee when computing its taxable trading
profits.
Employees may also benefit from life cover and/or income protection cover.
.. Personal pensions
Individuals who are in self-employment and those in non-pensionable employment may be able to make
contributions into a personal pension.
The individual entirely funds the pension. The individual decides to pay contributions into a personal
pension in order to provide an income stream on which to depend after retirement. Individuals normally
benefit from life cover and/or income protection. Such pension schemes are provided by insurance
companies.
.. Defined benefit schemes and defined contributory schemes
(a)
(b)
Defined benefit schemes; or
Defined contributory schemes.
This applies to all the types of occupational pensions schemes irrespective of whether they are individual,
group or statutory.
... Defined benefit schemes
A defined benefit scheme is one where the benefits payable to the employees are generally based on the
employee's earnings at retirement and linked to the number of years the employee has worked for the
employer.
Contributions payable are determined by a number of factors which include the consideration of the
composition of the scheme membership, investment returns on scheme assets and changing regulatory
requirements. Defined benefit schemes are also known as final salary schemes.
... Defined contributory scheme
A defined contributory scheme is one where the amount of pension payable on retirement depend on the
amount of contributions paid into the scheme.
271
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Pension schemes may be either:
The total contributions paid into the scheme include the employee's own contributions and the employer's
contribution paid on behalf of the employee. These are the individual's investments which are used to build up
the pension. Defined contributory schemes are also known as money purchase schemes.
QUESTION
11.1 Sources of finance
For the purpose of this part of the question, you should assume that today's date is 15 December 2018.
MY Limited, a manufacturing company is planning to replace its manufacturing equipment that has been in
use for quite some time now. The company is considering various financing options which include the
following:
(a)
The equipment could be acquired at a cost of K957,000 using internally generated funds. The whole
amount would be paid in full on 1 January 2019.
(b)
The company could obtain a bank loan of K957,000 at an annual interest rate of 19% and use the
funds to acquire the equipment. The loan would be repaid over a period of five years. The loan would
be granted on 1 January 2019 and on that same day, the whole amount would be used to pay for the
equipment.
(c)
The company could acquire the equipment by way of an operating lease at an annual lease rental of
K304,000 payable annually in advance over a period of five years, with the first lease rental being
payable on 1 January 2019.
Required
Advise MY Limited of the income tax and VAT implications of each of the above financing options.
……………………
Individuals who are in employment are required to pay contributions to NAPSA. They may also pay
contributions to their employers' pension schemes. The self-employed must make their own pension
arrangements through personal pension schemes.
……………………
272
Chapter Roundup
Financial instruments can either provide the investor with part ownership of an asset or pay interest and
return the principal value.

Investment income is subject to withholding tax which is often the final tax, so the income does not need to
be included in the taxpayer's tax computation.

The main sources of finance for business are classified into equity finance and debt finance. Equity consists
of ordinary share capital and reserves while debt consist of borrowing, whether on a short term or
otherwise.

Shareholders in a company receive dividends which are declared at the discretion of directors when a
company has distributable profits. Dividends are not allowable expenses in the computation of taxable
trading profits. The company making the distribution deducts withholding tax at source and this is the final
tax.

Holders of debt receive interest from the company. Interest is payable on the agreed due dates and it is
deductible when computing the company's taxable trading profit. The company deducts withholding tax at
the rate of 15%. This is the final tax if the recipient is an individual. If the recipient is a person other than an
individual, withholding tax is not the final tax.

Other sources of finance include loans, bank overdrafts, trade credit, leasing, business angels financing and
so on.

A number of financial instruments are available for debt financing.

Hedging can be used to reduce exposure to risk.

As part of financial planning, individuals need to plan ahead of time for retirement, sudden death, loss of
employment and so on. Various protection products may be used. These protection products include: life
assurance, whole of life assurance, term assurance and critical illness cover.

Collective Investment Schemes enable investors to pool their assets and have these professionally managed
by an independent professional investment manager.

Deposit based investment opportunities include certificates of deposit, GRZ bonds and bills of exchange.

Individuals who are in employment are required to pay contributions to NAPSA. They may also pay
contributions to their employers' pension schemes. The self-employed must make their own pension
arrangements through personal pension schemes.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system

273
Quick Quiz
274
1
What is meant by equity finance and debt finance?
2
What are the five types of protection product available?
3
What is meant by a defined benefit scheme?
Answers to Quick Quiz
1
Equity consist of ordinary share capital and reserves while debt consist of borrowing, whether on a short
term or otherwise.
2
(i)
(ii)
(iii)
(iv)
(v)
3
A defined benefit scheme is one where the benefits payable to the employees are generally based on the
employee's earnings at retirement and linked to the number of years the employee has worked for the
employer.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Life assurance
Permanent health insurance
Critical illness insurance
Redundancy insurance
Long term care insurance
275
Answer to Question
11.1 Sources of finance
The taxation implications of each of the financing options are as follows:
(a)
If the equipment were acquired outright from internally generated funds, MY Ltd will pay the VAT inclusive
amount of K957,000.
The company will claim input VAT of (4/29  K957,000) K132,000 and claim capital allowances on the VAT
exclusive amount of K957000 – K132,000 = K825,000.
The amount of annual wear and tear allowance per annum over a period of two years will be K412,500.
The capital allowances will be available as the company will acquire ownership of the asset.
(b)
If the company obtains a loan to acquire the equipment, the VAT implications will be that the amount
payable for the equipment of K957,000 will be inclusive of VAT which the company will be able to reclaim
since the equipment will be for use in its trade. The amount of input VAT of K132,000 will be claimable.
For income tax purposes, the loan interest payable will be a deductible expense in the computation of
taxable business profits. Capital allowances will also be available on the same basis as if the asset was
acquired outright using internally generated funds.
(c)
If the company acquires the equipment by way of an operating lease, the VAT implications will be that input
VAT on the lease rentals payable will be available for credit.
As the company will not be the legal owner of the equipment, it will not be able to claim capital allowances
on the equipment. The amounts of lease rentals payable will be deductible in the computation of the
company's taxable profits.
276
TAX PLANNING
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
This chapter discusses the tax planning measures that a taxpayer can use to reduce their tax liabilities.
syllabus references
1 Tax planning, tax avoidance and tax evasion
2 Tax planning for individuals
3 Tax planning for groups of companies
5A(i)
5A(ii) – 5A(vii)
5A(viii) – 5A(xiii)
277
LEARNING OBJECTIVES

Advise on the measures that could be put in place to minimise or defer taxation liabilities, dealing specifically
with:
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
(viii)
(ix)
(x)
(xi)
(xii)
(xiii)
The differences between tax planning, tax avoidance and tax evasion
Employment compared with self-employment from a tax point of view
Tax implications of alternative remuneration packages
Choice of business medium
Tax implications of incorporation of a business
Tax treatment of alternative ways of extracting profits from a company
Tax implications arising from the disposal of a business
Income Tax assessment of consolidated groups
Treatment of entry and exits from a group
Treatment of group losses
Property Transfer Tax for groups of companies
Value Added Tax in groups of companies
Corporate insolvency and reconstruction (5A)
. Tax planning, tax avoidance and tax evasion
……………………
Tax planning ensures a taxpayer uses their financial resources most efficiently by minimising their tax
liabilities while complying wholly with the law.
……………………
TAX PLANNING can be defined as the minimising or deferring of tax liabilities. Tax planning is often achieved
by utilising exemptions and/or reliefs but it can also be achieved by structuring a transaction in a different
way.
Examples of this would be:
•
Trading through a limited company rather than an unincorporated entity
•
Gifting into trust rather than direct to an individual
•
Leasing rather than buying an asset
•
Running a business in partnership with a family member rather than employing him or her, and so on.
Tax planning is distinguished from financial planning in that financial planning is the establishment and
development of a comprehensive financial plan that is tailored to an individual's needs and which
maximises and protects financial resources, and is adapted to meet that individual's changing circumstances
during the various stages of their life. Despite this being the case, many financial planning opportunities
come within the ambit of tax planning.
Tax planning is not the reduction of tax liabilities by the use of illegal means. Tax evasion is the use of illegal
means to avoid tax. Such means include failing to disclose the relevant amounts of income and other forms
of fraud. The aim of the taxpayer practising tax evasion is to defraud the government of the revenue. Tax
evasion is an offence and may be punishable by fines and sometimes imprisonment.
On the other hand, tax avoidance is concerned with identifying opportunities to exploit tax legislation, and
to minimise or defer tax liabilities. Tax avoidance is, however difficult to define more thoroughly. It is not an
offence, but to discourage its practice the government may issue anti-avoidance legislation.
278
Anti-avoidance legislation aims at closing any loopholes in tax legislation so as to prevent taxpayers from
taking advantage of them. An example of an anti-avoidance measure in Zambian tax laws is the exemption of
consultancy business income from turnover tax. If this had not been the case, individuals may opt to work
as self-employed consultants rather than employees so that they pay turnover tax at a specified minimum
amount plus 3% of the excess monthly turnover depending on monthly turnover category compared with
income tax collected via PAYE at 37.5%.
The opportunities identified below cover various tax planning opportunities for individuals and companies.
……………………
Tax planning is the identification and use of tax reliefs and exemptions within the law to minimise or
defer taxation liabilities.
……………………
. Tax planning for individuals
……………………
In this section we consider the various tax planning opportunities for individuals.
……………………
..
Employment versus self-employment
An employee may consider leaving employment and starting up their own business as a self employed
person. When comparing an employee with a self-employed person from a taxation point of view, the main
issues to be considered include the following:
(a)
An employee does not have to account for income tax payable personally. The employer is
responsible for handling the employee's tax affairs. An employee cannot suffer any tax penalties.
Contrast this with a self-employed individual must account for income tax on their earnings
personally. In case of failing to comply with some obligations under the Income Tax Act, the selfemployed individual will suffer tax penalties.
For the employee, income tax is payable under the PAYE system immediately the emoluments are paid.
This means the employee cannot receive the gross earnings and pay income tax later on.
A self-employed individual with annual turnover in excess of K800,000 pays income tax based on
provisional income during the tax year. The final balance of income tax is payable by 21 June after
the end of the tax year. Assuming the profits are equal to cash, a self-employed person will be able to
invest that cash and earn additional income before 21 June following the end of the tax year.
(d)
Employees must pay contributions to NAPSA, with the employer also making a contribution on behalf
of employees. In addition, employees can also pay contributions into another pension scheme.
The self-employed are free to make their own pension arrangements. They must pay contributions
to NAPSA on behalf of their own employees, if they have any.
(e)
Deductions from emoluments for tax purposes are quite rare. Only a few statutory deductions are
allowed.
For the self-employed, all revenue expenses that are incurred wholly and exclusively for the
purposes of a business are deductible.
(f)
An employee cannot register for VAT and will bear all VAT on supplies received as a final consumer.
A self-employed individual may be able to register for VAT if they make taxable supplies. If so, they
will not bear VAT on supplies received by the business, unless the VAT relating to them
is irrecoverable.
279
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(c)
..
Alternative remuneration packages
An employee may be offered alternative remuneration packages, from which he should choose the one that
would put him in a better tax position. Such cases arise when an employee is considering changing jobs, or
where the current employer is trying to retain the employee's services.
The idea is to ensure that an individual has a higher amount of net income after all the payments.
Some matters that can be considered include the following:
(a)
A large salary will be taxable in full on the employee, subject to the statutory tax free pay amount,
which is K39,600 for the tax year 2019
A lower salary with free accommodation and a personal to holder car will be more tax efficient than
a large salary as these benefits are not taxable on the employee. Instead the employer is assessed on
these benefits.
Most employers may not be willing to provide such benefits since these will increase their own tax
liabilities. However, it would be beneficial for exempt organisations to consider awarding such benefits to
employees as there would be no tax implications for both the employees and the employers.
(b)
Lunch allowance received from the employer will be taxable on the employee, whereas if the employer
provides a canteen where meals are free, this is chargeable on the employer. Clearly an employee
would prefer to receive free canteen lunches rather than be taxed on a lunch allowance.
In all cases, the final decision is made after comparing the net income after all payments under each
alternative.
..
Choice of business medium
When an individual has decided to go into business he may be unsure whether to run the business as a sole
trader, a partner or a shareholder and director in a private company.
The key considerations are as follows:
(a)
A sole trader is assessed to income tax on the whole amount of tax adjusted profit from the
business, whether any drawings are made or not. The same applies to partners, who are each
assessed to income tax on their share of the whole amount of partnership tax adjusted profit, not
only their appropriations.
A director in a private company is only assessed to income tax on any amounts that they receive
from the company by way of emoluments.
(b)
Any private use of business assets by a sole trader or partner results in a restriction of capital
allowances to the proportion of private use. Any expenses relating to such assets are also not
allowed for tax purposes in full. Only the proportion relating to business use is allowed.
In the case of a director in a private company, private use of business assets does not result in
restrictions of capital allowances for the private company. Expenses incurred by a director which are
partly for business purposes and partly for private purposes are allowed for tax purposes in full when
computing the company's tax adjusted profits.
(c)
Provision of any form of benefit to an individual sole trader or partner out of the business results in
that benefit being chargeable on that sole trader or partner.
In the case of a director in a private company, provision of benefits that cannot be converted into
cash results in benefits being assessed on the company. This is the case when free accommodation or
personal to holder motor cars are provided for use by the director/employee. Benefits that are in the
form of cash are chargeable on the director/employee. As such, when the company incurs expenses
on the maintenance of an director's/employee's residence, those expenses would be chargeable on
the director/employee.
280
In order to choose the better alternative, it would be necessary to compare the net income after all
payments. The alternative that leaves a higher amount of net income is the better of the two. When making
this comparison, the underlying assumption is that taxable profit is equal to cash inflow.
... Family businesses
Further considerations arise where an individual has decided to run a business as an unincorporated business
with a family member, but is unsure whether to engage that family member as an employee or as a partner.
The key considerations in this case include the following, although there are many others.
(a)
If the family member is engaged as an employee, NAPSA contributions will be payable on behalf of that
family member and are tax deductible when computing the sole trader's tax adjusted profits.
If the family member is engaged as a partner, the obligation relating to NAPSA would not arise.
(b)
The payments made to a family member as an employee would all be deductible when computing
taxable profits, as long those payments are incurred wholly and exclusively for the purposes of the
business.
If the family member is engaged as a partner, then any payments made to them would not be
deductible when computing tax adjusted profits of the sole trader.
In arriving at the final decision as to which alternative is beneficial, there would be need to compare the net
income after all payments, the alternative that produces a higher amount of net income is the better of the
two, assuming that the taxable profits are equal to cash inflow.
EXAMPLE
Family business
Today's date is 1 December 2018.
Inness Tembo has been in business on her own account for many years making substantial amounts of
profits. In the year ending 31 December 2019, she expects to make a final taxable business profit of K95,000,
from a turnover of K850,000.
If Clement is introduced as a partner, then there will be annual partnership salaries of K20,000 for Inness and
K18,000 for Clement. Profits and losses would be shared between Inness and Clement in the ratio of 3:2
respectively. NAPSA contributions would not be payable by either party under this option.
If Clement is introduced as an employee, his annual salary would still be K18,000. He will then be required to
pay NAPSA contributions of 5% of the salary. Inness, as the employer, would also be required to pay a further
5% to NAPSA as employer's contribution. Inness will also get K20,000 as her own salary.
Required
(a)
Calculate the income tax payable by Inness and Clement for 2019, on the basis that,
(i)
(ii)
SOLUTION
(b)
Clement is brought into the business as a partner, and
Clement is brought into the business as an employee.
Advise Inness as to which of the two options is beneficial from a tax point of view.
In this example Inness wishes to run a business with her son, Clement, who may be engaged as a partner or
as an employee. If Clement were engaged as a partner, all payments to him would not be tax deductible
where as if he were engaged as an employee, all payments to, and on his behalf would be tax deductible.
281
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Her son, Clement Tembo, has just completed his studies at university. Inness is considering bringing him into
the business either as an employee or as a partner with effect from 1 January 2019.
The better alternative is determined by comparing the family's net income under each of the two
alternatives.
The solution is as follows:
(a)
Calculation of income tax under the two alternatives.
(i)
PERSONAL INCOME TAX COMPUTATIONS IF CLEMENT WAS A PARTNER FOR 2019
Total
Inness
K
K
Partnership salary
38,000
20,000
Balance (3:2)
57,000
34,200
Total income
54,200
95,000
Less tax free income
Final taxable income
Income tax payable
25%  K9,600/K1,200
30%  K5,000
Income tax payable
(ii)
(39,600)
Clement
K
18,000
22,800
40,800
(39,600)
14,600
1,200
2,400
1,500
300
–
3,900
300
INNESS TEMBO
PERSONAL INCOME TAX COMPUTATION FOR 2019 IF CLEMENT IS EMPLOYED
K
Original adjusted profit
Less:
Clement's salary
18,000
Employer's NAPSA
900
(5%  K18,000)
Less tax free income
Taxable income
K
95,000
(18,900)
76,100
(39,600)
36,500
K
Income tax:
25%  K9,600
30%  K25,200
37.5%  K1,700
Income tax payable
2,400
7,560
638
10,598
CLEMENT TEMBO
PERSONAL INCOME TAX COMPUTATION FOR 2019 IF CLEMENT IS EMPLOYED
Salary from employment
Less tax free income
Final taxable income
K
18,000
18,000
(18,000)
Nil
K
Income tax
25%  K0
282
Nil
(b)
If Clement is engaged as a partner, the net income for the family is:
Total profit
Less:
Income tax for Inness
Income tax for Clement
Net income
K
95,000
(3,900)
(300)
90,800
If Clement is engaged as an employee, the net income for the family is:
Total income
Less:
Income tax for Inness
Income tax for Clement
Clements' NAPSA (5%  K18,000)
Employer's NAPSA
Net income
K
95,000
(10,598)
(Nil)
(900)
(900)
82,602
If Clement was engaged as an partner, the family's net income would be higher by:
K90,800 – K82,602 = K8,198
Based on the above analysis, it is beneficial for Inness to engage Clement as a partner, rather than as
an employee.
.. Incorporation of a business
A sole trader or partners may decide to incorporate their business. Incorporation is a transfer of a business to
a company.
(a)
This will be a change of the status of the business. The original sole trader's business or partnership
will be deregistered for VAT so that the new company is registered.
(b)
Assets qualifying for capital allowances are deemed to have been disposed of at their market values,
and therefore, acquired by the new company at those values.
(c)
Cessation rules will apply when computing the assessable profits for the sole trader or for the
partners, as the case may be, while commencement rules would be applied when computing the
assessable profits for the new company.
.. Extracting profits from a company
Shareholders in private companies may consider several alternatives for extracting profits from a company.
Common ones are rewarding shareholders working as directors using large salaries, bonuses or dividends.
A salary and a bonus essentially have similar tax implications.
(a)
Assuming the salary being paid to a director in a private company is not already above the NAPSA
upper limit, payment of a bonus will attract additional NAPSA contributions. This will therefore
reduce the director's income.
(b)
Income tax will also, most likely be paid at 37.5% on any additional salary or bonus received from the
company.
(c)
The additional salary or bonus will be an allowable expense in the computation of the company's tax
adjusted profit.
283
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The following are the tax implications that arise as a result of the incorporation:
If, instead of huge salaries or bonuses, dividends are paid, the income tax implications would be:
(a)
NAPSA contributions are not payable on dividends.
(b)
Dividends are subjected to withholding tax at the rate of 15%. This amount of withholding tax is the
final tax payable.
(c)
The dividend paid will not be an allowable expense in the computation of the company's tax
adjusted business profit.
Where applicable, approved share option schemes may also be considered. There would be no income tax
payable on the benefit arising from exercising the options where the relevant conditions are complied with.
Like in all other cases, the best method of extracting profits from a company is one that leaves a larger
amount of net income after all the payments.
.. Disposal of a business
When a business is disposed of, the key factor to consider is whether that business has been sold as a going
concern or not. If the business is disposed of as a going concern, then all the assets are taken over by the
new owner. The business continues to operate but under new owners. As a result, the only tax implications
are to make the assessment on the persons making the disposal using cessation rules and start making the
assessments on the new owners using commencement rules.
If the business not sold as a going concern, VAT is payable on all taxable supplies. Similarly, property transfer
tax would be chargeable on the transfers of assets from the unincorporated business to the company. This is
because it would be the individual assets being disposed of rather than the business as a whole.
……………………
How a business is structured, or how money is extracted from an enterprise may make a difference to the
taxpayer's tax liability. By structuring transactions in a tax efficient way individuals may reduce or defer
their liability to tax.
……………………
. Tax planning for groups of companies
……………………
Groups of companies may also reduce their liabilities to tax by structuring their business in a tax efficient
way.
……………………
.. Company income tax for groups
Holding companies of groups are required to prepare consolidated financial statements for their groups.
Two companies are members of a group if one controls the other or both are under common control.
The holding company should be entitled to receive more than 50% of any profits available for distribution to
members and more than 50% of any net assets available for distribution to members on a winding up.
In addition, the holding company should also hold more than 50% of the other company and control over
50% of the voting rights of the other company.
The holding company should be able to exercise a dominant influence of the affairs of the subsidiary
company.
However, group members are taxable as separate entities. Therefore, the holding company of a group
cannot complete a single tax return for the entire group.
Each group member must complete its own tax return covering the relevant tax year. However, group
members should normally prepare their accounts to a common accounting date.
284
..
Treatment of entry and exits from a group
When a new company is acquired by a group and joins the group, that company is assessed separately for
company income tax purposes. The existing members of the group will still be taxable individually and
separately as explained in the previous section.
The new member must complete its own tax returns for each relevant tax year and will normally prepare its
accounts to a common accounting date with the rest of the group. In the year of entry to the group, the
acquired company will be required to make its company income tax assessments using commencement
rules.
When a company within the group is disposed of and hence exits the group, the taxation implications will
depend on whether that subsidiary has been sold as a going concern.
If the subsidiary is disposed of as a going concern, then all the assets of that company will be taken over by
the new owners. The business will continue operating but under new owners. For taxation purposes, the
only taxation implications are that the company is deemed to have ceased trading in the year of disposal
and therefore, the company income tax assessment for the subsidiary in the year of disposal is be made
using cessation rules.
If the subsidiary is not sold as a going concern, this means that the individual assets of the company are
being disposed of as opposed to selling the business as a whole. In such a case, VAT will be payable on all
taxable assets for VAT purposes. Similarly, property transfer tax will be chargeable on the transfers of
property by that company.
.. Treatment of group losses
There is no concept of group losses in Zambia. Companies making up a group are taxable individually as
separate entities.
This means that a tax loss incurred by one company within a group cannot be surrendered to be set of
against profits of another member of the group. An individual company within the group must utilise its
own losses. The tax loss must therefore be carried forward by the loss making group member and set off
against the first available profits of that company arising from the same source as that which produced the
loss. That loss can be carried forward for a maximum of five years. If at the end of the fifth year there is still
an outstanding loss, that outstanding loss cannot be relieved in any other way.
..
Property transfer tax for groups
When one group company makes a transfer of property to another group company as part of the internal
reorganisation of the group, the Commissioner General may determine that the realised value of that
property is nil. This rule only applies where the companies are Zambian resident companies. Companies that
members of a group but not resident in Zambia cannot benefit from this treatment.
.. Value Added Tax for groups
Group companies are required to individually and separately account for VAT and cannot register for VAT as
a single entity. Each company in the group must individually register for VAT, if that company makes taxable
supplies and meets the relevant VAT registration requirements (VAT registration requirements are covered in
an earlier chapter).
285
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
The Income Tax Act provides that tax losses incurred by a taxable person can only be deducted from income
derived by that person from the same source. Where a loss exceeds the income of a taxable person for the
charge year in which the loss was incurred, then the excess can be carried forward and be relieved by that
business, against income arising from the same source in the following five years.
This means that:
(a)
Each individual company within a group is required to file its own VAT return and account for any
output VAT on supplies made by the company and claim any input VAT on its expenditure.
(b)
VAT is chargeable on any taxable supplies of goods and services made by companies within the
group to each other.
Each individual company is held liable for any VAT due from that company and failure to meet any other
obligation relating to VAT.
.. Corporate insolvency and reconstruction
Reconstruction schemes are usually undertaken when companies are facing financial distress to prevent the
total failure of the company. Reconstruction schemes may also be undertaken as part of a strategy to
enhance the value of the firm for its owners.
There are two options available to companies facing financial distress:
(a)
(b)
The company may be allowed to go into liquidation; or
The company may undergo reconstruction to enable it continue in business.
... Corporate insolvency
A poorly performing company which is unprofitable, but has enough cash to keep going, might eventually
decide to go into liquidation, because it is not worth carrying on in business.
In some cases, liquidation can be an effective way of extracting the final value from the company where, the
net assets of the company are worth more than the share on a going concern basis, or where no one wishes
to buy the shares in the company as it stands.
In other cases a company which runs out of cash, even if it is profitable, might be forced into liquidation by
unpaid creditors, who want payment and think that applying to the court to wind up the company is the best
way of getting some or all of their money.
The process of liquidation is normally as follows:
(a)
The liquidator is appointed, and the trade ceases.
(b)
The assets of the company are solid, the receivables collected, and the liabilities paid.
(c)
There will be corporation tax due on any profits and gains made on the disposal of assets, and must
be paid.
(d)
The liquidator pays out the balance of the funds to shareholders, and the shares are cancelled.
(e)
The shareholders pay any tax due on the amounts received.
If payments are made to shareholders before the liquidator is appointed they are taxed as dividends and
after the liquidator is appointed they are treated as capital receipts for the disposal of shares.
The definition of 'dividend' in the income tax in relation to a company that is being wound up or liquidated,
include any profits distributed, whether in cash or otherwise, other than those of a capital nature, earned
before or during the winding up or liquidation.
... Reconstruction schemes
.... Reconstruction schemes to prevent business failure
Companies in financial distress however often undergo corporate reconstructions to enable them to remain
in business rather than go into liquidation.
286
A company might be on the brink of going into liquidation, but hold out good promise of profits in the future.
In such a situation, the company might be able to attract fresh capital and to persuade its payables
(creditors) to accept some securities in the company as 'payment', and achieve a capital reconstruction
which allows the company to carry on in business.
Corporate reconstruction in a failing company therefore often involves raising some new capital and
negotiating with creditors to convince them to accept some alternative to the repayment of their debts, to
ensure the business continues in the short term. In the longer term, the management will need to assess
whether a corporate reconstruction will help the company develop a sustainable competitive advantage,
and provide opportunities for raising further finance.
.... Reconstruction schemes for value creation
Reconstruction schemes may also be undertaken by companies which are not in difficulties as part of a
strategy to create value for the owners of the company. The management of a company can improve
operations and increase the value of the company by:
(a)
Reducing costs through the sale of a poorly performing division or subsidiary.
(b)
Increasing revenue or reducing costs through the acquisition of a company to exploit revenue or cost
economies.
(c)
Improving the financial structure of the company.
.... Types of reconstruction
(a)
Financial reconstruction which involves a company reorganises its capital structure, including
leveraged buyouts, leveraged recapitalisations and debt for equity swaps.
(b)
Portfolio reconstruction, which involves making additions to or disposals from companies'
businesses, e.g. through acquisitions.
(c)
Portfolio restructuring which consists of changes in the mix of assets owned by the firm or the lines
of business in which the firm operates (through acquisitions or disposal of assets or business units) in
order to increase the performance of the firm.
(d)
Organisational restructuring, which involves changes in the organisational structure of the firm, such as
divisional changes and hierarchical structures. As part of such a restructuring a company may redraw
divisional boundaries, it may flatten the hierarchical structure, it may streamline processes, it may adopt
a different system of corporate governance and it may reduce employment.
.... Taxation implications of reconstructions
The income tax act provides that in the case of a reconstruction scheme, any cash or the value of any asset
which is given to the shareholder in excess of the nominal value of the shares held by him before
reconstruction is treated as a dividend paid to the shareholder.
Similarly, when there is a partial reduction of the capital of a company, any cash or the value of any asset
which is given to the shareholder in excess of the cash equivalent of the nominal value by which the shares of
that shareholder are reduced is deemed to be a dividend paid to the shareholder.
Property transfer tax will not normally arise when one group company makes a transfer of property to another
member in the group as part of the internal reorganisation of the group, as was discussed above.
287
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
Depending on the actions that a company needs to take as part of its reconstruction plans, these schemes
are usually classified in three categories:
QUESTION
12.1 Kachali and Chali
For the purposes of this question you should assume that today's date is 1 December 2018 and you should
ignore NAPSA contributions.
Kachali and Chali are to commence in business on 1 January 2019 running a retail shop. They are unsure
whether to run the new business as a partnership or as a limited company. Whether they run the new
business as a partnership or as a limited company, they will contribute equal amounts of capital and share
any appropriations between them equally.
Irrespective of whether the business is run as a partnership or as a limited company, Kachali and Chali will
personally manage it.
On 1 January 2019, they will purchase two motor cars at a cost of K30,000 each for use by each of them for
both business and private purposes. Approximately, private use of each of the two cars by each person will
be 60%. Each person will personally keep the car each day at his residence over night. Employees will not be
allowed to drive any of these cars. Each of the two motor cars will have a cylinder capacity of 2,000 cc and
will be petrol driven. On 1 June 2019, they will buy two motor vans at a cost of K45,000, each for use in
delivering goods to customers. These motor vans will not have private use by any of the employees and will
each have a cylinder capacity of 2,700 cc and will be diesel driven.
If they run their new business as a partnership then the tax adjusted profit for the year ending 31 December
2019 is expected to be K300,000. This profit is before taking account of capital allowances on implements,
plant and machinery, but after all other necessary adjustments. They will withdraw K250,000 of the profit as
partnership salaries.
If they run their business as a limited company they will make up accounts to 31 December 2019 and the
company's tax adjusted profit before capital allowances on implements, plant and machinery for the year
ending 31 December 2019 is also expected to be K300,000. This figure is before taking account of director's
remuneration, but after all other necessary adjustments. They will personally withdraw K250,000, of the
company's profits, and this will be either as director's emoluments or as dividends.
Neither Kachali nor Chali has any other income for 2019.
Required
(a)
Describe the criteria that would normally be used to determine whether a motor car is a pool car for
taxation purposes and explain whether the two motor cars to be bought on 1 January 2019 will be
classified as pool cars.
(b)
Calculate Kachali and Chali's income tax payable for 2019 if they run their business as:
(i)
(ii)
(iii)
(c)
Calculate the company income tax payable for the year ended 31 December 2019 if Kachali and Chali
run their business as a limited company and:
(i)
(ii)
(d)
A partnership
As a limited company and withdraw gross director's emoluments of K250,000
As a limited company and withdraw dividends of K250,000
Withdraws gross director's emoluments of K250,000
Withdraws dividends of K250,000
Based on your calculations in parts (b) and (c), advise Kachali and Chali whether it will be beneficial to
run their business as a partnership or whether they should run it as a limited company.
……………………
Group members can take advantage of limited concessions allowing the whole group to be treated as a
single entity for tax purposes.
Companies facing financial distress may be allowed to go into liquidation, or may undergo reconstruction
to enable them to continue in business.
288
……………………
Chapter Roundup
Tax planning is the identification and use of tax reliefs and exemptions within the law to minimise or defer
taxation liabilities.

How a business is structured, or how money is extracted from an enterprise may make a difference to the
taxpayer's tax liability. By structuring transactions in a tax efficient way individuals may reduce or defer their
liability to tax.

Group members can take advantage of limited concessions allowing the whole group to be treated as a
single entity for tax purposes.

Companies facing financial distress may be allowed to go into liquidation, or may undergo reconstruction to
enable them to continue in business.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system

289
Quick Quiz
290
1
Distinguish tax planning from tax avoidance.
2
What are the tax implications for a business sold as a going concern?
Answers to Quick Quiz
Tax planning is the process of the identifying and using tax reliefs and exemptions within the law to minimise
or defer taxation liabilities. Tax avoidance is concerned with identifying opportunities in tax legislation, and
use them to minimise or defer tax liabilities.
2
When a business is sold as going concern, there are no tax implications for both VAT and property transfer
tax.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
1
291
Answer to Question
12.1 Kachali and Chali
(a)
For the purposes of taxation, a motor car is classed as a pool car if:
(i)
(ii)
(iii)
It is not available for use by one employee or director to the exclusion of others.
It is not normally kept overnight at, or near the residence of one employee or director.
It is specifically meant for business use, any private use being incidental to the business use.
In respect of Kachali and Chali, the two motor cars that will be bought will be for the exclusive use of Kachali
and Chali for both business and private use. The motor cars will be kept at their homes over night and no
other employee will normally be allowed to use any of the two motor cars.
Based on the criteria described above, it is most likely that the two motor cars will not be classed as pool
cars.
(b)
(i)
PERSONAL INCOME TAX COMPUTATION IF BUSINESS RUN AS A PARTNERSHIP - 2019
Adjusted profit
Less capital allowances
20%  K30,000  2  40%
25%  K45,000  2
Final trading profit
Salaries
Balance (1:1)
Income tax:
0%  K39,600
25%  K9,600
30%  K25,200
37.5%  K61,950
Income tax payable
(ii)
(4,800)
(22,500)
272,700
250,000
22,700
272,700
Kachali
K
Chali
K
125,000
11,350
136,350
125,000
11,350
136,350
Nil
2,400
7,560
23,231
33,191
Nil
2400
7,560
23,231
33,191
PERSONAL INCOME TAX COMPUTATIONS IF BUSINESS RUN AS A COMPANY
Emoluments
Income tax:
0%  K39,600
25%  K9,600
30%  K25,200
37.5%  K50,600
Income tax payable
(iii)
Total
K
300,000
Kachali
K
125,000
Chali
K
125,000
Nil
2,400
7,560
18,975
28,935
Nil
2,400
7,560
18,975
28,935
If the business is run as a limited company and the Directors draw dividends of K250,000, withholding
tax payable of 15%  K250,000 = K37,500 will be the final tax. Therefore, no further income tax will
be paid by Kachali and Chali.
(c)
(i)
COMPANY INCOME TAX COMPUTATION IF REMUNERATION IS DRAWN - 2019
Tax adjusted profit
Less:
Total remuneration
Capital allowances:
20%  K30,000  2
292
K
300,000
(250,000)
(12,000)
25%  K45,000  2
Taxable income
(22,500)
15,500
Company income tax @ 35%
(ii)
K5,425
COMPANY INCOME TAX COMPUTATION IF DIVIDENDS ARE DRAWN - 2019
K
300,000
Tax adjusted profit
Less capital allowances:
20%  K30,000  2
25%  K45,000  2
Taxable income
(12,000)
(22,500)
265,500
Company income tax @ 35%
K92,925
Withholding tax on dividends paid will be equal to K37,500 as in (b) (iii) above.
Computations of net income under each of the various alternatives is as follows:
Total income
Less:
Total personal income tax
(K33,191  2)/(K28,935  2)
Partnership
K
300,000
(66,382)
Company income Tax
Withholding tax
Net income
Limited Company
Emoluments
Dividends
K
K
300,000
300,000
(57,870)
(5,425)
(92,925)
(37,500)
233,618
236,705
169,575
Based on the above calculations, it would be beneficial for the business to be run as a limited company with
Kachali and Chali rewarding themselves by way of emoluments.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
(d)
293
ETHICAL ISSUES IN TAX PRACTICE
In this chapter we look at ethical issues in tax practice.
syllabus references
294
1 Taxation, ethics and the fundamental principles
6A
2 Threats to the fundamental principles
6A
3 Ethical safeguards
6C
4 Tax avoidance and tax evasion
6B
LEARNING OBJECTIVES

For a given business scenario explain how the fundamental principles of integrity, objectivity, professional
competence and due care, professional behaviour and confidentiality apply when providing taxation services
and identify and evaluate an appropriate course of action (6A)

For a given business scenario explain the nature of and difference between tax avoidance and tax evasion
and evaluate an appropriate course of action (6B)

Design and recommend appropriate ethical safeguards in tax practice (6C)
. Taxation, ethics and the fundamental principles
……………………
In this section we discuss the importance of professional ethics and explain the source of ethical guidance
for professional accountants.
……………………
..
Professional code of ethics
Professional codes of ethics for the accountancy profession are designed to guide the individual behaviour
of professional accountants. The International Ethics Standards Board for Accountants (IESBA), a body of
IFAC, lays down fundamental principles in the Code of Ethics for Professional Accountants.
Accountants require such an ethical code because they hold positions of trust, and people rely on them and
their expertise.
The IESBA's Code of Ethics for Professional Accountants gives the key reason why accountancy bodies
produce ethical guidance: the public interest.
The public interest is considered to be the collective wellbeing of the community of people and institutions
the professional accountant serves, including clients, lenders, governments, employers, employees,
investors, the business and financial community and others who rely on the work of professional
accountants.
..
The fundamental ethical principles
ZiCA has adopted the IESBA's Code of Ethics for Professional Accountants and all members of ZiCA must
comply with the fundamental principles outlined in the Code of Ethics.
The five fundamental principles are:
(i)
(ii)
(iii)
(iv)
(v)
Integrity
Objectivity
Professional competence and due care
Confidentiality and
Professional behaviour
295
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
'A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in
the public interest. Therefore, a professional accountant's responsibility is not exclusively to satisfy
the needs of an individual client or employer.'
The IESBA Code of Ethics for Professional Accountants provides a conceptual framework for applying these
principles. Members must apply this conceptual framework to identify threats to compliance with the
principles, evaluate their significance and apply appropriate safeguards to eliminate or reduce them so that
compliance is not compromised.
The following paragraphs explain the five fundamental principles and describe how they apply to the
provision of taxation services.
... Integrity
Members shall be straightforward and honest in all professional and business relationships.
The principles of honesty and integrity impose an obligation on the practitioner to ensure
straightforwardness, fair dealing, a commitment not to mislead or deceive and truthfulness.
This means that a member providing tax services shall ensure that their own personal tax obligations and
those of any associated entities for which the member is responsible are properly discharged.
It also means that a member providing taxation services must not knowingly be associated with reports,
returns, communications or other information where the member believes that the information:
(a)
(b)
Contains a materially false or misleading statement or calculation.
Contains statements or information furnished recklessly.
... Objectivity
Members shall not allow bias, conflict of interest or undue influence of others to override professional or
business judgements.
Members shall be impartial and not allow prejudice or bias, conflict of interest or the influence of others to
override their objective judgement in relation to tax matters.
In situations where a member is required to act as an advocate for a client when representing or assisting them
before tribunals or courts of law, the member shall ensure that the client is aware that the member has an
obligation not to mislead the Court or Tribunal and to safeguard their professional objectivity.
... Professional competence and due care
Members shall maintain professional knowledge and skill at a level required to ensure that a client or
employer receives competent professional services based on current developments in practice, legislation
and techniques and shall act diligently and in accordance with applicable technical and professional
standards when providing professional services.
This means that members engaged in providing tax services shall maintain professional competence and take
due care in the performance of their work. To achieve this, members shall remain continuously aware of
developments in the tax profession and tax legislation to ensure that they have the requisite knowledge
related to such developments, including an awareness of relevant national pronouncements and other
relevant statutory requirements and regulations.
Members must take reasonable care in ascertaining a client's state of affairs, to the extent that ascertaining
the state of those affairs is relevant to a statement being made on behalf of the client. Members must
ensure that tax laws are applied correctly and lawfully to the circumstances of the particular client.
Members shall not knowingly obstruct the proper administration of tax law.
Members must exercise due diligence and care in accordance with applicable technical and professional
standards in their interaction with the Zambia Revenue Authority on behalf of their clients. In the context of
tax services requested, a member shall advise a client on the application of tax law, including any possible
296
penalties and other legal tax consequence, so as to allow the client or employer to make an informed
decision of the course of action to be taken.
... Confidentiality
Members shall respect the confidentiality of information acquired as a result of professional and business
relationships.
They should therefore, not disclose any such information to third parties without proper and specific
authority, unless there is a legal or professional right or duty to disclose, nor use the information for the
personal advantage of the professional accountant or third parties.
A member who acquires confidential information during the course of performing professional tax services
for a client shall not use or disclose any such information without proper and specific authority, unless there
is a legal or professional right or duty to disclose such information.
... Professional behaviour
Members shall comply with relevant laws and regulations to avoid any action that discredits the profession.
Members shall act in a manner consistent with the good reputation of the Institute and the tax profession,
refraining from any conducts that might bring the Institute and/or tax profession into disrepute.
Members should conduct themselves professionally with due consideration towards clients, third parties,
other members of the tax profession, staff, employers and the general public.
All professionals who provide tax services shall do so in accordance with appropriate standards of
professional and ethical conduct.
……………………
The ethical code provides a framework for applying the five fundamental principles of ethics.
……………………
. Threats to the fundamental principles
In this section we cover the potential threats to a ZiCA member's compliance with the fundamental
principles.
……………………
.. Threats to compliance with the fundamental principles
There are many potential scenarios where a member of ZiCA may find themselves in a situation where there
is a specific threat to compliance with the fundamental principles. These include:
(a)
(b)
(c)
(d)
(e)
Self-interest threat
Self-review threat
Advocacy threat
Familiarity threat
Intimidation threat.
297
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
……………………
.. Threats
... Self-interest threat
A self-interest threat may occur where a member's financial or other interests may inappropriately
influence their professional judgement.
... Self-review threat
A self-review threat may occur when a member has to review work that they have previously done. It may
be difficult for that member to re-evaluate their own previous judgments objectively, or identify any defects
in their work for fear of receiving a reprimand, ruining their reputation or even losing their job.
... Advocacy threat
An advocacy threat can occur if the member is asked to promote or represent their client in some way. In
this case, the member would likely be biased in favour of the client and therefore his/her objectivity may be
compromised.
... Familiarity threat
An advocacy threat can occur where, because of a long or close relationship with a client or employer, a
member becomes too sympathetic to their interests or too accepting of their work.
... Intimidation threat
An advocacy threat can occur when a member may be deterred from acting objectively because of actual or
perceived pressures, including attempts to exercise undue influence over the member.
.. Evaluation of threats
The member must evaluate the significance of any threat as soon as he knows, or should be expected to
know, of its existence.
This is a matter of professional judgment and the matters that form part of the evaluation will depend on the
type of threat that exists.
For example, if a client offers a member gifts or hospitality this may give rise to a self-interest threat to the
fundamental principle of objectivity. This is because the offer may sway the member's judgment in favour of
the client when preparing his tax computations. In evaluating the significance of this type of threat matters
such as the nature and monetary value of the gift or hospitality to both the client and the member, and the
intention of the offer should be considered.
……………………
ZiCA members should be aware of threats to their compliance with the fundamental principles.
……………………
. Ethical safeguards
……………………
In this section we discuss the ethical safeguards that should be put in place to deal with threats to
compliance with the fundamental principles.
…………………
298
Where the member has identified that threats exist that compromise one or more of the fundamental
principles, safeguards should be applied.
These should eliminate or reduce threats to an acceptable level, and fall into two broad categories:
(a)
Safeguards created by the profession, legislation or regulation, such as education and training,
continuing professional development, professional or regulatory monitoring and disciplinary
procedures.
(b)
Safeguards in the work environment, such as policies and procedures to implement and monitor
quality control of engagements, and effective, well publicised complaints systems operated by the
employing organisation.
The nature of the safeguards to be applied will vary depending on the circumstances. In exercising
professional judgement, a member should consider what a reasonable and informed third party, having
knowledge of all relevant information, including the significance of the threat and the safeguards applied,
would conclude to be unacceptable.
If a member cannot implement appropriate safeguards, he should decline or discontinue the specific
professional service involved, or where necessary resign from the client.
……………………
Ethical safeguards eliminate threats to compliance with the fundamental principles or reduce them to an
acceptable level.
The two categories of safeguards are those created by the profession, legislation or regulation and those
in the work environment.
…………………
. Tax avoidance and evasion
……………………
In this section we describe the nature of tax avoidance and tax evasion.
.. Tax planning
Tax planning can be defined as the minimising or deferring of tax liabilities by utilising various provisions of
the law.
Government in many cases provides various deductions and exemptions which can be used to minimise or
reduce a taxpayer's tax liability. Tax planning is often achieved by utilising such exemptions and/or reliefs but it
can also be achieved by structuring a transaction in a different way. Examples of this would be:
•
•
•
•
Trading through a limited company rather than an unincorporated entity
Gifting into trust rather than direct to an individual
Leasing rather than buying an asset
Running a business in partnership with a family member rather than employing them
Tax planning ensures an individual uses their financial resources most efficiently by minimising their tax
liabilities while complying wholly with the law and applying the law in the way it was intended.
.. Tax avoidance
There is a thin line of difference between tax planning and tax avoidance and the two terms are sometimes
used interchangeably.
299
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
…………………
Tax avoidance can be defined as acting within the law, sometimes at the edge of legality, to minimise,
eliminate or defer tax that would otherwise be legally owed. It involves a taxpayer taking advantage of
loopholes or weaknesses and mismatches in tax law to minimise or defer tax liabilities, thereby obtaining a
tax advantage that was not originally intended by tax legislation.
Tax avoidance is legal and not an offence, but it defeats the intention or purpose of the law and therefore,
to discourage its practice, the Government may issue anti-avoidance tax legislation. Anti-avoidance
legislation aims at sealing the loopholes in the tax legislation so as to prevent taxpayers from taking
advantage of them, and thereby reducing their tax liabilities lawfully.
.. Tax evasion
Tax evasion refers to the use of illegal means to avoid or reduce tax liabilities. The aim of the taxpayer
practising tax evasion is to defraud the Government of the revenue.
Such illegal means of reducing tax liabilities may include but are not limited to the following:
(a)
Deliberate concealment of income, including overstatement of tax credits or exemptions and
suppression of profits. This results in the disclosure of income which is not the actual income earned
by the taxpayer.
(b)
Deliberate misrepresentation of material fact, manipulation of accounts, disclosure of unreal
expenses for deductions, showing personal expenditure as business expenses etc.
(c)
Hiding relevant documents.
(d)
Not maintaining complete records of all the transactions.
(e)
Not reporting taxes such as Value Added Tax, Pay as You Earn and withholding tax. These taxes are
collected from others by the taxpayer and held in trust by the business, to be reported and paid to
the Zambia Revenue Authority. Wilfully using such taxes to fund a business instead of reporting the
collection and paying the taxes when they are due is tax fraud.
The distinction between tax avoidance and tax evasion is not always that clear. For example, a tax avoidance
scheme comprising a series of transactions solely designed to reduce the tax liability with no commercial gain
to the taxpayer may be taken as illegal and therefore amount to tax evasion.
The causes and consequences of tax evasion
Tax evasion arises when taxes are perceived to be too high or unfair on taxpayers. However, it can also be
just deliberate where the taxpayer intentionally hides some income. Tax evasion is an offence and may be
punishable by fines and/or imprisonment.
The consequences of tax evasion include:
(1)
Loss of revenue for government: The Government sustains enormous revenue losses that directly
affect its debt level and jeopardise its capacity to provide services and fund programmes that meet
the needs of our ever-changing society.
(2)
Some people have to pay for others: People who comply with the law shoulder a heavier tax burden
than they should because they must compensate for others who participate in the underground
economy.
(3)
Tax compliant businesses face unfair competition: Businesses that fulfil their tax obligations face
unfair competition from those that do not.
……………………
A taxpayer may arrange their tax affairs in a way that minimises their tax liability through tax planning
using reliefs and exemptions. Tax avoidance exploits gaps in the law and is not encouraged, but is still
legal. Tax evasion is illegal and can result in fines and/or imprisonment. There is sometimes a fine line
between tax avoidance and tax evasion.
……………………
300
Chapter Roundup
The ethical code provides a framework for applying the five fundamental principles of ethics.

ZiCA members should be aware of threats to their compliance with the fundamental principles.

Ethical safeguards eliminate threats to compliance with the fundamental principles or reduce them to an
acceptable level.

The two categories of safeguards are those created by the profession, legislation or regulation and those in
the work environment.

A taxpayer may arrange their tax affairs in a way that minimises their tax liability through tax planning using
reliefs and exemptions. Tax avoidance exploits gaps in the law and is not encouraged, but is still legal. Tax
evasion is illegal and can result in fines and/or imprisonment. There is sometimes a fine line between tax
avoidance and tax evasion.
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system

301
Quick Quiz
302
1
Why are professional codes of ethics for professional accountants developed?
2
State the fundamental principles of the IFAC Code of Ethics for Professional Accountants.
3
Explain when a self-review threat may arise.
4
Explain the meaning of tax planning, tax avoidance and tax evasion.
5
State three consequences of tax evasion.
Answers to Quick Quiz
1
Accountants require a professional ethical code because they hold positions of trust, and people rely on
them and their expertise. The IESBA's Code of Ethics for Professional Accountants gives the key reason why
accountancy bodies produce ethical guidance: the public interest.
2
The five fundamental principles are integrity, objectivity, professional competence and due care,
confidentiality and professional behaviour.
3
A self-review threat may occur when a member has to review work that they have previously done. It may be
difficult for that member to re-evaluate their own previous judgments objectively, or identify any defects in
their work for fear of receiving a reprimand, ruining their reputation or even losing their job.
4
Tax planning is the minimising or deferring of tax liabilities by utilising various provisions of the law in the
manner tax law was originally intended for. It is not illegal.
Tax avoidance involves a taxpayer taking advantage of loopholes or weaknesses and mismatches in tax law to
minimise or defer tax liabilities, thereby obtaining a tax advantage that was not originally intended by tax
legislation. Tax avoidance is legal but it defeats the intention or purpose of the tax law.
Tax evasion refers to the use of illegal means to avoid or reduce tax liabilities. The aim of the taxpayer
practising tax evasion is to defraud the Government of the revenue.
Consequences of tax evasion include:
•
•
•
Loss of revenue for government
Tax compliant taxpayers shoulder a heavier tax burden than they should
Tax compliant businesses face unfair competition
PART A: THE ZAMBIAN TAXATION SYSTEM // 1: The Zambian taxation system
5
303