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Domestic Minimum Top Up Tax

By Tatenda Tendayi

Finance Act 13 of 2023 (the “Finance Act”) was gazetted on 30 December 2023 and some of the proposals which were announced during the 2023 national budget were passed into law. One of the major highlights of the Finance Act was the introduction of a Domestic Minimum Top Up Tax (“DMTT”). The DMTT was introduced to align with The Pillar Two Model Rules (also referred to as the “Global Anti-Base Erosion” or “GloBE” Rules) which were released on 20 December 2021. These rules are part of the Two-Pillar Solution to address the tax challenges of the digitalisation of the global economy that was agreed by 137 member jurisdictions of the Organisation for Economic Cooperation and Development/G20 Inclusive Framework on Base Erosion and Profit Sharing and endorsed by the G20 Finance Ministers and Leaders in October 2021.

Key features of the Pillar Two Model Rules are:

  1. they are designed to ensure that large multi-national companies pay a minimum level of tax (fifteen percent) in each jurisdiction where they operate;
  2. they provide for a co-ordinated system of payment of top-up tax in jurisdictions where these large companies are paying tax at a rate lower than the minimum level; and
  3. they came into effect in 2024.

Zimbabwe’s DMTT rules are codified in section 12B of the Income Tax Act [Chapter 23:06] (the “ITA”). Key features of the DMTT rules are that they apply only to “foreign entities” which are defined as any juristic entity domiciled outside Zimbabwe including:

  1. any locally incorporated subsidiary company of a foreign entity;
  2. any locally registered company of a foreign entity; and
  3. any locally resident agent, arm or branch of a foreign entity.

Under Zimbabwe’s DMTT rules, the onus is on the foreign entity to determine its effective rate of corporate tax. Section 12B(2) outlines the formula for the determination of effective rate of corporate tax. Where a foreign entity earns income from a source in Zimbabwe and, in its country of residence, pays no corporate tax or corporate tax at an effective rate of less than fifteen percent, then such foreign entity is liable to pay a top up tax to ensure that its effective corporate tax on income earned from Zimbabwe is at least fifteen percent.

The DMTT rules apply even where there is a double tax agreement between Zimbabwe and the foreign entity’s country of residence which renders the foreign entity not liable for tax in Zimbabwe or liable for tax at a rate lower than fifteen percent.

There are a few issues which require clarification in the implementation of the DMTT rules. Section 12B(1) of the ITA defines “corporate tax” as any tax, by whatever name called, that is levied on the income or capital of any entity. This definition is expansive considering that the Zimbabwe has various tax heads such as income tax, value added tax and capital gains tax levied on the income and capital receipts of a taxpayer. Given that each tax head has its own formulae and tax rates, it could potentially complicate the calculation of a foreign entity’s effective rate of corporate tax.

Additionally, the DMTT rules nullify the benefits of any double tax agreement between Zimbabwe and another country which result in a foreign entity paying corporate income tax in Zimbabwe at a rate lower than fifteen percent. The DMTT rules do not address other special investment dispensations which potentially result in foreign entities paying tax at lower-than-normal tax rates. For instance, qualifying entities with special economic zone status are entitled to corporate income tax rate of zero percent in the first five years of their operations. It is still unclear what impact the DMTT rules will have on this and similar investment dispensations.

Section 12B(5) of the ITA empowers the Minister of Finance and Economic Development to make regulations to give effect to the DMTT rules and it is anticipated that such regulations will clarify the issues mentioned above. If addressed clearly, the DMTT rules will go a long way in ensuring Zimbabwe’s compliance with Pillar Two Model Rules and enhance tax revenue collection.