Our Vision To be a world class organisation recognized as a beacon of excellence in revenue administration

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2 Our Mission To optimise and sustain revenue collection through integrated, efficient, cost effective and transparent systems, professionally managed to meet the expectations of all stakeholders. Our Vision To be a world class organisation recognized as a beacon of excellence in revenue administration

3 CONTENTS PAGE 1.0 GENERAL INTRODUCTION DEFINITIONS TYPES OF PAYMENTS SUBJECT TO WHT S.82A OTHER PAYMENTS SUBJECT TO WITHHOLDING TAX 9 S.81 AND S. 81A 6.0 COMMISSIONER-GENERAL S DIRECTION DUE DATES PENALTIES FORMS IN USE DOMESTIC TAXES OFFICES 13 1

4 GENERAL This PRACTICE NOTE describes the provisions of Sections 81, 81A and 82A, which relate to the deduction of withholding tax from certain types of payments. It takes into account the various changes that have occurred since the last issue of 2003 and reflects the current status for the charge year The commentary is for general guidance only and is not intended to substitute the law in any particular case. It is therefore not exhaustive and does not affect any person's right of appeal on any point concerning their liability to tax, nor does it preclude any discretionary treatment which may be allowed under the law. Enquiries may be made through the National Call Centre of Zambia Revenue Authority, your nearest Client Service Centre or any Domestic Taxes Office. Berlin Msiska COMMISSIONER-GENERAL 2 2

5 2.0 INTRODUCTION A withholding tax is deductible from a payment by the person who is liable to make the payment (the payer) at the point in time the person to whom it is due to be made (the payee) becomes legally entitled to it (the date of accrual). Withholding tax was first introduced in Zambia on interest, management and consultancy fees, royalties and public entertainment fees in The withholding tax has over the years been extended to dividends, rents, commissions and payments to non-resident contractors. 3.0 DEFINITIONS In this Practice Note, the following words and expressions will have the following meaning: 3.1 Date of accrual 3.2 Payee 3.3 Payer This is the date on which payment is legally due to the payee. This is also the date on which tax is deductible regardless of whether the actual payment has been made or not to the payee. The date of accrual determines the date by which the tax deductible is payable to the Zambia Revenue Authority. The person legally entitled to receive a payment. This is the person who is liable to make a payment to the payee and also responsible for deducting and remitting tax to the Zambia Revenue Authority. 4.0 TYPES OF PAYMENTS WHICH ARE SUBJECT TO WITHHOLDING TAX UNDER SECTION 82A Withholding tax is deductible on the date of accrual of any amount due to a payee. The amount from which tax is to be deducted is the total amount payable before any deduction whatsoever (gross). However, for a WHT on 3

6 a payment such as commercial rent where the supplier is registered for Value Added Tax (VAT) the tax treatment should be as illustrated in Example 2 below: Example 1- Non VAT registered supplier (e.g Rental Payment) K Gross Amount 10, Withholding 10 % 1, Amount Net of WHT 9, Example 2 VAT registered Supplier Zed Limited, a VAT registered supplier rents out its property at K10, 000 per month (VAT exclusive) to Mr. Rich. Zed Limited is required to charge VAT on the K10,000 rental amount at 16%, whilst Mr. Rich is required to deduct WHT at 10% on the K10,000 (VAT exclusive amount) when making the payment to Zed Limited. It should be noted that Zed Limited is liable to the 10% WHT under Income tax which will be deducted by Mr. Rich and Mr. Rich is economically liable to the VAT that will be charged by Zed Limited. K Gross Rental Amount before VAT 10, VAT 16 % 1, Total Invoiced Rental Amount (VAT inclusive 11, amount) WHT@ 10% of Gross Rental Amount 1, VAT@16% of Total Invoice Amount 1, Note: From example 2 it can be seen that both the WHT and VAT are applied on the same contractual payment, that is, the K10, Mr Rich will thus pay a total of K11, of which K1, will be remitted to ZRA as WHT and K10, will be paid to Zed Limited. Zed Limited will be required to declare K1, as output VAT to ZRA. 4

7 4.1 Interest Interest is not defined in the Income Tax Act, but it is to be taken as an amount calculated according to a fixed ratio on debt or money lent. Interest can be earned on savings or deposit accounts, treasury bills, government bonds or any other financial instruments Government Bonds, Corporate Bonds and Treasury Bills The withholding tax rate on interest earned on government or corporate bonds and Treasury Bills is 15%. This tax is final for individuals and for organisations that are exempt from Income Tax as per Second Schedule to the Income Tax Act (Exempt Organisations). The implication for Exempt Organisations is that despite their income being exempt, they are liable to tax on interest arising from government or corporate bonds, treasury bills and other financial instruments or securities (Securities in this regard are as defined in the Securities Act). Exempt organisations include; Approved Public Benefit Organisations, Local Authorities, Statutory Bodies, Approved funds, Collective Investment Schemes etc. The final tax rate for companies and other organisations is at 35% and thus eligible to the credit on WHT deducted when determining the final liability payable Interest earned on deposit and savings accounts The withholding tax rate for interest earned on deposit and savings accounts held with financial institutions including building societies is 0% for both resident and non-resident individuals and 15 % for others Other Interest Withholding tax on any interest not falling under and is at the rate of 15% and is final tax for individuals Exempt Interest Notwithstanding paragraph the following interest is exempt from tax; 5

8 a) interest on any public loan raised by the Government or a statutory corporation, where the terms of the loan provide that the interest thereon shall be exempt from tax; (b) interest on any bond issued under or in respect of a loan of the kind described in clause (a). 4.2 Royalties 4.3 Rents Royalty is defined in the Income Tax Act as a payment in any form received as a consideration for the use of, or the right to use, any copyright of literary, artistic, or scientific work (including cinematograph films and tapes for radio or television broadcasting), any patent, trademark, 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% for residents and 20% for nonresidents. However, in the case of non-residents, this is the final tax. Some examples of Royalties are payments for the rent of cinematograph films whether those films are exhibited in cinemas or television and income from leasing. Payment for the use of equipment under an operating lease also attracts withholding tax. Rent means 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. It is important to note that the property from which rentals the withholding tax is deducted must be situated in Zambia. The rate of withholding tax is 10% and is the final tax. 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. 6

9 4.4 Management and Consultancy Fees Management or consultancy fee means payment in any form, other than an emolument, for or in respect of any creation, design, development, installation and maintenance of any information technology or solution, programme or system, administrative, consultative, managerial, technical or consultative or any service of a like nature. It should be noted that withholding tax is deductible from payments to a payee who is not in business in Zambia but renders a service to a person carrying on business in Zambia. It does not matter whether the service is rendered in Zambia or not. The rate of withholding tax is 20%. Where a payment is made to a person carrying on business in Zambia, no withholding tax should be deducted. Such persons in receipt of management or consultant's fees are required to pay tax under the normal income tax system. These taxpayers are, among other tax obligations, required to submit provisional and annual income tax returns even if their income per annum is below the turnover tax threshold. 4.5 Public Entertainment Fees Public entertainment fee means a payment in any form other than an emolument to, on behalf of, or in respect of, any person or persons in partnership, including theatre, motion picture, radio or television artists, musicians, athletes or sports persons, in respect of those persons' personal activities in any entertainment, competition or similar activity within the Republic The withholding tax is deductible from payments made to non-resident entertainers and sportsmen for performances within Zambia. These would include non-resident: singers, musicians, actresses, comedians etc. The responsibility to withhold is on the promoter of the event or any other person managing the affairs of such foreign artist. The withholding tax rate is 20% and is the final tax. 7

10 4.6 Commissions A commission that is subject to withholding tax is any commission other than a commission received by an individual whose income is from employment or office. The withholding tax rate for residents is 15% and 20% for non-residents. The tax is not final for residents but is final tax for non-residents. 4.7 Winnings from Gaming, Lotteries and Betting The Income Tax Act was amended in 2014 to introduce the requirement to deduct withholding tax at the rate of 20% on winnings from gaming, lotteries and betting. All winnings from gaming, lotteries and betting in money or money's worth shall be subject to withholding tax. Examples include winnings from raffle draws, commercial promotions and radio/television promotions or winnings from any other game of chance. Where the winning is in the form of a service or tangible good (e.g. house, car, holiday package, etc), the tax shall be levied on the value of the service or the good respectively. Below are examples illustrating how the values are to be determined: Example 1 Mr. X wins a house worth K250, in a promotion. The promoter will deduct and remit withholding tax of K50, to Zambia Revenue Authority; Example 2 Ms. Y wins a holiday package worth K20, in accommodation and food, K8, air tickets and K2, for incidentals. The promoter will account for withholding tax as follows: Accommodation and Food K20, Air Tickets K 8, Incidentals K 2, Total K30, % K 6,

11 5.0 OTHER TYPES OF PAYMENTS 5.1 Dividends - Section 81 Dividend means any amount distributed or credited as construed in subsection (3) by a company to its shareholders; Subsection three of section two provides as follows; 3) The reference in the definition of "dividend" to amount distributed or credited" shall be read and construed - (a) so as to include - (i) in relation to a company that is being wound up or liquidated, any profits distributed, whether in cash or otherwise, other than those of a capital nature, earned before or during the winding up or liquidation; (ii) in relation to a company that is not being wound up or liquidated, any profits distributed whether in cash or otherwise, other than those of a capital nature, including the value of that element of any shares awarded to its shareholders which is redeemable or capable of redemption by conversion and any debentures or securities awarded to its shareholders by a company; (iii) In the event of the 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; and (iv)in the event of the reconstruction of a company, 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; (b) so as not to include any cash or the value of any asset given to a shareholder, to the extent to which the cash or the value of the said asset represents a reduction of the share premium account of the company. All Companies incorporated in Zambia are required under this section to deduct withholding tax from payments of dividends other than dividends paid to the Government of the Republic of Zambia. 9

12 Tax is deductible on the date of accrual. Dividends accrue on the day of the resolution provided that where the resolution states that the dividend is to be paid to shareholders or stockholders registered on a day in the future, then the dividend is deemed to accrue on that day. The rate of withholding tax is 15% and it is the final tax for residents and non - residents. Note however that, for companies carrying out mining operations and for a dividend declared by a company listed on the Stock Exchange to an individual, the rate is 0%. 5.2 Payments to Non- Resident Contractors Section 81A These are payments made to non - resident contractors who are engaged in construction and haulage operations. Non resident contractor means; i) An individual who is neither resident nor ordinarily resident in Zambia; or ii) any other person or partnership who is not resident in Zambia and does not have a permanent establishment in Zambia. Construction operations include i) The erection, alteration, maintenance, repair, extension, demolition or cleaning of any building or structure, whether permanent or not; ii) iii) The installation in any building or structure of heating, lighting, lift, air conditioning, ventilation, power, drainage, sanitation, water, fire protection or like supplies or services; The painting or decoration of the internal or external face of any building or structure; and iv) Any operations which are an integral part of or prior to or to render complete the operations described in paragraphs (i) and (iii) above. Haulage operations are defined in the Act as including the transportation by land, water or air of persons, livestock, or any goods whatsoever including farm produce or produce of a like nature or ores and minerals, food stuffs and merchandise. The withholding tax rate is 20% and is the final tax. 10

13 Where a non-resident contractor has created a permanent establishment in Zambia in accordance with Section 81AA, the payments made to such a person shall not be subjected to a deduction of withholding tax. In this case, the permanent establishment will be required to register with the Zambia Revenue Authority and account for tax either under the normal income tax or the turnover tax system, whichever is applicable. Other tax obligations for the permanent establishment include operating a PAYE Scheme for the employees. 6.0 COMMISSIONER- GENERAL'S DIRECTION In certain cases, the payee happens to be in a country which has a Double Taxation Agreement (DTA) with the Republic of Zambia. The payer is required to make an application for a directive from the Commissioner- General to restrict the deduction of tax to the rate specified in the respective Double Taxation Agreement. Before a direction can be given, the Commissioner- General has to be satisfied that conditions as stipulated in the respective DTA are fulfilled. In order to be granted benefits as provided for under the tax treaty, the claimant will be required to do the following: i) lodge in an application by completing fully the Double Taxation Relief form providing details such as name of the Zambian payer, amounts of the payment made and the type of payment etc. ii) obtain a tax residence certificate from the tax authorities of the other State. Alternatively, the claimant may request that Double Taxation Relief form be endorsed by the tax authorities in the other State. iii) submit a copy of the Agreement/Contract entered into for the provision of the loan, services or use of the intellectual property. In the case of dividends, a record of the minutes authorising the declaration and payment of the dividends should be availed. 7.0 DUE DATES The tax deducted must be remitted to the Zambia Revenue Authority by the fourteenth of the month following the month in which the deduction was made. For example, withholding tax, which was deducted in the month of 11

14 th January 2015, is due for payment on or before 14 of February th Payments made after the 14, will be regarded as late and attract interest and penalties. 8.0 PENALTIES A penalty of 5% of tax unpaid is payable for each month, or part thereof, that the tax remains unpaid. In addition, interest is payable at Bank of Zambia discount rate plus 2%. 9.0 FORMS IN USE Under the TaxOnline system, the Return of Withholding Tax covers all forms of payments of withholding tax. 12

15 10.0 DOMESTIC TAXES CONTACT ADDRESSES: If you have any problems concerning your taxes, please contact the Client Services Centres or your nearest Domestic Tax Office at the following addresses: 1 Client Services Centre New Revenue Hall Private Bag W136 Tel: Zamtel Network: (01) Airtel Network: Fax: Client Services Manager Large Taxpayer Office 6 th Floor, Revenue House P.O. Box Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Design & Monitoring Policy & Legislation P.O.Box Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Design & Monitoring Audit P.O.Box Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Large Taxpayer Office Processing and enforcement P.O.Box Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Small Taxpayer Office - P.O.Box Tel: Zamtel Network: (01) Airtel Network: Fax: Client Services Centre Nchanga House P. O. Box Kitwe Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Design & Monitoring - Taxpayer Services P.O.Box Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Design & Monitoring Processing and Enforcement P.O.Box Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Large Taxpayer Office Non-mining Audit Unit P.O.Box Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Large Taxpayer Office Mining Audit Unit P.O.Box Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Small Taxpayer Office - Copperbelt P.O. Box Ndola Tel: Zamtel Network: (01) Airtel Network: Fax:

16 13 Assistant Director Medium Tax Office South P.O.Box LUSAKA Tel: Zamtel Network: (01) Airtel Network: Fax: Assistant Director Medium Tax Office North P.O.Box Kitwe Tel: Zamtel Network: (01) Airtel Network: Fax: Provincial Manager Small Taxpayer Office - Central P.O. Box Kabwe Tel: Zamtel Network: (01) Airtel Network: Fax: Provincial Manager Small Taxpayer Office - Eastern P.O. Box Chipata Tel: Fax: Provincial Manager Small Taxpayer Office - Luapula P.O. Box Mansa Tel: Zamtel Network: (01) Airtel Network: Fax: Provincial Manager Small Taxpayer Office - Western P.O. Box Mongu Tel: Fax: Provincial Manager Small Taxpayer Office - Southern P.O. Box Livingstone Tel: Zamtel Network: (01) Airtel Network: Fax: Provincial Manager Small Taxpayer Office North-Western P.O. Box Solwezi Tel: Fax: Provincial Manager 22 National Call Centre Kasama Tax Office New Revenue Hall P.O. Box Private Bag W136 Kasama Tel: Tel: Zamtel Network: (01) Fax: Airtel Network: Or 5972 Website: 14

17 Our Values Our commitment to serving Government, taxpayers, employees and other stakeholders is reflected in our Corporate Values: Integrity Professionalism Fairness Equity Courtesy Teamwork Value for Money Confidentiality Goal orientation Innovation : exhibiting the highest standards of personal probity and behaviour; : performing official duties with skill, care and diligence; and providing the public with service and advice in a professional manner; : performing official duties in an impartial manner free of political, personal or other biases; : treating all taxpayers, colleagues and members of the public equitably in accordance with the provisions of legislation and procedures in force; : treating all taxpayers, colleagues and members of the public with courtesy and being sensitive to their rights, duties and aspirations; : working as a team, not only to reinforce each other's divisional functions, but also at collegiate level in order to strengthen mutual confidence, respect and trust : avoiding wastage and extravagant use of resources; : upholding the highest level of secrecy in respect of information that comes to one's knowledge in the course of duty; : focusing on the development and achievement of personal and organisational goals in the course of duty; : consistently improving on quality, quantity, timeliness and cost.

18 For more information contact: / / 5972 / us at: advice@zra.org.zm Website: Revenue House: P O Box 35710, Zambia