Harsh tax regime, ease of doing business

“WE have to look at how we can create an investment environment in the country, which will attract the flow of capital from friendly countries and, in fact, capital is capital — it will go where it finds comfort so we need to do that, ease of doing business in an environment.”
This was Vice President Emmerson Mnangagwa in an interview with the Chinese Central Television during his visit to that country two years ago.
Since the second half of 2015, the buzz phrase from Munhumutapa Building right to the office of the smallest administrative unit in the country has been “ease of doing business.”
These are basically a set of yardsticks set by the World Bank Group to measure a country’s receptiveness to investment.
However, while this could be ideal that government could be professing to be pursuing diligently, the realities on the ground could be forcing the same government to do the opposite as it deals heavy-handedly with those businesses already on the ground as it seeks to squeeze as much as it can to sustain its hand-to-mouth existence.
With more than 6 000 companies reported to have closed in the past decade or so, more than 200 of these closing down last year alone, while those that have remained in business are operating at a fraction of their capacity, this translates to a drastically shrunk tax base for government.
With a smaller tax base, desperation sets in and friction increases between the taxman and the taxpayer as the former resorts to hammer and chisel tactics to extract everything that he can from the latter.
It is generally a common trend that the higher the tax rate, the more people are tempted to avoid it.
For a government that is not only desperate, but also has a history of violent take-overs, as well as a blatant disregard of court orders and the general rule of law, it then becomes difficult to tell whether in trying to get the most from very little, it is still operating within the strict confines of the law.
Analysts his week said as the taxman is being forced by dire circumstances to go the proverbial extra mile, there is real temptation to resort to unorthodox means to raise the desperately needed cash. It is at this point in this increasingly acrimonious relationship that it becomes difficult to tell which side is right and which one is trying to trick the other.
Late last year, members of local building contractors appealed to Finance Minister Patrick Chinamasa (pictured) to intervene and stop the Zimbabwe Revenue Authority (ZIMRA) from garnishing their bank accounts saying that this practice was leading to the closure of many businesses.
This was at a time when ZIMRA was placing garnishing orders on bank accounts of at least 100 businesses every month.
The delegates at that meeting openly accused ZIMRA of adopting some predatory tendencies such as investigating and demanding taxes going back to many years back, or reviewing taxes that have long been paid. Chinamasa said while he appreciated that the tax collector should not work to collapse businesses, most of those who make the most noise are not clean themselves, as most local businesspeople are notorious for evading tax.
He said most issues to do with problems that taxpayers encounter end up being referred to his office when he has no powers under the legislation to interfere in such cases.

“I have no powers to give anyone an exemption and I don’t like that power, it is corrupting power… any person with discretion over such issues, sooner or later will be corrupted, not just by money, but even by relatives who would come asking for favours, so I don’t like that power,” Chinamasa said.
Bongani Ngwenya, a senior lecturer at Solusi University’s Post-Graduate School of Business told the Financial Gazette that desperation on the part of government has led to an aggressive tax collection system, which does not augur well for investment inflows.
“We are dealing with a desperate government now. A government presiding over a failing economy that is hard hit by a liquidity crisis. Government is desperate for real money in the advent of a failing bond notes project,” Ngwenya said.
“A country’s tax regime is one of the main components of ease of doing business; investor friendliness, etc. It is very clear that our tax regime is not investor friendly. It is just as good as the indigenous policy that has scared away potential FDI. In normal economies, what happens during the temporary periods of economic recession is that companies would normally get a reprieve from tax liabilities as a way of helping them recover. It does not make any good sense to want to penalise companies for the ills of the hyperinflation era, which was largely government’s own making as a result of imprudent economic policies and lack of financial discipline,” he said.
A number of companies have been fighting ZIMRA in the courts where they have very limited success as the country’s no nonsense tax laws are based on a “Pay Now Argue Later” principle, thereby creating very limited room for negotiations.
Among these companies include Delta Beverages, which is fighting ZIMRA’s US$27 million tax claim dating back to 2009. Packers International is also fighting a US$20 million tax claim all the way to the Constitutional Court.
Platinum miner, the Zimbabwe Platinum Mines has also had run-ins with the tax collector. Only at the weekend, the State-media claimed that the new management at ZIMRA was investigating the possibility that management at telecommunications firm, Econet Wireless, could have connived with the suspended management at the revenue authority to deprive treasury of nearly US$300 million in import duty over the past eight years.
Economist John Robertson said most of the companies have closed because of a hostile tax regime in the country.
“The pay-now-and-argue-later principle has already forced the closure of a number of companies, but the unknown figure, possibly much more serious, is the number of companies that might have started, but have not done so because of the extremely hostile business environment.”
He said government had allowed this to become even more aggressive by not imposing disciplines on its officials. “Of course, the more corrupt among them have profited enormously from the abuse of their authority, so they will vigorously oppose such a law. But basically, in a well-run and just society, everyone has to be accountable. Mechanisms that can hold everyone to account, whoever they are, will greatly assist the recovery of this country,” he said.
The uncertainty caused by desperate tax officials, who have the backing a law allowing them to collect even taxes in dispute, only serves to make the concept of easy of doing business almost a moot one, as Mnangagwa rightly pointed out, that capital goes where it finds comfort.
“I feel very sorry for our companies in Zimbabwe. This current tax regime is part of the things that certainly need to be restructured as a holistic approach to nation branding and ease of doing business,” Ngwenya said.
“The art of taxation consists in plucking the goose as to obtain the largest possible amount of feathers with the least possible amount of hissing,”— Jean-Baptiste Colbert, French finance minister during the era of King Louis XIV in the 17th century, rightly pointed out.