Introduction of the 2% Intermediated Money Transfer Tax (IMTT)

Towards the end of the 2018 calendar year, the Finance Minister – Professor Mthuli Ncube announced a 2% Intermediated Money Transfer Tax (IMTT) as part of the austerity measures introduced by the government.Certain transactions such as payment of salaries or remittance of taxes are exempt from IMTT. The Financial reporting implications of the 2% tax have added to the already complex reporting issues in Zimbabwe.IMTT is a tax collected in terms of Section 36G as read with the Thirtieth Schedule of the Income Tax Act [Chapter 23:06].

What are the issues

From our interactions with accounting professionals, a lot of questions have been raised on how to correctly account for this tax and in this step by step guide we look at:

1. What is the IMTT tax and which transactions are affected by this tax
2. Can IMTT tax be part of the cost of an asset?
3. Can the IMTT be expensed?
4. What are the tax implication of the IMTT?

IMTT IFRS Considerations

In determining the accounting for the IMTT, the first and important question is whether IMTT can result in an asset, liability, income or expense?IMTT is a tax on electronic payments or transfers made by a payer (both individual and corporate). IMTT does not affect the receiver of the payment. Payments are normally made to settle consideration for goods and services acquired or for settlement of obligations among other reasons. Hence, IMTT is payable on acquisition of assets, payment for expenses and settlement of liabilities by the payer and has no effect on income as it is not charged to the payment recipient.

Thus, the 2% tax shall be accounted for in the same way as the cost of the underlying payment. Differently stated, 2% can be accounted for as an asset, expense or part of a liability if it was levied as payment of such transactions.

Can IMTT be part of the cost of an asset?

IFRS requires that the cost of an asset include the purchase price and other costs that are necessary to bring it to the location and condition for intended use. The cost of an asset also includes non-refundable taxes levied on acquisition of the asset. Input tax on expenditure is excluded from the cost of an asset or expense when the payer is a registered operator. However, no IMTT is refundable to the payer. IFRS reference of difference assets that are normally acquired:

Cost of Inventory

Cost of Inventories are measured at the lower of cost or net realisable value . The cost of inventories comprises costs of purchase, costs of conversion and other costs incurred in bringing the inventories to their present location and condition. (IAS 2 para 10).

The costs of purchase of inventories comprise the purchase price, import duties and other taxes (other than those subsequently recoverable by the entity from the taxing authorities), and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services. Trade discounts, rebates and other similar items are deducted in determining the costs of purchase. (IAS 2 para 11)

Cost of Property, Plant and Equipment (PPE)

The cost of an item of property, plant and equipment comprises:

1. Its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates.
2. Any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management. (IAS 16 paraph 16 (a) and (b)).

Cost of Intangible Assets
The cost of a separately acquired intangible asset comprises: Its purchase price, including import duties and non-refundable purchase taxes, after
deducting trade discounts and rebates (IAS38 paragraph 27(a))

Cost of Investment Property

The cost of a purchased investment property comprises its purchase price and any
directly attributable expenditure. Directly attributable expenditure includes, for
example, professional fees for legal services, property transfer taxes and other
transaction costs. (IAS40 paragraph 21)

Cost of a financial asset and liabilities

An entity shall measure a financial asset or financial liability at its fair value plus or minus, in the case of a financial asset or financial liability not at fair value through profit or loss, transaction costs that are directly attributable to the acquisition or issue of the financial asset or financial liability. [IFRS9.5.1.1]

Transaction costs include fees and commission paid to agents (including employees acting as selling agents), advisers, brokers and dealers, levies by regulatory agencies and security exchanges, and transfer taxes and duties. Transaction costs do not include debt premiums or discounts, financing costs or internal administrative or holding costs. [IFRS9.B5.4.8].

IFRS is clear that all non-refundable taxes, including import duties and transfer taxes, shall form part of the cost of the asset being acquired. It is therefore currently impossible for an entity to bring an asset to the location and condition necessary for it to be capable of operating in the manner intended by management without paying IMTT. Thus, IMTT forms part of the cost of inventory, PPE, Intangible, investment property, financial assets or any other asset that an entity acquires.

IMTT is therefore part of the transaction costs on acquisition of a financial asset or liability (note some securities are exempt from IMTT, e.g. money market). Note that when a financial asset or liability is classiØed as FVTPL the transaction costs are directly expensed in profit or loss account. The IMTT paid on acquiring financial assets classified as FVTOCI and amortised cost are added (capitalised or recognised as asset) to the cost of the financial asset. The IMTT included in acquiring an amortised financial liability would be deducted from the fair value of the loan on initial recognition. IMTT payable in servicing a loan (loan repayments) would be expensed when incurred.

Can IMTT be expenses

Payments for goods and services results with either an asset or expense. Hence, if a payment does not result in an asset, an expense should be recognised. nder, the new IASB Conceptual Framework an asset is defined as “present economic resource controlled by the entity as a result of past events. An economic resource is a right that has the potential to produce economic benefits”. (paragraph 4.2) An expense represents those payments that do not result with either an economic resource or a right that has potential to generate economic benefits for the payer. As such, an expense is an element of financial statements that relates to an entity’s financial performance. [paragraph 4.71]. The performance of an entity is presented in the profit or loss account.

Unlike VAT, the cost of IMTT relating to an expense which is not refundable shall be recognised in profit or loss together with the related expense e.g. the electronic payment for printing costs includes the IMTT, hence the printing costs expense includes the 2% paid to ZIMRA as part of the printing costs.

IMTT Tax Considerations

Now that the IMTT was added to the cost of acquiring an asset or included in the expense in the profit and loss account what is its impact to income tax expense or deferred tax expense.

Is the IMTT deductible for income tax purposes? The answer is NO. IMTT is non deductible. It should be added back to profit when computing income tax.