🗃️ Analysis of the Reintroduction of Non-Resident Tax on Interest (NRTI)
The proposal to reintroduce the 15% Non-Resident Tax on Interest (NRTI), bringing back Sections 29 and the 16th Schedule of the Income Tax Act which were repealed in 2009, is a significant policy shift aimed at bolstering the domestic tax base.
This measure will require Zimbabwean taxpayers (companies, banks, etc.) who pay interest to foreign companies or individuals to withhold 15% of that interest and remit it to the Zimbabwe Revenue Authority (ZIMRA).
1. Direct Impact on Foreign Borrowing Costs
The immediate and most critical impact is the effective increase in the cost of foreign debt for Zimbabwean entities.
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Impact on Local Borrowers: When a local company secures a loan from a non-resident lender, the 15% NRTI is typically factored into the borrowing agreement.
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Gross-Up Clause: If the loan agreement contains a “gross-up” clause (which is common), the local borrower will be required to pay the tax themselves to ensure the non-resident receives the agreed-upon net interest rate. This means the 15% tax becomes an additional expense for the Zimbabwean borrower, directly increasing their debt servicing cost.
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Reduced Net Return: If the borrower does not gross-up the payment, the non-resident lender will receive 15% less interest than negotiated, making lending to Zimbabwe less attractive compared to other jurisdictions.
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Financial Disincentive: The tax acts as a disincentive for foreign financial institutions and investors to lend capital to the Zimbabwean market, as it reduces the yield on their debt instruments.
2. Impact on Foreign Direct Investment (FDI) and Capital Flows
The reintroduction of NRTI sends a mixed signal to the international investment community:
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Deterrent to Portfolio Investment: Interest income is a key component of return for portfolio investors (e.g., those buying government or corporate bonds). Adding a 15% withholding tax immediately makes Zimbabwean debt instruments less competitive against instruments from countries that offer tax exemptions or lower rates.
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Encouragement vs. Taxation: Historically, the exemption (repealed in 2009) was meant to encourage the inflow of foreign capital when the economy needed it most. Reintroducing the tax suggests a prioritization of domestic revenue generation over the promotion of debt-related foreign capital inflows.
3. Impact on Tax Administration and Revenue
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Revenue Generation: The primary benefit for the Government is a new and predictable stream of revenue. Non-resident interest is a high-value transaction, and the withholding mechanism makes the collection efficient, as the local payer (the Zimbabwean company) is responsible for remitting the tax directly to ZIMRA.
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Compliance Burden: The policy places an administrative burden on Zimbabwean taxpayers. They must accurately track interest payments to non-residents, correctly apply the 15% withholding rate, and ensure the remittance is made to ZIMRA within the 30-day window, or face penalties.
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Double Taxation Avoidance Agreements (DTAs): This is a crucial mitigating factor. Zimbabwe has DTAs with several countries. In many cases, these agreements will override the domestic 15% rate, reducing it to a lower rate (often 5% or 10%) or exempting it entirely, depending on the terms of the specific treaty. Local payers will need to confirm the residency status of the recipient and the applicable DTA rate to legally withhold the correct amount.
4. Comparison with Other Withholding Taxes
The 15% NRTI aligns with the standard withholding tax rates currently applied to non-residents for other income types in Zimbabwe, such as:
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Non-Resident Shareholders’ Tax on Dividends: 15% (for unlisted securities).
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Non-Resident Tax on Royalties: 15%.
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Non-Resident Tax on Fees: 15%.
This harmonization creates a consistent tax policy for various forms of income flowing out of Zimbabwe to non-residents.
Conclusion
The reintroduction of the 15% Non-Resident Tax on Interest will be a positive for government revenue and domestic tax uniformity. However, it poses a direct cost increase for Zimbabwean borrowers and presents a deterrent to foreign financial capital that is not covered by existing Double Taxation Agreements.
The net effect on the economy will depend on:
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The extent to which Zimbabwean borrowers can absorb the 15% cost.
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The number of non-resident lenders who benefit from a DTA that reduces or eliminates the tax.
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The overall global supply of capital willing to overlook the higher effective tax rate.
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