BAF 2022-Taxation

UNIVERSITY OF ZAMBIA
INSTITUTE OF DISTANCE EDUCATION
BACHELOR OF SCIENCE
(ACCOUNTING AND FINANCE)
MODULE TITLE: TAXATION
(BAF 2022)
2016
The University of Zambia, Institute of Distance Education

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Copyright
All rights reserved. No part of this publication may be reproduced, stored in a retrieval
system, or transmitted in any form or by any means, electronic or mechanical, including
photocopying, recording or otherwise without the permission of the publisher.

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This module is property of the Institute of Distance Education
December, 2016
University of Zambia
P.O. Box 32379
Lusaka
Zambia
Telefax: +260 978772248/9
E-mail: director-ide@unza.zm
Website: www.unza.zm

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ACKNOWLEDGEMENTS
The University of Zambia (UNZA), Institute of Distance Education (IDE) wishes to thank
Mr. Arnold Machila for writing this module on BAF 2022: TAXATION

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Table of Content
Introduction ....................................................................................................................... - 1 -
Aim ................................................................................................................................... - 7 -
Objectives ......................................................................................................................... - 8 -
Structure of the Module .................................................................................................... - 8 -
Applicable Tax Rates.........................................................................................................- 9-
Assessment...................................................................................................................... - 12 -
Prescribed Readings ........................................................................................................ - 13 -
Recommended Readings ................................................................................................. - 13 -
Time frame ..................................................................................................................... .- 13 -
Study skills........................................................................................................................-13-
Need help? ...................................................................................................................... - 14 -
UNIT 1 ............................................................................................................................ - 16 -
The obligations of taxpayers and their agent….……………………………......-16-
1.1 Introduction……………………………………………………………………...-16-
1.2 Aim………………………………………………………………………………-16-
1.3 Objectives………………………………………………………………………..-16-
1.4 Time Frame……………………………………………………………………...-16-
1.5 Tax Administration……………………………………………………..……….-17-
1.6 Return and Assessment………………………………………………..………...-17-
1.7 Pay As You Earn………………………………………………………………...-18-
1.8 Withholding Tax………………………………………………………………...-19-
1.9 Activity…………………………………………………………………….…….-21-
1.10 Summary………………………………………………………………………...-21-
UNIT 2…………………………………………………………………………………..-22-
Taxation and investment regulations…..……………………………………-22-
2.1 Introduction……………………………………………………………..………-22-
2.2 Aim……………………………………………………………………………...-22-
2.3 Objectives…………………………………………………………………….…-22-
2.4 Time Frame……………………………………………………………………..-23-
2.5 Foreign Direct Investment…………………………………………………....…-23-
2.6 Sector Specific Investment Opportunities………………………………………-24-
2.7 Activity.…………………………………………………………………………-27-
2.8 Summary………………………………………………………………………..-27-
UNIT 3………………………………………………………………………………….-28-
Tax audits……………………………………………………………………………………..-28-
3.1 Introduction……………………………………………………………………..-28-
3.2 Aim………………………………………………………………………….…..-28-
3.3 Objectives……………………………………………………………………….-28-
3.4 Time Frame……………………………………………………………………..-28-
3.5 Meaning and Purpose of Tax audits………………………………………….…-29-
3.6 Tax Defaults………………………………………………………………….…-30-
3.7 Tax Audit Outcomes…………………………………………………….……...-31-
3.8 Taxpayer Disclosures……………………………………………………….…..-31-
3.9 Quality Tax Audits……………………………………………………………...-32-
3.10 The Role of the Tax Advisor…………………………………………….….…..-33-
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3.11 Activity…………………………………………………………………...……..-33-
3.12 Summary………………………………………………………………….…….-34-
UNIT 4………………………………………………………………………………….-35-
Taxation of mining operations…………………………………………………………-35-
4.1 Introduction………………………………………………………………….….-35-
4.2 Aim……………………………………………………………………………..-35-
4.3 Objectives…………………………………………………………...………….-35-
4.4 Time Frame……………………………………………………………….…….-35-
4.5 Mining………………………………………………………………………......-36-
4.6 Mineral Royalty……………………………………………………………...…-38-
4.7 Income Tax Deductions for Mining Investments……………………………….-41-
4.8 Computation of Company Income Tax…………………………………………-45-
4.9 Property Transfer Tax on Mining Rights……………………………………….-48-
4.10 Activity…………………………………………………………………………-49-
4.11 Summary………………………………………………………………………..-49-
UNIT 5……………………………………………………………………………....…-50-
Financial services and Insurance operations…………………………………….-50-
5.1 Introduction…………………………………………………………………….-50-
5.2 Aim………………………………………………………………………….….-50-
5.3 Objectives………………………………………………………………………-50-
5.4 Time Frame………………………………………………………….………….-50-
5.5 Financial Institutions…………………………………………………………....-51-
5.6 Activity………………………………………………………………….……...-55-
5.7 Summary……………………………………………………….……………….-56-
UNIT 6…………………………………………………………………………………-57-
Introduction to Tax planning……………………………………………….………….-57-
6.1 Introduction…………………………………………………………….………-57-
6.2 Aim…………………………………………………………………….……….-57-
6.3 Objectives………………………………………………………….…….……..-57-
6.4 Time Frame…………………………………………………………………….-57-
6.5 The Scope of Tax Planning…………………….………………………………-58-
6.6 Tax Planning Opportunities…………….……………………………………...-58-
6.7 Activity…………………………………………………..……………………..-62-
6.8 Summary……………………………………………………………..…………-67-
UNIT 7………………………………………………………………….……………..-68-
Financial arrangements and planning……………………………..……………….-68-
7.1 Introduction…………………………………………………….……………...-68-
7.2 Aim…………………………………………………………………………….-68-
7.3 Objectives……………………………………………………….……………..-68-
7.4 Time Frame……………………………………………………………………-68-
7.5 Scope of Financial Planning………………………………………….………..-69-
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7.6 Financial Planning for Individuals and Companies……………………….…...-69-
7.7 Sources of Finance for Individuals and Companies……………….…………..-70-
7.8 Pension Scheme Planning………………………………………………..…….-75-
7.9 Activity…………………………………………………………………......….-77-
7.10 Summary…………………………………………………………………….…-78-
UNIT 8…………………………………………………………………………………-79-
Overseas aspects of taxation………………………………………………….,.-79-
8.1 Introduction………………………………………………………………….....-79-
8.2 Aim………………………………………………………………………….….-79-
8.3 Objectives……………………………………………………………….……...-79-
8.4 Time Frame…………………………………………………………………….-80-
8.5 Systems of International Taxation……………………………………………..-80-
8.6 Overseas Aspects of Personal Income Tax…………………………………….-81-
8.7 Double Taxation Relief…………………………………………………….…..-82-
8.8 Overseas Aspects of Company Income Tax……………………………….…..-86-
8.9 Activity……………….…………………………………………………..……-88-
8.10 Summary…………………………………………………….………………....-90-
9.0 Module Summary……………….……………………………………………..-90-

Further Readings……………………………………………………..………………..-91-

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Introduction
Welcome to the Module on Taxation. This module provides you with a progression from
Principles of Taxation (BAF 2011) into advanced coverage of taxation principles.
You may realize that among many other roles that the modern accountant assumes, is that
of tax consultant and agent. This module provides you with the knowledge and
understanding of the procedures which must be followed when dealing with the Revenue
Authority and possible alternative courses of action. It Includes topics such as the
organization of the Revenue Service, filing requirements, refund claims, closing
agreements, examination procedures, protests, assessment, payment and collection of tax,
statute of limitations, interest and penalties. The module also covers the tax aspects of
individuals, corporations and partnerships, including mining operations at a higher level.
Aim
The module aims to provide you with a theoretical and practical understanding of the
dynamics and applications of taxation rules, which result from changes in the economic,
political, regulatory and technological environment. The module will provide you with the
opportunity, in the context of being a finance professional, to demonstrate your ability to
assess the impact of such changes on organisations and individual taxpayers. It aims to
explore pertinent tax issues relating to a wide range of areas including, mining, financial
institutions, multinational businesses and tax planning among others and further aims to
provide opportunities for you to develop your skills in critical analysis and evaluation of
alternative solutions. The module is designed to suit students with or without work
experience and will provide opportunities for those who are in employment to reflect on
what they have learned in the context of their workplace.

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Objectives
By the end of the module, you should be able to:
i. Explain the obligations of tax payers and/or their agents and the implications of
non-compliance
ii. Evaluate the tax implications of the various investment opportunities.
iii. Evaluate the approaches to carrying out tax audit and investigations, and
perform appropriate tax investigations
iv. Calculate taxes payable on mining income and gains computed using applicable
tax law
v. Calculate relevant taxes payable by enterprises in the insurance and financial
services sector
vi. Explain and quantify the measures that could be put in place to minimise or
defer taxation liabilities
vii. Evaluate the taxation implications of various financial arrangements that could
be made by individuals and enterprises
viii. Calculate taxes payable on overseas transactions, including those of
multinational enterprises
Structure of the Module
As you can see from the table of content above, the module is divided into eight (8) units.
Each unit is in turn divided into several sub-units. Each unit has a core text and an
exercise at the end. You are required to read the text and thereafter attempt the exercise
before proceeding to the next unit. Further take note that the tax rates used in this module
related to 2016. Please refer to the schedule below for the applicable tax rates for all
workings in this module. However, these tax rates are subject to change each tax year and
you are expected to refer to the latest practice notes or budget highlights for such changes.
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TAXATION TABLE FOR THE CHARGE YEAR 2016
1. Income Tax
(a) Individual income tax rates
Income band Taxable amount Rate

K1 to K36,000 first K36,000 0%
K36,001 to 45,600 next K9,600 25%
K45,601 to K70,800 next K25,200 30%
Over K70,800 35%
(b) Income from farming for individuals
K1 to K36,000 first K36,000 0%

Over K36,000 10%
(c) Gratuity
Note that gratuity is now tax exempt under the provision of the amended constitution of Zambia.
(d) Terminal benefits
Terminal benefits are now tax exempt.
2. Company Income Tax rates
On income from manufacturing and other 35%

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On income from farming 10%
On income of Banks and other Financial Institutions 35%
On income from processing of purchased mineral ores, concentrates and other
semi-processed minerals 30%
On income from Tolling 30%
On income from mining operations of industrial minerals 30%
(Variable profit tax rate – industrial metals) y = 30% + [a - (ab/c)]
Where: y = the tax rate to be applied per annum
a = 15%
b = 8%
c = Assessable Income x 100%
Gross sales
3. Mineral Royalty
Underground Mining operations 8%
Opencast Mining operations 20%
Mining of industrial minerals 6%
4. Capital Allowances
(a) Implements, plant and machinery and commercial vehicles:
Wear and Tear allowance - Plant used normally 25%
- Used in Manufacturing, Farming, Leasing 50%
(b) Non-commercial vehicles

Wear and Tear Allowance 20%
(c) Industrial Buildings:
Initial Allowance 10%
Investment Allowance 10%
(d) Low Cost Housing (Cost up to K20,000)
Initial Allowance 10%

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(e) Commercial Buildings
(f) Farming Allowances
Development Allowance 10%

Farm Works Allowance 100%
Farm Improvement Allowance 100%
5. Presumptive Taxes
(a) Turnover Tax 3%
(b) Presumptive tax for transport
Seating capacity Tax per annum Tax per day
K K
Less than 12 passengers and taxis 1,200.00 3.20
From 12 to 17 passengers 2,400.00 6.60
From 64 passengers and over 14,400.00 39.40
6. Property Transfer Tax

Rate of Tax on Realised Value other than mining rights 10%
Rate of Tax on Realised Value on a transfer or sale of mining right 10%
7. Value Added Tax
Registration threshold K800,000.00
Standard Value Added Tax Rate (on VAT exclusive turnover) 16%

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8. Customs and Excise
Duty rates on:
(a) Motor cars and other motor vehicles (including station wagons) principally
designed for the transport of less than ten persons, including the driver:
Customs Duty: 25%
Excise Duty:
Cylinder capacity of 1500 cc and less 20%
Cylinder capacity of more than 1500 cc 30%
(b) Pick-ups and Trucks/lorries with gross weight not exceeding 20 tones:
Customs Duty 15%
Excise Duty 10%
(c) Buses/coaches for the transport of more than ten persons
Customs Duty: 15%
Excise Duty :
Seating capacity of 16 persons and less 25%
Seating capacity of 16 persons and more 0%
(d) Trucks/lorries with gross weight exceeding 20 tones:

Customs Duty: 15%
Excise Duty : 0%
The minimum amount of Customs Duty on Motor Vehicles in categories from

(a) up to (c) above is K2,000.00
Assessment
Continuous assessment 40%
1 Assignment 10%
1 Group/syndicate work 10%
Residential school Test 20%
Final examination 60%

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Prescribed Readings
Mulolani, C.A. (2015). Taxation Principles and Practice, 7th edition, Zambia Education
Publishing House, Lusaka.
ZICA Study Manual. ( 2016). Integrated Taxation L3, BPP Learning Media, BPP House,
Aldine Place, London.
Zambia Revenue Authority Practice Notes (2016). https://www.zra.org.zm
Recommended Readings
ZICA Study Manual. ( 2016). Integrated Taxation L3, BPP Learning Media, BPP House,
Income Tax Act CAP 323 of the Laws of Zambia (Amended 2015), Government Printers,
Lusaka.
Zambian Constitution (Amended 2016), Government Printers. Lusaka.
Apart from this module, you are expected to read widely around all the topics covered in
the module. You may find the references provided at the end of the module useful, but you
could also explore other sources of information, particularly the Zambia Revenue
Authority website which has invaluable information.
Time frame
You are expected to spend at least 60 hours of study time on this module. In addition,
there shall be arranged contacts with lecturers from the University from time to time
during the course. You are requested to spend your time judiciously so that you reap
maximum benefit from the course.
Study Skills
As an adult learner, your approach to learning will be different to that from your school
days: you will choose what you want to study, you will have professional and/or personal
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motivation for doing so and you will most likely be fitting your study activities around
other professional or domestic responsibilities.
Essentially you will be taking control of your learning environment. As a consequence,

you will need to consider performance issues related to time management, goal setting,
stress management, etc. Perhaps you will also need to reacquaint yourself in areas such as
essay planning, coping with examinations and using the internet as a learning resource.
Your most significant considerations will be time and space i.e. the time you dedicate to
your learning and the environment in which you engage in that learning.
I recommend that you take time now—before starting your self-study—to familiarize
yourself with these issues. There are a number of excellent resources on the web. A few
suggested links are:
§ http://www.how-to-study.com/
The “How to study” web site is dedicated to study skills resources. You will find
links to study preparation (a list of nine essentials for a good study place), taking
notes, strategies for reading text books, using reference sources, test anxiety.
§ http://www.ucc.vt.edu/stdysk/stdyhlp.html
This is the web site of the Virginia Tech, Division of Student Affairs. You will
find links to time scheduling (including a “where does time go?” link), a study
skill checklist, basic concentration techniques, control of the study environment,
note taking, how to read essays for analysis, memory skills (“remembering”).
Required Resources
You will require a calculator and note books as requisite resources for studying this
module. You may also need a laptop or a desktop computer for use during your study
period for activities such as assignment.
Need help?
In case you have difficulties during the duration of the course, please get in touch with the
Director, Institute of Distance Education, or the resident lecturer in your province.

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Your lecturer can be contacted for routine enquiries at: Institute of Distance Education,
University of Zambia, Great East Road Campus, PO Box 32379, Lusaka, Zambia,
during working days (Monday-Friday) from 08:00 to 17:00 hours on Telephone:
+260978772248/9; Fax: +260211253952; E-mail: director-ide@unza.zm; Website:
www.unza.zm. You can also see your lecturer at the office during working hours and days
as stated above. You could also utilize the services of the phone as well as the email
address. For other details, you may visit the website as stated above.
You are free to utilize the services of the University library which opens from 0700 hours
to 2400 hours every working day. As for weekends and public holidays, the library opens
from 0900 hours to1800 hours. It will be important for you to carry your student identity
card for you to access the library and let alone borrow books.

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UNIT 1
THE OBLIGATIONS OF TAXPAYERS AND THEIR AGENTS
1.1 Introduction
Welcome to unit 1 of the taxation module series. This Unit introduces you to the most
common administrative issues of taxation. We will explain to you the administrative
provisions contained in the Income Tax act which taxpayers and tax agents are expected to
comply with. The Income tax act in Zambia is administered by the Zambia Revenue
authority Commissioner General.
1.2 Aim
The aim of this unit is to provide you with a working knowledge of the administration of
tax in Zambia.
1.3 Objectives
By the end of this unit, you should be able to;
(i) Explain how tax is administered in Zambia, particularly the administration of tax
returns
(ii) Describe the nature of the withholding tax system.
(iii) Explain the responsibilities of the taxpayer on each type of withholding tax
(iv) Discuss how Pay as You Earn is administered and operated by the taxpayers.
(v) Explain the consequences of late submission of returns and late payments of tax
1.4 Time Frame

You are expected to spend a minimum of at least 4 hours on this unit. Please note that this
duration of time is a recommendation and serves as a guide to help you in how much time
you could spend.

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1.5 Tax administration
Let us begin by looking at tax administration as provided for by the Income Tax act.
According to the law (Zambia Revenue Act), the administration of taxes is vested in the
Commissioner General who is assisted by three commissioners who head the Domestic
taxes division, Customs Services and Corporate services division. The commissioner
General has the following powers;
• Request for a return to be submitted at any time

• Request accounts and documents to be submitted for examination
• Examine any person for purposes of obtaining information
• Search and seize money, documents and property
You should also note that the provisions of section 46 of the Income Tax act require tax
payers and tax agents to file a return and pay the appropriate tax to the revenue authority.
1.6 Returns and assessments

Let us now consider returns and assessments.
The Income Tax Act requires taxpayers to complete a tax return each year within six
months after the expiry of each tax year ending 31 December. Section 46 of the Income tax
act the taxpayer or their agent to file an electronic return by 30th June following the end of
the charge year or by 5th June where the taxpayer opts to file a manual return.
At the beginning of each year, a provisional income tax return shall be filed by the
taxpayer or their agents. Section 46a of the Act provides for the different due dates for the
submission of manual returns and electronic returns. Taxpayers that file returns electronically
are required to submit the returns by the 31st of March, while those who opt to file returns
manually are required to submit them by the 5th of March. As you may know, provisional tax
shall be paid in four equal instalments by the fourteenth day following the end of each
quarter.
The Income Tax Act provides that where a taxpayer fails to file a return, the
Commissioner General is empowered to estimate the taxpayer’s taxable income and the
resultant tax. In addition to estimated tax, the Income Tax Act empowers the
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Commissioner General to charge a penalty. You are expected to know the various types of
penalties that may be imposed upon the taxpayer under the Income Tax Act.
Section 111 of the Income Tax Act does however give the right of appeal to the taxpayer
who may not be satisfied with decision of the Commissioner General in accordance with
the Tax appeals Tribunal act No. 1 of 2015.
1.2.1 Reflection
What would you advise a taxpayer who has not been filing returns to the Zambia Revenue
Authority for the past four years to do? He/she wants you to advise him/her of any
implications that may arise with the Revenue Authority.
1.7. Pay as You Earn.
According to the Income Tax Act, any person that receives income from a source within or
deemed to be within the Republic will be liable to Income Tax in Zambia. As such, it is a
requirement by law for every employer with employee who earn an emolument to register
for Pay as You Earn. According to Section 2 of the Income Tax act, emolument means any
salary, wage, overtime or leave pay, commission, fee, bonus, gratuity, benefit, advantage
(whether or not that advantage is capable of being turned into money or money's worth),
allowance, including inducement allowance, pension or annuity paid, given, or granted in
respect of any employment or office, wherever engaged in or held; Thus, any individual
who receives income arising from his duties of employment which are performed in
Zambia will be liable to Income Tax in Zambia on all of the emoluments receivable under
the Pay as You Earn (PAYE) system. Chargeable emoluments for the purposes of PAYE
refers emoluments from an employee’s employment which are chargeable to Income Tax,
but does not include any allowable pension contribution or any amount which is exempt
from Income Tax.
You should always remember that the Income Tax Act requires the employer to deduct
income tax from the emoluments of the employee and at the same time places the
responsibility to account the same tax to Zambia Revenue Authority. The PAYE is payable
to Zambia Revenue Authority by the 14th day following the end of the month. Under
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section 71 of the income Tax act, penalties may be charged on delayed payment of PAYE
or where the return has not been filed.
1.7.1 Reflection
1. A company has being operating in Zambia for the past two years and employed 4
employees. The annual salaries of the employees are K36,000.00, K28,900.00, K45,000.00
and K39,000.00. Advise the company whether they ought to register for PAYE during the
year 2016.
2. Mutemaire is a South African national working for a South African subsidiary company
operating in Zambia. Advise whether Mutemaire will be required to pay tax under PAYE
system in Zambia.
We hope that your advice is that in both 1 and 2 the companies ought to register for PAYE.
1.8. Witholding Tax.
Section 81 and 82 of the Income Tax Act outline various withholding taxes on dividend
income, interest on GRZ bonds, Interest on treasury bills, Commissions, royalties, public
entertainment fees to non residents, consultancy fees to non residents, payment on winning
from gaming, lotteries and betting, rent income. You should refer to table 1 below for
details.
Table 1
Category Rate (%)
Dividends (Final Tax) 15
Dividends paid by a company 0
carrying on mining operations
Dividends paid to an individual by a 0
company listed on the Lusaka Stock
Exchange (LUSE)
Dividends paid by a company 0 (First 5 years)
engaged in the assembly of motor
assembly, motor cycles and bicycles
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Dividends declared from farming 0 (First 5 years)
income
Dividends paid by a manufacturing 0 % for the first 5 years from
enterprise located in a rural area, commencement of operations.
Multi Facility Economic Zone or
industrial park
Interest on GRZ bonds (Final Tax 15
for Individuals & Exempt
Organisations only)
Interest for individuals (earned from 0
banks or building societies savings
and deposit accounts),
Interest on Treasury Bills for 15
Individuals (Final Tax)
Interest on Treasury Bills (Final Tax 15
for Exempt Organisations)
Other Interest 15
Royalties (Residents) 15
Royalties to Non - Residents 20
Rent (Final Tax) 10
Commissions (Residents) 15
Commissions paid to Non-Resident 20
persons (Final Tax)
Public Entertainment Fees for Non- 20
Residents (Final Tax)
Management and Consultancy Fees 20
to Non -Residents
Non-Resident Contractors (Final 20
Tax)
Payment or Distribution of Branch 15
Profits
Payment of Winnings from Gaming, 20
Lotteries and Betting
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1.9 Activity
1. Discuss at least three duties of a tax agent?

2. What requirement is an employer expected to meet before they can register for Pay
as You Earn?
1.10 Summary
In this Unit we have introduced you to the administrative framework for taxation in
Zambia. We have specifically looked at the duties of a taxpayer and a tax agent in as far as
tax administration is concerned. Our main focus has been on income tax assessment, Pay
as You Earn and the withholding tax system.
All taxpayers and their agents are required to comply with the provision of the Income Tax
act. Failure to comply leads to penalties or fines being imposed on the taxpayer. In the next
unit, you will be introduced to Taxation and Investment Policy.

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UNIT 2
TAXATION AND INVESTMENT POLICY
2.1 Introduction
You are welcome to unit 2 of this module.

In the previous unit, we discussed the basic tax administrative framework as practiced in
Zambia. We considered the importance of compliance by both the taxpayer and tax agents
to the administrative provisions as contained in the Income tax administered by the
Commissioner General of the Zambia Revenue Authority. In this unit, we will explain to
you the common principles of direct foreign investment in relation to the taxation policy in
Zambia.
2.2 Aim
The aim of this unit is to help you develop an understanding of the relationship between
government economic policies and the fiscal policy. The unit further aims to develop your
ability to interpret and apply certain provisions in the investment policies with regard to
their impact on taxation.
2.3 Objectives
By the end of this unit you will be able to;
i) Explain the concept of Direct Foreign Investment
ii) Describe the investment opportunities and tax incentives available to investors in
several sectors such as manufacturing, agriculture and mining.
iii) Explain the consequences that may arise from fiscal incentives negotiations.
iv) Discuss the tax incentives under the provisions of the Zambia Development
Agency Act.

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2.4 Time frame
you could spend on this unit.
2.5 Foreign Direct Investment
We will begin this unit by explaining what foreign direct investment (FDI) is. Using your
own words, what is an investment? We hope your answer looks like this! An investment is
an expenditure (outlay) of financial resources intended to generate economic benefit over a
long period of time. FDI therefore is the kind of investment by a foreign business in a
foreign country. You might have heard of foreign companies investing in Zambia, such
investment is called foreign direct investment. Where foreign direct investment is made in
Zambia, then that type of FDI is known as Inward Foreign Direct Investment. On the other
hand, where a Zambian company or business enterprise makes an investment overseas,
that type of investment is called outward foreign direct investment.
You should remember that foreign direct investment may be done either by setting up a
new company altogether or establishing a subsidiary or through a buying an existing local
company in Zambia. Either way, FDI involves commitment of huge amounts of capital
funds which carries a significant risk.
In order to attract foreign direct investment, the government may give a number of
incentives to foreign investors which include tax holidays. This is a very risk undertaking
on the part of government because the investor may decide to close down at the expiry of
the tax holiday period. Normally the government may enter into negotiations with

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multinational enterprises in order to arrive at development agreements that may make a
desired investment and make tax contributions through payment of appropriate taxes.
2.5.1 Reflection
What are the possible motivations for foreign direct investment?
2.5.2 Taxation of Consequences of inward Investment
You should consider a multinational company that invests in Zambia as liable to the
Zambian Income Tax Act rules where it is set up as a permanent establishment in Zambia
subject to double taxation rules or conventions.
2.5.3 Taxation Consequences of outward Investment
In the case of a Zambian company making an investment outside in a foreign country, then
you should consider its income from foreign operations as taxable if that company remains
a Zambian resident company for income tax purposes. As you are aware by now, a
company would only cease to be Zambian resident where its board of directors meetings
are being held abroad.
Profits earned by a Zambian resident company from overseas operations are chargeable to
income tax in Zambia subject to any double taxation convention. Further, special tax
incentives may be available in a foreign country where a Zambian company has invested.
2.6 The Sector Specific Investment Opportunities

We now wish to take you through some of the investments sectors where the tax policy
provides for tax incentives.
2.6.1 Manufacturing Sector

In order to promote growth in this sector, measures such as the creation of Multi-Facility
Economic Zone were put in place. The tax incentives that may be available to investors in
the manufacturing sector include but not limited to the following:
(a) Income from manufacturing of fertilisers is taxed at a reduced rate of 10%
(b) Reduction of import duties for certain materials used in manufacturing. For
example, import duty on PVC lining and eyelets used in the manufacture of shoes
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has been reduced to 5%. On the other hand, import duty on various textile
machinery has been reduced to 0% and all woven fabrics of polyester imported for
further processing, all imported sewing threads and gray fabrics has duty reduced
to 0% also.
(c) Customs duty exemption on importation of most capital machinery and equipment
used in manufacturing.
(d) Capital allowances on implements, plant and machinery used in manufacturing at
an accelerated wear and tear allowance rate of 50% on cost.
(e) An initial allowance of 10% for capital expenditure on an industrial building in the
charge year in which the industrial building is first brought to use. Further, capital
expenditure on an industrial building gives rise to an investment allowance of 10%
of such expenditure in the first year that the building is used for manufacturing
purposes.
(f) Zambian Value added tax refund on export of Zambian products by non-resident
businesses under the Commercial Exporters Scheme.
(g) Guaranteed input VAT claim for two years prior to commencement of production.
2.6.2 Agriculture Sector

Tax incentives available to farming enterprises may include the following:
a) Import duty exemption on irrigation equipment and reduced duty rates on imports
of other farming equipment.
b) VAT deferment on importation of some agricultural equipment and machinery.
c) Guaranteed input VAT claim for four years prior to commencement of production
for taxable agricultural businesses.
d) Zero rating of agricultural products and supplies when exported.
e) Reduced income tax rate to only 10% of taxable income from farming.
f) Capital allowances at the wear and tear rate of 50% on cost on implements, plant
and machinery that are used in farming
g) Capital expenditure incurred on the farm may qualify for 100% wear and tear
allowance if that expenditure qualifies as expenditure on farm works or farm
improvements.

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h) Dividends paid out of farming profits are exempted from tax for the first five years
since the company commenced farming.
2.6.3 Mining Sector

The incentives that are available to mining businesses may include the following:
• 10 year period carryover of tax losses (5 years for prospecting and exploration
companies).
• Guaranteed input tax claim for seven years on pre-production expenditure for
exploration companies in the mining sector
• Reduced standard rate of company income tax of 30% provided profits are not
supernormal.
• 25% capital allowances on mining equipment and related expenditure when assets
are brought into use.
• Deduction of capital expenditure incurred for mining purposes and also capital
expenditure incurred on the provision of services in a mine township on a straight
line basis.
• 0% withholding tax on dividends paid.
2.6.3.1 Incentives for Priority Sector Investments
An enterprise registered under the Zambian Development Act (ZDA), 2006 shall be
entitled to the following incentives;
(a). Exemption from payment of tax on income for;
(i) The first three years of operations for an enterprise operating in an urban
area.
(ii) The first five years of operations for an enterprise operating in a rural area.
(b). Operation of a manufacturing enterprise for the first five years without a
manufacturing licence required for such an enterprise under any law.
(c). Exemption from the payment of licensing fees required for an enterprise under any
law.

- 26 -
(d). Ability to claim improvement allowance at the rate of 100% of the cost of an industrial
building or commercial building constructed or altered in a particular tax year and used for
business purposes. The improved allowance can only be claimed in respect of buildings
actually contracted or altered by a trader and not on buildings acquired by way of
purchase. This incentive is provided in order to encourage traders to construct buildings.
The improvement allowance is given as a deduction from profits in addition to the normal
wear and tear allowance and initial allowances available on the building. The development
allowance is not deductible from the cost of the building.
Small and micro enterprises are entitled to several incentives as long as they register with
the Zambian Development Agency (ZDA) Act, 2006.
2.7 Activity
Attempt to answer the questions below to test your understanding of Unit 2 topic:
1. Describe the tax incentives that are available for each of the following economic
sectors:
a. Mining
b. Agriculture
c. Manufacturing
2. Outline the incentives available for investments under the ZDA Act 2006
2.8 Summary
In this Unit you have been introduced to the concept of direct foreign investment and the
tax incentives available for investment in priority sectors. The main sectors where tax
incentives may be available include manufacturing, agriculture and mining. The Zambia
Development Agency Act provide further incentives. Given this coverage so far, in the
next unit you will learn about tax audits.

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UNIT 3
TAX AUDITS
3.1 Introduction
Welcome to unit 3 where we will focus our attention on tax audits.

In the previous unit, you learnt how taxation and investment policy provide investment
incentives that you should be aware of as Tax consultant. In this unit, we will explain to
you the generally accepted practice of tax audit and the rights and responsibilities of
taxpayers in relation to a tax audit. We will also discuss the powers that may be exercised
by the Commissioner General in a tax audit situation.
3.2 Aim
This aim of this unit is to determine the key aspects of taxation that professional
accountants like yourself should be familiar with.
3.3 Objectives
i) Explain the meaning of a tax audit
ii) Describe the main areas where taxpayers default
iii) Distinguish between a desk audit and a field audit
iv) Explain how the taxpayer would cooperate with the tax auditors
3.4 Time frame

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3.5 Meaning and Purpose of Tax Audit
Let us now look at what a tax audit is. What do you understand by a tax audit? Do not
proceed before you provide your own definition.
A tax audit is an examination of your tax return by the Zambia Revenue Authority
to verify that your income and deductions are accurate.
The tax audit may also be defined as an examination of a tax return, a declaration of
liability or repayment claim, a statement of liability to stamp Duty, or the compliance of a
business with tax and duty legislation. The purpose of tax audit is to establish the correct
amount of tax liability. As such, any persons (individuals and companies) who are subject
to income tax assessment including employers who are registered for Pay as You Earn,
traders registered for Value added tax and all persons who may be required to make a one
off tax payment because of having engaged in a taxable transaction may be subject to a tax
audit. A tax audit may be comprehensive and therefore examine compliance under a
specific tax, such as PAYE or VAT. A tax audit therefore is when the Zambia Revenue
Authority decides to examine your tax return a little more closely and verify that your
income and deductions are accurate. A tax audit will examine the books and records of a
taxpayer to determine (establish) whether there is any tax default and if so to reach a
settlement with the taxpayer and ensure future compliance to tax regulation.
Typically, your tax return is chosen for audit when something you have entered on your
return is out of the ordinary. There are three main types of tax audits namely; the mail
audit, the office audit and the field audit.
3.5.1 Mail audits
No matter what type of audit the tax inspectors decide to conduct, you will receive
notification of it by mail. A mail audit is the simplest type of tax examination and does not
require you to meet with an auditor in person. Typically, the Revenue Authority requests
additional documentation to substantiate various items you report on your tax return. For
example, if you claim K15,000 in charitable deductions , the auditors may send you a letter
requesting proof of your donations. Generally, submitting sufficient proof will conclude
the audit in your favor if the Zambia Revenue Authority is satisfied.

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3.5.2 Office audits
An office audit involves review of the accounting records and any returns that you have
already submitted to the Revenue Authority as a taxpayer and this audit is conducted at a
local Revenue office. These audits are typically more in-depth than mail audits and usually
include questioning by an audit officer about information on your return. You will be
asked to bring specific information to an office audit, such as the books and records for
your business or your personal bank statements and receipts. You also have the right to
bring an accountant or tax agent to represent you at these meetings.
3.5.3 Field audits
The field audit is the broadest type of examination that the tax auditors or inspectors
conduct. In these cases, a ZRA agent will conduct the audit at your home or place of
business. A field audit is generally very thorough and will cover many, if not all, items on
your return including obtaining further information relating to your business.
A tax investigation on the other hand is carried out purely because some case of tax
evasion or tax fraud has been reported in connection with a taxpayer. A tax investigation
may also be carried out where a taxpayer carrying on a business consistently reports losses.
3.6 Tax Defaults
Several types of tax defaults may be established following the conduct of a tax audit.
We will explain to you three main categories of such defaults.
3.6.1 Deliberate behaviour
This is where a taxpayer intentionally is in breach of their tax obligation. Such

behaviour may include deliberate failure to maintain books of accounts, omission of
transactions from the accounting records and or providing misleading or false
information.

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3.6.2 Careless behaviour with Significant Consequences
This usually arises where a tax payer fails to take reasonable care in as far as the tax
obligations are concerned. Where in the case of tax underpaid is significant with reference
to the correct tax payable, for the relevant period, then significant consequences may be
established. Some of the examples of careless behaviour may include failure to tax advice,
neglecting to properly define expenditure into allowable and disallowable categories for
tax purposes.
3.6.3 Careless behaviour without significant consequences
We may now look at careless behavior without significant consequences. These may result
from for example computational errors that may be of a minor nature discovered during a
tax audit. This category arises where the tax underpaid is not significant with reference to
the amount of tax ultimately payable.
3.7 Possible outcomes of an audit
There are three possible outcomes of a tax audit. If the tax authority is satisfied with your
explanations and the documentation you provide, then it will not change anything on your
tax return. If the tax auditors propose changes to your tax return, you can either agree and
accept the changes or challenge the auditor's assessment. If you agree, you may have to
sign an examination report or other form provided by the Zambia Revenue Authority and
establish some type of payment arrangement. If you disagree with the findings, you may
request a meeting with the tax inspector to further review your case or you can commence
a formal appeals process to the Revenue Appeals Tribunal. Where there are no proper
accounting records from which reliable information could be obtained, a negotiation
system ensures that a fair amount of tax is agreed upon following a tax audit.
3.8 Taxpayer Disclosures
We will now proceed to look at disclosures by taxpayers. Where you have identified an
error in your return as a taxpayer or tax agent, there are a number of options available to
you to correct the error. You can self-correct without incurring a penalty within a specified

- 31 -
time frame. In such a case, you must apply in writing to the Commissioner General setting
out the adjustment to be made with computations of the correct tax liability attached and
enclosing the payment of the tax payable, including the statutory interest due. However,
this option may not be available where you have been notified of an impending tax audit or
tax investigation. In such a circumstance, you may only have the option to declare an
innocent error and where an auditor is satisfied that it was indeed an innocent error, no
penalty may apply.
3.9 Quality Tax audit
In order to assure quality, the tax audit should provide assurance that:
• All relevant accounting records and source documents are reviewed with sufficient
depth to reach a reasonable conclusion regarding all items of material tax
consequences.
• Appropriate income tests are performed to ensure that proper and complete
reporting of income is made regardless of the source.
• The taxpayer’s responsibility with regard to filling of all tax returns have been
fulfilled.
• The conclusions stated are documented in sufficient detail to enable the reader
appreciate the processes involved in arriving at such conclusions.
In achieving the above, the auditor may seek to;
i. Ascertain the nature of business and those responsible for maintenance of proper
records.
ii. Examine the books and records for completeness and accuracy with regard to tax
and accounting principles whether maintained manually or electronically.
iii. Check that all relevant tax returns have been made are complete in accordance with
the accounting records.
iv. Advise the taxpayer of any errors, omissions or irregularities in the returns
submitted, determine any liability or refund and specify any action required by the
taxpayer in order to ensure compliance.

- 32 -
When conducting an audit, the auditor should consider all possible sources of information.
The auditor may request:
a.) The taxpayer to provide a statement of affairs indicating all of their assets and
liabilities as of a specific date.
b.) Third parties such as suppliers and customers to make available for inspection
books, records and information relating to the taxpayer that may be relevant to the
tax audit.
c.) Financial institutions to provide details of accounts and financial transactions
which may be material in determining the taxpayer’s liability.
Where the auditor suspects that a serious tax offence could have occurred, he/she may
undertake an audit investigation. In such a case, the auditor has the right to access the
business premises even without a search warrant to inspect documents and records and
seek further documentary evidence.
3.10 The Role of the Tax advisor

Tax advisors are professionals with expert tax knowledge engaged by the taxpayer to
facilitate compliance in as far as taxation is concerned. Tax advisors who become aware of
a material non-compliance or tax evasion practice by the client should advise the client to
correct the status and request that they disclose to the Commissioner General. Where the
tax advisor knowingly gets involved in tax fraud or facilitates evasion of tax, they may be
liable to a fine or imprisonment or both.
Most tax advisors are chartered accountants who are members of the Zambia Institute of
Chartered Accountants (ZICA). All members of ZICA are expected to uphold ethical
values as provided for in the ethical code of conduct. A member who may have assisted a
client to evade tax may be subject to disciplinary action.
3.11 Activity
1. Explain the meaning of a tax audit and its purpose.

2. Contrast between a tax audit and a tax investigation.
3. Discuss the possible outcome of a tax audit and their consequences
- 33 -
4. Distinguish between a desk audit and a field audit
3.12 Summary
In this Unit you have learnt how a tax audit enables the Commissioner General to be
assured that the correct amount of taxes are being collected from the taxpayers. We further
explained to you the main defaults a taxpayer may default and their consequences. We
have also explained the need for voluntary disclosure of tax errors by the taxpayer and the
steps they should take in this entire process. It is expected that you will be able to advise
businesses or taxpayers on the books of accounts and records that need to be maintained
and that compliance to tax law is very important. In case you are not sure of any part of
this unit, please go back to that particular section of the unit and make sure you understand
and are able to apply the principles discussed in this unit. Given this orientation, in the
next unit you will explore the taxation of mining operations.

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UNIT 4
TAXATION OF MINING OPERATIONS
4.1 Introduction
You are welcome to unit 4 of this module that focuses on taxation of mining operations.
In the previous unit, you learnt how a tax audit is conducted and the reasons why a tax
audit is conducted. You also learnt the types of tax defaults and the possible outcome of a
tax audit and the role of the tax advisors. In this unit, you are going to learn about the
taxation of income arising from mining operations. You are expected to use the applicable
tax rates and allowance given in this module for the charge year (tax year) 2016.
4.2 Aim
The aim of this unit is to equip you with competences in the application of taxation rules
to mining operations.
4.3 Objectives
i.) Explain and define the meaning of the term mining,
ii.) Compute tax adjusted mining profits for incorporated mining businesses,
iii.) Calculate income tax and mineral royalty payable by both incorporated and
unincorporated mining businesses.
4.4 Time frame

- 35 -
4.5 Mining
Mining may be defined as the extraction of materials whether solid, liquid or gaseous from
beneath the surface of the earth in order to win minerals, or any operations directly or
indirectly necessary or incidental thereto (Mines and Minerals Development Act, 2015). A
mineral may be defined as any substance occurring naturally in or on the earth or in or
under water and which was formed by or subjected to a geological process and includes
any mineral occurring in residue stock piles or in residue deposits but, excludes petroleum
and water extracted for domestic or industrial use.
Section 2 of the Income Tax Act number 6 of 2016 defines Mining Operation as an
operation carried out under a mining right, excluding an operation carried out under a
mineral processing license only or an exploration license. You should take note that this
definition excludes from the definition of mining operations, any operations carried out
under a mineral processing or exploration license. However, where a person is carrying on
both mining and mineral processing, the income earned from the two activities shall
qualify to be taxed as income arising from mining operations.
The term mineral processing on the other hand is defined by the Mines and Minerals
Development Act, 2015 as the practice of beneficiating or liberating valuable minerals
from their ores which may combine a number of unit operations such as crushing,
grinding, sizing, screening, classification, washing, froth floatation, gravity concentration,
electrostatic separation, magnetic separation, leaching, smelting, refining, calcining and
gasification or other processes incidental thereto.
The Mines and Minerals Development act classifies minerals into industrial and energy
minerals.
An Industrial mineral is a rock or mineral other than gemstones, base metals, energy
minerals used either in their natural state or after physical or chemical transformation and
may include barites, dolomite, fluorspar, graphite, guano, gypsum, ironstone, kyanite,
Limestone, phyllite, magnesite, mica, nitrate, phosphate, parophyllite, sands, clay and talc.

- 36 -
An energy mineral is a naturally occurring substance in the earth’s crust that may be used
as a source of energy and include coal, uranium and any other minerals used to generate
energy but does not include petroleum.
Gemstones means amethyst, aquamarine, beryl, corundum, diamond, emerald, garnet,

ruby, sapphite, topaz, tourmaline and any other non – metallic mineral substance, being a
substance used in the manufacture of jewelry.
Mining operations may be classified into large scale and small scale mining operations.
4.5.1 Large Scale Mining Operations

Mining rights that may be granted under large scale mining operations include:
4.5.1.1 Prospecting Licenses

Prospect means to search for any mineral by means of digging and to carry out such works,
and remove such samples, as be necessary to test the mineral bearing qualities of any land.
A prospecting license confers on the holder of the license exclusive rights to carry on
prospecting operations in the prospecting area for the minerals specified in the License and
to do all such other acts and things as are necessary for or reasonably incidental to the
carrying on of those operations.
4.5.1.2 A retention Licenses

Retention License confers on the holder exclusive rights to apply for a Large- scale mining
License within the area for which the retention License has been granted.
4.5.1.3 Large scale mining License

Such a License confers on the holder exclusive rights to carry on mining and prospecting
operations in the mining area, and to do all such other acts and things as necessary for or
incidental to the carrying on of those operations.
4.5.2 Small Scale Mining Operations

You should be able to explain the various mining rights that may be granted under small
scale mining as discussed below:
- 37 -
4.5.2.1 Prospecting permits
A prospecting permit confers on the holder exclusive rights to carry on prospecting
operations in the prospecting area for the minerals (except gemstones) specified in the
License.
4.5.2.2 Small scale mining License

This License confers on the holder exclusive rights to carry on mining operations in the
mining area for minerals other than gemstones.
4.5.2.3 Gemstone Licenses

A gemstone License confers on the holder the same exclusive rights as a prospecting
permit and a small scale mining License, but only in relation to gemstone.
4.5.2.4 Artisan's Mining Right

An Artisan’s mining right shall confer on the person to whom it is granted exclusive rights
to mine according to its terms in respect of the minerals specified in the permit. Any
citizen of Zambia who has identified a mineral deposit may apply for an artisan’s mining
right.
4.6 Mineral Royalty Tax

The Commissioner General is responsible for the assessment and collection of mineral
Royalty. Mineral Royalty is payable by holders of large scale mining License, Small Scale
Mining licenses, large and small scale gemstone licenses or artisan mining rights.
Mineral Royalty is calculated on the gross and norm (average) value of minerals produced.
The applicable rates for the charge year 2016 are as follows:
(i) nine percent (9%) for open cast mining operations and six percent (6%) for
underground mining operations of;
• the norm value of the base metals or precious metals produced or recoverable under
the mining license;

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• the gross value of the gemstones or energy minerals produced or recoverable under
the mining license;
(ii) six percent (6%) of the gross value of industrial minerals produced or recoverable
under the mining license;
(iii) nine percent (9%) of the norm value for base and precious metals where the person in
possession of the minerals that were extracted in Zambia, has not paid mineral royalty for
the minerals;
(iv) nine percent (9%) of the gross value of gemstones and energy minerals where the
person in possession of the minerals that were extracted in Zambia, has not paid mineral
royalty for the minerals; and
(v) six percent (6%) of the gross value for industrial minerals where the person in
possession of the minerals that were extracted in Zambia, has not paid mineral royalty for
the minerals.
Base metal means a non-precious metal that is either common or more chemically active,
or both common and chemically active and includes iron, copper, nickel, aluminium, lead,
zinc, tin, magnesium, cobalt, manganese, titanium, scandium, vanadium and chromium.
For your tax purposes norm value means the following:
a) the monthly average London Metal Exchange (LME) Cash price per metric tonne
multiplied by the quantity of the metal or recoverable metal sold;
b) the monthly average Metal Bulletin cash price per metric tonne multiplied by the
quantity of the metal sold or recoverable metal sold to the extent that the metal is
not quoted on the London Metal Exchange or;
c) the monthly average cash price per metric tonne of any other exchange market
approved by the Commissioner General multiplied by the quantity of the metal or
recoverable metal sold to the extent that the metal price is not quoted on the
London Metal Exchange or Metal Bulletin.
For the purpose of the calculation of mineral royalty, you should consider gross value to
mean the realizable value for a sale free on board, at the point of export from Zambia or
point of delivery within Zambia.

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4.6.1 Reflection
Let us now consider an example on how to compute mineral royalty tax.
Illustration
Namonda Limited is a copper mining company in the Copperbelt town of Chililabombwe.

During the month ended 31 December 2016, the company sold 1200 metric tones of
copper. The average London Metal Exchange cash price for the period was US$ 10,300
per metric tonne. The Bank of Zambia advised that the exchange rate ruling during that
time was K9.80 per US$1.00. Namonda Limited is an open pit mining operation.
Required:
Calculate the amount of mineral royalty tax payable by Namonda Limited on the copper
sales in the month of December 2016.
Solution
Since Namonda Limited is an open cast mining operation, the company is therefore
required to pay mineral royalty at the rate of 9% of the norm value.
Accordingly, norm value is the monthly average price of the London Metal Exchange per
metric tonne multiplied by the quantity of the copper sold as computed below:
Norm value = US$10,300 x 1,200 metric tones
= US$12,360,000.00
Mineral Royalty tax = US$12,360,000.00 x 9% x K9.80
= K10,901,520.00

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4.6.2 Due Date
Section 66 (2) of the Mines and Minerals Act stipulates that mineral royalty is due and
payable 14 days after the end of the month in which the sale of minerals is done. A penalty
of 5% per month or part thereof is charged on late payments of mineral royalty as provided
in Section 78 of the Income Tax Act. Further, interest is charged at the rate of 2% above
the Bank of Zambia.
4.6.3 Mineral royalty Returns

Monthly mineral royalty returns are due within 14 days after the end of the month in which
they become due. A penalty is charged per month or part thereof for failure to submit a
monthly mineral royalty return.
4.7 Income Tax Deductions for Mining Investments

You should remember that just like other non-mining businesses, mining companies are
also allowed certain outgoings incurred wholly and exclusively for the purpose of
mining to be deducted from their income in order to arrive at their amount of taxable
income.
4.7.1 Capital Expenditure

Mining companies are able to claim capital allowances on qualifying capital
expenditure that they incur.
Capital allowances are claimed at the rate of 25% on cost from the year when the assets
created from that expenditure are put to use for purposes of mining. Other capital
expenditure on implements, plant and machinery qualifies for capital allowances at the
normal rates of wear and tear as any other business.
The guidance below will help you apply the correct capital allowances deductible under
each of the following categories of mining related investments:

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(i) Mineral Processing Only: Capital allowances will be claimed at the rate of
50% for the whole year.
(ii) Mining Operations Only: Capital allowances will be claimed at the rate of
25% for the whole year.
(iii) Integrated Mining Operations: For a company that has integrated mining
activities such as tolling, processing of own and purchased concentrates, the
capital allowances will be claimed at the rate of 25% for the whole year. This is
because the assets have dual use and are not exclusively and directly used for
mineral processing.
4.7.2 Mining losses
Where a mining operation incurs a loss, you should carry forward that loss and get a
relief of such a loss against future profits arising from the same business. Section 30 of
the Income Tax act provide for the following:
(i). A loss incurred by a person in a charge year from a source other than a mining
operation, shall be deducted from that person’s income from the same source on which
the loss was incurred. Where such a loss exceeds the income of a person for a charge
year, the excess shall, as far as possible, be deducted from that person’s income from
the same source on which the loss was incurred in the following charge year.
(ii). A loss incurred by a person in a charge year from a mining operation, shall be
deducted from fifty percent of the income of the person from the mining operation.
Where such a loss exceeds fifty percent of the income from a mining operation for a
charge year, the excess shall, as far as possible, be deducted from fifty percent of that
person’s income from the mining operation in the following charge year.
A loss incurred by a person carrying on a mining operation shall not be carried forward
beyond ten subsequent charge years after the charge year in which the loss is incurred
as opposed to the five years.

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Where on the death of an individual, interest in a business passes to that individual’s
spouse, any undeducted loss attributable to that interest shall be deducted from the
spouse’s income from that business in accordance with subsection.
The Act limits the use of losses to a maximum of fifty percent of the taxable income in
a charge year for a person carrying on mining operations. The remainder of the losses
will be carried forward for a maximum period of ten years.
Illustration
Chitwangeni Plc incurred a loss from mining operations amounting K15,590,500.00

during the year ended 31 December 2015. During the year ended 31 December 2016,
Chitwangeni Plc earned a tax adjusted profit from mining operations amounting to
K22,250,000.00.
Required
Calculate the amount of mining loss that will be relieved against the mining profits for
the year ended 31 December 2016 and the taxable Income if any for the year to 31
December 2016.
Solution
The amount of mining loss that can be relieved in the year ended 31 December 2016
will be restricted to 50% of the taxable income for the year which is K11,125,000.00
(i.e. K22,250,000 x 50%).
Chitwangeni Plc’s Taxable Income

For the Year ended 31 December 2016
K’000
- 43 -
Mining profits for the year 22,250
Less mining loss relief (50% of taxable Income) 11,125
Taxable Income 11,125
Further, in order to maintain the real values of losses for the mining sector, there is a
provision for you to index the losses using the formula below:
Index mining loss = 1+ (R2-R1) x mining loss brought forward

R1
Where: R1 is the Kwacha per Dollar exchange rate ruling on the last day of the
accounting year preceding that in which the loss relief is being claimed and R2 is the
Kwacha per US Dollar exchange rate ruling on the last day of the accounting year in
which the loss relief is being claimed.
Illustration
Using the data in the example for Chitwangeni Plc above, let us assume that the US
Dollar was trading at K14.52 on 31 December 2015 and was trading at K10.84 per
Dollar on 31 December 2016.
Required
Calculate the mining loss that will be relieved against the mining profit for the year
ended 31 December 2016 and the amount of loss still to be carried forward as at 31
December 2016.
Solution
The indexed mining loss is = 1 + (R2 – R1) x Mining loss brought forward
R1

- 44 -
= 1+ (10.84 -14.52) x K15,590,500
14.52
= K11,639,188.70
The mining loss still being carried forward is:

K
Indexed Mining loss brought forward 11,639,188.70
Less loss relieved in the tax year 2016 (11,125,000.00)
Mining loss carried forward as at 31 December 2016 514,188.70
4.7.2.1 Hedging losses
You should treat hedging income for a mining company as being taxable separately, but
you should use the mining tax rate applicable to all the other mining income. When a loss
is incurred in any tax year on hedging, you should only deduct that loss from hedging
income arising in the future. The loss can only be carried forward for a period not
exceeding ten years because it is still treated as a loss from mining.
4.8 Computation of Company Income Tax
Corporate income tax will apply to mining companies engaged in mining minerals and on
income from tolling and processing of purchased mineral ores as follows:
(i) the rate of tax charged on income from mineral processing has increased to thirty-five
percent from thirty-percent;
(ii) income from mining operations that does not exceed eight percent of the gross sales
shall be taxed at the rate of thirty percent; and
(iii) income from mining operations that exceeds eight percent of the gross sales shall be
subjected to the variable profits tax rate.
Previously, only income from the mining of industrial minerals was subjected to the
variable profits tax.
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Variable profit tax is calculated at the rate determined in accordance with the following
formula:
Y = 30% + [a – (ab/c)]
Where –
Y = the tax rate to be applied per annum;
a = 15%
b = 8%; and
c = the percentage ratio of the assessable income to gross sales.
Illustration
Mukuka mining Limited is a Zambia mining company involved in mining operation in

Chambeshi. The gross sales for the year ended 31 December 2016 were K1,298,920,000
and the profit as per accounts before taxation was K37,950,000. The profit figure was
arrived at after deducting depreciation amounting to K12,000,000 and entertainment to
suppliers of K1,300,000.
During the same period, Mukuka Limited incurred capital expenditure for purposes of
mining amounting to 36,000,000. The capital expenditure qualifies for capital allowance
deduction at 25% of the cost.
Required
Calculate the company income tax payable by Mukuka Mining Limited for the year 2016.
Solution
You should first calculate the taxable profit. Once you have calculated the taxable profit,
you should be able to determine whether the taxable profit is over 8% of the gross sales.
Where the taxable profit is over 8%, then you should calculate the variable tax rate and
where it is not over 8% of gross sales, then you should apply the tax rate of 30%.
Mukuka Mining Limited

Computation of taxable mining profits
for the year ended 31 December 2016
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K
Net profit before tax 37,950,000
Add:Depreciation 12,000,000
Entertainment to suppliers 1,300,000
51,150,000
Less capital allowances (K36,000,000 x 25%) 9,000,000
Taxable mining profit 42,150,000
Taxable mining profit as a percentage of gross sales = Taxable profit

Gross sales
= 42,150,000 x 100%
1,298,920,000
= 3.25%
Mukuka Mining Limited’s taxable profit is below 8% of the gross sales and you should
therefore apply the standard rate of 30% to compute income tax as follows:
Company Income tax payable = K42,150,000 x 30%

= K12,645,000
Illustration
In the tax year ended 31 December 2016, Nyanyati Mining Plc recorded profit before tax
amounting to K4,650,000. The profit before tax was arrived at after charging depreciation
of K2,120,000 and bad debts of K1,070,000. During the year, gross sales revenue was
K11,250,000.
Required
Calculate the income tax payable by Nyanyati Mining Plc for the year ended 31 December
2016.
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Solution
Nyanyati Mining Plc

Computation of Taxable profit for the year ended 31 December 2016
K
Profit before tax 4,650,000
Add: Depreciation 2,120,000
Taxable profit 6,770,000
Taxable mining profit as a percentage of gross sales = 6,770,000 x 100%

11,250,000
= 60.18%
Since the taxable profit as a percentage of gross sales is over 8%, Nyanyati Plc will pay
income tax at the variable tax rate as follows:
Variable tax rate; Y = 30 + [a – (ab/c)]

= 30 +[ 15 – (15 x 8)/60.18]
= 30 + 13.01
= 43
Company income tax will be at the variable tax rate of 43% of taxable profit.
Company Income tax = 43% x K6,770,000

= K2,911,100
4.9 Property transfer tax on mining rights
Where there is a transfer of mining rights, then will have to pay property transfer tax based
on the realized value of the mining rights transferred. The rate of property transfer tax on
the realized value of the mining right is 10%. Realised value may be defined as the open
market value of the mining rights. Where the actual price paid is more than the open
market value, the actual price paid will be taken as the realised value.
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4.10 Activity
Attempt to answer the questions below to test your understanding on Unit 4 topics:
1. Compare and contrast the following methods of taxation that are used by the Zambian
Government to tax the mining sector:
(i) Variable profit tax
(ii) Mineral royalty
2.In the tax year ended 31 December 2016, Mumbimunda Mining Plc recorded profit
before tax amounting to K3,850,000. The profit before tax was arrived at after charging
depreciation of K1,710,000, bad debts of K1,800,000 and other allowable expenses of
K3,740,000. During the year, gross sales revenue was K12,250,000.
Required
Calculate the income tax payable by Mumbimunda Mining Plc for the year ended 31
December 2016.
4.11 Summary
In this Unit you have been taught how Income tax is chargeable on mining operation. You
should always remember that mining in Zambia is governed by the Mines and Minerals
Development act as well as the Income Tax Act. We have also explained that when you
are computing taxable mining profits all revenue expenses that are incurred and wholly
and exclusively for the purposes of mining are deductible. Further, capital expenditure
qualifying for a 100% wear and tear allowance is also deductible in the charge year when
it is incurred. Mining losses are relieved against future mining profits and are carried
forward for a maximum period of ten years. When taxable mining profits are not above 8%
of the gross sales revenue, then the standard rate of 30% is applicable. However, when
taxable profits exceed 8% of the gross sales revenue, a variable profit tax applies. Before
you proceed to unit 5, ensure that you understand the computations done in unit 4.

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UNIT 5
FINANCIAL SERVICES AND INSURANCE OPERATIONS
5.1 Introduction
You are welcome to unit 5 of this module.

In the previous unit, you were introduced to the taxation of mining operations. In this unit,
you will learn how to compute taxes on income for financial services and insurance
operations. Major financial institutions are commercial banks, thrift associations, insurers,
securities firms, investment/merchant banks, finance companies, mutual funds and pension
funds. These are institutions that channel funds from those with surplus funds to those with
shortages of funds. You are expected to learn how these are taxed.
5.2 Aim
The aim of this unit is to bring out aspects of taxation peculiar to financial services and
insurance businesses.
5.3 Objectives
i) Explain the meaning of a bank and banking services for purposes of taxation
ii) Explain the tax treatment of other financial institutions including insurance
companies
iii) Apply the principles relating to the calculation of taxable business profits for
financial institutions.
iv) Compute income tax payable by financial institutions
5.4 Time frame

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5.5 Financial Institutions
Let us begin by asking you to list down examples of the types of investment that may fall
under the category of financial institutions. How did your list look like? We hope that it
looks as follows:
a) Institutions such as commercial banks operating under the banking financial

services act
b) Insurance companies
c) Pensions organisations
d) Mutual Funds
e) Building societies
As you may be aware, financial services include and not limited to taking deposits, asset
finance, giving loans and advances and serving as investment advisors.
5.5.1 Banks and banking related financial Services
Institutions that take deposits such as banks and building societies are taxed differently
from other financial institutions such as insurance companies. Any institution holding a
practicing license issued under the Banking and Financial Services Act is deemed as a
bank. The main income of banks and other similar financial services institutions is interest.
Expenses will include interest payments made and other non-interest expenditure.
When you are computing the taxable profits, you should as a general rule allow all revenue
expenses that are wholly and exclusively incurred for purposes of the banking services.
Depreciation and losses on disposal of non-current (fixed) assets are not allowable
expenses for tax purposes. Further, you should treat profit on disposal of assets as non
taxable income. As a general rule, you should also consider the tax rules that you learnt on
the taxation of business as being applicable except for the following additional guidance;
a) Amounts of loans written off are allowable expenses (you should remember that giving
out loans is part of the core business for banking services),
b) Provisions for losses on specific loans that may be written off are allowable,

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c) General provisions made for losses on loans are not allowed. You should therefore add
back to the profits any increase in such provisions and deduct any decrease thereof.
d) You should treat as taxable any loans previously written off and now recovered in the
year in which they are recovered. You should not make any adjustment in respect of
such loans.
Illustration
ATM Bank Limited made a net income of K5.8million before tax for the year ended 31
December 2016. The following deductions were made before arriving at the net income;
i) Depreciation on non-current assets of K370,000.00
ii) Irrecoverable loan written off of K210,000.00
iii) An increase in general provision for loan losses of K75,000.00
iv) A specific provision against loan losses amounting to K115,000.00
Assume that 60% of the net income was in the form of interest and that withholding tax at
15% was already accounted for. Capital allowances for ATM bank are K450,000.00
You are required to calculate the bank’s income tax payable for the charge year 2016.
Solution
ATM Bank Limited

Income tax computation for the charge year 2016
K
Net Income as per accounts 5,800,000
Add back:
Depreciation 370,000
Increase in general loan provision 75,000
Less capital allowances (450,000)
Taxable income 5,795,000
Income tax payable

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35% x K5,795,000 2,028,250
Less withholding tax on interest income
60% x K5,800,000 = K3,480,000 x 15% (522,000)
Income tax payable by ATM Bank 1,506,250
5.5.2 Insurance Businesses
The main function of insurance companies is to compensate individuals and corporations

(insured) if a prescribed adverse event occurs, in exchange for premiums paid to the
insurer by the policy holder (insured). Insurance business is classified into two
subdivisions namely general insurance and life insurance.
General insurance also known as property and casualty insurance offer protection against
personal injury and liability due to accidents, theft, fire and other calamities.
Life Insurance on the other hand offers protection in the event of untimely death
(morbidity risk), illnesses and retirement for the insured and their beneficiaries. Life
insurance policies are divided into two forms namely protection contracts which provide
protection against adverse financial effects of death or illness and savings contracts which
are regular savings schemes that pay out a lump sum at the end of a specified period.
5.5.2.1 Computation of Tax adjusted Profits for Insurance Businesses

You should refer to the third schedule of the Income Tax Act Chapter 323 for the
determination of taxable profits for insurance businesses. The taxable profits for an
insurance company are determined based on the type of insurance that a company provides
and is taxed at the rate of 35% applicable to any other company. Please note that due to
complexities associated with actuarial valuations in the computation of taxable profits, you
may not be asked to do the actual computations of taxable profits for insurance businesses
unless otherwise provided. However, you are expected to understand rules applicable to
the calculation of taxable profits for insurance businesses as provided for in the Income
Tax Act.
5.5.2.1.1 General Insurance

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For non-life insurance business for a resident company, taxable business profits are
determined as follows:
i) take the gross premiums, interest and other income less premium refunded or
premiums paid on reinsurance;
ii) add reserves for unexpired risks at such reasonable rates as adopted by the
company at the beginning of the year’s business;
iii) deduct reserves for unexpired risks at such reasonable rates as adopted by the
company at the end of the year’s business; and
iv) deduct the actual losses (less the mounts received from reinsurance), allowable
expenses and deductions in computing any business profits.
For non-life insurance business of a non- resident company, taxable business profits are
determined as follows:
i) take the gross premiums, interest and other income received in the republic, less
premium refunded or premiums paid on reinsurance;
ii) add reserves for unexpired risks at such reasonable rates as adopted by the
company in relation to its business as a whole at the begging of the year’s
business;
iii) deduct reserves for unexpired risks at such reasonable rates as adopted by the
company in relation to its business as a whole at the end of the year’s business;
and;
iv) deduct the actual losses (less the mounts received from reinsurance), agency
expenses and allowable business expenses incurred in the republic and a
proportion of head office expenses as determined by the Commissioner
General.
5.5.2.1.2 Life Insurance
Regarding the computation of taxable profits for life insurance business, you will need
some actuarial valuations.
Profits for the life insurance business of a resident insurance company are calculated as the
excess of total investment income over three and one half percent of the total mean
actuarial liabilities reduced in the proportion with the total mean actuarial liabilities less
the mean actuarial liabilities in respect of policies constituting approved funds and annuity
policies issued in the republic under which annuities are being paid bear to the total
actuarial liabilities.
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Profits for the life insurance business of a non-resident insurance company are calculated
as the proportion of the company’s total investment income that the actuarial liabilities in
respect of local taxed life policies bear to the company’s total actuarial liabilities less three
and one half percent of the mean actuarial liabilities in respect of local taxed policies.
5.6 Activity
Try the following questions to test your understanding of this unit.
Cuundu Savings and Credit Bank Limited made a net income of K2,350,000 before tax for
the year ended 31 December 2016. The following deductions were made before arriving at
the net income;
i) Depreciation on non-current assets of K230,000.00
ii) Tax penalties of K89,500.00
iii) Donation to a non-registered charity of K 25,000.00
iv) Irrecoverable loan written off of K115,000.00
v) An increase in general provision for loan losses of K105,000.00
vi) Loss on sale of motor car of K56,000.00
vii) A specific provision against loan losses amounting to K200,000.00
Assume that 50% of the net income was in the form of interest and that withholding tax at
15% was already accounted for. Capital allowances for Cuundu Savings and Credit bank
are K360,000.00
Required
a.) Compute the taxable income for Cuundu Savings and Credit Bank Limited and tax
payable for the year ended 31 December 2016.
b.) Explain how the taxable business profits for a life insurance business are
determined.

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5.7 Summary
In this Unit you have been introduced to the taxation of financial institutions such as banks
and insurance companies. We explained to you that banks income is generally subject to
the same rules that are applicable to any other business with regard to calculation of
taxable profits. Further, we explained to you the rules applicable to determining taxable
profits for insurance businesses as provided for in the third schedule of the Income Tax
Act for both general and life insurance. Further, we explained that you would need
actuarial valuations to enable you compute taxable income for insurance businesses. You
will be provided with these valuations if required to perform any calculations.
You are encouraged to go back and read this unit for you to understand clearly in case you
have any doubts over the application of the principle discussed in this unit. In the next unit,
will learn about tax planning.

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UNIT 6
INTRODUCTION TO TAX PLANNING
6.1 Introduction
Welcome to unit 6 on Tax Planning.

In the previous unit, you were introduced to the taxation of income from financial
institutions. In this unit, you will learn how to identify alternatives, opportunities and
reliefs which you may consider when advising taxpayers on how to plan their tax affairs
for a particular tax year. You will learn how to use the provisions of the tax law to
minimize or defer tax liabilities while complying with the provisions of the law.
6.2 Aim
The aim of this unit is to introduce you to concept of tax planning and how its principles
are applied in practice.
6.3 Objectives
(i) Explain the meaning of tax planning.
(ii) Identity the difference between tax avoidance and tax evasion.
(iii)Compute tax liabilities under alternative forms of earning income.
(iv) Provide advice on the best alternative way of earning in order to be tax
efficient.
6.4 Time frame

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6.5 The scope of tax Planning
We will start this unit by explaining to you what tax planning mean. Tax planning
may be explained as the development of a plan aimed at minimizing the amount of
tax payable or at least deferring payment as much as possible while complying with
all the tax legislation in effect. You can achieve tax planning through the use of tax
exemptions and reliefs or through structuring a transaction in a different way. For
example you may opt for leasing rather than buying an asset. Having said that, you
are expected to have a thorough understanding of the Income Tax Act for you to
apply yourself appropriately in matters of tax planning. You should also take note of
changes in government fiscal policy each year. As you may have noticed, tax
planning is a year round activity.
Tax planning is not the same as reducing tax liabilities using illegal means. The use
of illegal means to avoid tax is called tax evasion. Such illegal means may include
willful omission of transactions in the accounting records, secret bank accounts,
manipulating figures in the accounting records so as to pay less tax and many others.
The main aim of tax evasion is to defraud the government of tax revenue. When you
are involved in tax evasion, the offence may be punishable by fines, imprisonment or
both.
On the other hand, tax avoidance may be defined as the reduction of tax liabilities
within the framework of the law The term is also used to describe tax schemes that
utilise loopholes in the tax legislation. However, tax avoidance where you set up
false accounting structures and strategies that abuse a loophole so you can claim
large tax deductions or take advantage of some benefit that was never intended to be
used in such a way is illegal. To this end, the revenue authority have introduced
disclosure obligations regarding tax avoidance schemes and anti-abuse rule has been
introduced to back up the existing specific legislation.
6.6 Tax Planning Opportunities
Let us proceed and consider various tax planning options available for you to utilise
with their tax implication.

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6.6.1 Employment Versus Self employment
When you are called upon to advise whether someone should leave employment in
favour of being self-employed, the following may be some of the key issues to
consider from the taxation point of view:
a. Under employment, it is the employer who accounts for income tax and who is
liable to possible tax penalties over an employee’s tax affairs.
b. Where you are self-employed, you are personally responsible for tax compliance
and can suffer tax penalties.
c. As an employee, you suffer immediate cash deductions when the emoluments
are paid under the Pay As You Earn system. Meaning you cannot receive the
gross emoluments and pay the tax later. On the other hand, as a self-employed
with an annual turnover of more than K800,000.00, you will pay your income
tax under the provisional tax system quarterly during the year. You will be
required to pay the tax balance by the 30th June after the end of the tax year.
This would enable you management your cash efficiently and effectively.
d. An employee is only entitled to NAPSA statutory deductible relief of 15% or
K3,060.00 per year whichever is lower besides the K36,000.00 amount taxed at
0%. As a self-employed person, all your revenue expenses that you incur wholly
and exclusively for purposes of business are deductible for tax purposes.
e. As an employee, you cannot register for value added tax (VAT) and you will
bear all the value added tax on supplies procured as final consumer whereas a
self-employed you may register for VAT if you trade in taxable supplies. As
such, you then then cannot bear VAT on all supplies received, unless the VAT
relating to them is irrecoverable.
6.6.2 Choice of Business Medium
Where you have to choose the form of business to go for, you may wish to be a sole
trader, a partner, a shareholder or director and will have to consider the following for
taxation purposes:

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a. As sole trader you will be assessed to income tax on the whole amount of tax
adjusted profit from the businesses. As a partner you will be assessed the same
way as sole trader on your share of partnership tax adjusted profit. As director in
a private company, your tax assessment will be limited to emoluments that you
receive.
b. As sole trader or partner, any private use of business assets will not be allowable
on capital allowances to the proportion of private use and any expenses incurred
on such assets are also not allowed for tax purposes for the private use
proportion. However, as director in a private company, private use of business
assets are not restricted for tax purposes when computing tax adjusted profits.
You will be expected to compare the net income for each alternative when making a
choice. The alternative that leaves you with a higher net income is the better one to
choose. You should remember that tax planning should only ever be done with a view
to increasing your total wealth.
6.6.3 Family Businesses
Where you are running an unincorporated business with a family member, you may
wish to consider the impact of taxation on engaging that family member either as
employee or partner. Here are some of the issues you may consider:
• Where you engage the family member as an employee, NAPSA contributions

will be payable on behalf of the family member. NAPSA contributions are tax
deductible when computing the sole trader’s tax adjusted profits. On the other
hand you will not accrue any NAPSA obligation where you engaged the family
member as partner.
• When you engage a family member as employee payments you make will be
deductible when calculating taxable profits provided they are wholly and
exclusively incurred for business purposes.

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You will be expected to compare the net income for each alternative when making a
choice. The alternative that leaves you with a higher net income is the better one to
choose assuming that the taxable profits are equal to cash inflow.
6.6.4 Remuneration Package
You will have to consider an appropriate remuneration package that would put you or
another in a better position when changing jobs or when offered an alternative package
by your employer. You should ensure that one remains with a larger amount of net
income after all payments. Some of the key issues that you may need to consider
include the following:
i). where one gets a huge salary, that will be taxable in full on the employee, apart from
the statutory tax free pay of K36,000 for the tax year 2016.
Where employers provide free accommodation and personal to holder cars to their
employees, this will increase their tax liabilities and so they may not be willing to
provide such. You should only advise exempt organisations to consider awarding such
benefits to employees as there would be no tax implications for both the employees and
employers.
ii). Where lunch allowance is provided to the employee, tax will be chargeable on the
employee. Where the employer provides a canteen where they receive meals for free,
this should be attractive to employees. Refer to the relief available on canteen expenses
to the business.
You should compare the net income after all payments under each alternative for you to
make a final decision.
6.6.5 Incorporation of a Business
Where you decide to change the legal status of your business from sole proprietorship
or partnership to a Limited company, the following will be the tax implications:

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i). the sole proprietorship or partnership business will be deregistered and a new
company will have to be registered for taxes such VAT, Income Tax, etc.
ii). When calculating the taxable profits cessation rules will apply as for unincorporated
business whereas commencement rules will apply for the new company.
iii). Assets qualifying for capital allowances will be deemed to have been disposed off
and therefore acquired by the new company at their market values.
6.7 Activity
Attempt the questions below to test your understanding of this unit. Please make sure you
have understood this unit before you proceed to the next one.
1. Sebeza Kagoto, a Zambian resident individual, has received two offers of employment
from two different Zambian resident companies, Mwaani Plc and Mubanga Plc, as a
Finance Manager. Sebeza is required to commence employment on 1 January 2016, under
each offer.
Mwaani Plc
Under the offer of employment from Mwaani plc, his annual salary will be K410,000, with
a utility allowance of K5,000 per month and a fuel subsistence of K6,000 per month. He
will be provided with free meals at the staff canteen at a cost of K2,800 per month. The
company will lease a house with a market value of K405,000 on 1 January, 2016, on his
behalf and will pay annual lease rentals of K110,000 on his behalf.
Sebeza will be required to travel out of town in performance of the duties of his
employment, and the company will pay his board and lodging fees on his behalf which
will amount to K15,000 per month.
He will use his own motor car which he acquired at cost K320,000 and has a cylinder
capacity of 3,000cc for the duties of the employment. His total mileage is expected to be
40,000 kilometres per annum out of which 3,200 kilometres will be travel from his home
to the premises of Mwaani Plc, 22,500 kilometres will be travel for promotional campaigns
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of Mwaani Plc’s products and 5,000 kilometres on personal trips. He will incur motor car
running expenses of K3,500 per month.
He will be required to pay annual subscription fees of K1,600 to the Zambia Institute of
Chartered Accountants and he will make NAPSA contributions of 5% of his basic salary.
Mwaani Plc will also pay employer’s NAPSA contributions of 5% of his basic salary on
his behalf.
He will be entitled to a gratuity of 25% of the cumulative salary earned under the contract.
Half of this gratuity, will be paid after he has served eighteen months on the contract and
the other half will be paid at the expiry of the contract. In the event that he resigns before
the contract term expires, he will only be entitled to a gratuity of 25% of his cumulative
basic salary up to the date of resignation. However, this gratuity will only be paid on
condition that he must have served a period of at least eighteen (18) months on the contract
before resigning.
His annual basic salary and all the other conditions of service will remain constant
throughout the three year term of the contract.
Mubanga Plc
Under the offer of employment from Mubanga Plc, his annual salary will be K300,000. He
will be entitled to a housing allowance of K10,000 per month, transport allowance of
K7,000 per month and lunch allowance of K2,800 per month. The company will pay his
professional subscriptions to the Zambia Institute of Chartered Accountants, which will
amount to K1,600 per annum. He will be required to travel out of town for promotional
tours each month, and the company will pay him subsistence of K15,000 per month in
respect of boarding and lodging.
He will be provided with a petrol driven personal to holder car with a cost of K320,000
with a cylinder capacity of 3000cc capitalise. It is estimated that he will have private usage
in the motor car of 30%. The company will pay all the motor car running expenses and
these are expected to be K16,000 per month.
He will make NAPSA contributions of 5% of his basic salary. Mubanga Plc will also pay
employer’s NAPSA contributions of 5% of his basic salary on his behalf.

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He will be entitled to a gratuity of 35% of the cumulative basic salary earned under the
contract which will all be paid at the expiry of the contract. In the event that he resigns
before the contract term expires, he will only be entitled to a gratuity of 35% of his
cumulative basic salary up to the date of resignation. However, this gratuity will only be
paid on condition that he must have served a period of at least eighteen (18) months on the
contract before resigning.
Under this offer of employment, Kagoto will be entitled to annual basic salary increments
of 10% of the basic salary, whilst all the other conditions of service will remain constant
throughout the three year term of the contract.
Required:
(a) Advise both Mwaani Plc and Mubanga Plc of the tax implications of their offers to
Kagoto.
(b) Compute the income tax payable by Kagoto and his net income after tax, NAPSA
contributions and other relevant expenses for the tax year 2016 if;
(i) He accepts the offer of employment from Mwaani plc.
(ii) He accepts the offer of employment from Mubanga plc.
(c) Assuming that Kagoto serves three years under each contract, explain the tax
implication on the gratuity paid under each offer of employment and calculate the net
gratuity (after tax) receivable under each offer. You should assume that the personal
income tax rates for the tax year 2016, will apply throughout the next three years.
(d) Based on your computations of net income after tax in (b) and (c) above, advise Kagoto
on which offer of employment he should accept.
2. Imbuwa Nyambe, a Zambian resident individual is married to Mundia Nyambe who is

also resident in Zambia. The following information is available in respect of both Imbuwa
and Mundia for the tax year 2016.
Imbuwa Nyambe
Imbuwa commenced trading on 1 January 2016, running a retail business. He will prepare
his first accounts for the eighteen month period ending 30 June 2017. He then intends to
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immediately change his accounting date and will prepare the next accounts for the thirteen
month period ended 31 July 2018.
On 1 January 2016, he acquired a delivery van to be used in his trade at a cost of K90,000.
On 1 August 2017, he will purchase office furniture at a cost of K30,000.
The amounts of tax adjusted profits before capital allowances are expected to be as
follows:
K
Period ended 30 June 2017 990,000
Period ended 31 July 2018 (forecast) 858,000
Mundia Nyambe
Mundia Nyambe has been employed as a public relations manager at BRE Plc for many
years.
Her contract of employment provided for the following in the tax year 2016:
(i) An annual salary of K240,000 and she received an annual educational allowance of
K18,000.
(ii) The company reimbursed her the following expenses she incurred in the tax year 2016,
after producing relevant supporting documentation:
K
Medical bills 25,000
Life insurance premiums 12,000
Electricity bills 14,400
Water bills 7,200
(iii) In the tax year 2016, the company provided her with shopping vouchers with a value
of K16,000.
(iv) Throughout the tax year 2016, she was provided with free meals in BRE Plc’s staff
canteen. The total cost of these meals to the company was K19,000. The canteen is
available to all of the company’s employees.

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(v) Throughout the tax year 2016, Mundia used her own personal Toyota Fortuner motor
car with a cylinder capacity of 3000cc for the purposes of the employment. She acquired
the car on 1 January 2016 at a cost of K150,000. She travelled a total of 30,000 kilometers
in the motor car in the tax year 2016, out of which 21,000 kilometers where in the
performance of the duties of her employment. She incurred motor car running expenses of
K2,000 per month in the tax year 2016. BRE Plc paid her a commuted fuel allowance of
K1,000 per month throughout the tax year 2016.
(vi) Mundia is accommodated in a company house, which had a market value of K700,000
in the tax year 2016. Had it been let out on a commercial basis, the company would have
received monthly rentals of K10,000.
(vii) She was additionally given a labour day award of K15,000 cash, on 1 May 2016 and a
long service award of K25,000 cash on the same day.
(viii) She made NAPSA contributions of 5% of her basic salary throughout the tax year
2016 and BRE Plc also contributed 5% of her basic salary as employer’s NAPSA
contribution on her behalf in the tax year 2016.
(ix) She paid interest of K500 per month on a personal bank loan and professional
subscriptions relevant to the duties of her employment of K1,100 during the tax 2016.
(x) Pay As You Earn of K89,287 was deducted from her emoluments in the tax year 2016.
Other income
Mundia received royalties of K18,000 (gross), bank fixed deposit account interest of
K3,000 (gross), dividends of K2,500 (gross) from Muntu Limted, a private company and
rental income of K120,000 (gross).
Required:
(a) Advise Imbuwa Nyambe of the amounts that will be chargeable to income tax in
respect of his trade for the tax years 2016, 2017 and 2018, explaining the basis of
assessment for each tax year. You should assume that the tax rules for the tax year 2016
will apply throughout to all the above tax years.
(b) Calculate the total income tax payable by Mundia Nyambe in the tax year 2016. Your
answer should include an explanation of the tax implications for Mundia of being

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accommodated in a company house and being provided with free meals from the staff
canteen of in the tax year 2016.
3.Ndunda Yandunda has been trading as a sole trader for many years and has been making
considerable amounts of profits. In the year ended 31 December 2016, he expects to make
a final taxable profit of K695,000.00
His daughter, Wamunyima, has just completed her university studies. Ndunda is
considering taking on the daughter into the business either as employee or as a partner with
effective 1 January 2016. If Wamunyima is taken on as a partner, there will be annual
partnership salaries of K260,000.00 for Ndunda and 180,000.00 for Wamunyima. The
profit and loss sharing ratio between Ndunda and Wamunyima will be 3:2. There will be
no NAPSA contributions under this option. If Wamunyima is engaged as an employee, her
salary will be K180,000.00 and she will be required to pay NAPSA contributions of 5% of
her salary while Ndunda as employer will also pay 5% as employer’s contribution. Ndunda
will also pay himself a salary of K260,000.00.
Required
a). Compute the income tax payable by Ndunda and Wamunyima for 2016 where:
i. Wamunyima is brought into the business as an employee, and
ii. Wamunyima is brought into the business as a partner
b). Advise Ndunda as to which of the two options is beneficial from the tax point of view.
6.8 Summary
In this Unit you have been introduced to the concept of tax planning. We have explained to
you that tax planning is different from tax evasion and have also defined the meaning of
tax avoidance. You are expected to advise taxpayers on the appropriate course of action to
take in instances where they have to take advantage of tax reliefs and exemptions within
the law to minimize or defer tax liabilities as the case may be. As always, you are
encouraged to go back and read this unit for you to understand clearly in case you have
any doubts over the application of the principle discussed in this unit. In the next unit you
will learn about financial planning.

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UNIT 7
FINANCIAL ARRANGEMENTS AND PLANNING
7.1 Introduction
Welcome to unit 7 of this module where we look at financial arrangements and planning.
In the previous unit, you were introduced to the taxation of Limited companies. In this
unit, you will be expected to understand the meaning of financial planning. You will also
learn the sources of finance for both individual and companies.
7.2 Aim
This unit aims at developing your skill in evaluating the tax implication of various
financing options for a business.
7.3 Objectives
i) Explain the meaning of financial planning.
ii) Describe the various sources of finance for individuals and companies
iii) Describe the various investment products available for investment purposes.
iv) Explain how the valuation of inventory impacts calculations of taxable farming profits.
7.4 Time frame

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7.5 Scope of Financial Planning
What do you understand by the term financial planning?
Let us begin by defining what financial planning is. Financial planning is a long-term
process of prudently managing your finances so that you can achieve your goals and
aspirations, while at the same time helping you to resolve the financial barriers that
inevitably arise in every phase of life. It is expected that as a tax expert you should be able
to facilitate economic choices that often lead to new goals. Example of financial planning
at individual level may include buying a home, saving for a child's education or planning
for retirement and many more.
The steps involved in the financial planning process may entail gaining perspective on
where one is now and defining where one may want or need to be in the future. It provides
direction and meaning to one’s financial decisions, defining each in context with the other,
how they are all part of a whole.
You should be aware that Government may most certainly benefit from sound Financial
Planning through increased Tax Revenues and this is the reason why this topic is important
for you.
7.6 Financial Planning for individuals and companies
People have certain basic financial goals they want to achieve. To help meet their goals, a
range of investments, insurance coverage, savings plans and tax saving devices are
available.
Personal Financial Planning is concerned with the development and implementation of
coordinated plans for achieving one’s overall financial objectives. A variety of financial
instruments are available for use to achieve financial objectives. These basic financial

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instruments may include common stocks, preferred stocks, bonds, mutual funds,
Insurance, fixed and variable annuities, money market accounts, certificate of deposits, and
Savings accounts.
The planning process also involves the development of personal financial policies to help
guide you in the financial operations. An example of such policies in investments would be
deciding what percentage of an investment portfolio is to go into government bonds and
what percentage into common stocks or other types of financing.
7.6.1 Objectives of Personal Financial Planning:
Each person’s financial objectives may differ in terms of individual circumstances, goals,
attitudes and needs. However the general objectives may include the following:
(a). Protection against personal Risks such as premature death, disability losses, medical
expenses, unemployment, property and liability losses and many other risks.
(b). Capital accumulation for such reasons as emergency funds purposes, family purposes,
education purposes, general investment portfolio and many more.
(c). Retirement preparation
(d). Tax planning purposes
(e). Estate Planning
(f). Investment and Property management.
7.7 Sources of finance for Individuals and Companies
Let us now explain the various sources of finance for businesses. The main sources of
finance are equity and debt.

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7.7.1 Ordinary Shares (Common Stock)
When a company is formed for the first time, it is usually financed by the funds provided
for by the owners. The total net investment of the owners’ funds is known as equity (i.e.
common stock and retained earnings). We have outlined below some of the key
characteristics associated with ordinary shares.
(i). Ordinary shareholders have the right to vote at the annual general meeting of the
company.
(ii) The ordinary share dividends are given discretionary by the directors. However, the
ordinary shareholders are entitled to all of the undistributed profits after all other claims
have been met.
(iii). The profits that are not distributed as a dividend will increase the Ordinary
shareholder’s equity.
(iv). The Ordinary shareholders rank last in terms of cash payment in an event that a
business is liquidated. This means that they may lose everything they have invested where
there are no sufficient funds to pay.
7.7.2 Preference Shares (Preferred Stock)
These shares are a hybrid instrument with characteristics of both bonds (debt) and common
stock (ordinary shares). It represents ownership interest in the issuing firm and pays a
periodic fixed dividend usually quarterly. The dividend is only paid when profits are made
and after all debt holders have paid but before common stockholders are paid. Further,
non-payment of preferred dividends cannot force the firm into bankruptcy. Preferred stock
rank first to common stock in terms of payment in an event that a company is liquidated
but not to bonds (debt stock). These shares do not generally confer voting rights but there
may be an exception where the issuing firm has missed a promised dividend payment.

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For non-participating preference stock the dividend is fixed regardless of any increase or
decrease in the issuing firm’s profits.
For cumulative preference stock missed dividend payments go into arrears and must be
paid up before any common stock dividends can be paid.
For participating preference stock actual dividends paid in any year may be greater than
the promised dividends through an extra dividend or change in dividend as with common
stock.
For non-cumulative preference stock dividend payments don’t go into arrears when they
are not paid. These are generally unattractive to investors.
In general preferred stock is better than bonds as the dividend is not a legal obligation to
stockholders. However if the firm misses dividends this may discourage investors and
make it costly to firms. In addition dividends are not tax-deductible to the firm.
7.7.3 Debt Finance
Debt finance means a financing decision where a business will use borrowed funds to
finance the business. The cost of borrowing is known as interest. Interest is an allowable
expense for purposes of computing taxable business profits unlike dividends. Debt finance
many take many forms or instruments.
7.7.3.1 Debentures
What is a debenture? Pose for a bit and give your own definition before you compare with
what is given below.
A debenture is a document issued by a company containing an acknowledgement of
indebtedness. Debentures are bonds backed solely by the general credit of the issuing firm
and unsecured by specific assets or collateral. Company debentures can also be referred to
as loan stock. Usually, a debenture is a bond given in exchange for money lent to the

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company. Debentures can be offered to the public only if a prospectus accompanies the
application form. The company agrees to repay the principal to the lender by some future
date and in each year up to repayment it will pay a stated rate of interest in return for the
use of the funds. The debenture holder is a creditor of the company and the interest has to
be paid each year before a dividend is paid to any class of shareholder.
When a loan is secured this is by means of a trust deed. The deed usually charges, in
favour of the trustees, the whole or part of the property of the company. The advantages of
a trust deed are that a prior charge cannot be obtained on the property without the consent
of the debenture holder, the amounts on which the principal is to be repaid are specified
and power is given for the trustees to appoint a receiver.
The debentures can be secured by a charge upon the whole or specific part of a company’s
assets, or they can be secured by a floating charge upon the assets of the company.
7.7.3.2 Mortgages
Mortgage bonds are issued to finance specific projects that are pledged as collateral for the
issue.
7.7.3.3 Trade Credit
Trade credit may be an important source of finance for most Individuals engaged in
business as well as limited liability companies. Trade credit is the money owed to the
suppliers of goods and services as a result of purchasing goods or services on one date, but
paying later.
As interest is not usually charged on trade credit, there is a temptation to maximize the use
of trade credit. Exceeding the normal credit terms may lead to a number of potential
problems:

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i. Difficulty in obtaining credit terms from new suppliers;
ii. Cash-flow problems for key suppliers that could adversely affect the viability of
both organizations;
iii. Existing suppliers may be unwilling to extend further credit
iv. Supplier goodwill may be eroded;
v. Suppliers may refuse to supply in the future;
vi. Credit rating may be reduced.
The problems of late payment have been a particular concern for smaller companies selling
goods on credit to large companies. Companies that suffer late payment usually have to
resort to additional overdraft finance while waiting for their customers to pay.
7.7.3.4 Overdrafts
You ought to know that this is one of the important external sources of finance particularly
for individuals and small firms. Features that make the overdraft popular are:
i. Flexibility: The bank will agree to a maximum overdraft limit facility. The
borrower may not require the full facility immediately but may draw funds up to
the limit as and when required.
ii. Minimal documentation: Legal documentation is fairly minimal when arranging an
overdraft.
iii. Interest is only paid on the amount borrowed, rather than on the full facility.
The drawback of overdraft finance is that it is repayable on demand, which means that the
facility could be withdrawn at any time.
7.7.3.5 Loans
Where an overdraft appears to be permanent, it may be advisable to convert it into a bank

loan. The banks may also provide loans for the acquisition of non-current assets. It is
important to consider using a loan to finance long term assets or projects while overdrafts
may be suitable for financing working capital requirements of a business.
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For tax purposes, only interest payable on a loan which is not used to acquire non-current
is an allowable expenses when calculating taxable business profits.
7.7.4 Banks’ Criteria for Lending
When you are seeking to raise bank finance in the form of overdrafts or loans for your
business, the bank will carry out an assessment of your businesses (company of
enterprise). The factors that the bank may consider before extending finance will include:
i. The purpose of the loan;

ii. The amount of the loan;
iii. The duration of the loan – a shorter term loan is likely to be less risky to the bank
than a longer term loan
iv. Conduct of the account – if the managers of the company have a previous history at
the bank, this could be viewed favourably;
v. The level of borrowings currently outstanding;
vi. The credit rating of the borrower.
7.8 Pension Scheme Planning
It is a legal requirement that every employer make arrangement to register their employees
with the national pension scheme authority. The employee is required to contribute 5%
with the employer contributing the other 5% subject to an upper limit amount. For the year
2016 the upper limit for calculating NAPSA contributions is K202,528.80. An annual
maximum amount of K3,060 on pension contribution is deductible from emolument when
computing taxable emoluments under Pay as you Earn for individuals.
7.8.1 Types of Pensions

7.8.1.1 Group Pensions
This type of plan is one that is provided for by your employer. This involves the individual
agreeing to pay a regular sum into their pension from source, the amount usually being at
the individual’s discretion. The employer must make a reasonable contribution to the plan,

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usually equal to about 10% of the overall cost. There are a number of additional benefit
options available under this plan such as Life Cover and Income Protection Cover.
7.8.1.2 Individual Pensions

If you are working for a company and no pension scheme is in place, your employer may
agree to set up an individual pension for you. The employer must make a reasonable
contribution to the plan, usually equal to about 10% of the overall cost. It is a very tax
efficient way for an employer to reward an employee as the employer gets tax relief on the
contribution it makes. However, it is mandatory for every employer to register their
employees with NAPSA so that any other pension scheme arranged may be an additional
pension plan.
7.8.1.3 Personal Pensions

This type of plan is for self-employed individual or individuals in non-pensionable
employment. The pension is entirely funded by the individual. The main purpose of these
plans is to build up a fund which you can use to provide an income when you retire. There
are a number of additional benefit options available under this plan such as Life Cover and
Income Protection Cover.
7.8.2 Defined benefit pensions v defined contribution schemes

The recent rush to close final salary pension schemes to new employees means that an
increasing number of workers are now having to rely on defined contribution (or money
purchase) schemes to provide their future retirement income, either through a scheme set
up by their employer or a personal pension as a group or individual arrangement.
7.8.2.1 Defined Benefit Schemes
The simplest definition of a defined benefit scheme is that it is an arrangement where the
benefits payable to the members are determined by the scheme rules. In many cases there
will be a compulsory employee contribution (and typically this would be of the order of
5% of salary) but over and above this all costs of meeting the quoted benefits are the
responsibility of the employer.
7.8.2.2 Defined Contribution Schemes
Defined contribution arrangements are also known as money purchase schemes. This
description fits many types of arrangements including both occupational and personal

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schemes. Under defined contribution schemes there are four factors which determine the
pension income available at retirement. These are:
i. The charges deducted by the product provider
ii. the contributions invested in the scheme
iii. The charges deducted by the product provider
iv. The investment returns within the arrangement
v. The annuity rate at retirement.
Under defined contribution schemes contributions are paid into the fund by the employer
and the employee and these are invested with the proceeds from the contributions and
investments being used to buy a pension, called an annuity, at retirement.
The best way of differentiating between defined benefit and defined contribution schemes
is in determining where the risks lie.
In a defined benefit schemes it is the employer that underwrites the vast majority of costs
so that if investment returns are poor or costs increase the employer needs to either make
adjustments to the scheme (often very unpopular with the workforce), or to increase levels
of contribution.
In a defined contribution scheme the contributions are paid at a fixed level and therefore it
is the scheme member who is shouldering these risks. If they fail to take action by
increasing contribution rates when investment returns are poor or costs increase, then their
retirement benefits will be lower than they had planned for.
7.9 Activity
1. You are a tax senior for Yunza Chartered Accountants. You have been approached by
Mr. Himakwebo who intends to start a business trading as a Limited company with
two other friends. Mr. Himakwebo and the friends have been trading as sole
proprietors for some time. Equity finance from their new shares issue and debt finance
are available to them as alternatives ways of financing. They want to know the tax
implication of financing their new business with either debt or equity.
Required
Write a letter advising Himakwebo and friends on the tax implication of financing the
business with:

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(i). Debt
(ii). Additional share issue
7.10 Summary
In this Unit we have explained to you the concept of farming and how farming profits are
calculated. We also explained how farming enterprises can obtain allowances for the
capital expenditure that they make. We also described the impact on personal income tax
calculations of income from farming and went on to show how farming income affects
company income tax calculations. Later in the unit, we mentioned to you how important it
is for the farmer to take into account farm inventories (stock) in order to determine or
compute profits or gains. As always, you are encouraged to go back and read this unit for
you to understand clearly the principles that you have been taught in this unit. In the next
unit you will be introduced to the overseas aspects of taxation.

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UNIT 8
OVERSEAS ASPECTS OF TAXATION
8.1 Introduction
Welcome to Unit 8 of this module which focuses on overseas aspects of taxation.
In the previous unit, you learn on how financial Planning can be used in the context of
taxation. In this unit, we are going to look at how taxation is applied to persons who are
resident in Zambia and receives income from foreign sources. You will also learn the
income tax consequences of multinational businesses and overseas aspects of indirect
taxes. Further, we will discuss matters relating to transfer pricing.
8.2 Aim
This unit aims at developing your understanding of how to deal with taxation issues
relating to income originating from different countries.
8.3 Objectives
(i.) Understand the operation of systems of international taxation.
(ii.) Explain the income tax implication of both residents and non-residents on income
from within the country and from foreign sources.
(iii.) Describe the principles of Double Taxation Conversion based on the organisation
for Economic Co-operation and Development model.
(iv.) Explain the concept of thin capitalisation in international taxation and the
application of transfer pricing policies.
(v.) Compute personal and company income tax on foreign income and apply the
principles of double taxation relief.

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8.4 Time frame
8.5 Systems of International Taxation
Let us begin by defining some of the key terms.
Territorial Taxation. Under this system of taxation, only the income that arises from
sources within the country or are deemed to arise from within the country are taxable on
all types of taxable persons.
Residency Taxation Systems. Under this system, all the income of persons who are
resident in the country is taxable irrespective of whether that income arises from within or
outside the country where the taxable person is resident. As such, resident persons are
taxed on their worldwide income while non-residents are taxed on certain income that
arises from within the country.
Exclusionary Taxation System. This system include and exclude certain amounts, classes
or items of income arising from within and outside the country for purposes of calculating
taxes. This system is usually applies when dealing with income from foreign subsidiary
companies. In most countries, dividends received from certain foreign subsidiary
companies are exempt from tax whereas income received by way of interest and royalties
from foreign subsidiaries is taxable.

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8.6 Overseas Aspects of Personal Income Tax
This section briefly describes how income received by a Zambian individual resident from
a source outside Zambia is taxed. You will have to consider such income as chargeable in
Zambia for tax purposes even when it would have been subjected to tax already in the
foreign country. The general rule you need to apply is that foreign income is chargeable to
Zambian income tax at the gross amount. The gross amount of foreign income is the net
amount received plus the foreign tax charged by the foreign tax authorities.
8.6.1 Foreign Income Received by Resident Individual
Below is the description and tax treatment of chargeable foreign income received by
individuals who are ordinarily resident in Zambia:
(a). Dividend received from foreign sources are chargeable to income tax at gross amount.
This is a dividend received from an investment in shares deemed to be located in a foreign
country. Such shares will be for the company incorporated and registered in that particular
foreign country.
(b). Rent received by a Zambia resident from letting of property that is situated outside
Zambia is of a foreign source. However, such rental income is exempt from Zambian
income tax.
(c.) Interest received from foreign sources such as foreign debentures, loans and other
forms of foreign investments is taxable.
(d). For foreign businesses run by Zambian ordinarily resident individuals and where such
business are controlled from within Zambia, then profits of such businesses are chargeable
to income tax in Zambia. The reason for this treatment is that these profits will be received
in Zambia.
(e) If income earned from employment outside Zambia is received in Zambia, such income
will then be subject to Zambian income tax.

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8.6.2 Foreign Income Received by Non- resident Individuals
Foreign income of non-resident individuals is not chargeable to Zambian income tax
because that income is not from a Zambian source and is not from a source deemed
Zambian. Such individuals will only be liable to Zambian income tax on income they
derive from a source within Zambia or deemed to be within Zambia. You should
remember from your earlier studies that a non-resident individual is one who is physically
in Zambia in any tax year for a period less than 183 days or for a temporally purpose.
8.7 Double Taxation Relief (DTR)
8.7.1 Double Taxation Conventions
Let us now explain the concept of double taxation. When chargeable foreign income is
received, the gross amount is subjected to income tax in Zambia. As such, the foreign
income would suffer double taxation since such income will have already been taxed in the
country of origin. Normally a relief known as double tax relief would be given where
income that has suffered tax in one country is also subjected to tax in another country in
order to eliminate the impact of double taxation.
In order to determine how double taxation may be avoided, the Organisation for Economic
Cooperation and Development (OECD) has developed a double taxation model that
countries may adopt when formulating their double taxation conventions. The following
are the principles of the model convention:
(a). give total exemption from tax in the country where income originate from for certain
persons such as visiting diplomats and teachers on exchange programmes.
(b) apply preferential rates of withholding tax to payments of investment income where the
usual rate is replaced by a lower rate.

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(c) Provide double taxation relief to taxpayers in their country of residence by way of a
credit on tax suffered in the country where income arises from.
(d) rules which render certain profits taxable only in one country rather than in two
countries.
(e) exchange information so that tax evaders can be pursued internationally
(f) through rules of residence to prevent dual residence
(g) through non-discriminatory clauses so that a country does not tax foreigners more
severely than its own nationals.
8.7.2 Double Taxation Relief (DTR) Methods
Double taxation relief may be given the under the following ways:
8.7.2.1 Treaty Relief
Treat relief is available where the President of Zambia has entered into a treaty with
Presidents of foreign countries for double taxation relief purposes. Where such a treat
exists, double taxation relief is given in accordance to the provision of that treaty.
8.7.2.2 Unilateral Relief (Unilateral credit relief)
This kind of relief is only available where there is no treaty relief and relief is given on
foreign tax unilaterally in Zambia. This means that the amount of foreign tax suffered is
credited against the Zambian income tax on the foreign as long as it does not exceed the
Zambian tax on that foreign income. Therefore, the amount of foreign tax available for
credit is the lower of:
(a). the actual amount of foreign tax paid to foreign tax authorities and
(b). the amount of Zambian tax chargeable on the foreign income computed as follows:
Gross amount of foreign income x Zambian tax charge

Total assessable income

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Where the total assessable income includes the gross amount of income subjected to final
withholding tax and the final withholding tax is included in the Zambian tax charge.
8.7.2.3 Unilateral Expense Relief
This is where relief is given by deducting the foreign tax from the foreign income before
including it in the Zambian tax computation. This method of giving double taxation relief
is not common because it does not provide the same level of relief as the other methods.
Illustration
Matauka Matauka is ordinarily resident in Zambia. In the tax year 2016, she earned
income amounting to K200,000 from employment in Zambia. In addition, she also
received income from foreign sources as follows:
Interest from Stanbic Bank South Africa 10,350.00
Dividend income from Mandela Limited, resident in South Africa 31,000.00
The above income foreign income is net of withholding tax by the South African tax
authority at 20% for dividends and 10% on interest.
Assume that Matauka did not make any pension scheme contribution on her employment
income from Zambia because she is passed retirement age. Further, assume there is no
double taxation convention between Zambia and South Africa as such double taxation is
given in Zambia unilaterally.
Required
Compute the income tax paid by Matauka in the tax year 2016.

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Answer
Matauka Matauka
Computation of Income tax Paid for the tax year ended 2016
K K
Emoluments from employment 200,000
Add foreign Income:
Dividends (K31,000 x 100/80) 38,750
Interest (K10,350 x 100/90) 11,500
Total foreign income 50,250
250,250
Less tax free income (36,000)
214,250
Income tax
K 9,600 x 25% 2,400
K 25,200 x 30% 7,560
K179,450 x 35% 62,808
72,768
Less double taxation relief
Foreign dividend (W1) (7,750)
Foreign interest (W2) (1,150)
Income tax paid 63,868
Double taxation relief workings
1. Foreign dividends:
Foreign dividend tax paid = K38,750 x 20%

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= K7,750
Zambian tax on the foreign income
= Gross amount of foreign dividend x Zambian tax charge

= K 38,750 x K72,768
K250,250
= K11,267.77
The amount available for double tax relief credit is the lower amount of K7,750
which is the foreign withholding tax.
2. Foreign interest:
Foreign tax paid on interest = K11,500 x 10%
= K1,150
Zambian tax on the foreign income
= Gross amount of foreign dividend x Zambian tax charge

= K 11,500 x K72,768
K250,250
= K3,343.98
The amount available for double tax relief credit is the lower amount of K1,150
which is the foreign withholding tax.
8.8 Overseas aspects of Company Income Tax
Under this sub-unit, we want you to learn the tax implication on multinational companies.
First of all, companies are also divided into resident and non-resident companies for
purposes of overseas aspects of taxation.

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8.8.1 Resident Companies
When you are calculating the amount of income tax payable by a Zambian resident
company that also receives foreign dividends and interest, you should the rules that apply
to individuals as discussed above. You should remember that double taxation relief could
be provided either under the treaty relief, unilateral expense relief or unilateral credit relief
as the case may be.
8.8.2 Non-Resident Companies
Non-resident companies are liable to income tax in Zambia on the income that comes from
a Zambian source where such companies set up their operations in Zambia through their
permanent establishments. The Organisation for Economic cooperation and Development
(OECD) model convention defines a permanent establishment as a fixed place of business
through which the business of an enterprise is wholly or partly carried on. This include a
place of management, a branch, and office, a workshop and a mine, oil or gas well, a
quarry or any other place of extraction of natural resources.
8.8.3 Thin Capitalisation
A company is said to be thinly capitalised if it is finance by debt that exceeds its normal
borrowing capacity. Most mining companies in Zambia are subsidiaries of foreign
companies. As such, their parent companies may finance such subsidiaries through heavy
debt. Under thin capitalisation rules, interest paid by such a subsidiary company is only
allowable as an expense where the debt to equity ratio is not over the benchmark ratio of
3:1. Where debt is excessive, then interest on the excessive debt is not allowed as an
expense for tax purposes.
8.8.4 Transfer Pricing
Where a Zambian company in a group is required to transfer goods produced in Zambia to
another company in the group that is resident abroad, then the rules require that you should
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use the price equal to the market value of those goods. If the transfer price used for such
goods are lower than the actual market price of the goods being transferred, then you must
the profit element to the profit when computing the taxable profits.
Where a Zambian resident company makes a loan to a foreign related company, it must
charge interest on that loan at a commercial rate. If loan interest is charged at the rate that
is less than the commercial lending rate, then the company receiving the said loan interest
is deemed to have received interest at the commercial rate.
8.9 Activity
1. Chilunji Ltd is a Zambian resident company. It owns 40% of the ordinary share capital
of Chilombo Ltd, and 20% of the ordinary share capital of Chitwangeni Ltd. Both of these
companies are incorporated overseas, and the directors of each company hold their board
meetings overseas. Chilunji Ltd sells imported domestic electrical appliances that have
been manufactured by Chilombo Ltd and Chitwangeni Ltd.
Chilunji Ltd’s tax adjusted business profit for the year ended 31 December 2016 was
K2,100,000. The company received gross dividends of K360,000 and K60,000 from
Chilombo Ltd and Chitwangeni Ltd respectively during this year.
Chilunji Ltd’s Chief Executive Officer, Brian Musika, earns an annual salary of K180,000.
He has shareholdings of 5% in each of Chilombo Ltd and Chitwangeni Ltd. In the year
ended 31 December 2016, he received gross dividends of K45,000 and K15,000 from
Chilombo Ltd and Chitwangeni Ltd respectively. In addition to his annual salary and
dividends, he also received a bonus of K25,000 in the tax year 2016. He pays 5% of his

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annual salary as NAPSA contributions and he pays a further 5% of his annual salary as
pension contribution into the employer’s approved fund.
The results of Chilombo Ltd and Chitwangeni Ltd for the year ended 31 December 2016
were as follows:
Chilombo Ltd Chitwangeni Ltd

K K K K
Trading profit 1,200,000 500,000
Company income tax 225,000 175,000
Distributable profits 975,000 325,000
Dividends paid:
Net 650,000 180,000
Withholding tax 250,000 120,000
900,000 300,000
Retained profits 75,000 25,000
In the absence of double taxation conventions between Zambia and the countries where
both Chilombo Ltd and Chitwangeni Ltd are based, any double taxation relief is given to
Zambian residents unilaterally in Zambia by way of crediting the foreign taxes paid against
Zambian income tax.
Required:
(a) Explain why Chilombo Ltd and Chitwangeni Ltd are treated as being resident overseas,
and state what difference it would make if the directors of each company held their board
meetings in Zambia.
(b) Calculate the following amounts for the tax year 2016:
(i) Chilunji Ltd’s company income tax paid.
(ii) Brian Musika’s income tax paid.

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(c) Explain the tax implications if Chilombo Ltd and Chitwangeni Ltd were to invoice
Chilunji Ltd for the imported electrical equipment at a price that was higher than the
market price.
8.10 Summary
In this Unit we have explained to you the concepts on systems of international taxation
including double taxation conventions and methods of giving double taxation relief. We
also explained to you on overseas aspects of company income tax such as thin
capitalization and transfer pricing. You are encouraged to go back and read this unit for
you to understand clearly the principles that you have been taught in this unit.
9.0 Module Summary

We are glad that you have successfully completed the module in Taxation BAF 2105
course. We hope that you are confident enough to explain the obligations of tax payers
and/or their agents and the implications of non-compliance to taxation rules. You are
further expected to be able to evaluate the tax implications of the various investment
opportunities and calculate the taxes payable. You should also be able to evaluate the
approaches to carrying out tax audit and investigations, and perform appropriate tax
investigations. With regards to mining operation you are expected to calculate taxes
payable on mining income and gains using applicable tax law. Furthermore, you should be
able to calculate relevant taxes payable by enterprises in the insurance and financial
services sectors. As a tax expert, you should be able to advise on the measures that could
be put in place to minimise or defer taxation liabilities and also on the taxation
implications of various financial arrangements that could be made by individuals and
enterprises. Finally, you should be able to calculate taxes payable on overseas transactions,
including those of multinational enterprises.
Just in case you are doubtful on the issues highlighted above, kindly do revise your module
again. We wish you the best as you come to the conclusion of Taxation course BAF 2105
and look ahead to a successful examination.

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REFERENCES
ZICA 2016 Study Manual. ( 2015). Integrated Taxation L3, BPP Learning Media, 4th
edition, BPP House, Aldine Place, London.
ZICA 2013 Study Manual. ( 2012). Integrated Taxation L3, BPP Learning Media, 1st
edition, BPP House, Aldine Place, London.
Mulolani, C.A (2015). Taxation Principles and Practice, 7th edition, Zambia Education
Publishing House, Lusaka.
Mulenga, H, M. (2015). Taxation in Zambia, ZICA, Multimedia Zambia, Lusaka
ACCA Study Text (2016). Taxation (UK) F6, BPP Learning Media, London , BPP House,
Income Tax Act (Amended 2015), Government Printers, Lusaka.
Zambian Constitution (Amended 2016), Government Printers. Lusaka.
Zambia Revenue Authority Practice Notes (2016). https://www.zra.org.zm
Zambia Revenue Authority (2016) Budget Highlights. https://www.zra.org.zm

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UNIVERSITY OF ZAMBIA

INSTITUTE OF DISTANCE EDUCATION

MODULE TITLE: TAXATION

The University of Zambia, Institute of Distance Education

The University of Zambia, Institute of Distance Education

The University of Zambia, Institute of Distance Education

The University of Zambia, Institute of Distance Education

9.0 Module Summary……………….……………………………………………..-90-

The University of Zambia, Institute of Distance Education

The University of Zambia, Institute of Distance Education

By the end of the module, you should be able to:

ii. Evaluate the tax implications of the various investment opportunities.

perform appropriate tax investigations

v. Calculate relevant taxes payable by enterprises in the insurance and financial

defer taxation liabilities

be made by individuals and enterprises

viii. Calculate taxes payable on overseas transactions, including those of

Structure of the Module

(a) Individual income tax rates

Income band Taxable amount Rate

(b) Income from farming for individuals

K1 to K36,000 first K36,000 0%

(d) Terminal benefits

Terminal benefits are now tax exempt.

2. Company Income Tax rates

On income from manufacturing and other 35%

The University of Zambia, Institute of Distance Education

- Used in Manufacturing, Farming, Leasing 50%

(b) Non-commercial vehicles

The University of Zambia, Institute of Distance Education

Wear and Tear Allowance 2%

(f) Farming Allowances

Development Allowance 10%

6. Property Transfer Tax

The University of Zambia, Institute of Distance Education

(d) Trucks/lorries with gross weight exceeding 20 tones:

The minimum amount of Customs Duty on Motor Vehicles in categories from

Continuous assessment 40%

Final examination 60%

The University of Zambia, Institute of Distance Education

Zambia Revenue Authority Practice Notes (2016). https://www.zra.org.zm

Zambian Constitution (Amended 2016), Government Printers. Lusaka.

Essentially you will be taking control of your learning environment. As a consequence,

The University of Zambia, Institute of Distance Education

The University of Zambia, Institute of Distance Education

THE OBLIGATIONS OF TAXPAYERS AND THEIR AGENTS

By the end of this unit, you should be able to;

1.4 Time Frame

The University of Zambia, Institute of Distance Education

• Request for a return to be submitted at any time

1.6 Returns and assessments

1.7. Pay as You Earn.

1.8. Witholding Tax.

1. Discuss at least three duties of a tax agent?

as You Earn and the withholding tax system.

unit, you will be introduced to Taxation and Investment Policy.

The University of Zambia, Institute of Distance Education

TAXATION AND INVESTMENT POLICY

You are welcome to unit 2 of this module.

By the end of this unit you will be able to;

i) Explain the concept of Direct Foreign Investment

several sectors such as manufacturing, agriculture and mining.

The University of Zambia, Institute of Distance Education