Tax matters of the boardroom

NON-EXECUTIVE directors (NEDs) are sages who bring an array of skills to complement executive management in steering the corporate agenda ― mainly through fostering good corporate governance.
For these services, they usually receive benefit packages whose taxation are a grey area for most people despite the law being clear on how they must be treated for tax purposes.
The uncertainty usually emanates from whether NEDs who receive remuneration items (fuel allowance, home security services, accommodation, cellphone etc) should be regarded as employees or independent contractors. Even more worrisome is the emergence of hybrid payments such as retainer fees.
Apparently, some non-executive directors are aware of the tax rules but know that if these rules were to be applied by the “book” this would result in a reduction of their earnings.
This article seeks to unpack the tax consequences of being a non-executive director.
Non-executive vs executive director
A director is a person who is charged with the governance of a company and includes any person occupying the position of a director, by whatever name he/she is called e.g. shadow director, alternate directors, councillors, etc. The law does not differentiate an executive director from a non-executive director.
The collective understanding of what these two roles mean and represent has been developed via case law, corporate governance guidance and general market practice. A non-executive director is not part of the executive management team and is not an employee of a company. By contrast, an executive director is an employee of the company who holds a senior management and executive role. For this reason, executive directors’ earnings are subject to employee tax.
Withholding tax on non-executive director fees
A company should deduct withholding tax on the gross fees that it pays to a NED regardless of whether he or she is a resident or a non-resident at a tax rate of 20 percent. The company has a further mandate to remit to the Zimbabwe Revenue Authority (ZIMRA) the amount so withheld within 10 days of the date of payment of the fees. Where a NED is given fringe benefits or other items of remuneration normally given to employees in addition to the board fees and sitting allowances, he or she may be subject to employee tax. This is in accordance with a provision of paragraph 1(b) of the 13th Schedule to Income Tax Act which provides that remuneration does not include “any amount of director’s fees paid or payable to any individual by any company in respect of services rendered or to be rendered by such individual to such company if no other amounts constituting remuneration in terms of this definition have been paid or becomes payable to such individual by such company” (our own emphasis). It is incompatible for a director to be both executive and non-executive in the same company but can concurrently act as executive and non-executive for separate companies and taxed as an employee and a NED accordingly. In addition to withholding tax on NEDs fees, a company is required to deduct 10 percent withholding tax on local contracts where a director is not in possession of a tax clearance (IFT263).
Tax liability to the NED on earnings
In addition to the above, the NED is liable to income tax assessment because his or her earnings are treated as trade and investment income. The law requires any person earning trade and investment to register with the ZIMRA to obtain a Business Partner Number and be subject to payment of income tax in advance year end through a system known as quarterly payments dates (QPDs).
QPDs are payable in instalments on the 25th of March, 25th of June, 25th of September and 20th of December. The tax due on each quarter is 10 percent, 25 percent, 30 percent and 35 percent of the estimated annual tax liability, respectively. The non-executive director is entitled to deduct expenses incurred in the production of his or her trade and investment income.
Meanwhile, the withholding tax so withheld is treated as a credit against income tax on assessment. If the NED’s income from trade and investment (taxable supplies) whether fees alone or aggregated with other sources of income exceeds $60 000 per annum, the director will be liable for VAT registration and must charge 15 percent VAT on such income.
Local authorities board
Local authorities fall within the ambit of public entities and bring an interesting dynamic to this discussion. Its councilors are not employees; however, they play a pivotal role in the operations of a local authority in giving direction to the leadership of the local authorities to give effect to the needs of the people of the wards they represent.
Section 2 of the Income Tax Act defines local authorities as: A city or municipal, town council, local board or rural district council. Like non-executive directors in a company, councillors, are entitled to an allowance (fees), however these are subject to approval by the Minister of Local Government in terms of section 112 of the Urban Councils Act (Chapter 29:15). Councillors’ allowances are also exempt in terms of the paragraph 4 (n) of the 3rd Schedule of the Income Tax Act provided they have been approved by the minister.
Conclusion
NEDs are a moral campus for their organisations, so it is imperative that they comply with tax laws relating to management fees.
Any management fee hybrid arrangements to avoid tax compliance will be deleterious to the integrity of the boards they represent, not to mention potential penalties by the taxman.
Meanwhile, Matrix Tax School a subsidiary of Tax Matrix will be hosting the second edition of the Tax and Business Interface week from October 15 to 21, 2018 (workshop). The Tax Week, which is sectorial based, will feature: Manufacturing; Mining; Financial Services; Telecommunications and Tourism.

Marvellous Tapera is a tax expert with over 20 years’ experience in Tax Advisory and is the Managing Director of Tax Matrix (Pvt) Ltd. (Cell: 0772 349 740)