A Comprehensive Guide to Taxation in Malawi

By Moffat Ngalande

A Comprehensive Guide to Taxation in Malawi is exactly that, a comprehensive guide to Malawi tax. It is meant to assist a wide variety of users from students to the business community. It aims to bring a practical approach to taxation and enable an appreciation of real-life scenarios for tax purposes. It is meant to bring taxation to life, to simplify taxation concepts and bring a comprehensive view of tax to the reader. It brings novel topics that are traditionally not discussed in tax books such as inheritance tax, deferred tax, trusts, stamp duties tax audits, and transfer pricing.

• Language: English
• Publisher: AuthorHouse
• Release date: Dec 14, 2016
• ISBN: 9781524639303

Moffat Ngalande

Moffat Ngalande is an associate director at PricewaterhouseCoopers Malawi in audit and advisory where he continues his fourteen-year career as a public accountant and financial and IT consultant. Moffat was deployed to PwC's New York office from 2011 to 2012 where he worked on working alternative investment funds and hedge funds. He serves as a council member of the Institute of Chartered Accountants of Malawi (ICAM) since September 2014 and is a member of the Audit Committee of ICAM's council. He is also a chairperson of the Auditing and Accounting Standards Committee of ICAM. He is an author and mentor and is passionate about leadership. Moffat is currently writing a book called Spirit of Entrepreneurship where he writes stories of prominent entrepreneurs.

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© 2016 Moffat Ngalande. All rights reserved

No part of this book may be reproduced, stored in a retrieval system, or transmitted by any means without the written permission of the author.

Published by AuthorHouse 01/13/2017

ISBN: 978-1-5246-3931-0 (sc)

ISBN: 978-1-5246-3930-3 (e)

Any people depicted in stock imagery provided by Thinkstock are models,

and such images are being used for illustrative purposes only.

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Because of the dynamic nature of the Internet, any web addresses or links contained in this book may have changed since publication and may no longer be valid. The views expressed in this work are solely those of the author and do not necessarily reflect the views of the publisher, and the publisher hereby disclaims any responsibility for them.

CONTENTS

PART A: BASIC CONCEPTS

UNIT 1. FUNDAMENTAL TAXATION CONCEPTS

Chapter 1. Introduction to Taxation in Malawi

Section 1: Origins of Taxes

Section 2 : Tax Legislation And Administration

Section 3 : Types and Categories of Taxpayers

UNIT 2. TAXATION PRINCIPLES AND PRACTICE: COMPUTATION OF INCOME TAXES

Chapter 2. Taxation of Individuals

Section 1: Basis Of Taxation And Taxable Income

Chapter 3. Taxation of Unincorporated Organisations

Section 1: Types of Business Organisations

Section 2: Taxation of Sole Proprietorships And Partnerships

Chapter 4. Taxation of corporate entities

Section 1. Assessing Taxable Income For Corporate Entities

Section 2: Tax Implications of Business Operating Expenses

Section 3: Taxation Impact of Working Capital Transactions (Investment In Business Assets)

Section 4 : Transactions With And Related To Employees

Chapter 5. Special trades

Section 1. Taxation Requirements For Specific Kinds Of Business

Section 2 : Trust

Chapter 6. Transfer pricing

Section 1 : Tax implications of transactions between related entities - Transfer pricing principles

Chapter 7. Business transactions with third parties

Section 2: Value Added Taxes

PART B: FURTHER ASPECTS OF TAXATION

Chapter 8. Stamp Duties

Section 1: Principles of stamp duty

Chapter 9. Inheritance Tax

Section 1: Basic concepts of Inheritance tax

Chapter 10. Future Tax

Section 1 : Basic concepts of Future tax

UNIT 3. DEALING WITH REGULATORS

Chapter 11. MRA Tax Audits

Section 1: MRA Tax Audits And How To Handle Them

Chapter 12. Tax Appeals

Section 1: The Tax Appeal Process

Chapter 13. Tax Planning

Section 1: Concepts of Tax Planning

UNIT 4. TRANSACTIONS WITH FOREIGN SUPPLIERS AND CUSTOMERS

Chapter 14. Transactions with foreign suppliers and customers

Section 1 : Importation of Goods And Types of Importation

DEDICATION

To Debbie,

for believing and lovingly standing by me.

To Sean

for the bundle of joy that you are!

This book is in your honour!

I love you guys!

To the blessing that was Danielle

"a jewel and a gem, we love you,

miss you and celebrate you always"

ACKNOWLEDGEMENTS

The road to writing this book has been long and arduous. From 2011 when the concept was first conceived, different people have contributed in their own little way to the birth of this book.

Firstly, to Debbie for believing my madness and crazy musings.

Kezzie Mkandawire and Gray Balawe what faithful, passionate and professional reviews, I cannot thank you enough! Your help and independent eye has been invaluable, literally! My request for your help was not a burden but a faithful contribution to a wonderful project.

The PwC team Angela Zakeyu, for the very detailed initial reviews. Vyamala, Emmanuel and Tovwilane for letting me to pick your brains I say thank you.

PwC Staff of the Lilongwe office, thanks for cheering me on in the last mile of the book.

Ian Khonje, thanks for the tax overview picture. Enjoy your passion and you will reach great heights.

A very special thanks to Pr. Esau Banda. Your sermon stirred me up to finish this book when I was drained and mentally worn out in the very last mile of the project!

Thank you and God bless you all.

Moffat Ngalande

INTRODUCTION

In my introduction I need only tell you why I wrote this book after never before dreaming or intending to do so.

I am hopeful that for the business community they will have found a reference book which is a fair attempt to taxation issues in Malawi. I promise you more contemporary topics in the subsequent publication but since this is the first edition, it was not possible to include everything, such as international tax and impact of case law, without risking extreme delay in publishing the book which was meant to be published some years back. However rest assured that the current publication does cover a majority of your matters of concern.

For the academia, I must say that firstly, it is because of the challenges of our education system. We have largely had a system that focuses on having students pass exams. This pass the exam syndrome results in graduates who forget tax concepts soon after they graduate with no real practical application. This books seeks to change that. It makes understanding of tax concepts paramount.

Secondly, I have had the privilege of working as a practicing accountant in the world’s largest audit firm, PwC. But I have also had the opportunity to lecture in some colleges and in that time I discovered the immense value that practical experience brings to the learning environment. It is indispensable! This book therefore seeks to bring a practical approach to tax so that readers appreciate that tax is not just for the classroom, but is for life in the real world. It opens your eyes to concepts never before deciphered or areas that have never been a focus of tax books in Malawi. It is a one of a kind book, even if I say so myself.

Thirdly and naturally, because this book is not written by an academician, it does not have an academic focus, rather it has a practical focus, it has the perspective of a practicing accountant. This is perhaps the single most important factor of the book. Books with an academic approach will throw a bunch of rules at you, this in the hopes that you will remember and memorize them. That’s not what this book is about!

This book takes you into various scenarios of real life and then tells you their tax implications. It then tells you the guidelines you must follow in those situations. This makes it easier for the reader to understand the implication of the various circumstances for tax purposes. This makes tax come alive, this makes tax become easy and it makes tax become exciting.

And lastly, I think this book is so easy to read or at least I intended it to be so! I have simplified the concepts that others will usually labor to explain and consequently overcomplicate.

Hopefully, concepts that are considered challenging are not a challenge in this book! I have used simple words and have deliberately introduced new and simple terminology. I have used everyday words which make the concepts so easy to understand. If there was ever a book you should read, this is it! If you have struggled with tax in the past you should now find tax quite exciting, so… Congratulations for buying this book, you have made a commendable choice and as you read it make sure to enjoy it! Because you will!

Moffat Ngalande

Author--.jpg

Moffat Ngalande CGEIT, FCCA, CA(Mw), BAcc

2016

Moffat Ngalande is an Associate Director at PricewaterhouseCoopers Malawi in Audit and Advisory where he continues his 14 year career as a public accountant, financial and IT consultant. Moffat was deployed to PwC’s New York office from 2011 to 2012 Where he worked in the Banking and capital markets sector: alternative investment funds and hedge funds.

He currently serves a 3 year term as a council member of the Institute of Chartered Accountants of Malawi (ICAM) since September 2014, and is a member of the Audit Committee of ICAM’s council. He is also a chairperson of the Auditing and Accounting Standards Committee of ICAM.

He is an author and mentor and is passionate about leadership. Moffat is currently writing a book called spirit of entrepreneurship where he writes stories of prominent entrepreneurs.

PART A

BASIC CONCEPTS

Taxation Overview

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UNIT 1. FUNDAMENTAL TAXATION CONCEPTS

In this unit you are introduced to the basic concepts of taxes including:

a. Why taxes exist and how they began

b. How taxes are administered and regulated

c. Unique features of the Malawi Tax regime.

Chapter 1. Introduction to Taxation in Malawi

The origins and definition of taxes

Taxes are charges on the income, wealth or activities of individuals and legal persons for the support of the government. The literal meaning of the word tax is ‘a burden or a strain’. It implies that it is a duty that citizens have to bear in order to contribute to their countries economic growth.

Tax is also defined as compulsory contributions of wealth levied on persons by the government to meet the expenses incurred in the provision of common benefits to the country’s citizens and non-citizens resident in a country.

Fiscal policy: the purpose of taxes

Taxes are used in government’s fiscal policy. Fiscal policy is derived from two words:

‘Fiscal’ which means ‘involving financial matters’, and ‘policy’ which means ‘a plan of action’ or ‘programme’ that may be followed or adopted.’

In the case of a government, fiscal policy means the ‘financial plans’ adopted by government to collect income or revenue and make expenditures for the development of the nation and thus to ensure that social and economic stability is achieved and maintained. In Malawi, the government’s fiscal policy is implemented through government spending and income taxes. The plans of a government are evidenced through the annual budget which is presented to and approved by parliament as a summarized budget statement.

Government spending is used to stimulate economic activity in various targeted economic sectors. This creates more income for the government because people pay more taxes on the increased revenue.

Taxes are also the primary source of revenue for governments.

The objectives of fiscal policy

There are several reasons for government’s fiscal policy as follows:

1. To stimulate and achieve economic growth and development.

2. To raise levels of employment that follow (come as a result of) the growth of economies.

3. To influence consumption patterns of certain goods such as:

a. Raising taxes on alcoholic beverages to avoid abuse by adult consumers and those that are under age.

b. Raising duties on certain old or second hand vehicles in order to control pollution and environmental degradation due to high emissions that these vehicles produce.

4. To ensure the stability of prices of goods and services.

5. To ensure the redistribution of income from the rich to the poor of the nation.

6. To reduce or remove a deficit in a country’s balance of payments.

Methods used by government in implementing government policy

There are various methods that the government uses and these include:

1. Government spending.

2. Taxes and tariffs

3. Financing of government deficits. Government finances its funding or spending shortfalls through domestic borrowing such as borrowing through treasury bills from the public.

4. Government subsidies on certain economic activities such as subsidies of agricultural inputs including fertilizers and tools etc.

5. Increasing sources of revenue generation such as:

a. Internal and external borrowing.

b. Penalties and fines.

c. Aids and grants.

Adam Smith’s four maxims of taxation

Adam Smith is generally considered as the father of modern political economy. He came up with four ‘maxims’ or ‘canons’ of taxation.

Maxims are ‘principles that are generally accepted as being true and established and also fundamental in a particular field or subject.

Adam Smith’s maxims were as follows (paraphrased):

1. The citizen of every country ought to contribute towards the support of the government, as much as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the government.

2. The tax which each individual is obligated to pay should be certain, and not arbitrary. The time of payment, the manner of payment, the quantity to be paid, ought all to be clear and plain to the contributor, and to every other person.

3. Every tax ought to be levied at the time, or in the manner, in which it is most likely to be convenient for the contributor to pay it.

4. Every tax should be planned both to take out and to keep out of the pockets of the people as little as possible over and above what it brings into the public treasury of the government.

These four maxims have been summarised in four words: Equity, Certainty, Convenience and Efficiency.

Lamberts modern principles of tax

Adam smith’s maxims were developed in the 18th century in Britain. Over time these maxims or canons of tax have been simplified and interpreted as follows:

1. Simplicity

This principle implies that the taxation system should be simple, plain and easy to understand by the tax payer.

2. Certainty

This principle suggests that the amount to be paid should be certain and there should not be any ambiguity in the amount to be paid by the tax payer

3. Fairness- Judicious

This canon suggests that the taxation system should be based on principles of equity, fairness, and all known principles of natural justice

4. Convenience

This canon suggests that taxation should be payable at times convenient to the tax payer. There should be convenience in both the time of payment and also mode of collection of taxes by the government. This is similar to Adam Smith’s third maxim. This therefore suggests that taxes should be levied at source.

5. Capacity to pay

This canon suggests that taxes should be based on the taxpayer’s ability to pay taxes. This means that those who earn more income should pay more taxes where as those who earn less income should pay less taxes. This is evidenced by the tax free bands for employee income and also in lower rates of taxes, or no taxes at all in some cases, for loss making companies.

6. Business friendliness

This principle suggests that the taxation policy should be designed to boost the business atmosphere and stimulate economic growth.

7. There must be no double taxation

This suggests that taxpayers should not be taxed twice for the same asset or income. For example, you may be liable to pay two different governments. A citizen of one country working in country B may be liable to pay tax to the both countries A and B.

Self-test questions

• What is a sales tax?

• What is the purposes of income taxes?

• What is fiscal policy? And what are the objectives of fiscal policy

• What are maxims of taxation?

• Mention and explain any 6 maxims of taxation

Chapter 1. Introduction to Taxation in Malawi

Tax legislation and administration

Enactment of tax laws

The Parliament of the Republic of Malawi has primary authority in the matter of tax legislation. The Parliament consists of the National Assembly and the President. All suggested tax law amendments are presented by the Minister of finance to the National Assembly in Parliament. The finance minister summarises the proposals during the presentation of the annual budget speech. In this annual budget speech the finance minister presents key measures that outline the government’s fiscal policy in order to achieve certain objectives including stimulation of economic growth and provision of social services such as health, educational and national security services among others.

Once the national assembly is satisfied that the government budget is based on good fiscal policy they will adopt it or ‘make it pass’. Once the national budget is passed there will be an enacted amendment bill presented to the President to assent to (or agree and approve) the bill by signing it. Presidential assent is required because all the power and authority of the republic is vested in him or her.

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The income tax authority is the Taxation Act, Chapter 41.01 of 1964. Any changes in tax laws coming after the initial law of 1964 come as amendments or additions to the Act and are included in various Finance Acts by Parliament. In addition to this process of enacting tax laws it is worth noting that tax laws can also arise from legal rulings in court cases. The decided cases act as precedent for future cases and once a judgement is passed it becomes law.

Related tax laws are included in separate acts as follows:

Responsibility for tax administration

While the Ministry of finance is responsible for tax policy the MRA is responsible for tax administration. However the finance Minister has overall responsibility for the administration of taxes in Malawi.

1. Collect and administer all national taxes, duties and levies;

2. Collect revenue that may be imposed under any other legislation, as agreed on between MRA and an organ of the government or institution entitled to the revenue;

3. Provide protection against the illegal importation and exportation of goods;

4. Facilitate trade; and

5. Advise the Minister of Finance on all revenue matters.

The Commissioner is required to provide an annual report on the operation of the Act for presentation to the National Assembly in Parliament.

The Customs Division (Imports) and Customs Division (Exports) are similarly headed by the Commissioners of Customs and Excise. The divisions collect Import duty, Export duty Import Excise, Import VAT and trade statistics.

They are responsible for the collection of customs and excise duties and hides and skin cess. (Hides and skin cess is a charge levied on hides and skins exported from Malawi). They also facilitates trade and protects the community from entry and exit of restricted and prohibited goods.

The duties of the revenue authority can therefore be simplified into two main categories being revenue collection for the government and the facilitation of trade. Other roles, however, include collection of statistics and protection of the local business and economic community from illegal imports and exports.

Revenue Collection

The money that the Authority collects goes to Government for implementation of various socio-economic development projects such as the construction of roads and bridges, schools, provision of health facilities and social services like national security, provision of salaries for civil servants including the police, the army, judges, doctors, nurses and teachers.

The Authority aims to provide an enhanced, transparent and client-orientated service to ensure optimum and equitable collection of revenue.

Facilitation of Trade

MRA performs several important roles in international and local trade as part of its mandate to support the economy and provide the revenue needed by the government.

In fact, one of MRA’s core functions is the provision of a customs service that maximises revenue collection, protects Malawi’s borders and facilitates trade. It does this by:

1. enforcing customs and related trade laws;

2. collecting duties and taxes;

3. ensuring the social welfare of citizens by controlling the import and export of prohibited and restricted goods; and

4. Ensuring timely clearance of goods and facilitating the speedy movement of travellers through Malawian borders.

The Authority therefore facilitates trade through the customs regime.

The customs department administers external-trade regulations. This does not just involve duties and trade regulation – it also entails enforcing environmental, anti-dumping, consumer-protection, health and agricultural controls.

The Customs division works to facilitate trade and make it possible for companies and individuals to trade in an efficient and legal way. Unfortunately, there is a portion of trading activity that is illegal. The laws of the country and international obligations require Customs authorities to police or monitor all trade activities. This function is enabled by having sufficient and strategically placed officers. As a result, there are Customs branch offices at all major points of entry and exit points or borders of Malawi.

Therefore, the MRA through its Customs division (also called customs), makes it possible for businesses and individuals to engage in cross-border economic activity in a legitimate and efficient manner.

Legislation also plays an essential role as it helps to make sense of the broad range of controls that have to be implemented as international co-operation between Malawi and other countries increases. Laws, for example, enable control to be exercised while reducing friction with the regional and international trading system.

The negotiation of customs and tax agreements is carried out by the Law Administration division. These agreements, which are aimed at enabling the international trade regime, are administered by MRA. They also play a significant role in creating the right business environment for companies and individuals.

The Customs department also negotiates and maintains free-trade agreements, such as with the South African Customs Union, the European Union (EU) and the Southern African Development Community (SADC). It has General Systems of Preference agreements, such as the African Growth and Opportunities Act (AGOA) which afford local manufacturers greater competitiveness in foreign markets.

Customs is also engaged in developments that have the explicit intention of protecting and promoting the interests of the country, Africa and the developing world. Working with other African customs administrations, MRA has made a significant contribution to the New Partnership for Africa’s Development (NEPAD).

In summary the organization and set up of the Malawi Revenue Authority is as follows

1. Mandate

The mandate of the Malawi Revenue Authority is to perform following tasks:

• Collect all revenues that are due;

• Ensure maximum compliance with taxation legislation; and

• Provide a customs service that will maximise revenue collection, protect our borders and facilitate trade.

2. Vision

The vision of the MRA is ‘to be a modern professional and efficient Revenue Authority that provides first class service to all stakeholders’.

3. Mission

The mission of the MRA is ‘to maximize revenue collection through fair, efficient and transparent administration of taxes’.

4. Values

The core values of the MRA are:

a. Professionalism and service excellence

b. Equity and fairness

c. Efficiency and accountability

d. Teamwork

e. Courtesy and respect

Monitoring functions of the MRA

The MRA monitors compliance through the performance of tax audits. Tax audits are reviews performed by the MRA to ensure compliance with tax legislation.

The revenue authority makes use of several professionals in this task as follows.

1. Review of tax returns

Reviews of tax returns are done by tax assessors who review filed tax declarations or returns made by taxpayers for accuracy by checking taxpayers’ calculations and making sure that the amounts that they report match those reported from other sources. They also determine whether tax credits or refunds and deductions are allowed by law. They then make any adjustments or corrections to the returns. If a taxpayer owes additional taxes, tax examiners adjust the total amount by assessing fees, interest, and penalties and notify the taxpayer of the total amount they are liable to pay.

2. Tax collectors,

Tax collectors deal with defaulting or non-paying accounts. The process of collecting a defaulting account starts with the revenue agent or tax examiner sending a report to the taxpayer. If the taxpayer makes no effort to resolve the outstanding account, the case is assigned to a collector. When a collector takes a case, he or she first sends the taxpayer a notice. The collector then works with the taxpayer on how to settle the debt.

3. Tax Auditors

Tax auditors perform several reviews of taxpayers’ records to ensure that they are operating taxes in line with the law. Their scope can range from both income and other types of taxes such as the operation of value added taxes, Pay as you earn tax, withholding taxes, fringe benefits taxes non-resident taxes and import taxes and duties.

Tax auditors will give a notice to clients that they intend to audit and will send a team of auditors on the specified dates or those agreed with clients.

The outcome of the audit will be a report that indicates areas of compliance and noncompliance with legislation. If areas of noncompliance are reported tax auditors will advise if there are any additional