Tax dragnet chokes banks

LIVINGSTONE MARUFU

Zimbabwe’s banking sector has launched a legal challenge against the Zimbabwe Revenue Authority (ZIMRA), escalating a protracted dispute over the tax treatment of interest expenses that lenders say has eroded profitability, constrained lending and raised the cost of doing business.

At the heart of the conflict is a controversial interpretation of Zimbabwe’s Income Tax Act, under which interest expenses incurred by banks were disallowed in the calculation of taxable income, a move industry players argue distorts earnings and overstates tax obligations.

The measure, applied retrospectively to assessments covering the period 2019 to 2024, has triggered significant tax liabilities across the sector, forcing lenders to seek legal recourse under the umbrella of the Bankers Association of Zimbabwe (BAZ).

Executives warn the dispute goes beyond technical tax interpretation, describing it as a direct threat to the sector’s core function of mobilising and intermediating capital.

Financial services group, CBZ Holdings Limited board chairman Luxon Zembe said the tax assessments have materially weakened banks’ earnings and, by extension, their ability to fund the economy.

“The appeal by the financial sector is for authorities to recognise the importance of creating space for banks to mobilise resources for the good of the economy,” Zembe told Business Times, a market leader in business, financial and economic reportage.

“These tax positions create liabilities that directly reduce profits and, ultimately, dividends. But more critically, they shrink the pool of funds available for lending. Less lending means less economic activity and that feeds back into lower tax revenues for government.”

Industry leaders argue that the disallowance of interest expenses a core cost of banking artificially inflates taxable income, effectively taxing institutions on earnings they never realised.

At NMBZ Holdings Limited, chief executive Gerald Gore disclosed that the retrospective application of the rule resulted in additional tax charges of ZWG94.5m in 2025 and ZWG43.7m in 2024, further denting earnings momentum.

“Management continues to exercise prudence in provisioning and capital management,” Gore said, “while focusing on restoring earnings and strengthening the balance sheet.”

For FBC Holdings Limited, the exposure is even more acute.

The group faces potential additional taxes of US$9.4m and ZWG49.4m, rising to US$18.2m and ZWG72m when provisional assessments are included, excluding penalties and interest.

Chief executive Trynos Kufazvinei said the group has classified the matter as a contingent liability after extensive consultations with auditors and legal advisers.

“It is a liability we have not provided for because the issue remains under discussion and somewhat vague,” Kufazvinei said.

“Based on our interpretation of the law and expert advice, we believe our position is correct.”

However, he acknowledged the inherent uncertainty of litigation: “When you go to court, the outcome is never 100% guaranteed.”

Beyond accounting provisions, the dispute has had immediate real-economy consequences.

FBC was at one point prepared to suspend nearly US$80 million in foreign credit lines, a key funding source for domestic lending after the tax treatment raised concerns over the deductibility of interest expenses.

“We were about to stop with about US$80m in credit lines,” Kufazvinei revealed.

“We could not continue taking on facilities that would effectively penalise us for supporting the economy.”

The standoff underscores the delicate balance between revenue mobilisation and financial sector stability a tension that has become increasingly pronounced as Zimbabwe authorities widen the tax dragnet in a bid to shore up fiscus revenues.

In a partial climbdown, Treasury has since moved to correct the anomaly.

Finance Minister Mthuli Ncube acknowledged in the 2026 National Budget that existing provisions created a mismatch between income and expenditure, overstating taxable profits for financial institutions.

“Interest expenses on deposits are a legitimate and unavoidable cost directly incurred in the production of taxable income,” Ncube said.

“Disallowing them increases the effective tax burden on the sector.”

Government has now allowed such expenses to be treated as tax-deductible, effective January 1, 2026, subject to anti-abuse safeguards.

But for banks, the policy shift comes too late.

The legacy liabilities accumulated between 2019 and 2025 remain unresolved and it is this retrospective burden that has triggered the legal showdown.

Zembe said ongoing engagements between ZIMRA, Treasury and the financial sector offer hope for a negotiated settlement.

“We trust the discussions will yield a logical and mutually beneficial outcome for the economy,” he said.

The dispute has also amplified broader concerns over Zimbabwe’s tax administration approach.

The Zimbabwe National Chamber of Commerce also warned that aggressive and overlapping audits by ZIMRA are increasingly disruptive to business operations, diverting management focus and delaying investment decisions.

In a recent position paper, the chamber called for a more structured, risk-based audit framework, arguing that compliance and productivity must be mutually reinforcing rather than adversarial.

At stake is more than a tax technicality. The outcome of the court battle will signal Zimbabwe’s broader policy direction at a time when authorities are seeking to attract investment, deepen financial intermediation and stimulate growth.