ZiCA proposes income tax Act amendment to include all foreign currency earners

The Zambia Institute of Chartered Accountants (ZiCA) has called for an amendment to the Income Tax Act to accommodate taxpayers whose earnings and transactions are largely denominated in foreign currencies, not just mining companies.

In 2021, Section 55(3) of the Income Tax Act (ITA) was amended to allow mining companies whose foreign exchange earnings come from within Zambia to keep books of account in United States (US) dollars.

Previously, this provision only applied to companies or persons carrying out mining operations that derived at least 75 percent of their gross income from exports in foreign currency.

The 2021 amendment extended this exemption to include companies engaged in mining operations with qualifying foreign currency earnings from domestic sales.

While ZiCA commended this move, it noted that many taxpayers, besides mining companies, have earnings and transactions that are largely foreign currency denominated.

In its submission for the 2025 national budget last week, ZiCA Taxation Committee Member, Ellario Mwansa, proposed that the provisions of Section 55 be aligned with the requirements of International Accounting Standard (IAS) 21 – The Effects of Changes in Foreign Exchange Rates.

IAS 21 required an entity to use the currency of the primary economic environment in which it operates as its functional currency.

Mwansa explained that the lack of alignment between Section 55(4) and IAS 21 posed a challenge to many taxpayers.

“We note that the use of functional currency for financial reporting allows for normalization of an entity’s earnings and avoids distortions caused by currency fluctuations. This also applies to an entity’s tax profile as well,” Mwansa submitted.

“The use of functional currency for tax purposes would provide taxpayers with a cash taxes and current tax profile consistent with earnings. A consistent tax profile would avoid the distortions frequently caused by unrealized exchange gains and losses,” he added.

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