A. Income Tax: Scheme of the Act
Lesotho Income Tax Act imposes tax on every individual, trustee, company and non-resident person who has "chargeable income" for the year of assessment in Lesotho. Chargeable income is defined in section 13 of the Act to mean gross income less allowable deductions.
Income tax payable = chargeable income multiplied by the tax rate(s)
Chargeable income = gross income less deductions
Gross income (resident company) = business income(s) plus property income plus any other income
Deductions = generally the expenses and losses incurred in earning the gross income
B. Income Tax on Resident Corporations (National Government)
1. Name of Tax and Levied in Terms of Which (Name, Number and Year)
Company Tax, Income Tax Act No. 9 of 1993.
2. Institution Responsible for Administration
Ministry of Finance (Department of Income Tax)
Lesotho Revenue Authority (LRA)
3. Definition and Classification
Under section 3 of the Act, the term "company" is defined as a body corporate or unincorporate, whether created or recognised under the laws of Lesotho or elsewhere. A company also includes statutory corporation or any other body controlled by a government. A company does not include a partnership or trust.
A company is resident if: it is incorporated or formed under the laws of Lesotho, or, has its management in Lesotho, or undertakes the majority of its operations in Lesotho. A branch (situated in Lesotho) of a non-resident company is treated as a company for tax purposes.
4. Basis of Taxation
4.1 Source-based or residence based
Both source-based and residence-based, but residents are taxed on worldwide income and credit is granted on foreign income. (section 105).
4.2 If source, define:
4.2.1 Actual source
Income is Lesotho-source if:
It is derived from an activity which occurs in Lesotho, from movable and immovable property located in Lesotho including capital gains and interest secured on property in Lesotho, natural resource payment, dividend and management or director's fees paid by a resident company.
4.2.2 Deemed source
4.3 If residence, define:
4.3.1 Define resident
A company is a resident company if it is incorporated or formed under the laws of Lesotho, has its management and control in Lesotho or undertakes the majority of its operations in Lesotho. A resident branch of a non-resident company is treated, for tax purposes, as a resident company, notwithstanding its legal persona.
4.3.2 Exclusions from the definition of resident:
Any company not complying with section 6 above.
4.3.3 Ceasing of residency provided for in the Act
Ceasing of residency is not specifically provided for in the act. It is assumed that a company remains resident for as long as it meets the residency tests indicated.
5. Time Tax is Levied
When income is accrued or received.
6. Included in Tax Base
Worldwide income for resident companies and Lesotho source income for non-residents.
7. Year of Assessment
A twelve-month period from 1st April to 31st March or such substituted period as may be allowed by the Commissioner under section 49.
8. Computation of Taxable Income
8.1 Exemptions
8.1.1 Partial exemptions (amounts exempt irrespective of the identity of the recipient):
Dividends received from a resident company by a resident person are excluded from the gross income of the resident. Furthermore, dividends received from a resident company which engages in manufacturing are not subject to withholding tax.
8.1.2 Absolute exemptions (taxpayers enjoying completed exemption from tax on income):
The income of an organisation which is religious or charitable, an amateur sporting association, a trade union or similar organisation is exempt from income tax only to the extent that it does not include commercial income.
8.2 Deductions and recoupments
8.2.1 Allowable deductions
A deduction is allowed for any expense or loss including depreciation or amortisation expense, or other expense or loss but only to the extent incurred by the taxpayer during the year of assessment in the production of income subject to tax.
Sec 33 provides a general rule for allowing any expense or loss. The general rule is that any expense or loss incurred in the production of income subject to tax is an allowable deduction.
Specifically the following other deductions are spelled out.
Sec 35 provides that only 50% of entertainment expense is an allowable deduction.
Sec 36 interest incurred on a borrowing used by the taxpayer in the production of income subject to tax is an allowable deduction.
Sec 37 allows for a deduction of bad debts but only in as far as debt relates to a revenue account.
Sec 38 Annuity paid to former employees or their dependents is allowed as a deduction. The regulations allow for a maximum of M1200 per annum per employee.
Sec 39 Expenditure incurred in training or tertiary education of a citizen of Lesotho in the employ of a taxpayer is an allowable deduction. The amount allowed is 125% of the expenditure incurred.
Sec 40 Research and development expenditure except for acquiring a depreciable asset and ascertaining existence, location, extent, or quality of a natural deposit allowed as a deduction.
Sec 41 Provides for categorizing of assets into different groups for the purposes of calculating depreciation.
Sec 42 (2) 100% of the cost of a minor asset (costing less than M50) is allowed as a deduction in the year of purchase/acquisition.
Sec 45 allows for amortization of start-up cost.
Sec 47 losses carried forward from previous accounting periods are allowed as deductions in subsequent years.
Sec 48 losses on disposal of business assets are also allowed as a deduction.
8.2.2 Valuation of inventory/trading stock
FIFO or the average cost method
Sec 56 provides that stock held should e valued at the lower of cost or market value. The opening stock is included in the calculation of cost of goods sold during the year while closing stock is deducted in calculating cost of goods sold the given year.
Where items of stock are not easily/readily identifiable for purposes of stock valuation, the stocks at the end would be assumed to be those stocks that were purchased last, that is, FIFO method of stock valuation should be used.
8.2.3 Reserves and provisions
Provisions are not allowable except provision for depreciation
8.2.4 Non-deductible expenses
All expenses not incurred in production of income.(section 33) (c,e,f)
While Sec 33(1) allows for a deduction of any expense as long as it relates to the generation of income subject to tax the following are specifically non-deductible expenses under the same section.
Sec 33(1)(a) expenses of a personal are not allowed as deductions and these include the following: education leading to a degree or a diploma, caring for dependents, commuting to work, clothing which may also be worn outside work. Employees cannot deduct these expenses from their employment income.
Sec 33(1)(b) income tax paid is not an allowable deduction.
Sec 33(1)(c) expenses of improving property, that is, those expenses that are not by nature repairs to property, but are an improvement/enhancement of property or assets are not allowed as a deduction, but are capitalized and subsequently allowed as depreciation.
Sec 33(1)(d) the cost of a gift made to an employee is such a gift (value of) does not form part of the employee's gross income.
Sec 33(1)(e) a fine or penalty paid for breach of any law is not allowable deduction.
Sec 33(1)(f) insurance premium paid to non-resident insurer is not allowable deduction.
Sec 35 limits the amount of deduction allowed for entertainment. 50% of expenditure incurred on entertainment is a non-allowable deduction.
Sec 36(2) Limitation on interest deduction: if a resident company is not principally engage in money lending, that is, not in the financial sector, and has debt-to-equity ratio over 3:1 it can only deduct interest to the extent it relates to the 3:1 ratio.
8.2.5 Recoupments
Treated as income during the year recovered
8.3 Depreciable regime
8.3.1 Tangibles (movable and immovable assets, for example plant and machinery)
A deduction is allowed under section 41 for the depreciation of the taxpayer's asset on declining balance method
Group Assets Included Depreciation:
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25% |
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20% |
|
10% |
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5% |
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100% |
8.3.2 Intangibles/incorporeals (for example, copyright, patents, goodwill and other intellectual rights)
Section 44 provides for the amortisation of the cost of acquiring an intangible asset over the useful life of the asset on a straight-line basis. A deduction is only available if the intangible asset has an ascertainable useful life and is in the production of income subject to income tax.
8.4 Treatment of losses
Section 47 provides for the quarantining of deductions and carrying forward of losses on:
- manufacturing
- other income
- foreign income source
Corporate losses are to be carried forward on a global basis. The loss can only be set off against income of the same nature/type, that is, a loss from manufacturing operations cannot be set off against property income, for example.
9. Foreign Exchange Losses and Gains
Foreign losses are allowable deductions and foreign gains are included as part of income
10. Branch Profits Tax
A branch in Lesotho is treated as a separate company from its parent company on worldwide income. On repatriation of branch profits 25% standard rate is applied.
11. Group Taxation/Consolidated Returns
Tax is charged on individual companies not on the group
12. Presumptive Tax Measures (for example, a minimum tax in the form of a gross asset tax)
13. Rates
15% Manufacturing Income and 35% Other Income.
0% for manufacturers exporting to extra SACU.
14. Rebates
15. Withholding Taxes
Lesotho levies withholding tax on most types of property income paid to non-residents such as:
- dividends
- interest
- royalties
- natural resource payments
- management charge (section 107)
16. Beneficiaries of Revenue
Lesotho Government
C. Income Tax on Individuals (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year)
Income derived from outside Lesotho by a resident tax payer
2. Department Responsible for Administration
Ministry of Finance Department of Income Tax
Lesotho Revenue Authority
3. Definition and Classification
The term individual is not explained in the act, it takes its ordinary meaning
- employees
- partners
- sole proprietors
- trustees
- beneficiaries of a trust
4. Time Tax is Levied
When it is accrued and when it is received
5. Basis of Taxation
5.1 Source-based or residence based
Both source and residence
5.2 If source, define:
5.2.1 Actual source
Income is Lesotho source income if it is derived from an activity which occurs in Lesotho (section 103)(b)
5.2.2 Deemed source
Income is deemed income if it is derived from services performed under a contract entered into with the Lesotho Government (section 103)(b)
5.3 If residence,
5.3.1 Define resident
An individual qualifies as resident if:
- has a normal place of abode in Lesotho and is present in Lesotho for part of the year of assessment; or
- is present in Lesotho on more than 182 days in any consecutive period of twelve months which includes all or part of the year of assessment; or
- is an official of the Lesotho Government posted overseas during the year of assessment; or
- is otherwise a resident of Lesotho.
5.3.2 Exclusions from the definition of resident:
Any Individual not satisfying conditions in 5.3.1
5.3.3 Ceasing of residency provided for in the Act.
Not provided for in the act
6. Included in Tax Base
Worldwide income for residents is included in the tax base except employment income taxed in the foreign country. Non-residents are taxed on all Lesotho source income.
7. Year of Assessment
12 months period ending on 31st March.
8. Computation of Taxable Income
8.1 Exemptions (do not only indicate the heading, but provide a brief explanation)
8.1.1 Partial exemptions (amounts exempt irrespective of the identity of the recipient):
First 500 of interest derived from a single savings account by a resident individual is exempt form Incom Tax. Exemption is available only in respect of savings accounts with registered financial institution resident in Lesotho.
The following are exempt under the tax law and other laws in Lesotho.
Sec 27(1) exempts M500 interest on savings accounts held by individuals
Sec 32 exempts M1500 severance pay received by an employee
Sec 26 exempts war pensions gratuities paid by Government to individuals who retired before 1993.
Sec 28 exempts scholarships
Sec 29 exempts income of non-commercial farming, that is, income where the primary aim is not to earn profits but subsistence.
Sec 24 property income of an expatriate taxpayer is exempt to the extent it is not Lesotho-source, that is, property not located in Lesotho.
Sec 30 exempts maintenance and child support
Sec 31(1) a gift, bequest, inheritance are also exempt from tax
Sec dividends received by a resident person from a resident company are exempt from tax.
8.1.2 Absolute exemptions (taxpayers enjoying completed exemption from tax on income)
- war pensions
- foreign service allowance
- scholarships
- diplomatic and similar privileges
- property income of expatriate taxpayers
- maintenance and child support
Sec 25 exempts the following organisations from income tax. The exemption only applies if the income relates to the core functions/activities of the organisation, and the income derived should not confer any private benefit.
- religious or charitable
- amateur sporting
- trading union or similar
Sec 49 (Lesotho Constitution) The King and Regent are exempt/immune from tax.
8.2 Deductions and recoupments
8.2.1 Allowable deductions
A deduction is allowed for any expense or loss including depreciation and amortization expense only to the extent incurred by the taxpayer in production of business income subject to tax provided it is not of capital nature. A resident employee is allowed to the maximum of 20% of the individual cross income of the contribution to the superannuation fund
8.2.2 Valuation of inventory/trading stock
FIFO or the weighted cost method
8.2.3 Reserves and provisions
Provisions are not allowable except provision for depreciation. Reserves are not provided for in the act
8.2.4 Non-deductible expenses
All expenses not incurred in the production of income subject to tax such as expenses of a personal nature
8.2.5 Recoupments
Treated as income for the year in which recovered
8.3 Depreciable regime
8.3.1 Tangibles (movable and immovable assets, for example plant and machinery)
A deduction is allowed under section 41 for the depreciation of the taxpayer's asset on declining balance method
Group Assets Included Depreciation:
|
25% |
|
20% |
|
10% |
|
5% |
8.3.2 Intangibles/incorporeals (for example, copyright, patents, goodwill and other intellectual rights)
Section 44 provides for the amortisation of the cost of acquiring an itangible asset over the useful life of the asset on the straight line basis.
8.4 Treatment of losses
Section 47 provides for quarantining of deductions and carrying forward of the loss. For the purpose of carrying forward the loss, income derived by the individual taxpayer is divided into the following classes:
- Lesotho-source Business income
- Lesotho-source property income
- Lesotho-source other income
- Foreign source Business income
9. Foreign Exchange Losses and Gains
- Foreign losses are allowable
- Foreign gains are included as part of income
10. Rates
- Residents - first M30,000 of chargeable income - 25%
- Residents - excess over M30,000 - 35%
- Non-residents - 25% of taxable income
- Residents - first M40,368 of chargeable income -22%
11. Rebates/Tax Threshold
M2,640 of tax payable is allowed as tax credit and it is applicable only on resident taxpayers.
M5,000 is allowed as a tax credit on resident individuals and sole traders.
12. Fringe Benefit Taxes (Benefits Flowing from an Employer-Employee or an Office Relationship)
FBT is paid by the employer on behalf of the employee; however an employer is allowed a deduction of the fringe benefit tax. FBT is imposed on the following benefits: car, housing, utilities, domestic assistance, meal or refreshment, medical, loan, and debt waiver and superannuation contributions.
13. Allowances
All allowances are taxable except:
- diplomats and similar privileges
- foreign-service allowances
14. Treatment of Pension, Provident or Retirement Annuity Fund Income
- Taxable like any other ordinary income at normal marginal rates (monthly payments)
- If paid all at once it would attract tax at 25% (lump sum payments)
15. Treatment of Professional Income
Professional income is taxable at marginal rates:
- Residents - first 30 000 - 25%
- Residents - excess over 30 000 - 35%
- Non-residents - withholding tax at 10% is charged
- Residents - first M40 368 - 22%
16. Treatment of Investment Income
We only tax the return of investment - interest at 10% withholding at source, and it is treated as a final tax.
17. Withholding Taxes
Withholding tax at the standard rate (25%) is payable on the gross amount of Lesotho Source dividends. Interest, Royalties, Natural Resource payment and Management fees paid to a non-resident. Where a treaty exists a lower rate of tax is applied.
18. Beneficiary of Revenue
Lesotho Government
D. Income Tax on Non-Residents (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year)
Non-resident tax, Income Tax Act number 9 of 1993. The chargeable income of a non-resident taxpayer is subject to tax at the standard rate of tax (section 12).
2. Department Responsible for Administration
Ministry of Finance (Income Tax Department)
Lesotho Revenue Authority
3. Included in Tax Base
All non-residents deriving taxable income from Lesotho
4. If Sourced-Based, Define (If Not Already Done)
4.1 Actual source
Dealt with earlier
4.2 Deemed source
Under Sec 103 income is Lesotho-source if it meets any of the following:
- derived from an activity which occurs in Lesotho
- earned from a contract between a person and the Government of Lesotho
- derived by a resident driver where the driving partly occurs in Lesotho and partly elsewhere
- derived from disposal by a resident of Lesotho, from disposing of movable property
- derived from disposal of membership in a resident company
- derived from sale of license of industrial or intellectual property used in Lesotho
- interest where the debt is secured by immovable property located in Lesotho
- derived from rental of movable property used in Lesotho
- dividend, management fee, director's fee paid by a resident company
- pension or annuity paid by Lesotho Government or where services or employment were rendered in Lesotho
- payment for a natural resource taken from Lesotho
- derived by a resident from engaging in any form of transportation.
5. Rates
(1) Subject to section 107, withholding tax at the standard rate of tax is payable on the gross amount of a Lesotho-source dividend, interest, royalty, natural resource payment, or management charge paid to a non-resident and is charged to that non-resident. (1) Withholding tax at the rate of 10% is payable on the gross amount of a payment under a Lesotho-source services contract paid to a non-resident and is charged to that non-resident.
6. Beneficiary of Revenue
Lesotho Government
E. Income Tax: Treatment of Dividends, Interest, Royalties and Fees
1. Dividends
15% - The domestic law provides for 25% except for where a double taxation agreement applies.
2. Interest
10%
3. Royalties
10%
4. Fees
10%
5. Rents
Normal marginal rates
F. Income Tax: Specific Industries
1. Mining Tax
Taxable at normal marginal rates. Applicable to both individuals and companies.
2. Insurance Business
Taxable at normal marginal rates, however income of life assurance business is exempt from tax.
3. Farming
Taxable at the rate of 15% for both Companies and individuals.
4. Ships and Aircraft Owners
5. Other
G. Income Tax: Administrative Procedures (National Government)
1. Payment Periods
Employees' tax - Pay-As-You-Earn (PAYE) - payable monthly
Fringe Benefits Tax (FBT) - payable quarterly
Both Individual and Corporate tax - payable quarterly as advance payments
2. Rulings
2.1 Possibility of advance rulings
2.2 Publication of rulings
3. Codification of Revenue Practices
4. Refunds
Where tax has been paid for a year of assessment in excess of the taxpayer's liability for that year, the taxpayer is entitled to a refund of the excess. The claim of refund must be filed with the Commissioner within 4 years after service of the assessment (section 151).
5. Interest, Charges and Penalties
An additional tax specified rates are charged on:
- Failure to file returns (section 193)
- Failure to pay tax when due (section 194)
- Underestimation of tax payable (section 195)
- The withholding tax agent who fails to remit tax withheld to the commissioner on the due date (section 196)
- Failure to maintain proper records as required by the act (section 197)
H. Income Tax: Anti-Avoidance Provisions (National Government)
1. Transfer Pricing Legislation
Section 113 gives the commissioner broad powers to distribute, apportion or allocate income, deductions or credits between associated taxpayers to prevent evasion of Lesotho tax or to clearly reflect the income of such taxpayers.
2. Thin Capitalisation Legislation
A taxpayer is entitled to a deduction for interest incurred on a borrowing used by the taxpayer in the production of income subject to tax.
Where a resident company not principally engaged in a money-lending business has a debt-to-equity ratio in excess of 3 to 1, the commissioner may disallow a deduction for the interest paid on that part of the debt in excess of the 3 to 1 ratio.
3. Controlled Foreign Entities (CFES)
4. Provide a Brief Discussion of General Anti-Avoidance Provisions (both under common and statutory law).
The statute gives the commissioner powers to adjust chargeable income of taxpayers where income splitting is attempted e.g. where a professional taxpayer on the highest marginal rate pays a salary to a spouse as an administration assistant where no actual services are rendered - the statute also gives the commissioner broad powers to re-characterise elements of transactions entered into as part of a tax avoidance scheme, to disregard for tax purposes a transaction which does not have substantial economic effect, and re-characterise a transaction where the form does not reflect the substance.
5. Transactions between Connected Persons
I. Capital Gains Tax on Corporations (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
The Income Tax Act provides for a very limited element of capital gains tax. It exists only on disposal of business assets where gains form part of the gross income and is subject to marginal tax rates. And losses on disposal of such assets are allowable deductions. This applies to both companies and individuals
2. Department Responsible for Administration
3. Basis of Taxation (Source-based or residence-based)
4. Time When Tax is Levied
5. Included in Tax Base
6. Exemptions/Exclusions
7. Allowable Deductions
8. Non-Deductible Expenses
9. Rollovers
10. Treatment of Losses
11. Rates
12. Rebates
13. Tax Period
14. Withholding Taxes
15. Beneficiary of Revenue
J. Capital Gains Tax on Individuals (National Government)
1. Name of Tax and Levied in Terms of Which Levied (Name, Number and Year)
2. Department Responsible for Administration
3. Basis of Taxation (Source-based or residence-based)
4. Time When Tax is Levied
5. Included in Tax Base
6. Exemptions
7. Allowable Deductions
8. Non-Deductible Expenses
9. Treatment of Losses
10. Rates
11. Rebates/Annual Deduction
12. Tax Period
13. Withholding Taxes
14. Beneficiary of Revenue
K. Special Taxes (Other Than Income Tax) on Certain Industries/Types of Income
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
2. Department Responsible for Administration
3. Taxpayer
4. Included in Tax Base
5. Tax Rate
6. Beneficiary of Revenue
L. Taxation of Capital
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
2. Department Responsible for Administration
3. Taxpayer
4. Included in Tax Base
5. Tax Rate
6. Beneficiary of Revenue
M. Donations Tax (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
2. Department Responsible for Administration
3. Taxpayer
4. Included in Tax Base
5. Tax Rate
6. Beneficiary of Revenue
N. Other (National Government)
1. Name of Tax and Levied in Terms of Which Act (Name, Number and Year
2. Department Responsible for Administration
3. Taxpayer
4. Included in Tax Base
5. Tax Rate
6. Beneficiary of Revenue
O. Relief from Double Taxation
Lesotho has double taxation agreements with three countries:
- Republic of South Africa
- United Kingdom
- Mauritius