It,s no longer possible for taxpayers to avoid payment of taxes in foreign currency when the income or sales being taxed are in foreign currency, the Supreme Court has ruled in a landmark tax dispute pitting the Zimbabwe Revenue Authority and Delta Corporation.
For years, taxpayers have been contesting Zimra’s drive to collect the VAT on foreign currency sales and income tax on foreign currency income.
In addition, taxpayers were challenging the revenue collector against taxation on the basis of “gross tax”, which the contestants argued was contrary to the country’s tax laws.
However, a landmark ruling in a case involving Delta Corporation and Zimra now renders several cases before the Zimra appeals tribunal and the Special Fiscus Court at the High Court academic.
In a judgment handed down recently, a three-judge panel of Deputy Chief Justice Elizabeth Gwaunza, Tendai Uchena and Samuel Kudya unanimously upheld a High Court decision rejecting Delta’s appeal that the tax collector had improperly computed the company’s tax liability.
Writing the court judgment, Justice Tendai Uchena agreed with High Court Judge Justice Joseph Mafusire’s October 2023 judgment, that Zimra imposed additional tax (a penalty) on the beverage making company after it had breached the duty to pay tax in foreign currency.
“The court is satisfied that a penalty for any outstanding foreign currency tax is payable in foreign currency and it also follows that a penalty on any outstanding local currency tax is payable in local currency.
“Therefore, the court a quo’s decision is correct. There is no irregularity or irrationality in the court a quo’s determination of the application placed before it by the appellant,” said Justice Uchena, dismissing Delta’s appeal for lacking merit.
The law provides that a company, trust or any juristic person is obliged to pay tax in the currency in which the income is earned, received or accrued.
Zimra had made additional income tax and value added tax assessments, penalties and interest of US$54.7m against Delta group entities for amounts they deemed should have been paid exclusively in foreign currency.
It argued that Delta “had neglected or omitted to remit its income tax in respect thereon in foreign currency, but had purported to pay it all off in local currency”.
Zimra yesterday welcomed the landmark ruling, saying the judgment is of significant importance to its operations as it confirms the taxman’s right to collect both VAT and income tax in foreign currency, where the revenue or income being taxed is in foreign currency.
“Whatever challenges were being made in that regard have now been put to bed,” said the Zimra Legal Service Division commenting on the import of the Supreme Court ruling.
“The several cases that are before the Special Court, where validity of assessments was being challenged on the basis of the use of the terms gross tax, have now been rendered academic. We hope the taxpayers will consider withdrawing the argument completely.”
In addition, Zimra said several cases have also challenged the validity of assessments on the basis that Zimra did not have jurisdiction to raise assessments.
However, that issue should now be considered moot in all those cases, considering the decision of the Supreme Court in this case.
“Should there be any cases where taxpayers are still insisting on their right to have set offs of input tax and output tax across currencies, then this judgment seals the fate of any such arguments,” said Zimra Legal Division.
“While we can continue using the term gross tax in our assessments, we should make sure that our assessments have the correct description of the notice. We recommend that we describe our assessments as provided by the law.
“For example, we have additional assessments, where it’s a Section 47 assessment where we are charging more tax or reducing the assessed loss, or we have an amended assessment for a Section 49 loss assessment where we are increasing the assessed loss, or a reduced or amended assessment where we are reducing the tax chargeable.
“Let us also be consistent as regards the inclusion of all elements that form an assessment so we are not found wanting.”
However, Delta did not agree with Zimra on the formula used for splitting taxes into currency of payment.
The Supreme Court ruling comes at a time when the Special Court is weighed down with plentiful cases challenging the validity of taxations on the grounds that Zimra did not have jurisdiction to raise assessments in foreign currency.
Zimra is a central collector of revenue for the Government through tax legislation, principally the Income Tax Act and the Value-Added Tax Act .
The system of taxation involves the compilation by the taxpayers of self-assessments of their tax liabilities and the submission of tax returns to the respondent in respect of any year of assessment.
Zimra can adjust these assessments for any anomalies it may pick during its own audit processes.
The matter brought to the High Court by Delta was largely one of law, more precisely, the interpretation of the relevant provisions of the tax statutes.
Following a tax audit on Delta Beverages’ tax affairs for January 1, 2019, to October 31, 2021, Zimra concluded that the company had improperly computed its income tax in the sense that, despite having received foreign currency for some of its sales in the relevant period, it had neglected or omitted to remit its income tax in respect of that income in foreign currency, but had purported to pay it all off in local currency.
Zimra further concluded that Delta had improperly deducted certain expenses from its taxable income.
Declaring Delta’s conduct to be a violation of tax statutes, Zimra disallowed the expenses, which it considered to have been improperly deducted.
Further, it proceeded to re-compute Delta’s tax liability and issued it with amended tax returns, apportioning the tax payable by Delta in the proportion of the ratio of its turnover in foreign currency to local currency.
In effect, it required Delta to pay its taxes in foreign currency for revenue received in foreign currency, and in local currency for that received in local currency.
Zimra conducted a similar audit and a re-assessment of Delta’s VAT obligation and established that the company had paid its foreign currency component of the VAT, all in local currency, contrary to the law.
Furthermore, Zimra considered that the company had not properly completed the VAT returns in that it had left out a whole section altogether.
This is the section that separates the foreign currency input and output taxes from the local currency input and output taxes.
Output tax is the tax charged and received by a registered operator for subsequent transmission to Zimra, while input tax is the tax that the operator pays on imports.
Input tax is deducted from the output tax and the balance is what is remitted to Zimra.
In it’s amended notices of assessment, Zimra required that the foreign currency input and output taxes be separated from the local currency input and output taxes so that there would be no cross-currency deductions.
In other words, Zimra required that only foreign currency input tax be deductible from the foreign currency output tax and similarly, that only local currency input tax be deductible from the local currency output tax.
According to Zimra, that is the correct interpretation of the relevant tax provisions. The case was argued on multiple grounds which were narrowed down to five areas.
Firstly, Delta argued that the amended assessments by Zimra are invalid in that they refer to “gross tax”, yet such a term or concept is alien to the tax statutes.
It was further argued that the amended assessments by the respondent did not compute its taxable income and that, as such, they are invalid for want of compliance with the requirements of a valid tax assessment as previously pronounced upon by the courts.
Zimra, in response, argued that the use of this term is harmless and that the amended tax returns computed by it had all the requirements of an assessment as prescribed by law.
In his judgment, Justice Mafusire ruled that as long as those assessments contained the minimum requirements of the Acts, they cannot be held invalid merely because of the use of the term “gross tax”.
He went on to dismiss all the objections by Delta to the additional assessments by Zimra for the tax years in question, saying they lacked merit.