Zimbabwe’s special court for income tax appeal has dismissed with costs a long list of preliminary points made by Zimbabwe Stock Exchange listed seed manufacturer Seed Co Limited (Seed Co) in its appeal against a $7,9 million tax liability accruing from alleged tax avoidance between 2009 and 2012.
The liability came after the Zimbabwe Revenue Authority (Zimra) determined that a transaction, operation or scheme which had the effect of avoiding or reducing Seed Co’s tax liability was entered into and executed between the company and its Zimbabwean subsidiaries.
According to court documents (HH648-18) in our possession dated October 2018, Justice Kudya heard the case in which Seed Co is the appellant and Zimra commissioner general respondent.
Zimra conducted an investigation into the tax affairs of Seed Co for the period February 2009 to December 2012. The revenue collector in 2013 computed in a schedule both value added tax and income tax purportedly accruing on both management fees and royalties from subsidiaries of the seed company.
Seed Co is listed on the ZSE and is legal owner of five trademarks registered in Zimbabwe. It is the holding company of subsidiaries in Zimbabwe, Botswana, Zambia, Tanzania, Malawi , Kenya, South Africa, Lesotho and the Democratic Republic of Congo.
The listed regional group received management fees from foreign subsidiaries on a cost recovery basis on which Zimra imputed a 25 percent markup on such fees based on the tax before profit rate of 20 percent as measured against management fees turnover.
The research of royalty fees paid to the Botswana subsidiary by other subsidiaries less the economic value addition expenses not exceeding 5 percent was also imputed to the appellant for the use of trademarks to the appellant by Zimra was also factored.
Seed Co in December 2014 objected to the amended assessment which was disallowed in 2014 and also saw Zimra increasing additional tax levied from 60 percent to 100 percent.
Seed Co sought the setting aside of the additional assessments issued with costs on procedural and substantive grounds.
The seed manufacturer questioned whether or not Zimra charged a tax in terms of section 98 of the Income Tax Act or made adjustments in terms of the same section. The company argued Zimra’s conduct in invoking provisions of the income tax act without first establishing jurisdictional facts illegal and in contravention of the constitution of Zimbabwe. Seed Co also questioned whether or not the commissioner created and is authorised to create transactions, operation or scheme by subsection 98 of the Act. Seed Co says Zimra is not empowered by the Act and therefore acted unlawfully in that respect.
The company also argued attribution of management fees and royalties to Seed Co was in fact misapplication of the tax law.
Questions were also around who bears the onus between respondent and appellant, of proving the applicability of section 98 of the Income Tax Act.
Justice Kudya deferred to the main appeal hearing determination of a contentious issue in respect of whether or not OECD transfer pricing guidelines are applicable to Zimbabwe in terms of domestic law or of persuasive value.
Seed Co contended that Zimra raised new grounds and reasons for the additional assessment in the case which were not indicated in the determination in breach of legality, reasonableness and fairness.
The company also contended that Zimra conducted unlawful search and seizure as it did not have any reasonable grounds to conduct the search and seizure in question.
This led to the question whether or not information obtained is lawful. Determining the applicability of subsection 98 was deferred to the main appeal hearing.
Zimra relied on a transfer pricing policy document produced by a consultant engaged for the purpose by Seed Co and group financial statements in respect of royalties. The group financial statements, according to the court papers, showed that research costs were 76,65 percent in Zimbabwe and 2,5 percent in Botswana.
“The effect of the transaction, operation or scheme was that the foreign subsidiaries of the appellant remitted management fees at cost to the Zimbabwean subsidiary for functions that were conducted and controlled by the appellant’s employees and resulted in the diversion of the management fees which were due to the appellant to the Zimbabwean subsidiary,” reads part of the document.
“The respondent thus found that but for the arrangement between the appellant and the Zimbabwean subsidiary; these fees should have been paid to the appellant as encapsulated in the appellant’s transfer pricing policy.
“The transaction, operation or scheme actually succeeded in the avoidance or reduction of the applicant’s tax liability in Zimbabwe,” the document reads.