Zimbabwe vs CRS (Pvt) Ltd, October 2017, High Court, HH 728-17 FA 20/2014

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The issue in this case was whether tax administration could tax a “non-existent income” through the “deeming provisions” of s 98 of Zimbabwe’s Income Tax Act.

A lease agreement and a separate logistical agreement had been entered by CRS Ltd and a related South African company, for the lease of its mechanical trucks, trailers and tankers for a fixed rental.

The tax payer contended that the rentals in the agreements were fair and reasonable. The tax administration contended that they were outrageously low so as to constitute under invoicing and tax avoidance.

The court ruled in favor of the tax administration.

Excerps from the Judgement:

Where any transaction, operation or scheme (including a transaction, operation or scheme involving the alienation of property) has been entered into or carried out, which has the effect of avoiding or postponing liability for any tax or of reducing the amount of such liability, and which in the opinion of the Commissioner, having regard to the circumstances under which the transaction, operation or scheme was entered into or carried out- (a) was entered into or carried out by means or in a manner which would not normally be employed in the entering into or carrying out of a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; or (b) has created rights or obligations which would not nonnally be created between persons dealing at arm’s length under a transaction, operation or scheme of the nature of the transaction, operation or scheme in question; and the Commissioner is of the opinion that the avoidance or postponement of such liability or the reduction of the amount of such liability was the sole purpose or one of the main purposes of the transaction, operation or scheme, the Commissioner shall determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out, or in such manner as in the circumstances of the case he considers appropriate for the prevention or diminution of such avoidance, postponement or reduction.

Accordingly, I agree with Mr Bhebhe that the agreements had the stipulated effect of avoiding or reducing the appellant’s liability for income tax.
The circumstances prevailing at the time the agreement was entered into or carried out In the hyperinflationary era, the appellant averred that it could not secure local contracts that would enable it to fully utilize all its assets. The local currency Jost value at an alarming rate. The pricing of transport services became a nightmare. The income derived from transport services could not sustain the local operations. It was faced with the spectre of liquidation and staff retrenchments. The effect of which was that its loyal and skilled manpower mainly consisting of approximately 110 drivers would lose their only source of livelihood for themselves and their families while the company mechanical horses and trailers would deteriorate through disuse. The appellant could not access the foreign currency required to purchase spare parts and fuel necessary to keep the local operations running.

It is a notorious fact of commercial life that related parties enter into contractual amngements. I did not discern any abnormalities in the nature of the agreements nor in the identities of the signatories. There was however an admixture of the normal and abnormal in the manner in which the agreements were carried out. For starters, the appellant overemphasized the indisputable uniqueness of the manner in which the agreements were carried out. In the letter of 24 October 2013 at p 50.1 para 11 the external accountants for the appellant wrote that “the appellant’s position is unique in the transport regime of Zimbabwe and there is no other haulier which provides a similar service.” The same point was repeated in the letter of 6 December 2013 at p 45.1 in para 1.2 where the same accountants indicated that they “were unaware of any Zimbabwean company which operates in the same unique situation as the appellant.

In assessing the information availed to the Commissioner by the appellant and to this Court by both the appellant and the Commissioner, I am satisfied the agreements were carried out in a manner which would not normally be employed in such transactions. In the light of the formulation of Trollip JA in Hicklin v Secretary for Inland Revenue, supra, it appears to me that the two parties were not acting at arm’s length.

It was clear that each party derived tangible benefits from the agreements. The related party had the right to lease the equipment and the obligation to pay rentals and maintain the equipment. The appellant received a fixed rental. The obligation to meet the maintenance and running expenses was unique and abnonnal. The fixed rentals which negated the cost plus mark-up principle was abnormal and would not have been concluded by parties dealing at arm’s length.

It seems trite to me that the purpose of a private company is to make a profit. The appellant is not a non-profit making organisation. The appellant was content with the untenable situation in which it made and continues to make losses without any prospects of ever making a profit. It seems to me that the fixed rental was deliberately designed to ensure that the appellant would remain viable enough to survive liquidation and costly retrenchments and at the same avoid or reduce its income tax liability.

I am satisfied that the avoidance or reduction of income tax liability was one of the main purposes of the agreement (s).

In my view, the transactions undertaken by the appellant fell into the all-embracing provisions of s 98. The respondent correctly invoked this provision in assessing the appellant to income tax in each of the four tax years in question.

The appellant strongly argued against the alteration of the contract of lease concluded between the related parties by the respondent. While Mr Bhebhe conceded that the respondent did not have the legal authority to alter the contract of the related parties he forcefully argued that it had the power either to disregard the existence of the contract or to neutralise its perverse income tax consequences and assess a fair and reasonable tax. He contended that the respondent was empowered to make assessments based on notional rather than on received or accrued income.

It is true that Income Tax Acts sometimes do strange things, and that taxing a notional profit is by no means unknown. But in such cases the language of the Act clearly indicates that this is the case.”
I agree with Mr Bhebhe that the closing words of s 98 in unambiguous language empower the Commissioner to impute and tax notional income. However, the section does not provide the mechanism for determining such income but accords a wide discretion on the Commissioner to do so.

The answer to the question whether the Commissioner is empowered by s 98 to impute notional income and proceed to tax it is answered in the affirmative. The closing words of s 98 direct the Commissioner to “determine the liability for any tax and the amount thereof as if the transaction, operation or scheme had not been entered into or carried out or in such a manner as in the circumstances of the case it considers appropriate for the prevention or diminution of such avoidance, postponement or reduction” once the transaction, operation or scheme has the stipulated effect and he firstly forms the opinion that it was entered into or executed in an abnormal manner or was not entered into or executed at arm’s length and secondly, the further opinion that it was created and implement for the purpose of avoiding, reducing or postponing the payment of tax. I have found that the agreement had the stipulated effect and have upheld the Commissioner’s opinion in both the aforementioned respects.

The concluding words of s 98 provide the Commissioner with a very wide discretion in computing the imputed notional tax. He would have been within his rights to treat the agreement as a partnership despite the disavowal of the related parties in clause 8 of the 2003 agreement. He would off course have required information on which to apportion the partnership shares based amongst other factors on the ratio of the appellant’s equipment to that of the related party. Whether or not SI 163 of 2014 is applicable in casu.”

The offence of tax avoidance was described by MacDonald JP in Commissioner of Taxes v F in rather strong language as an evil. Of course taxpayers are allowed to employ legitimate means to lessen their tax burden and these do not invite public opprobrium. Tax avoidance certainly places the burden of taxation on other taxpayers to the exclusion of the offender. Courts emphasise both personal and general deterrence in imposing suitable penalties. As will appear in my assessment of each offending transaction, the appellant and its tax advisers deliberately implemented an opaque system of tax avoidance and reduction with the intention of evading the payment of the correct tax due. This course of action obviously raises the moral turpitude of the appellant and results in the imposition of the maximum penalty permitted by law. The interests of society require that taxpayers abide by the law and pay their fair share of taxes.


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