This appeal seeks to answer the question whether the payment made to a Community Share Ownership Trust (CSOT) by a holder of a Special Mining Licence (SML) before 1 January 2013 constituted a deductible expense in terms of paragraph 4(1)(a) of the Twenty Second Schedule to the Income Tax Act [Chapter 23:06].
The Facts
The parties did not call any evidence but proceeded by way of a statement of agreed facts to which was attached five (5) annexures.
These annexures comprised:
(i) The Cession Claims Agreement, dated 25 March 2008 (Annexure 1);
(ii) The appellant's holding company's Indigenisation and Economic Empowerment (General) Regulations Indigenisation Plans and Extent of Indigenisation document dated April 2012 (Annexure 2);
(iii) The appellant's holding company's Revised Empowerment Proposal dated 5 June 2012 (Annexure 3);
(iv) The letter from the Minister for Indigenisation approving the Implementation Plan in Annexure 3, dated 7 June 2012 (Annexure 4); and
(v) The approval of the Revised Implementation Plan by the same Minister dated 10 August 2012 (Annexure 5).
In addition, the parties adopted the contents of the Heads of Agreement concluded on 1 November 2012 between the Minister of Indigenisation and the National Indigenisation and Economic Empowerment Fund, on the one hand, and the appellant and three other related companies, which were the South Africa registered AP Limited, the appellant's holding company, AM Ltd and S Ltd, and the Trust Deed executed by the Minister of Indigenisation and the appellant's holding company as Founder 1 and 2, respectively, the appellant, and five (5) Founding Trustees on 23 November 2011.
The Founding Trustees comprised of three (3) local chiefs and two (2) nominees of the appellant.
The following facts are derived from these documents:
The appellant is a wholly owned local subsidiary of a locally registered company, O Ltd, which is in turn wholly owned by another local company, referred to in this judgment as the appellant's holding company or AM Ltd. AM Ltd is wholly owned by a Dutch company, E BV, which in turn is a wholly owned subsidiary of a South African registered and Johannesburg Stock Exchange listed company, AP Ltd…,.
These entities are all members of the worldwide AH Group, which prides itself as a “natural resources business of international scale.”…,.
The appellant is a platinum group metals (PGMs) mining company, which is in the business of developing and exploiting mining claims in and exporting platinum group metals from Zimbabwe….,.
It is also a holder of a Special Mining Lease (SML) issued in March 2008.
At the special instance and request of the Government of Zimbabwe (GoZ), represented by the Minister of Mines and Mining Development, the appellant and a related local company, S Ltd, entered into a cession of mining claims agreement with the Government of Zimbabwe on 28 March 2008, through which the Government sought to broaden the participation of indigenous players in the platinum mining industry.
The cession of claims agreement predated the special mining lease.
The ceded mining claims were valued at US$142m payable by way of cash, equity in joint ventures, processing rights, empowerment credits, or any agreed composition of these methods of payment.
On 15 April 2010, AM Ltd submitted its initial indigenisation implementation plan, which also covered its local subsidiaries, to the Minister of Indigenisation for approval, in terms of the prevailing indigenisation legislation.
It was revised on 5 June 2012 and approved on 7 June 2012. The plan was further amended and approved on 10 August 2012. The Heads of Agreement of 1 November 2011 were concluded after the approval of the indigenisation implementation plan.
On 30 May 2011, the appellant filed an income tax self-assessment for the tax year ended 31 December 2011 showing an assessed loss of US$41,652,575….,.
The total expenses, excluding interest and tax were in the sum of US$30,254=95, which included the sum of US$10m categorised in the notes to its financial statements for the year ended 31 December 2011 as “Contribution to Community Share Trust.”…,.
The respondent commenced a tax compliance investigation of the appellant on 12 November 2012 for the period January 2009 to 31 December 2012 which culminated in the issuance of a Manual Notice of Assessment for the Income Tax year ended 31 December 2011, assessment number 1/5114 on 2 September 2015.
The appellant was in a tax loss position of US$54,083,639=04.
The respondent disallowed US$405,852,101=50 from the assessed loss of US$459,935,739=54 in the self-assessment filed on 30 May 2012.
On 11 November 2015, the appellant belatedly lodged an objection with the respondent on the disallowance of the US$10m only, which effectively reduced the carried forward tax loss in the same amount in the 2011 tax year.
The respondent, acting in terms of section 62(2) of the Income Tax Act, condoned the late objection by letter of 17 November 2015.
On 13 April 2016, the respondent disallowed the objection on two bases:
(i) The first was that the payment was not made wholly and exclusively for the purposes of the special mining lease operations but largely for obtaining approval of the indigenization implementation plan.
(ii) The second was that the expenditure was, in any event, of a capital nature.
The appellant was granted leave to appeal out of time by this Court by order dated 6 July 2016 and duly filed its notice of appeal on 11 July 2016.
The appellant duly filed its case on 29 August 2016 while the respondent filed the Commissioner's case on 25 October 2016.
By letter of 21 October 2016, the appellant's erstwhile legal practitioners, inter alia, indicated that by that date, the Heads of Agreement had not yet been implemented nor had the Trust been allocated the envisaged 10% equity in AM Ltd, as specified in the transaction documents.
At the first pre-appeal hearing of 17 March 2017, the sole issue referred for determination on appeal was whether the payment of US$10m to the Rural District Community Share Ownership Scheme, made in November 2011, was properly claimed as a deduction.
On 22 November 2017, counsel for the parties further agreed to file a statement of agreed facts by 29 November 2017. The parties undertook to file their heads of argument by 18 and 31 January 2018, respectively.
In November 2011, the appellant paid US$10m to the Community Share Ownership Trust (CSOT) and claimed a deduction of that amount from its tax returns for the 2011 tax year.
The amount was disallowed by the appellant in both the amended assessment of 2 September 2015 and the determination to the objection on 13 April 2016.
It was common ground, that, in terms of section 3(1)(a) of the Indigenisation and Empowerment Act [Chapter 14:33] (the Indigenisation Act) the Government was mandated to compel “every public company and any other business” with a minimum value of US$500,000 to dispose of at least 51% of its equity to indigenous Zimbabweans at a fair market value.
The appellant contended, on the one hand, that the disbursement was in part fulfilment of its legal obligation to indigenise in terms of the Indigenisation Act and was of a revenue nature while the respondent contended, that, the appellant did not have any legal obligation to pay the Community Share Ownership Trust (CSOT), and, that such payment was of a capital nature.
The Issue
The issue referred on appeal, on 17 March 2017, was whether the payment of US$10 million to the Community Share Ownership Trust (CSOT), made in 2011, was an allowable deduction.
The Resolution of the Issue
It was common ground that the provisions of section 15(2)(11) of the Income Tax Act, allowing the deduction of contributions made to Community Share Ownership Trusts, was not applicable in the present case as they only came into force on 1 January 2013.
The Contents of Annexure 2 to 5 to the Statement of Agreed Facts
Annexure 2, the original empowerment plan, was compiled on 14 April 2010 by the appellant's holding company for the indigenisation of the holding company and all its local subsidiaries.
It provided the estimated gross and net values of each of its four local subsidiaries, inclusive of the appellant. The estimated net fair market value of the four subsidiaries was in the sum of US$480.2m of which US$25.5m was attributed to the appellant.
The sum of US$142.8m constituted 51% of the net fair market value of these four subsidiaries from which the amount attributed to the appellant would be in the sum of US$13,005,000.
Annexure 2 indicated that the appellant, was, by virtue of the Cession of Claims agreement, to be regarded as having been indigenised at the rate of 31.3% in April 2010.
The document listed amongst AM Ltd's “socially and economically desirable activities that ought to be given indigenisation credit”; the development of the appellant's mine from 2007 and the concomitant supply of materials to 363 households for the construction of blair toilets; drilling, casing and equipping seven (7) boreholes and training village pump minders; construction of a shelter at a local clinic; electrification of three (3) classroom blocks at a local secondary school; refurbishment of a local primary school; donation of an ambulance at the local district hospital; and the donation of six months worth of drugs at three local health centres at an aggregate cost of R7m.
Other projects included the provision of national provincial scholarships to 300 pupils in the country's 10 provinces since 1987; construction of a US$2m water supply dam for the mine and surrounding communities; construction of a road and bridge; and the donation by the AH Group of £270,000 for the enrolment of up to 1,000 children with disabilities in 21 primary schools over a three year period.
An overview of the original plan, Annexure 2, and the revised plan, Annexure 3, was captured in Annexure 310.
The summary highlighted that each plan comprised of “a donation of US$10 million to the CSOT”.
In addition, in regards to the original plan, the outstanding Cession of Claims Agreement financial obligations due from the Government were rated at 30% of the indigenisation threshold.
The holding company undertook a 28% equity ownership transaction through the Notional Vendor Funding (NVF)structure; 10% of this equity would be allocated to Strategic Equity Partners (SEPs) and the Sovereign Wealth Fund (SWF), while another 10% would be allocated to the Community Share Ownership Trust (CSOT); and the remaining 8% to the Employee Trust.
The South African based AP Ltd would hold 72% of the holding company's equity.
The chart flow summary showed that the holding company would continue to hold 100% equity in the appellant.
Apparently, the original plan was rejected by the Minister of Indigenisation who requested the holding company to submit a revised plan.
The holding company undertook to implement the revised plan in two phases.
The first phase involved the allocation of an aggregate of 20% equity, consisting of 10% equity to the Community Share Ownership Trust (CSOT) and the Employee Trust, respectively. The balance of 31% would be allocated to Strategic Equity Partners (SEPs) and the Sovereign Wealth Fund (SWF) in the second phase through the Notional Vendor Funding structure. The remaining 49% would be held by the South African related company, AP Ltd.
Again, the chart flow showed that the holding company would own all the equity of the appellant.
By letter of 7 June 2012 (Annexure 4) the Minister approved the proposed empowerment distribution to the Community Share Ownership Trust (CSOT) at 10%, Employee Share Trust at 10%, and, lastly, the Sovereign Wealth Fund (SWF) and Strategic Equity Partners (SEPs) at 31%.
He did not recognise the “donation of US$10m to the CSOT” as part of the approved indigenization implementation plan.
Apparently, the Minister and the holding company maintained dialogue on the plan, which culminated in a further approval on 10 August 2012 wherein the Minster distributed the 31% to the National Indigenisation and Economic Empowerment Fund (NIEEF) and the Strategic Equity Partners (SEPs).
He allocated 21% equity to the National Indigenisation and Economic Empowerment Fund (NIEEF) and 10% to the Strategic Equity Partners (SEPs).
The Legislative Requirements for Indigenisation
The relevant indigenisation legislation at the time the US$10m payment was made comprised the Indigenisation Act, which was enacted in 2007 and operationalised on 17 April 2008, the Indigenisation and Economic Empowerment (General) Regulations SI21/2010 as amended, and the Minimum Requirements for Indigenisation Implementation Plans Submitted by Non-Indigenous Businesses in the Mining Sector published in General Notice 114 of 2011.
The provisions of section 3(1)(a) of the Indigenisation and Economic Empowerment Act [Chapter 14:33] governed the indigenisation of the appellant.
The appellant, which fell under the rubric of a “public company or any other business” was obligated to dispose, at the fair market value, 51% of its equity to indigenous Zimbabweans.
Counsel for the appellant, in his written heads of argument, contended that the provisions of section 3(1)(e) of the Indigenisation Act also governed the indigenisation of the appellant.
His submission that the appellant would not have been issued with an investment licence had it not donated US$10m to the Community Share Ownership Trust (CSOT) was incorrect for two reasons:
(i) The first was that the provisions of section 3(1)(e) of the Indigenisation Act as particularised by section 9(2) of the Indigenisation and Economic Empowerment (General) (Amendment) Regulations, SI 34/2011 were inapplicable to the appellant because these provisions applied to the projected or proposed investment in a prescribed sector of the economy, to which platinum mining was excluded.
(ii) The second was the agreed fact that the appellant was an old investor that had commenced mining operations in 2007, and not a new one.
In terms of section 5(2) as read with the definition of “non-compliant business” in section 5(1) of the Indigenisation Act, the Minister of Indigenisation could, inter alia, direct a licensing authority to terminate an indefinite licence of any eligible company that failed to submit a section 3(b)(ii), (c)(i), (d) and (e) provisional indigenisation implementation plan within the prescribed period.
This provision would also have been inapplicable to the appellant regard being had to the fact that there were no apparent sanctions imposed for infringing section 3(1)(a) of the Indigenisation Act, which, in my view, would have regulated the conduct of the appellant.
It was common cause that the appellant's holding company timeously submitted the first indigenisation implementation plan in April 2010, well within SI 21/2010 first deadline of 30 June 2010.
The first amendment to the Regulations, SI 116/2010 introduced Community Share Ownership Trusts, in section 14B, as indigenisation partners.
In terms of section 14B(3), the dividends and any money accruing to the Trust was to be applied towards community projects such as the construction and maintenance of schools, health centres, roads, dipping tanks, water reticulation and sanitation, and gully reclamation.
The provisions of section 3(4) of the Indigenisation Act accorded the Minister the power to prescribe the minimum indigenisation threshold in each sector by notice in a statutory instrument.
He, however, did so by General Notice No.114/2011 and prescribed the minimum indigenisation threshold value in the mining sector at US$1.
The General Notice prescribed the actual approval period of 45 days and a deemed approval of 90 days.
The indigenising entity was further required to implement the approved plan within six (6) months of the approval date, with a possible extension thereof of three (3) months.
