ZIYAMBI
AJA:
[1] This
is an appeal against a judgment of the High Court sitting as an
Appeal Court in terms of s 65 of the Income Tax Act [Chapter
23:06]
(hereinafter referred to as “the Act”). It concerns certain
income tax assessments made in respect of the appellant by the
respondent with regard to the years 2009, 2010 and 2011. Of the four
issues which were raised in the High Court, three were decided
against the appellant and form the subject of this appeal. They are:
“Whether
or not the appellant was entitled to claim the costs of a staff
reduction exercise in the year in which the offer was made to the
staff to take voluntary retirement; whether the appellant was
correctly held to have earned interest in respect of offshore loans
made to various customers in each of the three years of the amended
assessments; and whether the charges debited against the foreign
nostro
accounts of the appellant by the bank operating such accounts were
liable to withholding tax in terms of s 30, as read with the 17th
Schedule, of the Act.”
I
deal with each of these issues in turn.
Whether
or not the appellant was entitled to claim the costs of a staff
reduction exercise in the year in which the offer was made to the
staff to take voluntary retirement.
[2] The
parties were agreed that if the staff reduction exercise constituted
a retrenchment in terms of the Labour Act then the costs of such a
scheme would properly be written into the taxable income of the year
in which the retrenchment took place. They were also agreed that the
definition of “retrench” in section 2 of the Labour Act
was broad enough to include the exercise undertaken by the
appellant. The question which fell to be decided was whether the
exercise constituted a retrenchment in terms of the Labour Act. I
did not understand the appellant to dispute the submission made on
behalf of the respondent that the retrenchment would take effect
from the date of its approval by the Minister.
[3] The
background facts are largely common cause. The appellant, a
Commercial Bank operating in Zimbabwe, embarked on a staff reduction
exercise during the year 2009. By resolution of its Board of
directors dated the 26 November 2009, the appellant undertook “a
voluntary retrenchment exercise to reduce its staff head count by up
to two hundred and fifty-two (252) staff members.” The rationale
for the decision taken by the Board was the downturn in economic
activity which triggered a drastic fall in business volumes from
average monthly transactions of US$1.9m in 2008 to US$380 000.00 in
2009 in the face of static staffing levels in excess to capacity. All
interested staff were required to submit formal applications by
31 December 2009. The appellant reserved the right to approve
or decline such applications.
[4]
Between 3 and 31 December 2009, a total of 74 applications were
received by the appellant. However, the confirmation certificates,
wherein each applicant affirmed freely and voluntary terminating
employment, were all signed by the 74 during the period 7 to 14
January 2010. Each employee was given 3 months' notice of
termination of his employment from the date of acceptance of his
application. The gross costs of the 'voluntary retrenchment'
exercise was US$1,995,402. A further 27 staff members submitted
applications in January and February 2010, but this appeal does not
relate to them. It is confined to the exercise in respect of the
74.
[5]
In the return for the tax year ending 31 December 2009, the
appellant submitted applications in respect of each of the 74
employees to the respondent for a tax directive. It claimed a
deduction for staff retrenchment costs in terms of s15 (2) (a) of the
Act as an expenditure incurred for the purpose of trade and for
conducting its business and earning income in that year of
assessment. The respondent disallowed the deduction but included it
in the amended assessment for the 2010 tax year.
[6] The
appellant contended that the deduction ought to have been allowed in
the year 2009 which is the year in which the expenditure was
incurred. Mr de
Bourbon
submitted that the exercise was a voluntary retirement scheme to
which the provisions of s 12C and 12D of the Labour Act did not
apply. By accepting the applications of the 74 on or before 31
December 2009, the appellant had incurred an unconditional legal
obligation to make payment to the 74. Therefore, the obligation to
pay the 74 arose in December 2009 and should be deducted in the
assessment year 2009.
[7] On
behalf of the respondent (“Zimra”), Mr Magwaliba
countered that the exercise constituted a retrenchment in terms of
the Labour Act. He accepted the legal position that in terms of s
15(2)(a) of the Act, the costs of the exercise were deductible in the
year of expenditure, viz,
the year in which the expenditure is incurred
even if paid in a subsequent year. He submitted, however, that in
the instant case, the assessment was properly made in 2010 which is
the tax year in which the expenditure was incurred.
[8] At
page 6 of its judgment the court a
quo,
in arriving at its conclusion that the exercise constituted a
retrenchment in terms of the Labour Act said:
“The
onus to show on a balance of probabilities that the scheme was not a
retrenchment exercise fell on the appellant. The discharge of the
onus was complicated by the sole witness called by the appellant on
this aspect. He conceded under cross examination that the scheme
constituted a retrenchment exercise. His attempt to correct the
picture in re-examination failed to paper the cracks. His
prevarication on the point did not paint him as a credible witness in
that respect only. The documentation emanating from the appellant is
replete with reference to retrenchment exercise, retrenchment costs
and retrenchment expenses”.
[9] As
it was submitted on behalf of the respondent, the appellant itself
referred to the exercise as a retrenchment. In his heads of argument
before this Court, Mr de
Bourbon
explained those references away by describing them as
'inappropriate'. Para 2 of the appellant's heads of argument
reads:
“At
the end of November 2009, the appellant resolved to undertake what it
termed a voluntary
retrenchment exercise (record
55) ...”
And
at Para 4:
“For
the purposes of its accounts, the appellant claimed the whole costs
of the voluntary separation scheme (often
using the inappropriate term retrenchment)
as a cost of its business in the tax year ending 31 December 2009.”
(My emphasis).
[10] It
is common cause that the appellant submitted, for approval by the
Retrenchment Board, a list of the employees affected by the
exercise. Such a procedure is necessary only where employees are
being retrenched.
In four letters dated between 12 January and 2 February 2010, the
appellant was advised by the Minister of the Board's approval of
the retrenchment exercise in relation to 94 employees, including the
74, in the following terms:
“Re:
Retrenchment of [the names of the staff members]. The retrenchment
Board acknowledges receipt of correspondence referring to the
Works/Employment Council Agreement in Form LRR2.
Please proceed as per agreement.” (My underlining)
[11]
It is evident that the appellant followed the retrenchment procedure
set out in the Labour Act right down to the use of the forms. The
approvals were granted by the Board in 2010. In the light of the
above, the conclusion reached by the learned Judge that the staff
reduction exercise constituted a retrenchment in terms of the Act
was inescapable. I therefore agree with Mr Magwaliba
that the commitments made by the appellant to the employees were
conditional upon the approval of the Minister of Labour and Social
Services and that since the approvals were only granted in 2010, the
expenditure could not be deducted in the tax year ending 2009 but
was properly deducted in the tax year 2010.
Whether
the appellant was correctly held to have earned interest in respect
of offshore loans made to various customers in each of the three
years of the amended assessments.
[12]
On 6 October 2009, the appellant (sometimes referred to herein as
“the Bank”) obtained authority from the External Loans
Co-ordination Committee of the Reserve Bank of Zimbabwe (“ELCC”)
to borrow offshore funds on behalf of its clients. The letter of
approval read, in part:
“Re:
Standard Chartered Bank Pre and Post Shipment Finance Facility
USD100Million.
Please
be advised that your application for the approval of a pre and post
shipment finance facility to the tune of USD100 million has been
approved by the External Loans Co-ordination Committee (ELCC)…”
The
lender was stated to be Standard Chartered Bank PLC London and the
borrower Standard Chartered Bank Zimbabwe Limited. The approval
related to an ordinary non- tobacco pre and post shipment finance
facility in the sum of US$50 million as well as a further US$50
million for tobacco financing. The facilities expired on the 31
August 2010. However, on the 9 September 2010, the ELCC approved an
enhanced ordinary non-tobacco pre and post shipment finance facility
increasing the loan from US$50 million granted on 6 October 2009 to
US$100 million sought by the appellant from the offshore related
party at an interest rate of Libor plus 4%. The tobacco pre-and
post- shipment facility was also increased from US$50 million to
US$100 million with an interest rate of Libor plus 3% expiring on
the 31 August 2011.
[13]
During the period 2009 to 2012, the appellant extended loan
facilities to 6 onshore customers of which 3 were tobacco companies.
The remaining 3 comprised of a cotton company, a cement
manufacturing company and a manufacturing and distributing
conglomerate. In terms of each of the facility letters the appellant
stated itself to be the lender and the customer the borrower. Each
agreement specified the amounts borrowed, the period of repayment,
the provision of security to the appellant and the manner of
calculation of interest. Save for the conglomerate in respect of
which in one instance, (the facility dated 2011 for US$200 million)
the courts of England were to have jurisdiction, the courts of
Zimbabwe were to have jurisdiction to settle any dispute arising in
connection with the facility letters. In terms of the facility
letters, all amounts paid to the Bank in repayment of the facility
would be applied firstly to the payment of interest accrued and any
fees or charges due and thereafter to the reduction of the capital
amount.
One
tobacco company was required to open an Evidence Account with the
appellant into which account repayments would be made. Any balance
in that account after the repayment of the facilities would be
applied toward the reduction of “any other offshore loans made
available by the Bank on the due date of such loans”. Any residual
surplus balance in the Evidence Account would be paid to the
borrower. Interest was to be debited to the borrower's account at
a 'day convenient to the bank'.
[14]
The respondent took the view that the interest in terms of each loan
agreement had been earned by the appellant and therefore became part
of the appellant's taxable income. On this basis, the respondent
wrote back into the appellant's taxable income for the three years
under mention, the interest paid by the 6 onshore borrowers. The
appellant's objection to the assessments was disallowed by the
respondent and its appeal to the High Court was dismissed.
Submissions
on appeal
[15] It
was contended by Mr de
Bourbon,
on behalf of the appellant, that interest accruing on the loans had
been paid directly to the offshore lender, namely, Standard Chartered
Bank PLC London. Regarding the 3 tobacco companies and the cotton
company, which were in a separate category by virtue of the Exchange
Control (Tobacco Finance) Order 2004
and the Exchange Control (Cotton) Order,2008
the appellant had neither received, nor accrued the right to, any
interest and that the finding of the court a
quo
to the contrary was wrong.
Regarding
the loans to the conglomerate and to the cement company, these were
external loans paid externally and the agreements were subject to
the laws of England. The only factors linking the appellant to the
matter are the facility letters which were drawn in the name of the
appellant but even that did not establish that the appellant either
received or accrued the right to interest on these loans as all
payments were made directly to the offshore bank Standard Chartered
PLC in London.
[16] On
behalf of the respondent Mr Magwaliba
submitted that the real issue for determination was whether the
appellant had discharged the onus of establishing, on the evidence
placed before the court, that there was no causa
for the payment of interest to it by the onshore borrowers and that
such interest was in fact not earned by the appellant. That onus, he
submitted, was not discharged by the appellant. He drew the court's
attention to the unsatisfactory nature of the evidence led by the
appellant from its head of corporate banking, Mr Young, as found by
the court a
quo,
in particular, the following remarks at page 25 of the judgment:
“There
was a plethora of disquieting features in the testimony of the head
of corporate banking. He disputed that any money was paid to the
appellant by the offshore lender contrary to the stipulation in
clause 3 of the MRPA. He disputed that the appellant borrowed funds
from the offshore lender, again contrary to all the approvals he
produced that emanated from the central bank. The lender was clearly
indicated as the offshore related party and the [appellant] the
borrower and in later approvals the beneficiary as the appellant. The
unexplained discrepancy between the first facility letter and the
acceptance agreement in respect of the first tobacco company did not
engender confidence in his testimony. More importantly, the failure
to produce the acceptance agreements of all the other facility
letters save for the one in respect of the conglomerate, exhibit 7,
and rate fix documents in respect of all the facility letters
undermined his credibility. The impression left in my mind was that
the appellant was deliberately hiding information in corporate
underbrush. Similarity of all the letters save for the first two for
the first tobacco company with the ones the appellant admitted were
provided with local funds undermined the appellant's case. There
was no reference to any evidence account in these facility letters.
The choice of law clause conferred jurisdiction on the local courts.
The calculation of the computation of the interest rate in respect of
the cement manufacturer demonstrated that it was receiving onshore
finance from the appellant.
In
my view, it was simply incredible that the appellant did not have the
capacity to fund the requirements of the conglomerate. It admitted to
funding the conglomerate in the aggregate sum of US$30 million from
onshore funds. In any event it held approvals from the ELCC to on
lend funds borrowed offshore to both tobacco and seed cotton
merchants and other non-tobacco customers. I was satisfied that the
head of banking, for reasons best known to himself and the appellant
chose to mislead this court about the nature of the interest payments
that were paid by the six onshore companies”.
[17]
It is evident that the appellant's witness did not make a good
impression on the court a
quo
which found that the allegations made in his evidence contradicted
the facility letters and the ELCC approvals which were produced in
evidence. For instance, despite his insistence that Standard
Chartered Bank PLC London was the lender, this allegation was
contradicted in each facility letter wherein the appellant was
stated to be the lender and the customer the borrower. Each
agreement required interest to be paid to the appellant. In each
facility letter the appellant obtained a tax indemnity from the
borrower.
[18] The
gist of the evidence of Mr Young and the beneficiaries of the
facility letters in question was that the beneficiaries sourced
offshore funds which they borrowed from Standard Chartered Bank PLC
London (the offshore bank) and repaid with interest to the offshore
bank, the appellant acting merely as a conduit pipe for facilitating
access to the funds and for seeking Reserve Bank approval on behalf
of both the borrowers and the offshore bank. However, while their
evidence corroborated each other, it conflicted with the documentary
evidence placed by the appellant before the court purportedly in
support of its case.
[19] It
seems to me that what clearly emerges from the contents of the
facility letters and the ELCC approvals, read together, is that the
appellant borrowed money from the offshore bank for on lending to
the six onshore customers or borrowers. The six borrowers were to
make payments in terms of their agreements with the appellant. In
terms of these agreements all repayments were to be applied first to
interest and then to capital. Nothing in the facility agreements
required the borrowers to make payment to any person other than the
appellant. In the premises, Mr Young's evidence to the effect that
the repayments, inclusive of interest, were made offshore to the
offshore bank on the appellant's instruction, called for an
explanation. The explanation given by Mr Young is that the bank was
the agent of the offshore bank. But this explanation presents a
further difficulty. It is this. The Master Risk Participation
Agreement (MRPA) concluded between the appellant (as Grantor) and
the offshore bank (as Participant) and placed by the appellant
before the court as an exhibit, expressly provides to the contrary.
Clause 6.4 provides in relevant part:
“6.4
Relationship: There is, and the Participant acknowledges that
there is nothing in this Master Agreement or any Acceptance Agreement
or any other agreement or understanding between the parties in
relation to a participation which:
-
Constitutes
the Grantor an agent, fiduciary or trustee for the Participant;”
[20] Granted,
the MRPA further provides that the acceptance agreement would prevail
over it. However, the acceptance agreement was not produced by the
appellant and it was not part of the appellant's case that the
acceptance agreement contained instructions requiring the appellant
to ensure that payments were made offshore. Suffice it to say that
the evidence presented by the appellant established no justification
for payments in respect of the loans to be made offshore. The
second issue is, therefore, determined in favour of the respondent.
Whether
the charges debited against the foreign nostro
accounts of the appellant by the bank operating such accounts were
liable to withholding tax in terms of s 30, as read with the 17th
Schedule, of the Income Tax Act [Chapter
23:06].
[21]
Section 30 of the Income Tax Act provides:
“30
Non-residents' tax on fees
There
shall be charged, levied and collected throughout Zimbabwe for the
benefit of the Consolidated Revenue Fund a non-residents' tax on
fees in accordance with the provisions of the 17th
Schedule at the rate of tax fixed from time to time in the charging
Act”.
The
17th
Schedule to the Act provides in paragraph 1:
“(1)…
“fees”
means any amount from a source within Zimbabwe payable in respect of
any services of a technical, managerial, administrative or
consultative nature, but does not include any such amount payable in
respect of—
(2)
For the purposes of this Schedule—
-
fees
shall be deemed to be from a source within Zimbabwe if the payer is
a person who or partnership which is ordinarily resident in
Zimbabwe;”
[22] The
appellant holds nostro
accounts with certain foreign banks. The appellant told the court
that transactions in these accounts were conducted in the following
manner. A customer would instruct the appellant to make payment to a
third party. The appellant generated a telegraphic transfer through
SWIFT (a safe international payment processing platform used by all
banks to transfer money from one bank to another), to transfer the
funds from its relevant nostro
account to the third party's designated bank account. In line
with international banking practice, SWIFT automatically charged a
fixed rate against the nostro
account based on the number of clearing transactions that operated
through the system. SWIFT charged the related account directly from
that transaction by debiting the account without raising an invoice.
The appellant's witness Mr Young equated the nostro
bank charges with fees paid by customers of local banks for services
rendered and charges levied for maintaining an account with the
local bank. The appellant was charged fees for particular
transactions that went through the nostro
accounts. He conceded that the debits to the nostro
accounts represented money earned by the foreign bank.
[23]
The respondent took the view that the nostro
charges, whether stated as service charges or transaction related
charges, are subject to non-resident tax on fees as they fall under
the definition of 'fees' as defined in s 30 as read with the
17th
Schedule to the Act. The court a
quo
agreed.
[24] Mr
de
Bourbon
submitted in his heads of argument that the nostro
charges were not liable to non-resident tax for three reasons.
-
There
had to be a payer who made a physical payment from which the tax
could be withheld. Since the appellant was not a payer the schedule
did not apply.
-
The
payment had to be from a source within Zimbabwe and no payment had
been
made from Zimbabwe, the debits having been made by the foreign bank
to
the nostro
accounts.
-
The
fees had to be in respect of services of a technical, managerial or
administrative nature. In this case the fees did not fall within the
above description and the section did not apply.
Reliance
was placed on the judgment of CHEDA J in Sunfresh
Enterprises (Pvt) Ltd t/a Bulembi Safaris v Zimbabwe Revenue
Authority
in which it was held that payment of a commission outside Zimbabwe
by a foreign client to a foreign marketing agent of a local safari
operator did not constitute payment of fees in terms of para 1(1) of
the 17th
Schedule of the Income Tax Act.
[25] On
behalf of the respondent
it was submitted as follows. The foreign banks earned certain fees
for transactions undertaken on the nostro
accounts held by them on behalf of the appellant. Those fees were
paid by the appellant. Whichever method was employed by the
appellant in making payment, money moved from the account held in the
name of the appellant to that of the foreign or non-resident and the
appellant is consequently regarded as having paid or extinguished
the debt. By virtue of section 30 of the Act, the appellant was
obliged, as payer, to withhold tax on the fees and charges.
It
was further submitted that in so far as the Sunfresh
case determined that the originating cause of the fees paid to the
non-resident was not Zimbabwe, that case was wrongly decided. The
respondent referred this Court to the decision of the High Court in
Zimasco
Ltd v Commissioner-General of the Zimbabwe Revenue Authority
which it urged us to accept as the correct exposition of the law.
In
the
Zimasco
case the fees were for service rendered by a foreign agent to a local
safari operator. The High Court held that the originating cause of
the fees was in Zimbabwe and that withholding tax was payable by the
local safari operator. At page 3 of the judgment the learned Judge
said the following:
“the
appellant disputes that the source of the commission is from within
Zimbabwe and seeks to rely for that proposition on the decision in
Sunfresh
Enterprises (Pvt) Ltd t/a Bulembi Safaris v Zimra 2004
(1)ZLR 506 (H). In that case Cheda J held inter alia that payment of
a commission by a foreign client to a foreign marketing agent of a
local safari operator outside the country did not under para 1(1) of
the 17th
Schedule of the Income Tax Act constitute payment of fees from within
Zimbabwe even though the originating cause was the safari operation
in Zimbabwe. In my view, however, the facts in this case are
distinguishable from those in the Sunfresh
decision. In casu, the appellant clearly qualifies as the “payer”,
i.e., “any person who or partnership which pays or
is responsible
for the payment of fees…” and is ordinarily resident in Zimbabwe,
whereas in Sunfresh
the payment of fees or commission was ostensibly done by foreign
clients to a foreign marketing agent.”
On
the interpretation of 'fees' as set out in the 17th
Schedule, the Court ruled:
“The
respondent submitted that the words “any amount” above give a
broad definition to the term fees and contended that money paid as
commission could be regarded as “any amount” for the purposes of
s 1(1) of the 17th
Schedule. In my view, the respondent was correct in its
interpretation of the words “any amount” to include commission.
From the above definition, it is clear that the legislature intended
“fees” to cover any sum of money, by whatever name called, paid
for services rendered of a technical, managerial, administrative or
consultative nature save for those that are expressly excluded”.
[27]
I respectfully associate myself with the views quoted above. As in
the Zimasco
case, the originating cause of the fees in casu,
is entirely in Zimbabwe. The fees and charges in issue are raised by
the banks holding the nostro
accounts
in respect of transactions undertaken by them on behalf of the
appellant which issues an instruction on behalf of its clients in
Zimbabwe and pays on behalf of those clients using its nostro
accounts. These transactions clearly amount to services of a
managerial or administrative nature within the meaning of para 1(1)
of the 17th
Schedule.
Regarding
the Sunfresh
case
it would appear that the facts are distinguishable from those in the
present matter. However, in so far as it conflicts with the Zimasco
decision on the issues discussed above I would consider the Zimasco
decision to be the correct exposition of the law.
[28]
Accordingly, I agree with Mr Magwaliba
that all three requirements mentioned by Mr de
Bourbon
are satisfied. It follows that the appellant, as payer of the fees,
was obliged to withhold the non-resident tax and remit such tax to
the Commissioner within 30days.
Disposition
[29]
The appeal falls to be dismissed on all three grounds.
On
the question of costs, it was agreed by the parties that there should
be no order as to costs.
It
is accordingly ordered as follows:
The
appeal is dismissed.
There
shall be no order as to costs.
GUVAVA
JA: I
agree
MAVANGIRA
JA: I
agree
Gill
Godlonton and Gerrans,
appellant's legal practitioners
1.
[Chapter
28:01]
2.
Kadir & Sons (Pvt) Ltd v Panganai and Anor 1996 (1) ZLR 598(S)
@604C
3.
Caltex Oil (SA) Ltd v Secretary for Inland Revenue 1975 (1) SA 665
(A) at 674
4.
Labour Act s12C
5.
S.I 161/2004 as amended by SI 229/2004
6.
S.I 150/2008
7.
2004 (1) ZLR 506 (H)
8.
HH 149-16
