Fiscal
Appeal
HLATSHWAYO
J:
At
the hearing of this matter I dismissed the appeal with costs and
indicated that the reasons would follow. These are they.
The
facts of this case are largely common cause.
On
23 May 1996, a firm of accountants, Messrs Deloitte and Touche
(hereinafter “Deloitte and Touche”) wrote the following letter to
the then Commissioner of Taxes (COT):
“Dear
Sir,
BONUS
SHARES (NINTH AND FIFTEENTH SCHEDULES TO THE INCOME TAX ACT)
The
above term is not defined in the statute.
We
would be grateful if you would advise us whether it is accepted that
where a company, in declaring a dividend, allows its shareholders a
choice of accepting cash or shares, those who opt for the latter
receive “bonus shares”.
Yours
faithfully
D
and T”
The
COT responded on 8 July 1996 as follows:
“Dear
Sirs
BONUS
SHARES (NINTH AND FIFTEENTH SCHEDULES TO THE INCOME TAX ACT [CHAPTER
181])
You
letter dated 23rd
May, 1996 reference RHMM/LWH/spw/12080 refers.
Please
be advised that where a company declares a dividend which is
immediately satisfied by issue of shares of an identical amount, no
dividend is paid by the company and such shares constitute bonus
shares.
Since
there is no distribution of profits by the company and no property
passed from the company to shareholders, what company does is to
capitalise a portion of its profits. This does not constitute the
payment of a dividend for income tax purposes. The fact that the
company allows its shareholders an option of accepting cash or shares
is not material.
Shares
received in lieu of dividend are “bonus shares”
Yours
faithfully
T.I
NCUBE (MRS)
For:
ACTING COMMISSIONER OF TAXES”
The
appellant apparently acting on the strength of the above letter did
not pay withholding tax on scrip dividends issued subsequent to that
letter.
On
24 November 2006, the Commissioner-General (COG) of the Zimbabwe
Revenue Authority, who is the successor to the COT, wrote to the
appellant requesting it to deduct and account for withholding tax for
three years prior to that date on scrip dividends issued.
The
appellant wrote back on 5 December 2006 objecting and averred that in
1996 the COT had given a ruling upon the strength of which the
appellant had acted. Such ruling, the appellant alleges, is binding
on the current respondent.
The
respondent disallowed the objection on 30 January 2007 and maintained
that the withholding tax was due and payable chiefly because a scrip
dividend was a dividend and not bonus shares.
The
appellant was aggrieved by the decision and filed the present appeal.
The
appellant's case is that the letter by the COT amounts to an
advance tax ruling which binds the respondent and suggests that the
benefits which are derived from the 1996 letter to Deloitte and
Touche accrue to it as well. The appellant also avers that a scrip
dividend is equivalent to bonus shares which type of shares are not
subject to income tax in terms of the 9th
and 15th
Schedules to the Income Tax Act [Chapter
23:06].
It is also appellant's case that a scrip dividend is incorporeal
property in lieu of cash. Appellant further contends that it would
not be proper for the respondent to demand arrear taxes when it acted
in line with an understanding with the COT.
The
respondent's main line of defence is that the COT letter to
Deloitte and Touche in 1996 did not amount to a tax ruling. Rather,
respondent argues, it was just a confirmation of a position as
perceived by Deloitte and Touche. The respondent also avers that if
any benefit is to be derived from the said letter, such benefit can
only accrue to Deloitte and Touche and not to the present appellant
because it was not privy to the communication or transaction between
Deloitte and Touche and the COT, the respondent's predecessor.
Regarding
the standpoint taken by the appellant that the letter from the COT
constitutes a tax ruling, one needs to understand the nature and
import of an advance tax ruling which is defined in 4th
Schedule to the Revenue Authority Act as “a written statement in
the form of a binding general ruling, binding private ruling and
binding class ruling issued by the Commissioner-General regarding the
interpretation or application of the relevant Act”.
The
procedural requirements for obtaining such a ruling are then spelt
out as follows:
“2.
Application for advance tax ruling
(1)
Subject to the minimum requirements set forth in subparagraph (2), an
application for an advance tax ruling must be made in such manner and
in such form as the Commissioner-General may prescribe, and be
accompanied by the fee charged in terms of paragraph 18 of the Second
Schedule, if any.
(2)
An application must state the following minimum information —
(a)
the applicant's name, postal address and telephone number; and
(b)
the name, postal address and telephone number of the applicant's
representative, if any; and
(c)
a complete description of the proposed transaction in respect of
which the ruling is sought; and
(d)
a complete description of the impact the proposed transaction may
have upon the tax liability of the applicant or, where relevant, any
connected person in relation to the applicant, including any and all
relevant information regarding the financial or tax implications of
the proposed transaction; and
(e)
a complete description of any transactions entered into by the
applicant prior to submitting the application or that may be taken
after the completion of the proposed transaction which may have a
bearing on the tax consequences of the proposed transaction or may be
considered to be part of a series of transactions involving the
proposed transaction; and
(f)
the proposed ruling being sought; and
(g)
a citation of the relevant statutory provisions or issues; and
(h)
the reasons why the applicant believes that the proposed ruling
should be made; and
(i)
a statement of the applicant's interpretation of the relevant
statutory provisions or issues, as well as ananalysis of any relevant
authorities either considered by the applicant or of which the
applicant is aware, whether those authorities support or are contrary
to the proposed ruling being sought; and
(j)
a statement to the best of the applicant's knowledge that the same
or substantially the same or substantially similar issue upon which a
ruling is sought is not the subject of an audit, examination,
investigation, ruling, application, objection and appeal, or other
proceeding currently before the Commissioner-General or the courts
involving the applicant or a connected person in relation to the
applicant; and
(k)
a draft version of the binding private ruling or binding class ruling
to be issued; and
(l)
a description of the information that the applicant believes should
be deleted from the final ruling before the publication of the ruling
in order to protect the applicant's confidentiality; and
(m)
the applicant's consent to the publication of the ruling by the
Commissioner-General.
(3)
In addition to the minimum information required by subparagraph (2),
an application for a binding class ruling must also state the
following minimum information —
(a)
a description of the class members concerned; and
(b)
the impact the proposed transaction may have upon the liability of
the class members or, where relevant, any connected person in
relation to the applicant or any class member.
(4)
The Commissioner-General may request additional information from an
applicant at any time.”
The
wording of the above section is peremptory and it is patently
conjunctive. All those requirements must be present for any enquiry
to be classified as an application for a tax ruling. Once the
enquiry made is lacking in one or more material respects, it cannot
be said to be an application for a tax ruling and in the absence of
such application, any correspondence from the taxing authority cannot
be construed as a tax ruling. One cannot obtain one without the
other. The letter by Deloitte and Touche to the respondent's
predecessor falls woefully short of the requirements detailed above.
In fact, the enquiry remains just that and not an application for a
tax ruling because it does not comply with para(s) (e), (f), (g),
(h), (i), (j), (k), (l) and (m) above.
Even
if the letter by Deloitte and Touche could have qualified as an
advance tax ruling in the absence of the above noted statutory
provisions, the issue now is whether the 'tax ruling' is binding
on the current respondent.
Section
5(3) of the 4th
Schedule to the Revenue Authority Act provides as follows:
“(3)
Any written statement issued by the Commissioner-General interpreting
or applying the Income Tax Act [Chapter
23:06]
prior to the 1st January 2007, or any other relevant Act prior to the
1st January 2009, is to be treated as and have the effect of a
non-binding private opinion, unless the Commissioner-General
prescribes otherwise in writing.”
The
alleged tax ruling was made in 1996 and it related to the
interpretation of schedules 9 and 15 to the Income Tax Act. The
letter written by the COT, therefore, is by operation of law a
non-binding private opinion, as the COG of the respondent has not
directed otherwise.
A
non-binding private opinion is defined in the following words in
section 1 of the 4th
Schedule to the Revenue Authority Act:
“'non-binding
private opinion'
means a written statement issued by the Commissioner General in
response to an enquiry by a person in order to provide the person
with informal guidance in respect of the tax treatment of a
particular set of facts and circumstances or transaction, but which
does not have a binding effect”.
Further,
the Revenue Act 4th
Schedule makes it clear in section 5(2) that a non binding private
opinion may not be cited in any proceedings before the COG or the
courts “other than a proceeding involving the person to whom a
non-binding private opinion was issued”.
The
Deloitte and Touche inquiry was not made in a representative
capacity, and hence only the accounting firm may rely on it and not
the appellant.
Where
a ruling is intended to benefit a certain class of persons, in terms
of section 2(3) of the 4th
Schedule to the Revenue Authority Act, a description of the class
members concerned must be made by the applicant.
None
was made in this case.
The
appellant's attention was fully drawn to the above self-evident
statutory provisions, and its insistence on its position on the point
can only be regarded as having been frivolous, which frivolity,
extending as it does to the rest of the appellant's submissions,
inevitably has to be visited by an appropriate order of costs.
The
respondent has taken the position that a scrip dividend is not the
same as bonus shares and for that reason is not exempt from tax in
terms of the 9th
and 15th
Schedules to the Income Tax Act.
In
terms of sections 26 and 28 of the Income Tax Act, shareholders are
liable to pay tax on their dividends. The company distributing such
dividends is at law required to withhold such tax when it distributes
the dividends and remit the same to the respondent. See
sections 2(1) of both the 9th
and 15th
Schedules to the Income tax Act.
Dividends
for the purposes of shareholders' taxes are defined in terms of the
9th
and 15th
Schedules to the Income Tax Act as follows:
“'dividend'
means any amount which is distributed by a company to its
shareholders….”
The
most important principle in relation to this emanates from the
reading of the section itself. The wording of the letter from Messrs
Deloitte and Touche to the Commissioner of Taxes becomes relevant. It
speaks to the state of the transaction involved. It says in part
'….where
a company, in declaring a dividend, allows…'
The
very act of declaring a dividend is distribution of an amount to the
shareholders.
At
this stage, before any further considerations are made, the amount so
declared is a dividend and subject to the withholding tax.
The
fact that the shareholders are then allowed an election after the
declaration of the dividend matters not. By then, taxes would already
have accrued by operation of law.
The
act of declaring a dividend is not linked to the choice the
shareholders are given in whether to accept cash or take a scrip
dividend. The former precedes the latter. At the point the former is
declared, tax is chargeable. Therefore, as at the time a dividend is
declared, the appellant is obliged to withhold tax for onward
transmission to the respondent. What happens to the dividend after
that stage matters not for purposes of taxation.
This
position is buttressed by section 1(2) under both the 9th
and 15th
Schedules to the Income Tax Act. The sections are similar and they
provide for the following:
“A
dividend shall be deemed to be distributed when it is paid to the
shareholder, credited to his account or so dealt with that he becomes
entitled to it, whichever occurs first”.
The
question whether the appellant capitalised its profits can only be
determined by having due regard to the circumstances surrounding the
transaction. This position was succinctly put forward by Benjamin J
in Wilson
v
Commissioner for Inland Revenue
1926
CPD 63 70 in the following words:
“From
a consideration of the judgment in that case it appears the test to
be applied is what was the intention of the company dealing with the
matter, did the company intend that the sum dealt with should become
income or capital. Thus Innes C.J., in discussing the case of Bouch
v Sproule
(12 AC 385) said (at p.357):-
'It
was a dispute as to whether the tenant for life or the remainder man
was entitled to a bonus dividend applied in part payment of certain
bonus shares. That depended upon whether the bonus was income passing
to the tenant for life under the will or was an accretion of capital
enuring to the ultimate benefit of the remainder man. So that the
point which lies at the root of the present appeal fell to be
decided: The facts were that the directors distributed certain
accumulated profits (which had been temporarily capitalized) as a
bonus dividend and allocated the new shares (partly paid up) to each
shareholder, applying the bonus dividend in part payment of the new
shares. Under these circumstances it was held.... that the company
did not pay or intend to pay any sum as dividend, but intended to
do, and did, appreciate the undivided profits as an increase of the
capital stock; the bonus dividend was therefore capital of the estate
and the life tenant was not entitled to it or the shares.'
Again,
in discussing the case of the Commissioner for Inland Revenue
v
Blott
(35 T.L.R 687, 36 T.L.R. 575, 125 L.T 4970 he said (at p. 358):
'The
principle of Bouch
v Sproule
was applied - namely that where the company has the power of
capitalizing or distributing profits and decided to capitalize them,
then the nature issued in respect of such profits was determined by
the company's intention; and it was held that the procedure
followed did not alter the real nature of the transaction.'
Again,
a little lower down in the judgment he said (at p. 361):
'The
company ought in the words of Lord HALDANE to be 'dominant on the
question whether the money in question was to be income or capital
for all purposes.'”
It
immediately becomes clear that for the shares to be considered bonus
shares, it must have been a capitalisation of the undistributed
profits at the instance of the company.
Once
a dividend is paid out and the shareholder is given the option to use
such cash dividend to buy more shares, such shares so bought are not
bonus shares. This is no more than the shareholder electing to use
his dividend to purchase more equity in a company.
The
letter by Deloitte and Touche is clear in its tenor.
The
choice is given to the shareholder whether to take the dividend in
cash or in shares. There is nothing which stops the company from
distributing the dividends in cash. In the same vein, there is
nothing which would stop a shareholder from accepting some of the
dividend in cash and the other part in shares. The intention of the
company is paramount here; it was to distribute dividends to its
members. It then gave the members a choice of accepting either cash
or shares. The scrip dividend in this case does not cease to be a
dividend. It is a dividend dealt in a particular way by the
shareholder and not the company and it does not lose its status as a
dividend. The scrip dividend in these circumstances is a dividend and
not 'bonus shares.'
The
submission by the Appellant that the 'the
company's accumulated profits have, as a matter of accounting
practice, therefore been capitalised and thus the shareholder has
received nothing out of the assets of the company for his separate
use and benefit'
cannot be correct.
The
election to receive shares in lieu of a cash dividend in itself is a
purchase of shares.
The
choice given to the shareholder is that which shows that the profits
have been distributed and the shareholder has elected to use his dues
to buy more equity. Since a shareholder who accepts the divided in
cash is liable to pay tax, the fact that another has elected to deal
with their dividend in a different manner does not make the dividend
so received and utilised any less a dividend. The election to receive
shares is a purchase of shares and the shareholder would have
received something out of the assets of the company for his separate
use and benefit. By distributing the dividend in the first place, the
amount representing that dividend would have ceased to be part of the
company's assets. The mere declaration of a dividend payable in one
manner or the other means that such dividend ceases to be part of the
company's assets and can be used by the shareholder in any manner
he or she pleases.
On
this premise, the contents of the letter by the COT to Deloitte and
Touche do not capture the correct position of the law.
Equally
untenable is the argument that a scrip dividend is not a dividend in
that it is not an 'amount distributed by a company to its
shareholder.'
The
fact of the matter is that the election only arises after the
dividend is declared, the default position is that the dividend will
be paid out in cash, an amount. When the shareholder elects to have
shares instead, the shareholder would have disposed of his cash
dividend and bought shares with it. The cash dividend which finances
the purchase of shares in an 'amount.' The scrip dividend in that
regard is also an amount.
It
is not in doubt that after the appellant declared dividends, it
invited its shareholders to decide whether to accept cash for the
dividends or accept shares in lieu of cash. The acceptance of shares
in
lieu
of cash simply means that the shareholders would have used their
dividends to buy more shares in the appellant. The acceptance of
shares in lieu of cash is no more than an instruction by the
shareholder that his dividend ought to be used to purchase shares.
This is totally independent from the declaration of the dividend. The
declaration of the dividend is the act of the company and the
acceptance of a scrip dividend is the act of a shareholder after the
dividend has been declared.
Now,
'bonus shares' are shares which are given out by the company to
its shareholders on a pro-rated basis and they are paid for from the
company's undistributed reserve profits.
The
intentions of the appellant are clear from the letter.
There
was no scheme of the capitalisation of capital going on. The
shareholders were given an election which they duly exercised. This
is distinctly different from capitalisation of undistributed profits.
The
moment a company declares a dividend, and issues it out, the profits
are distributed in the form of cash. The question of bonus shares
does not arise as the company by declaring a cash dividend would have
distributed the profits to its member. The question of bonus shares,
which come about where a company does not distribute profits in cash
and gives the members more shares in line with their shareholding in
the company, does not arise in this case because the profits were
distributed to the shareholder in cash as dividends. 'Bonus shares'
are fully paid up using the company's reserve undistributed
profits. The declaration of a dividend is in its own a
distribution of profit. As such, the question of bonus shares cannot
arise where such shares are paid for by proceeds from a dividend. In
other words, a scrip dividend is not the same as a bonus share.
The
Commissioner of Taxes was clearly wrong in saying that in a script
dividend situation, there is no distribution of profits and no
property is passed from the company to the shareholders.
In
a scrip dividend scenario, it is the individual shareholder who
invests his dividend by purchasing more shares. In a bonus share
arrangement, it is the company which pays for shares from the
undistributed reserve profits and distribute the same to the members
on a pro-rated basis. Both of these schemes result in shares for the
members of a company but a scrip dividend is shareholder driven and a
'bonus share' scheme is company driven. As such, the principle
relating to the two ought not to be conflated.
Perhaps
the most important point to note is that where a dividend is
declared, the shareholder becomes entitled to it and it attracts tax
as at that point and the choice to take a scrip dividend can only be
made after such tax is due by operation of law.
Now,
regarding the retrospective effect of the COG's measures, the
revenue authority is not entitled at law to give anyone unlawful tax
breaks and prejudice the fiscus.
Where
the revenue authority has made an error, it is allowed to rectify it,
even retrospectively. The
appellant relies on Commissioner
of Taxes v
Astra Holdings (Pvt) Ltd
2003 (1) ZLR 417 (S) for the proposition that the taxing authority is
required at law to act fairly towards both the taxpayer and the
fiscus.
In
this light, the allegation is that the appellant has acted on the
strength of the COT's ruling and requiring it to pay withholding
tax going three years back would be unfair.
However,
as a matter of law the respondent is not precluded from assessing a
tax legally due only because the taxpayer has relied upon the
respondent's predecessor's prior mistaken view of the law. In
Dixon
v
United
States
381 U.S. 68 (1965), it was said in part:
“Commissioner
is empowered retroactively to correct the mistakes of law in the
application of the tax laws to particular transactions. He may do so
even where a taxpayer may have relied to his detriment on the
Commissioner's mistake…. This principle is no more than a
reflection of the fact that Congress, not the Commissioner,
prescribes tax law”.
The
argument by the appellant that the decision to have it pay
withholding tax for the three prior years is unlawful is untenable.
The
point here is that the appellant cannot require the respondent to
continue acting unlawfully in order that its actions be fair. The
main duty on the respondent is to act lawfully and in demanding the
withholding tax, it acted lawfully. There is no question of the
respondent acting unfairly when it acts in accordance with the law,
in other words lawfully. Implicit in lawfulness is fairness.
A
similar principle can be derived from Tregers
Industries (Private) Limited v
Commissioner
General of the Zimbabwe Revenue Authority
2006 (2) ZLR 62 (H) wherein Garwe JP (as he then was) said:
“The
applicant argued that the respondent is “estopped” by the actions
of his subordinates from denying that the applicant's
interpretation of section of the Act is correct.
I
do not accept this submission. What the applicant is saying is that
irrespective of the correct interpretation, the fact that the
respondent's employees accepted that the goods in question were
zero rated estops the respondent from arguing to the contrary. As a
matter of law that cannot be correct. If an interpretation of the law
is not correct, then that interpretation is not correct. The fact
that respondent's employees may not have looked into the matter
more carefully cannot estop the respondent from arguing that such
interpretation is not correct”.
The
respondent cannot be estopped from acting lawfully.
What
is apparent is that the appellant cannot seek to enforce an unlawful
position on the basis that it would be unfair on it should the
respondent revert to acting lawfully.
Sight
should not be lost of the fact that tax law is strict liability law.
The fact that the respondent's predecessor made a mistake upon
which it relied does not save the appellant. It would be still
required to remit all taxes as is required at law.
It
is for these reasons that I dismissed the appeal with costs.
Gill,
Godlonton and Gerrans,
appellant's legal practitioners
Sinyoro
and Partners,
respondent's legal practitioners
