The answer sought in this appeal is whether, the appellant, a foreign registered company is liable to pay value added tax in Zimbabwe.
The appellant disputed liability for value added tax (VAT) arising from the purported importation of goods into and the carrying on of trade in Zimbabwe and appealed against a contrary determination of the respondent.
Introduction
The appellant is an International Business Company incorporated on 19 May 2005 in the British Virgin Islands in Guernsey in the Channel Islands but is not permitted to trade in that jurisdiction. The respondent is a body corporate responsible for the collection, amongst other imposts, of value added tax in Zimbabwe.
The Facts
The original intention of the appellant in Zimbabwe, prior to 1992, was to invest in property and participate in the construction of the Chitungwiza road…,.
Instead, the appellant became a supplier of basic commodities to local companies that included the WG (hereinafter referred to as the holding company).
It concluded an agency agreement with D & T, a subsidiary of the holding company, in 1992.
By 1999, it was supplying basic commodities under a US$10 million line of credit registered with the Reserve Bank of Zimbabwe to the holding company and other local customers…,.
On 1 October 2007, the Governor of the Reserve Bank of Zimbabwe unveiled the Basic Commodities Supply Side Intervention, BACOSSI, facility designed to end the chronic shortages of basic commodities in Zimbabwe…,.
The facility commenced in May 2008 and continued until the introduction of the multi-currency regime on 29 January 2009.
In May 2008, officials of the Reserve Bank of Zimbabwe (RBZ) amongst whom was the Governor and the Senior Division Chief Strategic Planning and Special Projects (SDC) visited the warehouse of D & T in Chitungwiza. The RBZ was referred to the appellant by D & T.
The appellant and the Reserve Bank of Zimbabwe (RBZ) commenced negotiations which culminated in the purchase of the non-Bacossi basic commodities that were in the D & T warehouse valued at US$7,987,207=54. The two parties also concluded an agreement in which the appellant supplied basic commodities to the RBZ, in Zimbabwe, the bacossi goods, valued at US$11,698,174 between July and September 2008.
The Baccossi Agreement was reduced to writing…, but was not signed by the parties apparently because the appellant was unhappy with the preamble to the agreement.
A verbal agreement, purportedly concluded between the Reserve Bank of Zimbabwe (RBZ), represented by the Governor, and the appellant, represented by a named Ukrainian lady, governed the supply relationship between them.
The respondent conducted a tax investigation of the purchases, in foreign currency, of the Reserve Bank of Zimbabwe from the appellant for the period between May 2006 and September 2008. The investigations revealed non-payment of value added tax (VAT) on the supplies made in that period…,.
They also revealed that D & T was paid commission, in terms of an agreement between them, on the invoiced supplies from 1 January 2006 to 31 January 2009.
On 9 February 2009…, the respondent made written demand on the Finance Director of the holding company, who was also the public officer of D & T, for the payment of value added tax (VAT) on the invoiced income paid to the appellant during that period.
On 13 February, a meeting was held at the Reserve Bank of Zimbabwe (RBZ) between the Senior Division Chief Strategic Planning and Special Projects, the investigators of the respondent, and the liaison officer of the appellant, who was also the Sales and Marketing Director of the holding company of D & T, the appellant's agent.
On 12 March, the respondent appointed the CEO of the holding company of D & T as the public officer for the appellant in terms of section 61 of the Taxes Act on the ground that his company was closely linked and connected to the appellant's local trading activities.
The CEO objected to the appointment on 17 and 20 March 2009 on the ground, that, he was not an agent, employee, director, or signatory to the bank account of the appellant; but, the respondent did not relent in its demand.
On 20 March 2009, at the respondent's offices, a meeting was held between three representatives of the respondent and two tax advisors from a local firm of accountants.
In reply to counsel for the respondent's oral submissions, counsel for the appellant disputed that the appellant was represented at the meeting and suggested that the tax accountants represented D & T.
The purpose of the meeting was to get the respondent's version on the value added tax (VAT) issues pertaining to both the appellant and D & T.
The VAT head from the tax advisors provided the respondent with two letters of his firm's mandate to represent the client.
It is inconceivable that he would not have received full instructions from his client, as he indicated, were that client D & T.
I am satisfied, from the heading of the minutes minuted by the tax advisors, that, they represented the appellant and not D & T.
In any event, the briefing given him by the respondent related to the alleged activities of the appellant, including the payment of 0.1% commission on the gross sales of the appellant in Zimbabwe to D & T.
On 30 March, the public officer of D & T disputed the legality of the appointment of his CEO as a public officer for the appellant. He, nonetheless, compiled and delivered the monthly breakdowns of the income received by D & T during the period from January 2006 to 31 January 2009 requested in the letter of 9 February.
On 25 March 2015…, the appellant wrote to the respondent objecting to the appointment of the public officer outside its registered place of business in Guernsey and to the tax liability claim.
The basis of the objection was that it did not maintain offices nor employ staff nor was it a value added tax (VAT) registered operator obligated to charge VAT on goods purchased from its foreign based operations and supplied to clients in Zimbabwe.
The relevant part of the letter reads:
“We object to your claim that we have a tax liability in Zimbabwe as we do not have a self-established presence in the country. Our involvement with Zimbabwe clients, and the West Group, is limited to the supply of our stock to agents who operate on a commission basis to store and handle our stock that we hold in Zimbabwe, for which we have always operated with Reserve Bank Approval.”
The objection by the appellant, of 25 March, and the further objection of its compulsorily appointed public officer, were dismissed by the respondent on 31 March 2009.
On 1 April, the respondent proceeded to appoint the holding company, and its subsidiaries, as an agent for the collection of value added tax (VAT) due from the appellant, purportedly in terms of section 48 of the Value Added Tax Act…,.
On 3 April 2009, the appellant, through its authorised signatories, wrote to the CEO of the holding company appointed as its public officer and copied the letter to the head of investigations of the respondent, and the Senior Division Chief Strategic Planning and Special Projects on the tax enquiry conducted by the respondent disputing tax liability on two grounds:
(i) The first was that it was not the importer; and
(ii) The second was that the sale to the importer, the Reserve Bank of Zimbabwe (RBZ), took place outside Zimbabwe.
I believe exhibit 2 may have been written by the compulsorily appointed public officer for the appellant between May 2009 and 17 June 2009, and not on 15 April 2008, as it is highly unlikely that the author possessed prescient powers to predict the events that were to take place between January and May 2009.
It was addressed to the prospective external legal practitioner of the Reserve Bank of Zimbabwe (RBZ).
The writer summarised the history of the relationship between the appellant and the holding company and one of its subsidiaries, D & T, before and during the bacossi period. He also dealt with the relationship between these parties and the Reserve Bank of Zimbabwe and exonerated the appellant from value added tax (VAT) liability.
In response, on 17 June 2009, the external legal practitioner of the Reserve Bank of Zimbabwe (RBZ) wrote a six page legal opinion to the Senior Division Chief on the US$4m tax dispute….,.
The legal practitioner in question had apparently held a meeting, on 21 April, with the Senior Division Chief of the central bank and two representatives of the holding company. He believed, that, his mandate to protect the interests of the Reserve Bank of Zimbabwe (RBZ) coincided with the interests of the appellant. He had engaged the lawyers of record of the appellant.
He identified the common problem to be the demand for value added tax (VAT) on the appellant in respect of the supply of Bacossi goods and its agent on commission received from the appellant.
Apparently, the appellant declined to supply him with information on its business profile, shareholders and directors, summary of significant business activities in the 12 months to the date of the letter and on the nature and extent of its business activities in Zimbabwe, its certificate of registration, any Board resolutions on Bacossi transactions, and its local call account.
In the absence of this information, he could not state, with certainty, that the appellant was not conducting local trading activities nor exclude it from value added tax (VAT) liability other than on the mere say so of its agent, D & T.
He advised that the Reserve Bank of Zimbabwe (RBZ) was liable for the payment of value added tax (VAT), in local currency, on the basis of the bills of entry that identified it as the importer.
He urged the Reserve Bank of Zimbabwe (RBZ), for strategic reasons that he set out in the opinion, to tender the duty in local currency hoping, that, if the respondent accepted the payment, the appellant would automatically be exempted from liability.
On 1 July 2009, the Senior Division Chief wrote to the appellant's legal practitioner of record. She confirmed the importation of Bacossi goods and the acceptance of liability for value added tax (VAT) by the Reserve Bank of Zimbabwe (RBZ)….,.
On 20 August 2009, three members of the respondent investigations team held a meeting with four RBZ employees at the RBZ amongst whom was the Senior Division Chief (SDC).
In that meeting, the Reserve Bank of Zimbabwe (RBZ) repudiated the concession made by the Senior Division Chief (SDC) and laid liability at the doorstep of the appellant.
However, in view of the national importance of the project and the profile of the major beneficiaries, the Reserve Bank of Zimbabwe (RBZ) resolved to seek exemption for payment of value added tax (VAT) on these goods from the Ministry of Finance by 25 August 2009.
A further meeting was held on 7 October 2009, in the Governor's boardroom at the Central Bank, between the Reserve Bank and the holding company, to discuss the appellant/RBZ value added tax (VAT) liability of US$3.2m….,.
In attendance were the Governor, his advisor, bank secretary, and a strategic planning executive for the Reserve Bank of Zimbabwe (RBZ) and the Sales and Marketing Director, indicated in exhibit 2 as the liaison officer of the appellant, and another officer of the holding company.
Notwithstanding that the respondent was not claiming value added tax (VAT) from the central bank, the Governor prevaricated on whether the Reserve Bank of Zimbabwe (RBZ) accepted liability or not. In one vein he accused the Senior Division Chief (SDC) of erroneously accepting liability for the central bank without his express authority, and, in the other, he was prepared to pay the VAT as long as it was charged in Zimbabwe dollars.
The Sales and Marketing Director for the holding company declined to answer for the appellant insisting that D & T acted as liaison for the appellant as the foreign supplier and local buyers.
The underlying suggestion from her contribution was that the appellant was not liable for value added tax (VAT).
In addition, the concluding remarks of the meeting suggested the existence of minutes of meetings between the Reserve Bank of Zimbabwe (RBZ) and the appellant.
The investigation prompted the respondent to raise against the appellant schedules for outstanding value added tax (VAT) on both the non-Bacossi and Bacossi transactions, initially on 17 March and later on 15 July 2009, in the sum of US$6,302,712=13 inclusive of interest and penalties, which it corrected by the exclusion of zero rated products on 13 October 2009 by reducing the amount to the sum of US$6,249,496=70.
The computations of the principal value added tax (VAT) due in each month for the non Bacossi commodities were in the sum of US$1,198,081=13. The respondent added an equal amount in penalties and a further amount of US$206,799=52 in interest and requested payment of US$2,602,961=79 for the non-Bacossi commodities.
In regards to the Bacossi commodities, it claimed a principal sum of US$1,754,726=10 and a penalty in an equal amount and interest from 21 July 2008 to 23 October 2009 in the sum of US$137,082=72 totalling US$3,646,534=92….,.
The appellant lodged an objection to the assessment in terms of section 32 of the Value Added Tax Act [Chapter 23:12] through its legal practitioners of record on 25 September 2009.
It also applied for condonation from the Commissioner for filing the objection outside the normal time limits. It set out four grounds for condonation and eight grounds of objection.
The respondent dismissed the condonation and disallowed the objection.
The appellant appealed both decisions to this Court on 12 October 2009. The respondent filed its reply on 12 November 2009.
In the objection, the appellant denied ever doing business in Zimbabwe and indicated, that, the local transactions were imports carried out by the holding company, the Reserve Bank of Zimbabwe (RBZ), and other local companies.
It averred, that, the appellant was authorised by the Reserve Bank of Zimbabwe (RBZ) to sell the goods in foreign currency using free funds from non-resident entities.
It supplied goods in bond to its local agent, D & T, for commission.
The local buyer took delivery of the goods after paying the appellant from free funds.
On receipt of payment, the appellant instructed D & T to pay duty and value added tax (VAT) before releasing the goods.
The appellant averred, that, the value added tax (VAT) claim on non-Bacossi goods constituted a double claim for VAT already paid by D & T.
The appellant called the evidence of the founder and chairman of the holding company and director of D & T.
He confirmed the foreign status of the appellant and its relationship with D & T before the Reserve Bank of Zimbabwe came onto the scene.
The holding company, D &T, and the appellant, were not related companies.
The contact between the appellant and D & T was facilitated by his Russian partners in 1992.
The relationship between the appellant and D & T was one of principal and agent.
The Central Bank appeared on the scene in May 2008. At that time, the agent, D & T, imported the goods into Zimbabwe that were supplied by its principal, the appellant.
The Central Bank concluded two agreements with the appellant:
(a) The first related to the purchase of the goods stored in the warehouse that had been imported by D & T, referred to in the appeal as the non Bacossi goods.
(b) The second agreement concerned the Bacossi goods under which the Central Bank directly imported in excess of 400 truckloads of goods from South Africa between July and September 2008.
At Beitbridge, the goods were checked against the bill of entry before they were taken to the bonded warehouse, and, unlike direct home consumption imports, the bill of entry was not surrendered at that stage.
D &T stored the Bacossi goods for the Reserve Bank for a fee.
The relationship between the appellant and D & T was suspended during the duration of the Bacossi imports.
The goods were received and secured by the Reserve Bank of Zimbabwe (RBZ).
The Reserve Bank of Zimbabwe (RBZ) would take the goods from the warehouse once D & T received a release order from the appellant confirming receipt of the purchase price, and, after D & T had paid duty and value added tax (VAT) for the goods.
The clearing agent invoiced D & T for clearance fees; D & T, in turn, added these to the storage fees for the account of the Reserve Bank of Zimbabwe.
He identified the South African export documents and the Zimbabwean import documents encompassing pp33-90 of exhibit 1. Amongst these documents were local bills of entry that identified the importer as the Reserve Bank of Zimbabwe.
The witness confirmed his managing director's assertion, in the letter of 30 March to the respondent, that, D & T was not paid commission by the appellant during the subsistence of the Bacossi imports.
It was on the basis of this evidence, that, counsel for the appellant submitted, that, the sole witness was credible and reliable in all material respects.
I do not agree with the contention by counsel for the appellant, that, the witness was a credible and reliable witness who gave his evidence well.
Under cross examination, he contradicted material parts of his evidence-in-chief.
He abandoned his earlier version that the relationship of principal and agent between the appellant and D & T was suspended during the Bacossi imports. He categorically stated, in cross-examination, that, the relationship did not change for both the Bacossi and non Bacossi imports as the appellant continued to pay D & T, in foreign currency, commission at the rate of 1% of the value of each transaction.
The appellant maintained its grip on the goods in the warehouse and directed its agent to pay duty and value added tax (VAT), and, thereafter, release the goods after confirming receipt of the transaction value of each consignment from the Reserve Bank of Zimbabwe.
He incorrectly stated that value added tax (VAT) was paid for the non-Bacossi goods.
That VAT was never paid was demonstrated by the abandonment of the double claim ground at the hearing of this appeal.
He did not participate in the discussions that culminated in the agreement between the appellant and the Central Bank. He was not privy to the terms and conditions of the agreement. He did not interact with any of the directors and authorised signatories of the appellant.
He had met an officer of the appellant whose name appears in the last paragraph on p112 of exhibit 1 once in Harare.
He was not a director, employee, or official of the appellant or the clearing agent.
His version on the motivation of the clearing agent to invoice D & T rather than the Reserve Bank of Zimbabwe (RBZ) was not confirmed by evidence from the clearing agent or the Central Bank.
He did not produce any evidence to show that D & T included the charges of the clearing agent in the storage fees levied on the Central Bank.
The evidence of the sole witness left gaps that could only be filled by the directors, employees, officials, or agents of the appellant.
His averments preceding the incorporation of the appellant, on 19 May 2005, underscored his unreliability and the need for the testimony of the active officers or agents of the appellant.
It is simply incomprehensible how he could have dealt with the appellant before it was incorporated.
The respondent's investigation established that the Reserve Bank of Zimbabwe (RBZ) purchased non Bacossi goods between May 2006 and June 2008 contrary to his testimony that the purchase started in May 2008.
I am satisfied that he was not a credible and reliable witness.
Rule 5(c) Documents
The respondent did not file Rule 5(c) documents within 14 days of entering his reply as required by Rule 5.
The material correspondence contemplated by Rule 5(c) would consist of the notice claiming the outstanding value added tax (VAT), the letter of objection, and the Commissioner's response to the objection.
Rather, at the hearing, and soon after the appellant had closed its case, counsel for the respondent produced the purported documents from the bar.
The documents consisted of a letter of objection dated 21 October 2014, a set of original value added tax (VAT) assessments issued by the respondent against the appellant on that date for the period May 2006 to August 2008, the letter of objection of 25 September 2009, and the unsigned agreement on the supply of basic commodities between the appellant and the Reserve Bank of Zimbabwe.
It did not file the ruling dismissing the condonation sought and disallowing the objection.
In the letter of objection, the appellant refers to “assessments, the last of which are dated 15 July 2009.”
The earlier assessments of 17 March and 22 May and the letters of 24 June and 10 September 2009, referred to in the notice of appeal, were not produced in evidence nor did they form part of the Rule 5(c) documents or the pleadings.
The respondent must simply comply with the law to obviate unnecessary delays associated with his failure to abide by the law in this regard.
The documents constitute a type of record of proceedings, which helps this Court understand the real dispute between the parties and the basis on which the determination appealed against was made.
That the objection was dismissed on the ground that it was filed out of time was only disclosed in the respondent's reply to the notice and grounds of appeal.
Rule 5(c) documents are simple documents that the respondent always has in its possession - even before filing his reply. This kind of dilatoriness on its part is totally inexcusable.
The respondent is directed to comply with Rule 5(c) in all future cases.
Condonation
At the pre-trial hearing of 17 September 2014, by consent of the parties, the delay in the filing of the notice of objection by the appellant and the failure to file Rule 5(c) documents timeously by the respondent were condoned.
The Issues
The four issues referred for appeal were:
(a) Was the appellant the importer of the goods in question into Zimbabwe?
(b) Does the appellant operate a business in Zimbabwe?
(c) In terms of section 6 of the Value Added Tax Act [Chapter 23:12] who was responsible for the payment of value added tax (VAT) on the imported BACOSSI goods, and, separately, on the imported non-BACOSSI goods?
(d) Was the appellant liable to pay any outstanding value added tax (VAT) in foreign currency?
I proceed to resolve each issue in turn....,.
Was the appointment the CEO of the holding company, as the public officer for the appellant, proper?
Counsel for the appellant contended, both in his written heads and oral submissions, that, the appointment of the CEO of the holding company as the public officer of the appellant and the holding company and all its subsidiaries as agents for the collection of value added tax (VAT) was unlawful and contrary to the provisions of both section 61 of the Taxes Act and section 48 of the Value Added Tax Act.
Counsel for the respondent agreed and indicated that the appointment was later revoked.
The contention can only be correct if the appellant establishes, on a balance of probabilities, that, it was not a related party to the holding company and any one of its subsidiaries.
In my view, the architectural design of both the Taxes Act and the Value Added Tax Act allows the Commissioner to compulsorily appoint a public officer, and an agent, for the collection of VAT in the absence of a voluntary appointment by the taxpayer.
Part VI of the Taxes Act provides for the payment of income tax by a representative taxpayer defined in section 53(1) to include the public officer of a company or the agent who possessed, disposed of, controlled, or managed, or owed income for the principal.
D & T did not hold any income for the appellant.
The only section through which the appointment could be done was section 61 of the Taxes Act, under which every company which carries on a trade or has an office or other established place of business in Zimbabwe is obliged to appoint a local resident its public officer.
Where voluntary appointment is absent, section 61(4) empowers the Commissioner to designate one from amongst the managing director, director, secretary or other officer of the company as the public officer.
In my view, section 61 must be read in conjunction with the definition of agent in section 2 of the Taxes Act, which includes any company when acting as agent.
It seems to me, that, this wider definition is contemplated in subsection (8) for penalties and (9) for service of any notice, process, or proceeding under this Act.
Section 47(a) of the Value Added Tax incorporates the public officer appointed under section 53 of the Taxes Act to perform the duties imposed by the Value Added Tax Act on any taxpayer.
The Commissioner is empowered, by section 48(2) of the Value Added Tax Act, to compulsorily appoint an agent from any holder of money due to or belonging to the taxpayer as the representative registered operator.
Section 49(2) of the Value Added Tax Act makes the representative liable to pay tax, additional tax, or penalties chargeable under the Value Added Tax Act in respect of moneys controlled or transactions concluded or anything done by him in his representative capacity.
It appears to me, that, the appointment of the CEO of the holding company of D & T, the agent of the appellant, as a public officer and representative registered operator, was above board because D & T acted as an agent of the appellant in Zimbabwe.
