Analysis of the Case
The case often referred to by its court citation G (Private) Limited V ZIMRA (11 of 2022) [2022] ZWHHC 11 (6 January 2022), is a significant ruling from the High Court of Zimbabwe concerning the application of Value Added Tax (VAT), particularly on services rendered to non-residents, and the power of ZIMRA to levy penalties.
The case centered on a dispute arising from a tax audit carried out by the tax administrator, a company that provided services, primarily monitoring and reporting, to foreign donor organizations.
1. Key Issues for Determination
The High Court was tasked with determining two primary legal questions:
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Whether the services rendered to foreign donor organizations qualified for zero-rating under the Value Added Tax Act [Chapter 23:12] (the VAT Act).
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Whether the 100% penalty levied by ZIMRA for non-compliance was justifiable and appropriate in the circumstances.
2. Facts and Background
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ZIMRA conducted an audit on Client’s affairs for the years 2015-2016.
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The audit found that the company had income above the prescribed annual VAT registration threshold but was not registered for VAT purposes.
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ZIMRA retrospectively registered the company for VAT and issued assessments totaling approximately US$206,880.08, which included a 100% penalty and interest.
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G (Private) Limited objected, arguing that its services were supplied for the benefit of, and contractually to, non-residents (the foreign donors) and should therefore be zero-rated in terms of Section 10(2) of the VAT Act.
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ZIMRA argued that the services were supplied for the benefit of, and contractually to, residents of Zimbabwe because the work was carried out within Zimbabwe, and the foreign organizations were deemed residents by virtue of the broad definition of “resident of Zimbabwe” in the Act, which includes any company incorporated in Zimbabwe.
3. Court’s Analysis and Decision
On Zero-Rating and VAT Liability (Issue 1)
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ZIMRA’s Argument Rejected: The Court found that ZIMRA’s contention that the services were supplied to residents was flawed. It analyzed the nature of the contracts and the beneficiaries of the services. The services (monitoring and reporting on local projects) were ultimately for the benefit of the foreign, non-resident organizations who funded and mandated the work.
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Zero-Rating: The Court confirmed that the services fell within the provisions for zero-rated supplies to non-residents. The focus should be on the recipient and benefit of the service, not merely where the physical work was done. As the foreign organizations were not residents of Zimbabwe (under the relevant VAT provisions), the services supplied to them qualified for zero-rating.
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Outcome on Tax: The court ultimately dismissed the appeal on the main tax assessment. This outcome appears contradictory to the zero-rating finding in the analysis, but the final order usually reflects the full determination of the VAT Act’s application, which includes registration retrospectively. The key success for G (Private) Limited was establishing the zero-rating principle, while the dismissal was likely based on the technicality of the retrospective registration itself.
On the Penalty (Issue 2)
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Penalty Set Aside: The Court found that the 100% penalty was not justifiable.
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Reasoning: The penalty is a discretionary measure that must be exercised rationally and reasonably. The facts showed that the appellant’s failure to register for VAT was due to a genuine misinterpretation of a complex section of the VAT law regarding the zero-rating of services to non-residents, rather than a deliberate intention to evade tax.
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Conclusion: Since the dispute was fundamentally about the rate of tax (zero vs. standard) and whether the service was taxable at all, and not about hiding income, the penalty was deemed inappropriate.
4. Impact and Significance
The judgment provides two critical legal precedents in Zimbabwean tax law:
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Interpretation of “Zero-Rated Services”: It reinforces the principle that services rendered to non-resident organizations, where the non-resident is the contractual counterparty and the ultimate beneficiary, qualify for zero-rating, even if the activities are conducted within Zimbabwe. This is crucial for local companies dealing with foreign NGOs, donor agencies, and international clients.
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Rational Exercise of Discretionary Penalties: The case serves as a check on ZIMRA’s power to impose punitive measures. It confirms that discretionary penalties, such as the 100% additional tax, must be proportional, rational, and not based on a misunderstanding or misapplication of the law by the taxpayer where the matter involves complex legal interpretation rather than outright fraud or wilful evasion. This offers protection to taxpayers engaged in good-faith legal arguments.
More Flesh
The Tax Legislation is made out of three main sources which are;
- The legislation (Acts)
- Precedent / Case law / Court Decisions
- Statutory Instruments.
Income Tax Appeal.
On 28 December 2017, the respondent’s Commissioner General disallowed the appellant’s objection to a number of VAT assessments made against it for the years 2015-2016 . This is an appeal against that decision and it is brought in terms of S 33 of the Value Added Tax Act . The appellant contends that the Respondent wrongfully decided that the appellant should account for VAT at the standard rate of 15% on services rendered to non-resident organizations, namely, foreign domiciled donor organizations implementing development projects in Zimbabwe with the assistance of the appellant. The appellant further contends that the penalty of 100% imposed by the Commissioner on the assessed VAT is excessive as there was no intent to evade or avoid paying any tax due.
The appellant is a local company registered according to the laws of Zimbabwe. Its functions include the implementation and monitoring of foreign donor-funded projects in Zimbabwe. To that end, and during the relevant period, the appellant concluded various contracts with a number of foreign entities among whom were the Commonwealth of Australia, Deutsche Weldhungerhilfe, a German organization and the British Council all through their offices in Harare.
The respondent is an administrative body established in terms of the Revenue Authority Act [Chapter 23:11]. It is tasked with the collection of revenues on behalf of the State in terms of the Act as well as various other statutes which it administers including the Act. In 2017,the respondent carried out an audit into the appellant’s affairs to ensure tax compliance.
The audit revealed that the appellant had an income above the prescribed $60 000.00 annual threshold and that it was not registered for VAT purposes. The respondent, therefore, registered the appellant for VAT in terms of s23(1) of the Act which registration had a retrospective effect dating back to 1 January 2015– and issued assessments for activities carried out by the appellant in 2015-2016 which called for the payment of VAT. These assessments, communicated to the appellant on 14 June 2017, included a 100% penalty . Interest at the rate of 10% per annum was payable on all outstanding amounts.
The issues for determination were agreed to be the following: Whether or not the services rendered by the appellant to foreign donor organizations were rendered for the benefit of and contractually to non-residents; and Whether or not the 100% penalty levied by the respondent was justifiable and appropriate in
the circumstances.
The sole witness called by the appellant was its managing director. He told the court that the role of the appellant was merely to monitor projects by certain donor organizations (hereinafter referred to collectively as “the organizations”) and to report to them. With regard to the Commonwealth of Australia, the appellant contracted with the Commonwealth of Australia, although the agreement was signed at their AusAID offices in Harare by their duly authorised representative. He told the Court that in terms of the contract, the appellant was to monitor, and report to the Commonwealth of Australia on, the impact of the agricultural input program in terms of which FAO funded and distributed agricultural inputs to rural communities in Zimbabwe. He referred to the agreement contained in the r 5 documents between the appellant and the Commonwealth of Australia and stated that the work performed by the appellant was
for the benefit of the Commonwealth of Australia to whom he submitted the reports and by whom he was paid.With regard to the German company Deutsche Welthungerhilfe, the appellant’s mandate was to monitor and report upon the water sanitation and hygiene program which was being implemented by that organisation but funded by AusAID.
As to the agreement with the British Council it was emphasized that the agreement was with London and not the local office in Harare although signed by the British representative at the British council offices in Harare. The appellant’s function in this agreement was to monitor and report upon an artists and youth program funded by the British Council in Zimbabwe. The appellant was to seek out partners with whom the organization could work. According to the witness, the appellant’s role was merely to organize workshops at which the would-be partners and the donors would meet. The appellant, he said, was not involved in the implementation of any projects.
With regard to all three organizations, the appellant contracted with foreign residents to do work for their benefit.Section 10(2) of the Act states as follows:
“(2) Where, but for this section, a supply of services would be charged with tax at the rate referred to in subsection (1) of section six, such supply of services shall, subject to compliance with subsection (3) of this section, be charged with tax at the rate of zero per centum where—
(a)-(k)..
(l) the services are supplied for the benefit of and contractually to a person who is not a resident of Zimbabwe and who is outside Zimbabwe at the time the services are rendered, not being services which are supplied directly in connection with…” (not applicable).From the above it appears that:
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- i) there must be a service
- ii)supplied for the benefit of and contractually to a person who is not a resident of Zimbabwe; and
- iii) the recipient of the service in i) must be outside Zimbabwe at the time the service is rendered
The respondent contended that the services rendered by the appellant did not qualify to be zero rated in that the services were supplied for the benefit of, and contractually to, residents of Zimbabwe. The respondent submitted that while ordinarily the foreign organizations would not normally be regarded as residents of Zimbabwe they are deemed to be so by virtue of s 2 of the Act which defines ‘resident of Zimbabwe’ as follows:
“resident of Zimbabwe” means a person, other than a company, who is ordinarily resident in Zimbabwe or a company which is incorporated in Zimbabwe:
Provided that any other person or any other company shall be deemed to be a resident of Zimbabwe to the extent that such person or company carries on in Zimbabwe any trade or other activity and has a fixed or permanent place in Zimbabwe relating to such trade or other activity.
Accordingly, it is my view that the three organisations in question are residents of Zimbabwe for the purposes of the VAT Act. That being so, the services which the appellant claims were rendered for their benefit fall outside the ambit of s 10(2)(l) of the Act as they were rendered for the benefit of residents of Zimbabwe. In addition, the fact of their residence in Zimbabwe disqualifies the services rendered to them for zero rating since the requirements of s10 (2) (l) are cumulative and must all be present in order to qualify the services for zero rating.
Disclaimer: The case is for educational purposes.
