📰 Landmark Victory for Nestle as Court Overturns Most of ZIMRA’s $16 Million Tax Claim
Harare, Zimbabwe – In a significant ruling for multinational corporations and an important clarification on deductible business expenses, the Special Court for Income Tax Appeals largely ruled in favor of Nestle Zimbabwe (Pvt) Ltd against the Zimbabwe Revenue Authority (ZIMRA). The court decision, handed down by Justice Mafusire on June 11, 2024, set aside a substantial portion of ZIMRA’s adjusted tax assessment of $15,998,442.22 (inclusive of a 40% penalty) for the tax years 2014 to 2018.
The case centered on ZIMRA’s disallowance of six categories of expenses claimed by Nestle, with ZIMRA arguing the claims were not legitimately incurred for the purpose of trade or were part of a tax avoidance scheme.
Major Wins for Nestle: Deductions Allowed
The court allowed Nestle’s appeal on four of the six expenditure items, affirming the principle that tax collectors cannot dictate how businesses should run their operations.
1. Royalties on Products Manufactured by Affiliates
ZIMRA had argued that royalties should only be paid by the manufacturing entity, not by Nestle, which merely imported the finished products.
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The Ruling: The court rejected ZIMRA’s anti-avoidance argument (under Sections 98 and 98A of the Income Tax Act ). Justice Mafusire held that the Global Licensing Agreement (GLA), which grants Nestle exclusive rights to sell and distribute products in Zimbabwe, is a normal international business arrangement. The economic benefit accrues on the sale to customers, justifying the royalty payment by Nestle. This expense was ruled legitimately deductible.
2. Shared Services
ZIMRA disallowed payments made by Nestle to an affiliate for accounting and human resources, asserting the services were a duplication of work already performed by local personnel.
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The Ruling: The court scrutinised the evidence, including employee interviews and job descriptions, and was satisfied there was no duplication. The court ruled that the services received from affiliates abroad were sufficiently distinct from local functions, and ZIMRA’s decision to disallow the deduction was set aside.
3. Research Services (Analytical Quality Tests)
ZIMRA challenged payments for analytical quality tests conducted by an affiliate’s specialised laboratory in Singapore under the rubric of ‘research services’.
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The Ruling: The court found that these analytical fees, paid to an affiliate with specialised equipment, were necessary to ensure product compliance, standards, and food safety. This expense was deemed “classically deductible” under Section 15(2)(a) of the Act.
4. Canteen Meals for Factory Workers
ZIMRA classified the provision of factory canteen meals for workers as “entertainment” under Section 16(1)(m) of the Act, which is non-deductible. Nestle had banned outside food due to contamination risk.
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The Ruling: The court ruled it was “wrong for ZRA to classify the canteen meals for Nestle’s factory workers as mere entertainment”. The court found that providing the meals was in Nestle’s “vital interest” to eliminate the risk of product contamination and protect its brand. The expense was therefore ruled deductible under Section 15(2)(a). The deductibility of meals for head office staff was left open.
Partial Loss: Deductions Disallowed
The appeal was dismissed regarding two items, highlighting the critical importance of the taxpayer’s burden of proof when claiming expenses “actually incurred”.
1. Management Services
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The Ruling: ZIMRA was allowed to disallow management fees paid to an affiliate. Nestle was found to have failed to provide cogent proof (such as invoices) that the services had actually been rendered. The court stated that relying solely on the Reserve Bank of Zimbabwe’s 2% fee cap on turnover was insufficient proof that the services were incurred.
2. Zone Services
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The Ruling: Nestle failed to verify the value of imported raw materials that exceeded the value captured on ZIMRA’s ASYCUDA platform. Despite Nestle’s claim of fraud by their customs agent, the court found ZIMRA was entitled to rely on the ASYCUDA evidence as the best available, ruling the excess expenditure unverified and not deductible.
Penalty Set Aside
Crucially, the court set aside the 40% penalty in its entirety.
ZIMRA had imposed the penalty claiming Nestle was a repeat tax evader for deducting expenses previously disallowed in prior tax years (2009 to 2013).
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The Ruling: The court found that Nestle’s actions were not a deliberate evasion of tax, but a genuine attempt to deduct expenses it lawfully considered deductible. Given that Nestle achieved substantial success in the appeal and had been vindicated in a previous Supreme Court appeal, the basis for imposing the penalty was ruled incompetent, and no mens rea (intent) was established to attract the penalty.
Due to the mixed outcome, the court ruled that in line with practice for public interest litigation, each party would bear their own costs.
