The application of General Anti-Avoidance Rules (GAAR) in Zimbabwe
Statutory Architecture, Judicial Interpretation and Strategic Risk Management
Prepared by: Lucent Consultancy
Subject: General Anti-Avoidance Rules (GAAR) under Zimbabwean Tax Law
Target Audience: Chief Financial Officers, Tax Directors, Legal Counsel, and Tax Practitioners
Overview.
Over the past decade, the Zimbabwe Revenue Authority (ZIMRA) has aggressively transitioned from standard compliance-based audits to sophisticated, substance-over-form investigations. At the apex of ZIMRA’s enforcement arsenal sits the General Anti-Avoidance Rule (GAAR), codified in Section 98 of the Income Tax Act [Chapter 23:06]. While specific anti-avoidance rules (SAAR) target narrow practices—such as the 3:1 debt-to-equity thin capitalization ratio or the transfer pricing provisions under Section 98B—GAAR functions as a sweeping dragnet. It empowers the Commissioner-General to dismantle, recharacterize, or ignore any transaction, operation, or scheme designed primarily to secure a tax benefit through abnormal or non-arm’s-length means.
This article provides a comprehensive legal and economic analysis of GAAR’s application in Zimbabwe. It deconstructs the four statutory requirements of Section 98, analyzes the critical procedural and substantive overlap with Transfer Pricing (TP), examines landmark Zimbabwean court cases, and outlines risk-mitigation frameworks for multinational enterprises (MNEs) and domestic corporate groups.
The Concept of Tax Avoidance vs. Tax Evasion
A fundamental tenet of tax law, famously articulated in Commonwealth jurisprudence, is that taxpayers are entitled to order their affairs so as to minimize their tax liabilities. This is termed tax mitigation or tax planning. However, a sharp legal boundary divides permissible tax mitigation from impermissible tax avoidance, and both from illegal tax evasion:
- Tax Evasion: Involves fraudulent conduct, such as the deliberate falsification of accounting records, non-disclosure of income, or suppression of facts. It is a criminal offense.
- Tax Mitigation: Occurs when a taxpayer takes advantage of a fiscal incentive or structure provided by the legislature in the manner intended by the statute (e.g., claiming capital allowances under the Fourth Schedule or tax credits under Section 13A of the Finance Act [Chapter 23:04]).
- Impermissible Tax Avoidance: Lies in the grey zone. It involves legally valid transactions that are structurally contrived, artificial, or abnormal, entered into with the primary purpose of escaping or reducing a tax liability. This is the domain policed by GAAR.
In Zimbabwe, the statutory definition of “tax” under Section 2 of the Income Tax Act includes any tax, levy, or mining royalty. Consequently, GAAR can be applied across a wide range of fiscal charges, making its comprehension vital for corporate survival.
The Statutory Architecture of Section 98 of the Income Tax Act
For the Commissioner-General of ZIMRA to successfully invoke Section 98 and adjust a taxpayer’s liability, the revenue authority must satisfy a four-part conjunctive test. This test is similar to South Africa’s historic Section 103(1) of the Income Tax Act 58 of 1962 and shares foundational elements with modern GAAR frameworks across the Commonwealth.
The Four Elements of the Section 98 Test
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| THE SCHEME |
| Was there a "transaction, operation, or scheme"? |
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v
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| THE TAX BENEFIT |
| Did it avoid, postpone, or reduce tax liability? |
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v
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| THE ABNORMALITY |
| Was it carried out in an abnormal manner, or did it |
| create non-arm's length rights/obligations? |
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| THE PURPOSE |
| Was the sole or main purpose to obtain a tax benefit? |
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1. The Scheme
There must be a “transaction, operation, or scheme” (including the alienation of property) entered into or carried out by the taxpayer. The courts interpret “scheme” broadly, encompassing not only written contracts but also oral understandings, series of transactions, and unilateral corporate restructures.
2. The Tax Benefit
The scheme must have the effect of avoiding, postponing, or reducing liability for the payment of any tax, levy, or royalty imposed by the Act. The existence of a tax benefit is determined objectively by comparing the taxpayer’s actual financial position resulting from the scheme against a hypothetical alternative scenario where the scheme was not executed.
3. The Abnormality / Non-Arm’s Length Element
The scheme must meet the “abnormality” test. This is satisfied if the transaction:
- Was entered into or carried out in a manner which would not normally be employed for the entry into or carrying out of a transaction, operation, or scheme of the nature of the transaction, operation, or scheme in question; or
- Has created rights or obligations which would not normally be created between persons dealing at arm’s length under a transaction, operation, or scheme of the nature of the transaction, operation, or scheme in question.
4. The Purpose Element
The sole or main purpose of the transaction, operation, or scheme must have been to obtain a tax benefit. This is a subjective-objective inquiry. While the taxpayer’s stated intentions are considered, the court will evaluate those intentions against the objective commercial realities of the transaction. If a transaction lacks any logical commercial, regulatory, or operational purpose other than tax savings, the purpose element is deemed satisfied.
The Remedy: Deeming Provisions and Recharacterization
Once the four elements are established, Section 98 empowers the Commissioner-General to determine the liability for any tax and the amount thereof:
- As if the transaction, operation, or scheme had not been entered into or carried out; or
- In such a manner as in the circumstances of the case the Commissioner considers appropriate for the prevention or diminution of such avoidance, postponement, or reduction.
This allows ZIMRA to ignore shell companies, recharacterize debt as equity, adjust transfer prices, or manufacture “notional income” to restore the tax base.
The Interplay Between GAAR (Section 98) and Transfer Pricing (Section 98B)
Historically, ZIMRA relied heavily on Section 98 (GAAR) to challenge transfer pricing arrangements. However, with effect from 1 January 2016, the legislature introduced Section 98B and the Thirty-Fifth Schedule to the Income Tax Act, codifying specific Transfer Pricing (TP) rules based on the arm’s length principle.
Structural Comparison: GAAR vs. Transfer Pricing
| Parameter | Section 98 (GAAR) | Section 98B & 35th Schedule (TP) |
| Scope of Application | Broadly applies to all domestic and international tax avoidance schemes. | Applies specifically to transactions between associated/related parties (controlled transactions). |
| Objective | To neutralize abnormal, tax-motivated structures. | To ensure transactions reflect market-equivalent “arm’s-length” pricing. |
| Trigger | Requires proof of “abnormality” and “sole or main purpose” of tax avoidance. | Triggered automatically when controlled transaction terms differ from arm’s length terms. |
| Documentation | No specific proactive statutory documentation requirements (retrospective defense). | Proactive compliance required under Statutory Instrument 109 of 2019 (TP Documentation). |
ZIMRA’s Twin-Track Enforcement Approach
Despite the enactment of specific TP rules, ZIMRA routinely deploys Section 98 (GAAR) and Section 98B concurrently in audits of multinational enterprises. When ZIMRA audits cross-border payments—such as management fees, technical service fees, royalties, or head office cost allocations—it conducts a dual inquiry:
- The Transfer Pricing Inquiry (Section 98B): Is the pricing of the service or intangible asset consistent with the arm’s length principle? Does it fall within an acceptable economic range determined by comparable uncontrolled transactions?
- The GAAR Inquiry (Section 98): Why was this transaction structured in this manner? Does the underlying contract reflect genuine commercial substance, or is it an artificial scheme designed to expatriate profits to a low-tax jurisdiction? If the contract lacks commercial reality, ZIMRA may use Section 98 to disallow the deduction entirely, bypassing debates over whether the price was arm’s length.
Judicial Jurisprudence: Landmark Zimbabwean Court Cases
The practical application of Section 98 is illustrated through key decisions handed down by the Special Court for Income Tax Appeals, the High Court, and the Supreme Court of Zimbabwe.
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| ZIMBABWEAN CASE LAW MATRIX |
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v v v
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| CRS (Pvt) Ltd | | Delta Beverages | | IAB Company |
| (HH 728-17) | | (SC 3/22) | | (HH 32-22) |
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| Focus: | | Focus: | | Focus: |
| Notional Income | | IP Royalty & | | Intra-Group |
| & Abnormality | | Contractual | | Management Fees |
| in related-party | | Nexus under | | & "Benefit |
| leasing. | | GAAR. | | Test". |
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Case Study 1: Zimbabwe vs. CRS (Pvt) Ltd (High Court, HH 728-17)
The Facts
The appellant, CRS (Pvt) Ltd, was a Zimbabwean transport company. During Zimbabwe’s hyperinflationary era, the taxpayer entered into a lease agreement and a logistical service agreement with a related South African entity. Under these agreements, CRS leased its fleet of mechanical horses, trailers, and tankers to the South African sister company for a low, fixed monthly rental. Crucially, the South African sister company was responsible for all maintenance, fuel, and operational costs. ZIMRA audited the transaction and concluded that the lease rentals were artificially low and designed to shift profits to South Africa. Using Section 98, ZIMRA calculated a “notional market-related rental income” and assessed CRS (Pvt) Ltd on this basis.
The Taxpayer’s Arguments
CRS argued that:
- The transaction was entered into for survival. During the hyperinflationary crisis, the company could not secure local contracts, fuel, or foreign currency for spare parts.
- Leasing the fleet to South Africa kept the assets from deteriorating, saved 110 local jobs, and brought in a steady stream of foreign currency.
- ZIMRA had no statutory authority to tax “non-existent, notional income” that the taxpayer had never actually received or accrued.
The Court’s Ruling and Ratio Decidendi
The High Court ruled in favor of ZIMRA, affirming that Section 98 permits the creation of notional assessments to prevent tax avoidance. The court emphasized the abnormality test:
- In an ordinary, arm’s length commercial transaction, a lessor would charge a rental that reflects the market value of the asset and incorporates a profit mark-up.
- The arrangement where the related South African party paid a fixed, low rental that negated the cost-plus mark-up principle was commercially abnormal.
- The court observed:
“It is a notorious fact of commercial life that related parties enter into contractual arrangements… While [the taxpayer] was faced with hyperinflation, it deliberately implemented an opaque system of tax avoidance and reduction… The closing words of Section 98 direct the Commissioner to determine liability as if the transaction had not been carried out, or in a manner appropriate to prevent the avoidance.”
Key Takeaways
- Commercial distress or macroeconomic crises do not justify transactions that violate the arm’s length standard.
- Under Section 98, ZIMRA is legally authorized to construct “notional income” to counter under-pricing in related-party deals.
Case Study 2: Delta Beverages Limited v. ZIMRA (Supreme Court, SC 3/22)
The Facts
Delta Beverages, a leading Zimbabwean brewery, was a subsidiary of Delta Corporation, which in turn was part of the SABMiller group. Delta Beverages paid substantial trademark royalties and technical service fees to SABMiller Management BV, a Dutch-resident entity, and deducted these expenses under the general deduction formula of Section 15(2)(a). ZIMRA audited Delta and disallowed approximately US$42 million in deductions for the tax years 2009 to 2014.
Among several arguments, ZIMRA raised a contractual nexus issue: the trademark license and technical assistance contracts were signed between SABMiller and Delta Corporation (the holding company), not Delta Beverages (the operating subsidiary). ZIMRA argued there was no privity of contract between the operating subsidiary making the payments and the foreign IP holder, and that the payments constituted an artificial scheme to avoid tax under Section 98.
The Special Court vs. Supreme Court Decisions
The Special Court for Income Tax Appeals initially ruled in favor of Delta, accepting that Delta Beverages had internally ratified the contracts and was the actual user of the IP.
However, on appeal, the Supreme Court set aside the Special Court’s decision. The Supreme Court ruled that the Special Court had failed to thoroughly investigate the transaction under the lens of Section 98. The Supreme Court remitted the case back to the Special Court with a mandate to conduct a full trial focusing strictly on GAAR:
- Whether the trademark and technical service arrangements constituted an impermissible tax avoidance scheme.
- Whether the lack of direct contractual privity between Delta Beverages and the Dutch parent was a structural anomaly designed to shift profits.
Key Takeaways
- Contractual Privity Matters: Operating subsidiaries must have direct, legally enforceable contracts with foreign service providers. Ratifying a parent company’s contract internally is highly vulnerable to a Section 98 challenge.
- Substance Over Form: The Supreme Court’s decision signals that Zimbabwean courts must actively look beyond formal accounting entries and trial balances to analyze the structural and commercial economic reality of intra-group charges.
Case Study 3: Zimbabwe vs. IAB Company (High Court, HH 32-22)
The Facts
A Zimbabwean subsidiary paid significant management fees to its foreign parent company for administrative, IT, and strategic services over several tax years. ZIMRA disallowed the deductions under Section 15(2)(a) and Section 98 on the basis that the taxpayer could not prove the services were actually rendered or that they provided a direct economic benefit to the local subsidiary.
The Court’s Ruling and the “Benefit Test”
The High Court upheld ZIMRA’s assessment, introducing the “benefit test” as a standard for GAAR and general deductions in Zimbabwe. The court held that:
- It is not enough to produce a written contract and a management fee invoice.
- The taxpayer must provide contemporaneous evidence (e.g., timesheets, emails, reports, software logs) proving that specific services were rendered by the parent company.
- The taxpayer must prove that these services directly enhanced the local entity’s income-producing activities.
- In the absence of such evidence, the transaction is deemed abnormal, artificial, and structured solely to expatriate profits, triggering Section 98.
Summary of Case Law Jurisprudence
| Case | Primary Dispute | Core Legal Principle Established | Judicial Outcome |
| CRS (Pvt) Ltd (2017) | Low-value leasing of trucks to SA affiliate. | Abnormality test under Section 98; authority of ZIMRA to assess “notional income”. | ZIMRA Upheld: Court found the fixed-rental structure abnormal. |
| Delta Beverages (2022) | Outbound IP royalties and technical service fees. | Critical requirement of direct contractual nexus (privity) and substance over form under GAAR. | Remitted for Trial: Sent back to Special Court for a trial under Section 98. |
| IAB Company (2022) | Outbound management service fees. | Establishment of the “Benefit Test”—taxpayers must prove services were actually rendered and added value. | ZIMRA Upheld: Deductions disallowed due to lack of proof. |
Procedural Realities: The Burden of Proof (Section 63)
In tax disputes, the procedural landscape in Zimbabwe is heavily weighted in favor of the revenue authority. Under Section 63 of the Income Tax Act [Chapter 23:06], the burden of proof is placed entirely on the taxpayer:
“In any objection or appeal under this Act, the burden of proof that any amount is exempt from or not liable to the tax or is subject to any deduction in terms of this Act or credit, shall be upon the person claiming such exemption, non-liability, deduction or credit…”
In a GAAR dispute, this creates a statutory presumption that ZIMRA’s assessment is correct. To rebut ZIMRA’s application of Section 98, the taxpayer must present factual and economic evidence to prove:
- That the transaction was structured in a commercially normal manner (satisfying the abnormality test).
- That the transaction was driven by a dominant, bona fide commercial or regulatory purpose other than tax avoidance (rebutting the purpose test).
If the taxpayer fails to produce a clear, documented audit trail, the courts will dismiss the appeal, as seen in IAB Company and Zimplats v. ZIMRA (SC 16/23).
Strategic Risk Management and Mitigation for Corporates
Given ZIMRA’s aggressive use of Section 98, corporate groups and multinational enterprises operating in Zimbabwe must proactively manage their tax exposure. Lucent Consultancy recommends the following strategic risk-mitigation framework:
LUCENT CONSULTANCY'S THREE-PILLAR GAAR DEFENSE FRAMEWORK
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| 1. DOCUMENTARY SUBSTANCE |
| Direct, bilateral contracts matching the economic reality. |
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| 2. THE ECONOMIC BENEFIT TEST |
| Maintain timesheets, deliverables, and value-added audits. |
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| 3. CONCURRENT TRANSFER PRICING (TP) |
| Contemporaneous local files under SI 109 of 2019. |
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Pillar 1: Maintain Contractual and Operational Substance
- Avoid Triangular Agreements: Ensure that contracts for services, IP licenses, or financing are executed directly between the operating subsidiary in Zimbabwe and the foreign service provider. Eliminate intermediary holding companies that do not add economic value.
- Reflect Commercial Reality: Contracts must reflect the actual conduct of the parties. If an agreement states that a local subsidiary is a low-risk distributor, the operational reality must not show the subsidiary performing high-risk marketing and product development activities.
Pillar 2: Operationalize the “Benefit Test”
For all intra-group charges (especially management and technical fees), establish a contemporaneous “Defense File” containing:
- Detailed timesheets and activity logs of the personnel performing the services.
- Physical or digital deliverables (e.g., strategic reports, IT code, tax opinions, training manuals).
- A clear narrative demonstrating how the services enhanced the Zimbabwean subsidiary’s efficiency, reduced its costs, or increased its revenues.
Pillar 3: Develop Contemporaneous Transfer Pricing Documentation
Under Statutory Instrument 109 of 2019, maintaining a Transfer Pricing Local File is a statutory obligation. This documentation should:
- Perform a functional, asset, and risk (FAR) analysis of each party to the transaction.
- Benchmark the pricing of the transaction against independent comparable companies using approved OECD methods (e.g., Comparable Uncontrolled Price or Transactional Net Margin Method).
- Demonstrate that the profit margins or prices conform to the arm’s length standard.
Pillar 4: Commercial Purpose Documentation
When executing corporate restructuring, debt refinancing, or asset sales:
- Document the commercial, regulatory, or operational reasons for the structure in Board of Directors minutes and project planning files.
- If a structure results in tax savings, ensure that these savings are an incidental outcome of a primary commercial objective, rather than the primary driver of the transaction.
Conclusion
Zimbabwe’s General Anti-Avoidance Rules under Section 98 are powerful statutory tools. Backed by a supportive judiciary and reinforced by the burden of proof in Section 63, ZIMRA can successfully challenge transactions that lack economic substance or commercial normality.
For multinational corporations and domestic businesses, relying on formal contract structures is no longer sufficient. Tax structures must align with commercial reality, deliver demonstrable economic benefits, and be supported by contemporaneous documentation. By implementing a proactive, substance-first approach to tax planning, businesses can navigate Zimbabwe’s challenging fiscal environment while remaining fully compliant with the law.
Core Legislative References
- General Anti-Avoidance Rules (GAAR): Section 98, Income Tax Act [Chapter 23:06]
- Transfer Pricing General Rule: Section 98B, Income Tax Act [Chapter 23:06]
- Rules for Determination of Arm’s Length Pricing: Thirty-Fifth Schedule, Income Tax Act [Chapter 23:06]
- Transfer Pricing Regulations: Statutory Instrument 109 of 2019 (Income Tax Transfer Pricing Documentation Regulations)
- Burden of Proof: Section 63, Income Tax Act [Chapter 23:06]
- Corporate Tax Charging Rates: Section 14, Finance Act [Chapter 23:04]
