The Section 4A Conflict: A Deep Dive into Foreign Currency Taxation and the “Retention Threshold” Paradox

The Birth of Dual-Currency Compliance

For decades, Zimbabwe’s tax system operated on a simple “monetary unit” principle. However, the re-introduction of the USD as legal tender alongside various iterations of local currency (ZWL, and now ZiG) created a legislative nightmare. The government’s response was Section 4A of the Finance Act [Chapter 23:04].

This section is the legal “umbilical cord” that forces taxpayers to remit taxes in the specific currency of the transaction. While the intent was to ensure the state collected hard currency to fund its own foreign obligations, the execution—specifically the calculation of “gross foreign currency receipts”—has triggered some of the most complex legal battles between the Zimbabwe Revenue Authority (ZIMRA) and corporate taxpayers.

The Legislative Mechanics: Decoding Section 4A

Section 4A (1) explicitly overrides Section 41 of the Reserve Bank of Zimbabwe Act. It mandates that any person (individual or corporate) who earns income in a foreign currency must pay the corresponding tax in that same currency.

The Finance (No. 2) Act of 2020 introduced a critical subsection (Subsection 10) to address a growing grievance: The Retention Problem. Under Exchange Control regulations, the Reserve Bank of Zimbabwe (RBZ) “liquidates” (forcibly converts) a portion of an exporter’s or local trader’s USD receipts into local currency at the official rate. Businesses argued that if the state takes 25% of their USD at the source, it is unfair for ZIMRA to demand tax on 100% of the USD gross.

Subsection 10 now provides:

“Where any person… earns any part of such income in foreign currency; and has any part of such income liquidated and paid in local currency… any tax due on such part that is liquidated shall be calculated on the basis that it was earned in local currency.”

This sounds straightforward, but in practice, it created two major “battlefronts”:

1. The Apportionment Battle: How do you split expenses between USD and local currency income?
2. The “Gross vs. Net” Battle: Does “liquidated” mean only the mandatory RBZ retention, or any voluntary conversion?

The Landmark Case: African Century Limited v ZIMRA

While many disputes are settled in the Special Court for Income Tax Appeals, the case of African Century and similar administrative challenges have highlighted the “Catch-22” of Section 4A.

The Conflict:

ZIMRA’s position has historically been that if a company issues an invoice in USD, the tax is a USD liability immediately. Taxpayers argued that “receipt” and “accrual” are not the same as “retention.” If a bank automatically converts 20% of an incoming payment to local currency, the taxpayer never “received” that 20% in USD in a way that allows them to pay tax in that currency.

The Judicial Sentiment:

The courts have increasingly leaned toward the “Actual Receipt” principle. If the law (Exchange Control) prevents a taxpayer from holding the currency, the tax law (Finance Act) cannot punish them for not having that currency. However, ZIMRA remains strict: if you trade in the “informal” market and receive cash USD, you cannot claim “retention” to pay ZIMRA in local currency. You must prove the liquidation via a bank Nostro statement.

Key Pillars of Dispute

A. The “Currency of Transaction” vs. “Currency of Receipt”

ZIMRA often uses Section 4A to “look through” accounting entries. In cases involving retailers, ZIMRA has used Public Notice 24 of 2022 to warn that even if a business records everything in local currency, if the underlying till slip shows USD, Section 4A applies.

The legal friction arises when a business offers a “dual price.” If a customer pays in ZiG at the official rate, but the business’s internal “functional currency” is USD, ZIMRA may attempt to assess the tax in USD. The courts have ruled that the actual currency that touched the hand of the seller is the one that governs the tax liability.

B. Apportionment of Deductions (The 50:50 Struggle)

One of the most complex areas of Section 4A is how to handle “Allowable Deductions” (Section 15 of the Income Tax Act). If a company has USD revenue and local currency revenue, but its expenses (like electricity or rent) are a mix of both, how do they calculate the “Taxable Income” for each currency?

ZIMRA’s Option 2 (as outlined in their 2021 compliance guidelines) allows for separate returns. However, if a company cannot precisely track which USD bought which liter of fuel, they must use a Turnover-Based Apportionment.

• The Dispute: Taxpayers often try to “load” their expenses onto the USD side to reduce the hard currency tax bill. ZIMRA frequently rejects these apportionments, leading to massive “Additional Assessments” and 100% penalties.

C. The “Pay Now, Argue Later” Principle

Under Section 69 of the Income Tax Act, the obligation to pay tax is not suspended by an appeal. Because Section 4A assessments involve USD, the stakes are incredibly high. Companies like Delta Beverages and Standard Chartered have faced situations where ZIMRA garnishes USD accounts based on a Section 4A assessment while the legal interpretation is still being debated in court. This creates a liquidity crisis that the 2020 amendment tried to solve but only partially mitigated.

Retentions, Liquidations, and the Thresholds

The “threshold” mentioned in your query is vital. Currently, for local USD sales, the retention is often 0%, but for exporters, it ranges from 75% (2024) and 70% (2025).

The Legal Trap:

If an exporter receives $1,000,000, and $250,000 is liquidated by the RBZ, the exporter has $750,000 in their Nostro.

• Tax Treatment: They pay USD tax on the profit derived from the $750,000 and local currency tax on the profit derived from the $250,000.
• The Error: Many companies mistakenly pay tax on the Net ($750k) and ignore the tax on the $250k entirely, or they try to pay the whole bill in local currency. ZIMRA views the latter as “Tax Evasion” because it deprives the state of hard currency.

The “Contra Fiscum” Rule in Foreign Currency Cases

In the case of Standard Chartered Bank Zimbabwe v ZIMRA, the courts reiterated the Contra Fiscum rule: if a tax law is ambiguous, the interpretation should favor the taxpayer.

Section 4A is notoriously ambiguous regarding “accruals.” If a company earns interest on a USD loan but hasn’t received the cash yet, should it pay tax in USD?

• ZIMRA Says: Yes, because it has “accrued.”
• Taxpayers Say: No, because I don’t have the USD “cash” to pay you yet.The 2020 amendment’s focus on “liquidated” amounts suggests that the legislature is moving toward a Cash-Basis logic for foreign currency, even if the rest of the Tax Act remains on an Accrual-Basis.

The Path Forward

The extension of the re-registration deadline (SI 76 of 2026) mentioned previously actually plays into this. As companies re-register under the new COBE Act, they are required to provide more transparent beneficial ownership and financial data. This digital migration will make it nearly impossible to “hide” USD transactions from ZIMRA’s Section 4A oversight.

For the Zimbabwean taxpayer, Section 4A is no longer a “new” provision, it is a mature, dangerous piece of legislation. The 2020 amendment provided a shield regarding RBZ retentions, but it did not provide a sword. Companies must ensure:

1. Strict Apportionment: Use a methodology (like turnover ratio) and get it pre-approved by ZIMRA in writing.
2. Document the “Liquidation”: Keep every bank advice slip that shows a conversion from USD to local currency.
3. Fiscalization: Ensure your fiscal devices are reporting the correct currency at the point of sale.

Section 4A remains the most litigated area of Zimbabwe’s Finance Act because it touches the most sensitive part of any business: its hard currency reserves. As the economy continues its “ZiG-USD” dance, the courts will likely remain the final arbier of what “gross foreign currency receipts” truly means.