Understanding Nestle Zimbabwe v ZIMRA: A Landmark Lesson in Corporate Taxation

The case of Nestle Zimbabwe (Pvt) Ltd v Zimbabwe Revenue Authority (ZRA) [2024] ZWHHC 236 stands as a pivotal moment in Zimbabwean tax jurisprudence. It provides a masterclass on the tension between how multinational corporations (MNCs) structure their global operations and how local tax authorities view those structures.

At its core, the dispute centered on Section 15(2)(a) of the Income Tax Act, which allows businesses to deduct expenses incurred for the purpose of trade or the production of income. When ZRA audited Nestle for the tax years 2014–2018, they disallowed millions in deductions, claiming Nestle was “income splitting” or engaging in tax avoidance. The High Court’s ruling refined the boundaries of what a company can—and cannot—legally claim as a business expense.

1. Royalties and the “End Product” Model

One of the biggest points of contention involved royalties. Nestle Zimbabwe pays a 2% royalty to its Swiss parent company for the right to use the “Nestle” brand. ZRA argued that Nestle should only pay royalties on goods they physically manufactured in Zimbabwe. They disallowed royalties on finished goods Nestle imported from other affiliates (like Nestle South Africa), arguing that Nestle was merely a “trader” of those items, not a licensee.

The Court’s Finding:

The court ruled in favor of Nestle. It held that the Global Licensing Agreement (GLA) gave Nestle the exclusive right to “market and distribute” products in Zimbabwe. Whether Nestle made the milk powder in Harare or had a sister branch in Kenya make it for them, they were still “exploiting the intangible asset” (the brand) to produce income in Zimbabwe.

The Lesson: Royalties aren’t just for the act of “making” things; they are for the right to “sell” a brand’s identity within a territory.

2. Management and Shared Services: The Burden of Proof

MNCs often centralize their “back-office” functions. Instead of every country having its own massive IT or accounting department, one regional hub (like Nestle’s hub in Ghana) handles it for everyone. Nestle claimed these “Management Fees” as deductions.

ZRA disallowed these on two grounds:

1. Duplication: They argued Nestle Zimbabwe already had local accountants and HR staff doing the same work.

2. Lack of Proof: They argued Nestle hadn’t proven the services were actually rendered.

The Court’s Finding:

The court split the difference here.

• On Shared Services: It ruled for Nestle, noting that local staff performed different, more granular tasks than the high-level regional hub.

• On Management Fees: It ruled for ZRA. The court held that Nestle relied too much on a “fee cap” (an RBZ limit) as proof of payment rather than showing specific invoices or “work done.”

The Lesson: “We have a contract” is not enough. To deduct an expense, a company must provide a clear paper trail (emails, minutes, invoices) proving the service actually happened.

3. The “Canteen Meals” Dispute: Business vs. Entertainment

ZRA tried to classify the meals Nestle provided to its factory workers as “entertainment,” which is not tax-deductible under Section 16 of the Act. Nestle argued that providing meals was a strict food safety requirement. Because they manufacture sensitive products (like baby formula and milk), allowing workers to bring outside food (which could carry bacteria or contaminants) was a massive business risk.

The Court’s Finding:

The court agreed with Nestle. Providing meals to factory workers wasn’t “hospitality” (like taking a client to dinner); it was a necessary protocol to protect the integrity of the product and prevent production shutdowns.

4. The Layman’s Example: “The Pizza Shop”

To understand the legal complexities of this case, let’s look at a simple analogy:

Imagine you own a franchised Pizza Shop in Bulawayo.

• The Royalties: You pay the “Big Pizza” head office 2% of your sales for using their name. Sometimes you run out of dough, so you buy pre-made branded dough from the “Big Pizza” branch in Gaborone. The taxman says, “You didn’t make that dough, so you can’t deduct the royalty on those pizzas.” The Court says: “Wrong. You are still using the ‘Big Pizza’ name to sell it in your shop, so the royalty is a valid expense.”

• The Shared Services: The “Big Pizza” regional office in South Africa does all your digital marketing and website maintenance. You claim this as an expense. The taxman says, “But you have a guy in your shop who prints flyers! That’s the same thing.” The Court says: “Wrong. Printing flyers is not the same as managing a global digital infrastructure. It’s a different service.”

• The Canteen: You give your chefs free lunch in the back so they don’t bring outside food that might drop a stray hair or non-compliant ingredient into the pizza. The taxman says, “That’s a party! No deduction.” The Court says: “Wrong. That’s quality control. If they bring in outside food and the kitchen gets contaminated, the business dies. It’s a business expense.”

5. Penalties and “Genuine Disagreement”

ZRA imposed a 40% penalty on Nestle, labeling them a “repeat offender.” However, the court struck this down. It found that while Nestle was “deliberate” in its actions, it wasn’t trying to cheat. It genuinely believed its tax interpretations were correct.

Summary Table of Outcomes

Final Reflections

The Nestle case reinforces a vital principle: The taxman cannot sit in an “armchair” and tell a business owner how to run their company. As long as an expense is “actually incurred” for the purpose of trade, it is generally deductible.

However, the case also serves as a warning to corporations. In the eyes of the law, a “Global Agreement” is just a piece of paper unless you can produce the emails, invoices, and logs to prove that the services mentioned in that agreement actually crossed the border and helped you make money.