IN THE SPECIAL COURT FOR INCOME TAX APPEALS CASE No ITC 09H 7 HELD AT HARARE In the matter between: . .-.. sworn-#1- I - -- ABB (PRIVATE) LIMITED E. i APPELLANT And ZIMBABWE REVENUE AUTHORITY RESPONDENT COMMISSIONERS CASE Background Facts 1. An audit was carried out on the Appellant to verify compliance with income tax, Value Added Tax (VAT), withholding tax and PAYE obligations for the years 2009, 2010, 2011 and 2012. The audit was focused on verification of declaration of income tax and VAT emanating from the contracts awarded to ABB (Private) Limited Zimbabwe (hereafter referred to as ABB-ZIM) by the Zimbabwe State Procurement Board (hereafter referred to as SP3). The Appellant in all instances of the contracts awarded is stated as the contractor. ABB-ZIM made a provision in the contracts to have all the income payable under the contracts to be paid out to its sister company ABB Pty {hereafter referred to as ABB SA). 2. The audit revealed that the client had not accounted for income tax amounting to USD9, 410, 755.39 principal, VAT of USD 4, 065, 284.94 principal and PAYE of USD116, 158.00 principal, which emanated from the tender contracts awarded. Additional tax of 50% was levied on the outstanding amount. 3. An audit of the Appellant?s ?nancial records revealed that; a. Throughout the period under audit, (2009 to 2012), the Appellant did not declare contract income from the tenders awarded to it by SP8. The Applicant failed to declare Income on the contract despite the contracts having been executed between the two local companies. Instead, the Appellant had the customer make the payments to its sister company, ABB SA which then invoiced the customer, with the Appellant then avoiding paying income tax. c. The Appellant, in earlier correspondence acknowledged that the contracts were made between two local companies, and thus income from the contracts was taxable in Zimbabwe. The Respondent has read the Appellant?s appeal filed of record and the Appellant?s case and wishes to respond in opposition thereto as follows; Ad Paragraphs 1.1 and 1.2 1. These are agreed and no issues arise. Ad Paragraph 1.3 2. This is agreed. The Respondent raised assessments amounting to principal of and 50% additional tax of in terms of section 46 (1) as read with Section 46 (6) of the Income Tax Act [Chapter 23:06] (hereafter referred to as the Tax Act) levied on the outstanding amount. Ad Paragraph 1.4 3. This is agreed. The Appellant objected to the assessments and the Respondent disallowed the objection in folk for the principal amount and additional tax. Ad Paragraph 1.5 . This is disputed. The Appeliant?s objection was disallowed in full and this is what the Appellant is now appeaiing against. Ad Paragraph 2.1 . This is agreed. However, it is pertinent to stated that ABB ZIM entered into contracts with Zimbabwe Electricity Transmission and Distribution Company (Private) Limited (ZETDC) and Zimbabwe Power Company {Private} Limited during the period 2009 to 2012. (Underlining for emphasis) Ad Paragraph 2.2 . This is disputed. The documentation submitted by the Appellant to the Respondent show that the Appetlant was awarded the tenders in its own name. The Appellant was fully aware of its obligations in tendering for big contracts with quasi government entities such as the Zimbabwe Electricity Transmission and Distribution Company (Private) Limited (ZETDC) and Zimbabwe Power Company (Private) Limited The Respondent?s officials requested the Appellant to submit documentation to prove that it had ceded the contract and its contractual obiigations to ABB SA, but it failed to do 50. Ad Paragraph 2.3 . This is disputed. The Appellant failed to produce evidence showing that the contracts with ZETDC and ZPC were abandoned and never enforced. One would have expected some formal termination of the contracts, and the subsequent engagement of the ABS SA. Ad Paragraph 2.4 . ZETDC and ZPC procured equipment directly from ABE-SA and this was solely to enable them to apply for duty free certificates since they were responsible for the duties and taxes as per contracts entered into. The new contracts between ZETDC and ZPC and ABE-SA never came into existence and the facilitation fees being ailuded were not part of income of the Appellant as per the financial statements. The mere mention of facilitation fees is an attempt by the Appellant to run away from its tax obligations which flows from its contracts with ZETDC and ZPC. Ad Paragraph 2.5 9. This is disputed. VAT on the importation of the equipment was paid as per the terms and conditions of the contracts between both ZETDC and ZPC and the Appellant. The contracts clearly stipulated that the purchaser {which is ZETDC and ZPC) would be ?responsible for local taxes namely income tax, sales tax, import 1liAT and duties?. The contract does not state ABE-SA as a party to the contactis). 10.The Appellant cannot not then disassociate itself from meeting other tax obligations, which may not have been specifically mentioned in the contract but were imposed on it in terms of the tax taws of the country, in this case the VAT Act. Ad Paragraph 2.6 11.This is disputed. The Appellant failed to submit proof that ZETDC and ZPC had been awarded National Project status for the period under audit. The National Project status was granted in November 2013, a period which is outside the scope of the audit (2009?2012). Also, customs duty was not waived during the period under audit. Ad Paragraph 2.7 12. This is diSputed. Facilitation fees were not declared in the income tax returns. The Financial Statements only reported on funding received from ABB SA, which is declared as other income. Ad Paragraph 2.3 13. This is agreed. The contracts were signed between two Zimbabwean entities and the supply of the equipment was in fulfilment of these contracts. The Respondent disputes that there was a new contract between ZETDC AND ZPC and ABE-SA, as the Appellant failed to furnish evidence to support this position. Ad Paragraph 2.9 14. This is agreed. The supply of the equipment was in fulfilment of the contracts signed between the Appellant and ZETDC and ZPC. Therefore, section 8 of the Income Tax Act {Chapter 23:06] (hereafter referred to as the Tax Act) was applied bringing into gross income the total amount as per the contracts. Contract income accrued to the Appellant on signing of the contract and therefore was correctly taxed in the Appellant?s hands. Ad Paragraph 2.10 15. This is disputed. Section 3 (1) of the Tax Act was invoked bringing into gross income all contract amounts received or accrued to the Appellant. Ad Paragraphs 2.11 to 2.13 16. These are agreed. 1?.lncorne tax assessments were raised on the amount received or accrued as per contracts between the Appellant and ZETDC and ZPC in terms of Section 8 (1) of the Tax Act. Penaities were levied in terms section 46 (1) of the Tax Act. 18. The Appellant objected to the principal income Tax liability and 50% additional tax charged. The objection was disallowed in fuli, meaning the status duo remained. 19.The appeal is against the Income Tax principal assessments raised and the 50% additional tax levied. Ad Paragraphs 3.1 and 3.2 20.These are agreed as these are requirements set out in section 8 (1) of the Tax Act 21. spelling out the requirements to be fulfilled for income to be subjected to tax. Ad Paragraph 3.3 This is disputed. ?Received by? means received by the taxpayer on his own behalf, for his own benefit. ?Accrued to" mean due and payable and entitled to. Income accrues when the taxpayer becomes entitled to it or when it is due and payable to him. Before inctuding any receipt in gross income you need to establish the date of accrual, so in this case before us the date of accrual is the date when the agreements were signed between Appellant and ZETDC and ZPC. Ad Paragraph 3.4 22.This is disputed. The contracts used by the Respondent during the audit were the 23. ones signed between ABB-ZIM and ZETDC and ZPC. No evidence was submitted by the Appellant to show that the contracts were abandoned. in the absence of such evidence, the Respondent correctly raised income tax assessments in terms of Section 6 and Section (1) of the Tax Act. Ad Paragraph 3.5 This is disputed. The assessments were raised on the income accrued to the Appellant based on the contracts signed between the Appellant and ZETDC and ZPC. No evidence proving that the contracts were abandoned was submitted to the Respondent. Therefore, income tax assessments raised in terms Section 6 and Section 8 (1) of the Tax Act, including penalties, should not be set aside. Ad Paragraph 4.1 24. No issues arise. Ad Paragraph 4.2 25.This is agreed and no issues arise. Ad Paragraph 4.3 26.!t is agreed that the Respondent is permitted to impose a additional tax on the taxpayer merely for incorrect tax return, which results inaccurate tax liability. However, in this case the Respondent imposed additional tax of 50% from the onset. Ad Paragraph 4.4 27.This is disputed. Section 46 (1) of the Tax Act allows the Respondent to levy additional tax of an amount equal to the tax properly chargeable after taking into account the omitted amounts, which is effectively 100%. Contrary to the assertions made by the Appellant, the Respondent actualty properly exercised its discretion pertaining the issue of additional tax. 28.The Respondent applied the provisions of section partly remitting part of the additional amount. This is how the 50% came into being. Ad Paragraph 4.5 29. This is agreed. The case law supports the Respondent?s position that the Respondent partially remitted additional tax levied as provided for in section 46 (6) of the Tax Act. Ad Paragraph 4.6 3U.This is agreed in part. The Appellant entered into the contract clearly aware of the terms and conditions of the contract (which the Appetlant negotiated themseives}. 31. Triad of Zinn (Traditional Triad) principle states that consideration should he made on the following; the crime, the accused and the interests of society. The Respondent partly remitted the additional tax taking into account that there was no fraud unearthed during the audit and that the Appeliant was also cooperative in terms of disclosing and submitting the requested information. However, this was also done without also ignoring the gravity of the offence. 32.Ad Paragraph 33. This is disputed. The Respondent levied additional tax in terms of section 46 (1) of the Tax Act which empowers the Commissioner to levy additional tax of an amount equal to the amount of tax levied which is effectively 100%. 34.However, the additional tax was reduced to 50% in terms of section 46 (6) of the Tax Act, considering that the Appellant did not know that they were supposed to account for incomes as per contracts signed since the payment was made to South Africa. There was no fraud unearthed during the audit and the client was also cooperative in terms of disclosing and submitting the requested information. The additional tax levied at 50% is appropriate in the circumstance. WHEREFORE the Respondent prays that the Appeal be dismissed with costs. DATED at HARARE this 24th day of JULY 2017 ZIMBABWE REVENUE AUTHORITY Respondent herein Cl The Legal and Corporate Services Division 23 Centre, oi"1 Floor 59 Kwanie Nkrumah Avenue HARARE (HTme) TO: THE REGISTRAR Special Court for Income Tax Appeals HARARE AND TO: CHIHAMBAKWE MUTIZWA PARTNERS Appellant?s Legal Practitioners 7 Lawson Avenue Milton Park HARARE