25 June 2014 ABB South Africa (Pty) Ltd ABB Campus 2 Lake Road Longmeadow Business Estate (North) Modderfontein 1609 Attention: Per email @za.abb.com Dear Opinion regarding the contracts executed in Zimbabwe We refer to our scope of works letter dated 17 June 2014 regarding the above and set out below the requested advice. Please note that the opinions expressed in this document are based on our interpretation of current enacted Zimbabwean law. These principles may be subject to change as a result of future legislative amendments and/or court decisions. Such changes may impact on our opinion set out below and the outcome of the transactions analysed. Neither this report nor its contents may be disclosed to any other person without the prior written consent of Deloitte & Touche. No other party may receive or rely on this opinion for any purpose whatsoever and if such party gains access to the opinion, it does so at its own risk and without recourse to Deloitte & Touche. In proceeding to read the opinion, the recipient on his/her own behalf and on behalf of his/her organisation is reconfirming his understanding of this position and the above conditions applying. Our comments are based on the facts and circumstances brought to our attention. Please advise us immediately of any areas where our information is inaccurate or where there are facts that we have not recorded, as this may materially affect our comments and conclusion. We have summarised below our understanding of the relevant facts as communicated to us. Should our understanding be incorrect or misstated in any way, please contact us immediately, as this may have a significant impact on our advice. Kindly note that this opinion is issued subject to the terms and conditions as provided in the Master Service Agreement concluded between ABB South Africa (Pty) Ltd (“ZAABB”) and Deloitte. Deloitte. ABB Zimbabwe (Pty) Ltd (“ZWABB”) Opinion regarding the contracts executed in Zimbabwe 1. Background facts We understand the factual background to be as follows:         2. ABB Zimbabwe (Pty) Ltd (“ZWABB”) entered into contracts with Zimbabwe Power Company (Private) Limited (“ZPC”) and ZETDC during the period 2010 – 2013; ZWABB was mainly involved in the contract negotiation, but was not intending to render the services under the contracts; ZWABB subcontracted all the works under the contracts to ZAABB. There is no signed contract to this effect, however both parties verbally agreed to this; ZAABB, in turn, subcontracted the onshore works which comprised the installation and commissioning services to local third parties in Zimbabwe; ZAABB carried out the offshore works, which comprised the design and engineering aspects as well as the supply of the equipment from South Africa. The equipment was largely sourced from other ABB companies abroad; There were no formal written agreements concluded between ZWABB and ZETDC. During the contract negotiations, ZWABB requested all purchase orders (“PO’s”) to be issued in the name of ZAABB; The local companies in Zimbabwe invoiced ZAABB, including VAT, in respect of the onshore works carried out in Zimbabwe. ZAABB, in turn, invoiced the clients directly for the entire project, both in respect of onshore and offshore works; ZAABB recognized the offshore revenue in South Africa and the onshore revenue was recognized by the local subcontractors in Zimbabwe. A portion of the offshore revenue was allocated to ZWABB but this was not paid over; instead it was set off against the intercompany loans owed to ZAABB. Scope of services In light of the above background, you have requested us to review the contracts and advise on: 2.1 3. The potential tax liability for ZWABB, mainly income tax, in Zimbabwe by virtue of these contracts. Our advice 3.1 The Law Zimbabwe has a source based system of taxation. Companies are subject to tax in Zimbabwe on income arising from a Zimbabwean source. However, residents are taxed on foreign-source dividends and interest. Zimbabwe is in the process of introducing a residence based tax system in terms of the new Income Tax Bill which was expected to be introduced during the year but has been delayed in the legislative process. The new regime proposes that a company will be resident in Zimbabwe if it is incorporated in Zimbabwe or if its central management and control is in Zimbabwe. The corporate income tax rate in Zimbabwe is 25%. An AIDS levy of 3% is generally imposed on the corporate tax, bringing the effective corporate income tax rate to 25.75%. Income is recognised on the earlier of the date of receipt or of accrual. In addition, Zimbabwe levies VAT on the supply of goods and services by a registered operator in Zimbabwe or upon importation of goods and services into Zimbabwe, at a rate of 15%. A registered operator is any person that is carrying on a trade on a continuous basis in Zimbabwe. A registered operator who makes taxable supplies of USD 60 000 or more per annum is obligated to register for VAT. 2 Deloitte. ABB Zimbabwe (Pty) Ltd (“ZWABB”) Opinion regarding the contracts executed in Zimbabwe Zimbabwe currently does not have any transfer pricing legislation. However, this is expected to be introduced in the short to medium term. Currently, Zimbabwe relies on the general anti-avoidance rules in assessing the arm’s length nature of related party and other transactions. 3.2 Application of law ZWABB is a company incorporated in Zimbabwe and is accordingly tax resident in Zimbabwe. In addition, ZWABB is an operator in Zimbabwe as it is carrying on a trade therein. Thus, to the extent that it has annual taxable supplies of USD 60 000 or more, it will be required to register and account for VAT in Zimbabwe. We reviewed the following contracts entered into between ZWABB and ZPC, which were subsequently subcontracted to ZAABB:    ZPC 09/11(a); ZPC 09/11(b); and ZPC 13/10. The subcontract agreement entered into between ZWABB and ZAABB constitutes a transaction carried out between related parties. As such, the terms and conditions of the subcontract agreement should be similar to those which would be entered into between independent parties dealing at arm’s length. Although there is currently no transfer pricing legislation in Zimbabwe, we think that the Zimbabwe Revenue Authorities (“ZIMRA”) may seek to enforce this by invoking the anti-avoidance provisions provided for in the Income Tax Act. What ZIMRA may potentially seek to argue is that by ZWABB not charging or charging ZAABB less for securing the contracts, ZWABB avoided tax in Zimbabwe by moving that profit to ZAABB. Therefore, we believe that ZWABB should have earned an arm’s length margin in respect of the subcontract agreement. In this respect, we understand that there was a portion of income allocated to ZWABB. We don’t know whether this represented the arm’s length subcontract agreement. If it did, the risk we have outlined above will be significantly reduced as this income would have been taxable in Zimbabwe. However, we understand that this was never physically paid to ZWABB. We understand that this was offset against the loans owed by ZWABB to ZAABB. We think that this poses a problem for ZWABB. We believe that ZWABB should have recognized the income in its books first, pay tax on it in Zimbabwe and then repay loans owed to ZAABB. By not recognizing the income in Zimbabwe but simply off-setting it against its liabilities, there is a real risk that ZIMRA may see this as an anti-avoidance transaction. In addition to the tax, ZWABB may also be liable to interest on the late payment of tax at a rate of 10% per annum. In addition, penalties of up to 100% of unpaid taxes may be levied. We have not been provided with any financial information regarding the aforementioned contracts. We are thus unable to quantify ZWABB’s tax exposure in Zimbabwe. We trust that you will find the above to be in order. Should you wish to discuss any aspect of this letter, . We look forward to being of service to you. please do not hesitate to contact me on Yours faithfully, 3 Deloitte. ABB Zimbabwe (Pty) Ltd (“ZWABB”) Opinion regarding the contracts executed in Zimbabwe Musa Manyathi Director: International Tax 4