1

HH 845-22

HC 5997-21

ZIMBABWE PLATINUM MINES (PVT) LTD

versus

ZIMBABWE REVENUE AUTHORITY

and

COMMISSIONER OF ZIMBABWE REVENUE AUTHORITY

HIGH COURT OF ZIMBABWE

MAFUSIRE J

HARARE, 26 May 2022

Date of judgment: 23 November 202

Opposed application

Mr J. Muchada, for the appellant

Mr S. Banda, for the respondents

MAFUSIRE J

[1]        This is an application for a declaratory order. It is vigorously contested. The applicant is an expansive mining concern and a taxpayer. It is in dispute with the respondents over the correct method of computing its income tax liabilities. The dispute arises partly on account of the fact that the applicant’s income and expenditure are predominantly in foreign currency and only marginally in local currency. The parties differ on their interpretation of the law regarding the correct method of deductions from revenue of the expenditure incurred in foreign currency, and the deduction from revenue of the expenditure incurred in local currency. The first respondent issued some public notices in terms of s 37 of the Income Tax Act [Chapter 23:06], purportedly to advise the applicant on how such deductions should be made. The applicant disagreed. There was a stalemate. The applicant now seeks a declaratur to get this court to say that the applicant’s interpretation of those public notices is the correct one, and inversely, that the respondent’s interpretation is wrong. The draft order is couched as follows:

“1.       The Applicant’s interpretation of Public Notices 36 of 2021 and 57 of 2021 read with the Finance Act and the Income Tax is correct and that its income tax liability (including any estimates for purposes of provisional tax payments) in foreign currency shall be determined by deducting expenditure incurred in foreign currency from foreign currency revenue and expenditure incurred in local currency from local currency revenue.

2.         As such, that the Respondents’ interpretation of Public Notices 36 of 2021 and 57 of 2021 read with the Finance Act and the Income Tax Act and their decision on 29 June 2021 to decline the Applicant’s proposed method is incorrect.

3.         Any alternative / further relief as the Court may grant.

4.         The Respondents should be ordered to pay the costs of this application.”

[2]        Initially, the applicant insisted on the second respondent, or the purported office thereof, being part of the suit, despite vehement protests from the respondents. However, on the eve of the hearing, the applicant withdrew its application as against the second respondent and tendered the wasted costs. Therefore, any reference henceforth to the respondents, or respondent, is a reference to the first respondent only. In limine, the respondent does not accept that the dispute is one to be resolved by way of a declaratory order. It argues that rather, it is incumbent upon the applicant to seek a review of the respondent’s decision. The applicant persists that it is entitled to seek a declaratur in terms of s 14 of the High Court Act [Chapter 7:06] which is the law governing this sort of remedy. Therefore, the first decision of this court in this matter is whether or not the applicant is non-suited by reason of its decision to seek a declaratur instead of a review.

[3]        Section 14 of the High Court Act reads:

“14      High Court may determine future or contingent rights

The High Court may, in its discretion, at the instance of any interested person, inquire into and determine any existing, future or contingent right or obligation, notwithstanding that such person cannot claim any relief consequential upon such determination.”

[4]        The issue of a declaratur under s 14 of the High Court Act is an overploughed field. A declaratur in terms of s 14 of the High Court is granted to one who can demonstrate more than a mere academic interest. The court does not decide abstract or hypothetical questions: see Adbro Investments Co Ltd v Minister of the Interior & Ors 1961 (3) SA 283 (T) at p 285D; Munn Publishing (Pvt) Ltd v Zimbabwe Broadcasting Corporation 1994 (1) ZLR 337 (S); 1995 (4) SA 675 (ZS), [1995] 3 All SA 444 (Z); Johnsen v Agricultural Finance Corp 1995 (1) ZLR 65 (S), and Movement for Democratic Change v The President of Zimbabwe & Ors 2007 (1) ZLR 257 (H). The applicants must show the existence of some tangible and justifiable advantage to themselves. They must demonstrate an interest in having their existing, future or contingent right or obligation determined even if they may claim no relief consequent upon such determination. In casu, the applicant’s draft order is poorly crafted. It is not quite clear that what is sought is the determination of an existing or a future or a contingent right. It does not seek the determination of any rights at all. It manifestly seeks to challenge a certain decision by the respondent concerning the correct interpretation of the public notices issued by the respondent. The applicant wants vindication of its own position regarding those notices and condemnation of the position taken by the respondent. The draft order does not crisply point out such a legal right as may have been dribbled away by the respondent. Paragraph 3 is worse. It is vague, open ended and therefore patently incompetent.  

[5]        However, the lack of precision or elegance in the applicant’s draft order is not enough reason to shut the court’s door in its face. This conclusion is arrived at for a number of reasons, not least the fact that an objective and wholesome assessment of the case, particularly the factual compendium and the origin of the dispute, shows that there is a live and contentious dispute between the parties concerning the correct interpretation of the various tax statutes regarding the correct method of deductions of foreign currency expenditure from foreign currency income, side by side with deductions of local currency expenditure from local currency income, and that such dispute requires a declaration by this court on the correct position thereof. Furthermore, the right to a declaration is not lost merely by reason of the fact that there may exist another remedy such as a review: see Munn Publishing (Pvt) Ltd, supra, at p 334A – B; also Bulawayo Bottlers (Pvt) Ltd v Minister of Labour, Manpower Planning and Social Welfare & Ors 1988 (2) ZLR 129 (HC), at p 142G. At any rate, it is always entirely in the discretion of the court whether or not to grant a declaratur where the requirements in terms of s 14 of the High Court Act have been fulfilled. In the Munn Publishing case above, the appellate court said that once the condition precedent to the grant of a declaratur has been fulfilled, the next rung of the enquiry is whether or not the case in question is a proper one for the exercise of the court’s discretion.[1] In exercising this discretion, the court makes reference to public policy: see Family Benefit Friendly Society v Commissioner for Inland Revenue & Anor 1995 (4) SA 120 (T) which was cited with approval in the MDC case above.[2]

[6]        In the present case, I consider that the applicant has fulfilled the requirements of a declaratur in terms of s 14 of the High Court Act. Among other things, the application before the court shows that:

• the applicant is an interested party;
• the applicant is not seeking a legal opinion from the court merely on a hypothetical or abstract or academic question, but on a matter that materially affects its day-to-day operations insofar as its tax affairs are concerned;
• as such, the applicant seeks to gain some tangible and justifiable advantage to itself as it has an interest in having its existing, future or contingent right or obligation determined in regards to the right to claim expenditure incurred in United States dollars [USD]to be deducted in that currency from the income earned in that currency, and equally to claim expenditure incurred in Zimbabwean dollars [ZWD] to be deducted in this currency from income earned in this currency without objection from the respondent;
• from a public policy point of view, it is important that the issue before the court be determined because it must be affecting a considerable number of taxpayers whose expenditures are in both foreign currency and local currency in the production of taxable incomes, making it necessary to ascertain the correct method of the deductions of the expenditures from such incomes for tax purposes.

[7]        But having said that, whether the applicant in the present matter is, in fact, entitled to the declaration that it seeks is a different consideration altogether. That is the object of the whole application. The difficulty is that what the respondent seeks to achieve by its preliminary objection is to prevent the court from even considering the application altogether because it believes the application is defective for want of form. The court disagrees. As alluded to earlier, whilst the form the applicant’s draft order is in may not stand up to scrutiny, the substance of the application is quite meritorious. This is one of those cases where form should not override substance. Therefore, the respondent’s point in limine regarding the right of the applicant to seek a declaratur in the circumstances of this case is hereby dismissed. The costs shall be in the cause. This decision paves the way for a determination on the merits. The starting point is a detailed exploration of the material facts. They are largely, if not entirely, uncontroverted.

[8]        The applicant mines and processes for export, platinum and associated metals such as nickel, gold, cobalt and silver. The respondent, a statutory corporation set up in terms of s 3 of the Revenue Authority Act [Chapter 23:12], is the central collector of taxes and related levies for government. All of the applicant’s exports are paid for in USD. But the applicant also generates revenue in ZWD from scrape sales and local investments. In order to generate this foreign currency revenue and local currency revenue, the applicant incurs operational expenditure [Opex] and capital expenditure [Capex] in both currencies as well. The major expenditure items in local currency [ZWD] include trackless mining machinery, maintenance costs, ore haulage, security, rentals, salaries, and so on. The major expenditure items in foreign currency [USD] include imported goods and services such as trackless mining machinery, reagents, mill liners, explosives, a portion of salaries, power, and so on. To arrive at its gross income, the applicant grosses up its USD and ZWD revenue. To compute its taxable income, the applicant deducts those expenses incurred in the production of its income. The bulk of the applicant’s revenue is USD. So is the bulk of the expenditure. But there is no telling which amount of the USD expenditure goes to generate which amount of that currency revenue and likewise, which amount of the ZWD expenditure goes to generate which amount of this currency revenue.

[9]        There were some rapid changes in the monetary policies and tax regime by central Government from February 2019. In paraphrase, whilst previously the economy functioned on the basis of a multi-currency system in terms of which the currencies of other countries like the USD, the British Pound, the Botswana Pula, the South African Rand, and so on, were legal tender when the local currency had practically been demonetized, subsequently there was introduced a series of statutory instruments and legislative amendments the effects of which were, inter alia, to re-introduce a new local currency, and then to ban altogether the use of those other currencies as legal tender in Zimbabwe. With the passage of time, the ban was modified to allow the limited use of some specified currencies, chiefly the USD, for certain transactions. The details are not important. At about the same period, the Reserve Bank of Zimbabwe [RBZ] introduced a foreign currency retention scheme. In terms of it, exporters earning foreign currency would be entitled to retain a portion of their foreign currency revenue for their operations and obliged to surrender and liquidate the balance to the RBZ at the ruling or prevailing market rate of exchange. At the relevant period, the applicant fell into a category of exporters the retention and surrender ratios of which were 60% and 40% respectively.

[10]      The respondent also issued a series of public notices to advise taxpayers on a variety of subjects in regards to their tax computations in the light of those legislative changes. The subjects covered included advice on the due dates for submission of income tax returns; how to treat the income from trade and investments; returns by dormant companies; the currency to use in the completion of income tax returns and the manner of such completion where a taxpayer’s income and expenditure were in both foreign currency and local currency. Two such public notices, No. 36 of 2021 and No. 57 of 2021, dealt with the submission of, inter alia, income tax returns for the tax years ending 31 December 2020. The applicant found some of their provisions objectionable. The impugned provisions, largely identical in the two, were to the effect that in general, income tax returns would be completed in ZWD but that the respondent could accept returns completed in foreign currency in the following manner [the area of conflict being underlined]:

• taxpayers with gross income in both local currency and foreign currency could submit separate income tax returns for taxable income accrued or received in the respective currencies;
• taxpayers would be required to submit an application in writing to the respondent detailing their positions and attaching their income tax returns;
• taxpayers with gross income mainly in foreign currency but with allowable deductions in local currency and foreign currency could submit a single income tax return in foreign currency;
• taxpayers should submit an application in writing to the respondent detailing their positions and attaching the income tax returns;
• in preparing the income tax returns, where apportionment of allowable deductions was required, for purposes of submission of separate returns, taxpayers should apportion based on the contribution of the respective currencies to total turnover, or any other method as the respondent might approve on request.

[11]      Taking a cue from the provision in the public notices that taxpayers could request an alternative method of apportionment of allowable deductions different from the apportionment based on the contribution of the respective currencies to total turnover, in June 2021 the applicant submitted to the respondent for approval, its alternative method for the year ending 30 June 2021. This would be based on the filing of two separate returns in respect of the revenue in both local currency and foreign currency. Distilled, the details of the alternative method proposed by the applicant were as follows:

• the revenue and expenses (comprising Opex and Capex) would be split into USD and ZWD and the taxable income and the taxes would be computed by currency in line with the filing of two separate tax returns for the same tax period;
• the export revenue would be apportioned in the ratio of 60 : 40 USD and ZWD respectively in line with the then prevailing retention ratios by the RBZ, the converted amount being combined with all the other ZWD income accruals;
• any USD exchange gains or losses would be applied onto the 40% ZWD component for the reason that the RBZ induced liquidation of USD did not occur simultaneously with the accrual or receipt of the foreign currency;
• Opex would be deducted in either USD or ZWD based on the currency of the invoice;
• It not being practical to employ the method of apportionment of allowable deductions based on the contribution of the respective currencies to the turnover, the applicant would propose an alternative method for the respondent’s approval, given that its business earned 100% of its export revenue in USD and that, aside the notional 60% to 40% RBZ induced apportionment which the applicant employed for the revenue element only, it was impractical to adopt the same for expenditure as some components like employment costs which were incurred in both currencies, could not properly be apportioned on the basis of the currency of the revenue;
• by reason of the foregoing, the applicant would propose apportionment of both Opex and Capex based on the currency of invoice when the expenditure was actually incurred, allegedly in line with s 15(2) of the Income Tax Act [Chapter 23:06] and the Fourth Schedule thereto;
• non-deductible expenditure should be based on the currency of the invoice given that it would not be incurred in the production of the income.

[12]      In response, the respondent agreed to the income split at the 60 : 40 ratio for USD and ZWD respectively. However, it rejected the apportionment of deductible expenses, capital allowances, and non-deductible expenses on the basis of the currency of the invoice. It insisted on a split of the expenses using the same ratio of 60 : 40 for USD and ZWD respectively, allegedly because the applicant incurred both USD and ZWD expenses in the production of the income in the two currencies. The respondent alleged that such a position was guided by, inter alia, s 15(1) and (2) of the Income Tax Act which allegedly allows deductions of expenditure and losses to the extent to which they are incurred for the purposes of trade or in the production of the income [emphasis by the respondent]. The respondent also said it was further guided by s 4A(10) of the Finance Act [Chapter 23:04] which allegedly deems the income realised after the retention scheme by the RBZ to be income in ZWD and that, in that regard for tax purposes, the applicant did not earn 100% of its taxable income in USD. The respondent explained further that it was not appropriate for the applicant to deduct all USD expenditure from USD income since that expenditure was being incurred for earning both types of incomes. The respondent concluded its argument by stating that it was critical that the apportionment method should align to the income streams in line with s 15(1) of the Income Tax Act. As such, there would be no ground to approve the applicant’s alternative method of apportionment based on the currency of the invoice against the currency of the income as it differed from the 60 : 40 ratio.

[13]      Thus, the dispute between the parties, in paraphrase, crystalized to this: in terms of legislation, what is the correct method of apportionment of allowable deductions from revenue where both the expenditure and the revenue are in USD and ZWD but in disparate proportions? Should the applicant’s proposed method of effecting those deductions on the basis of the currency of the invoices be determined as the correct one, or should it be rejected as wrong and the respondent’s method of apportionment on the basis of the 60% USD to 40% ZWD be determined as the correct one? The answer lies in the relevant legislation, or in the event of an ambiguity, in the proper interpretation of that legislation, in order to arrive at the intention of the legislature.  An adjunct to the dispute is whether or not there exists a lacuna in the law regarding the correct method of apportionment and if so, whether or not by those public notices, the respondent was trying to legislate in order to cover that lacuna.

[14]      The dispute before the court requires that some basic and foundational aspects of tax law be restated. They are these. A taxpayer should pay all the taxes due by him / her and the central collector of revenue should collect no less or no more. In the old English Case of Partington v Attorney-General (1896) L.R. 4 H.L. 100 it was sated:[3]

“If the person sought to be taxed comes within the letter of the law, he must be taxed, however great hardship may appear to the judicial mind today. On the other hand, if the statute seeking to impose the tax cannot bring the subject within the letter of the law, the subject is free, however apparent within the law the subject might appear to be. In other words if there be an equitable construction, certainly such construction is not admissible in a taxing statute – where we must simply adhere to the words of the statute.”

[15]      In a follow up case, Cape Brand Syndicate v Commissioners of Inland Revenue 1921 (1) KB 64 it was said that in a taxing statute, one has to look at what is clearly said as there is no room for any intendment. There is no equity about a tax. There is no presumption as to tax. Nothing is to be read in. Nothing is to be implied. One can only look fairly at the language used. Now, coming back to the Zimbabwean Income Tax Act, with contentious terms and phrases being underlined, income tax is paid on the taxable income received or accrued to a person in the year of assessment.[4] Income tax is calculated in accordance with the Finance Act,[5] as amended from time to time. Taxable income is the balance of the income after effecting all allowable deductions from the income.[6] Income is the remainder of the gross income after deducting amounts exempt from tax.[7] Gross income is the total amount received or accrued in any year of assessment.[8] The amounts exempt from tax are specified in the Third Schedule.[9] The allowable deductions are specified in s 15. With specific reference to mining, where the one income is from mining operations and the other from other trade and investments, allowable deductions are only in respect of the income to which they relate.[10] Further, such allowable deductions are the expenditure and losses to the extent to which they are incurred for the purposes of trade or in the production of the income, unless they are expenditure or losses of a capital nature.[11] In terms of s 4A of the Finance Act, tax on taxable income earned or received or accrued in whole or in part in a foreign currency is payable in foreign currency. This is so irrespective of the provisions of the Reserve Bank of Zimbabwe Act [Chapter 22:15] and the Exchange Control Act [Chapter 22:05] in regards to legal tender. As aforesaid, the ratio of the export retention thresholds by the RBZ were 60 : 40. In s 4A(10) of the Finance Act, where pursuant to a retention scheme operated by the RBZ, any part of the taxable income earned in foreign currency is liquidated and paid in local currency upon transfer to a nostro account, the tax due on such amount as has been liquidated is calculated on the basis that that income was earned in local currency.

[16]      The applicant argues that s 4A(10) of the Finance Act does not deal with expenditure in the determination of the taxable income, but only with income. For this reason, it apportions its revenue on the 60 : 40 ratio. But as regards expenditure, it advocates a different ratio which it says should be based on the currency of the invoice. It argues that this is more consonant with s 15(2)(a) of the Income Tax Act than the respondent’s method which apportions both the income and the expenditure on the notional RBZ ratio. The question that then arises for the court is this: by s 4A(10) of the Finance Act, did the legislature intend to split the retention schemes operated by the RBZ between income and expenses? In other words, was it the intention of the legislature that whilst the income of a taxpayer earning both foreign currency and local currency would be split in accordance with the RBZ retention thresholds, would a different ratio apply for expenses? What did the legislature mean, in s 15(2)(a) of the Income Tax Act, when it allowed deductions of expenditure and losses to the extent to which they are incurred … … … in the production of the income …? It is observed here that whilst s 4A(10) of the Finance Act refers to income only, s 15(2)(a) of the Income Tax Act matches both the income and the expenditure. In terms of this latter provision, expenses that must be deducted are those incurred in the production of the income. As the respondent argues, the expenditure should be deducted from the income that was earned from that expenditure. The income in the respective currencies is matched with expenses incurred in the respective currencies. The matching principle is part of our law: see Delta Beverages (Pvt) Ltd v Zimbabwe Revenue Authority SC 3-22. In that case, the appellate court, affirming the findings of the Special Court for Income Tax Appeals on the matching principle, concluded on the facts before it, that the expenditure that could not be linked to the production of the income in a tax year could not be deductible in that year. That was the matching principle in application.

[17]      I consider that the whole gamut of the tax legislation relevant to the calculation of the taxable income of persons whose income and expenditure are partly in foreign currency and partly in local currency has to be read together and interpreted sensibly so as to arrive at the true intention of the legislature. It seems that the applicant singles out a particular provision and seeks to interpret it piece meal and in isolation to the other provisions having a bearing on the terms or phrases in contention. It is my considered view that when s 4A(10) of the Finance Act is read together with s 15(2)(a) of the Income Tax Act, there can be no question that it was intended to apportion foreign currency income and local currency income in the same ratios as the foreign currency expenditure and local currency expenditure. This is more so, given the provisions of s 4A(7) of the Finance Act. It provides that all provisions of the Taxes Act (the Income Tax Act), shall apply to the payment of tax in foreign currency in the same way it applies to the payment of tax in local currency. In full the provision reads:

“For the avoidance of doubt it is hereby declared that all the provisions of the Taxes Act shall apply, with such necessary changes as may be necessary, to the payment in foreign currency of the taxes referred to in [… the specified provisions …] in the same way as they apply to the payment of such taxes in Zimbabwean currency” [emphasis added].

[18]      The applicant’s proposed method of accepting the RBZ notional ratio of 60 : 40 in regards to income only, and using the currency of the invoice for expenditure, has no legal backing. It is common cause that the applicant cannot pin-point with any degree of exactitude or accuracy how much of the USD expenditure produces how much of the income, USD or ZWD, and conversely, how much of the ZWD expenditure goes to produce how much of the income in the two currencies. All that can be said is that the applicant’s income and expenditure are predominantly USD and only marginally ZWD. Section 4A(10) of the Finance Act caters for such uncertainties. If, as the applicant argues, apportionment should be confined to revenue only, then s 15(2)(a) closes up the gap in regards to expenditure. The main dispute can only be decided in favour of the respondent.

[19]      The side-shoot of the dispute, namely whether by its public notices aforesaid the respondent improperly arrogated to itself legislative powers purportedly to cater for a lacuna in the law does not arise, or it falls away. Firstly by s 37 of the Income Tax Act, the respondent is obliged to issue such public notices annually to all taxpayers as may be specified, calling upon them to furnish returns for assessment in the time and manner specified, and to the place directed. The applicant argues that the respondent’s public notices exceed the powers conferred by statute by purporting to legislate how the applicant should treat the question of apportionment dealt with above. However, in the light of the conclusion reached above, it is not correct that the respondent has purported to legislate. It has merely unpacked the relevant legislation and advised on the manner of the apportionment that is consonant with that legislation. It is the applicant’s reading and interpretation of the same law that seems faulty.

[20]      It is for the above reasons that the declaratur sought by the applicant cannot be granted. Consequently, the application is hereby dismissed with costs.    

23 November 2022

Maguchu & Muchada, appellant’s legal practitioners

Sinyoro & Partners, respondents’ legal practitioners