Mota EngenharI Construction SA v Zimbabwe Revenue Authority

### Preamble
Judgment No. SC 115/22
1
Civil Appeal No. SC 487/20
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REPORTABLE (100)

MOTA     ENGENHARI     CONSTRUCTION      SA

v

ZIMBABWE     REVENUE     AUTHORITY

SUPREME COURT OF ZIMBABWE

GWAUNZA DCJ, MUSAKWA JA & MWAYERA JA

HARARE: 11 OCTOBER 2021 & 31 OCTOBER 2022

D. Tivadar, for the appellant

S. Bhebhe, for the respondent

MWAYERA JA:	This is an appeal against the whole judgment of the Special Court for Income Tax Appeals, in which the court upheld the Commissioner General’s determination that Non Resident Tax on fees (“NRTF”) imposed by s 30 of the Income Tax Act [Chapter 23: 06] (“the Act”) as read with the 17th Schedule of the Act is applicable to intra-company payments pertaining to fees paid by a local branch to its head office for services rendered by the head office to the branch.

THE PARTIES

The appellant is a public company incorporated in terms of the laws of Portugal with its headquarters based in the same country.  It is a non-resident company for tax purposes in Zimbabwe.  However, the appellant operates in Zimbabwe through a branch (“the local branch”) registered in Zimbabwe in terms of s 330 of the now repealed Companies Act [Chapter: 24:03].  The respondent is an administrative authority established in terms of the Revenue Authority Act [Chapter 23:11] tasked with the collection of revenues due in terms of the Act.

FACTUAL BACKGROUND

The appellant’s local branch entered into intra-company agreements with its head office in Portugal in terms of which the latter would provide the former with services including legal, procurement, logistics, equipment, human resources, production management and specialised technical services in return for fees.  These fees were payable during the tax years 2014 – 2017.

Subsequently, the respondent carried out an audit on the appellant’s tax affairs for the relevant period and discovered that the appellant’s local branch had been paying intra-company fees to the Portuguese head office for intra-company services rendered in terms of the intra-company agreements entered into.  As such, the appellant was claiming fees as permissible deductions against income in its books of accounts and tax returns.

The appellant however, was not withholding Non-Resident tax fees (NRTF) on the fees paid for the above mentioned services.  The respondent on the other hand, was of the view that the appellant was obliged to withhold the NRTF as required by s 30 of the Act as read with the 17th Schedule to the same.  The respondent took issue with the appellant’s position and consequently proceeded to issue NRTF assessments against the appellant for the period 2014 – 2017 amounting to USD4 404091.08.  The respondent’s position was that technical fees payable by the local branch to the appellant’s head office were taxable non-resident fees.  The NRTF assessments were issued out on 30 March 2019.

On 8 April 2019, the appellant requested for written reasons informing it of the basis of the disputed assessments.  The respondent furnished a response on 17 April 2019. The respondent’s position was that the appellant was due to pay for various technical and administrative services that were rendered by associated entities and one foreign supplier.  The NRTF was due on these fees.  This is because of the fact that the amounts were credited to the intra-company accounts or their accounts.  This meant that withholding taxes were payable in the circumstances as this position was provided for in s 30 as read with the 17th Schedule of the Act.

The appellant as an aggrieved tax payer objected to the assessment in accordance with the provisions of s 62 of the Act.  It raised and lodged an objection to the tax assessments on 29 April 2019.

The appellant objected to the intra-company payment fees paid by its local branch to the Head Office being held as subject to NRTF.  It contended that the company was operating through a branch and therefore it did not qualify as a person as defined in s 2 of the Act. The Commissioner was of the view that the restrictive interpretation or definition of “person” taken by the appellant was incorrect. It accepted that “person” ought to be interpreted in a manner inclusive of a local branch being taken to be a separate entity from its head office for purposes of tax.  As regards the issue of double taxation raised by the appellant, the Commissioner found that there was no double taxation because the local branch, as the tax payer in relation to the fees, was the entity that was required to withhold tax and not the appellant.

The appellant also objected to the penalty of 20% on the tax which was imposed by the respondent in terms of para 6 of the 17th Schedule.  This paragraph empowers the Commissioner General to levy a penalty for non-payment of tax.  It further allows the Commissioner General to exercise his discretion as regards the appropriate penalty.  In casu the Commissioner General determined the penalty at 20%. All the objections by the appellant were disallowed by the Commissioner General on 2 July 2019.

Dissatisfied with the Commissioner General’s findings, the appellant approached the court a quo on the following grounds of appeal:

In determining the appellant’s objection, the Commissioner erred at law and on the facts in finding that the appellant’s local branch is obliged in terms of the 17th Schedule of the Act, to withhold Non Resident Tax Fees (NRTF) on the payment of fees by the appellant’s local branch to the appellant’s Head Office which is based in Portugal when she should have found that the local branch is not obliged in terms of the Schedule to withhold NRTF on the payment of those fees.

In determining the appellant’s objection, the Commissioner erred at law and on the facts in finding that a local branch of the appellant is a separate legal person for purposes of withholding NRTF in terms of the 17th Schedule to the Act, when the local branch makes intra-company payment fees to the appellant’s head office based in Portugal, when she should have found that a branch is not a separate legal entity for purpose of that schedule and that intra-company payment of fees are not subject to withholding tax under the schedule (sic).

In determining the appellant’s objection, the Commissioner erred at law and on the facts in finding that the appellant must be taxed under part 111 of the Act in respect of its business profits in the case of the local branch and under part IV (17th Schedule) in respect of fees payable by the appellant’s local branch to the appellant’s head office based in Portugal, when she should have found that the appellant is only taxed under part III of the Act.

In determining the appellant’s objection, the Commissioner erred at law and on the facts by failing to set aside the penalty in the circumstances.

SUBMISSIONS BEFORE THE COURT A QUO

In the court a quo, the appellant contended that s 30 as read with the 17th Schedule of the Act were not applicable to the local branch because the local branch was not a person and could not be treated as a separate legal person.  It was contended that the local branch, instead, ought to be treated as part of the appellant and as such could not be a payer for purposes of the 17th Schedule of the Act.  Concerning the issue of NRTF, it was argued that the local branch was already being subjected to income tax on profits realised such that the suggestion that it be subject to s 30 and pay NRTF would amount to double taxation.  The appellant further contended that the Act enjoins the Commissioner General, to inquire whether a defaulting taxpayer had an intention to evade tax and where no such intention exists, the penalty should be waived.  The appellant argued that, it never had an intention to evade tax but that it genuinely believed there was no obligation to withhold NRTF because of its interpretation of the word “person”.

In response, counsel for the respondent argued that the two tax regimes in this case were different such that the issue of double taxation did not arise.  It was contended for the respondent that the tax required to be paid by the appellant as a foreign registered company was NRTF, in respect of fees paid to it by the resident local branch which in turn was required to withhold the tax and pay the Commissioner General in terms of the 17th Schedule.  The two entities were separable persons for purposes of the Act.

In respect of the query on penalty, the respondent’s counsel contended that the appellant had the intention of evading payment of tax.  It was argued that the appellant did not make full disclosure of transactions which were only unearthed after verifications and investigations by the respondent.  The respondent’s counsel contended that the penalty was properly levied.

FINDINGS OF THE COURT A QUO

In determining the matter, the court a quo held that the appellant’s local branch was liable to withholding tax as provided for in the 17th Schedule.  It further held that the local branch fell within the ambit of the class of “body of persons unincorporated” as provided for in the Act and therefore it fits under the definition of “person”. In view of this, it found that the local branch was a body of persons unincorporated which had entered into a contract in terms of which it would receive certain services from the appellant in exchange for payment. It would credit its head office with fees.  It was considered to be the person who pays or is responsible for the payment of fees to the non-resident company and thus, the appellant was a payer for purposes of the 17th Schedule.

Further, the court held that the two taxes were indeed different for purposes of the Act and were imposed against different persons. One such person was the local branch as a taxpayer in Zimbabwe in respect of profits earned from its business in Zimbabwe.  The other was the non-resident company, the appellant as a foreign resident receiving fees from a source within Zimbabwe in respect of services rendered.  The local branch, therefore as the payer of fees, would be the agent of the Commissioner for purposes of collecting the NRTF and there would be no question of double taxation.

In respect of the issue of the penalty, the court a quo held that the Commissioner General’s decision was correct.  The appellant made no effort to obtain directives on its liability to withhold NRTF.  It was held that the penalty was properly imposed.

The appellant was aggrieved by the decision of the court a quo and thus noted the present appeal on the following grounds.

GROUNDS OF APPEAL

The court a quo erred in law by holding that the appellant’s local branch is a separate legal person for purposes of withholding Non-Resident Tax Fees. (NRTF) in terms of the 17th Schedule to the Income Tax Act {chapter 23:06](ITA) when the local branch makes intra-company payment of fees to the appellant’s head office based in Portugal when the court should have found that a branch is not a separate legal entity for purposes of that schedule and that intra-company payment of fees are not subject to withholding tax under the schedule.

The court a quo erred in law by holding that the appellant’s local branch is obliged in terms of the 17th Schedule to the Income Tax Act, to withhold (NRTF) on the payment of fees by the appellant’s local branch to the appellant’s head office which is based in Portugal, when the court should have found that the local branch is not obliged in terms of that schedule to withhold NRTF on the payment of those fees.

The court a quo erred in law by holding that the appellant must be taxed under Part III of the Income Tax Act in respect of business profits in the case of the local branch and under Part IV (17th Schedule) in respect of fees payable by the appellant’s local branch to the appellant’s head office based in Portugal, when the court should have found that the appellant is only taxed for business profits under Part III of Income Tax Act (sic).

Given the mitigating facts, the court a quo erred in law by upholding the penalty in the circumstances.

SUBMISSIONS BEFORE THIS COURT

Mr Tivadar, for the appellant contended that a local branch is not a person as envisaged by s 2 (1) of the Act.  He submitted that although the definition of a person as provided for in s 2 (1) of the Act is wide, the appellant could not be classified as a person.  He contended that the legislature did not contemplate the branch of a company as a ‘person’ for purposes of the Act because of the exclusion of the term “branch” in the Act. He submitted that the branch could not be treated as a separate legal person from its main holding company.  He further submitted that the penalty imposed of 20% ought to be set aside since the court a quo failed to exercise its discretion properly as it did not take mitigatory factors into consideration.

Per contra, Mr Bhebhe, for the respondent, submitted that it was the legislature’s intention that a local branch be covered by the definition of a “person” for tax purposes.  He referred to the definitions provided for in the 17th Schedule of the Act.  It was submitted that the local branch was the payer as it is the one that paid fees to the appellant which in turn would be considered to be the payee in terms of the definitions outlined in the Act. Thus, in light of this, the respondent’s counsel submitted that the local branch was obliged to withhold NRTF in terms of the 17th Schedule of the Act.  On the issue of the penalty, Mr Bhebhe contended that the penalty of 20% was imposed after taking into consideration all mitigatory factors and thus the discretion was properly exercised.

ISSUES FOR DETERMINATION

The two issues that arise for determination in this case are:

Whether the appellant’s local branch was liable to withhold NRTF in terms of s 30 as read with the 17th Schedule of the Act.

Whether or not the court a quo erred in upholding the 20% penalty in the circumstances.

THE LAW

The applicable provision in the determination of this matter is s 30 as read with the 17th Schedule of the Act. Section 30 of the Act provides as follows:

“30 Non-residents tax on fees.

There shall be charged, levied and collected throughout Zimbabwe for the benefit of the consolidated Revenue Fund a non-residents’ tax on fees in accordance with the provisions of the Seventeenth Schedule at the rate of tax fixed from time to time in the charging Act.”

The 17th Schedule to the Act deals with Non-Residents Tax on Fees.

“SEVENTEENTH SCHEDULE (SECTION 30 AND 95)

NON-RESIDENTS’ TAX ON FEES

---

(2) For the purposes of this Schedule –

(a) fees shall be deemed to be from a source within Zimbabwe if the payer is a person who or partnership which is ordinarily resident in Zimbabwe.

(b) in determining whether or not non-residents’ tax on fees should be withheld, the question as to whether or not-

(i)  the payer is a person or partnership ordinarily resident in Zimbabwe, or

(ii)  the payee is a non-resident person;

shall be decided by reference to the date on which fees are paid by the payer.

(c)   fees shall be deemed to be paid to the payee if they are credited to his account or so dealt with that the conditions under which he is entitled to them are fulfilled, whichever occurs first.

(d) ----

Payer to withhold tax

2 (1) Every payer of fees to a non-resident person shall withhold non-residents’ tax on fees from those fees and shall pay the amount withheld to the Commissioner within ten days of the date of payment or within such further time as the Commissioner may for good cause allow.”

The 17th Schedule also defines relevant terms in para (1):

“’Fees means any amount from a source within Zimbabwe payable in respect of any services of a technical, managerial, administrative or consultative nature …”

‘Non-resident person’ means-

a person, other than a company, who; or

a partnership or foreign company which;

is not ordinarily resident in Zimbabwe;

“payee” means a non-resident person to whom fees are payable or paid;

“payer” means any person who or partnership which pays or is responsible for the payment of fees, including the State or a statutory corporation or any person who or partnership which pays or is responsible for the payment of fees for or on behalf of the State or any statutory corporation.”

Having outlined the relevant provisions of the Act, it is imperative that one relates to the principles relating to the interpretation of statutes since the main issue dispositive of this matter hinges on the interpretation of the status of the appellant in relation to the income tax laws of Zimbabwe.

It is settled that the approach to be adopted in interpreting statutes is the golden rule of interpretation. This rule pronounces that the ordinary grammatical meaning of words in a statute should be given effect unless doing so would lead to some absurdity or inconsistency with the legislative intention.  In the case of Chegutu Municipality v Manyora 1996 (1) ZLR 262 (S) at 264 D-E, McNALLY JA (as he then was) made the following pertinent remarks:

“There is no magic about interpretation. Words must be taken in their context. The grammatical and ordinary sense of the words is to be adhered to, as Lord Wensleydale said in Grey vs Pearson (1857) 10 ER 1216 at 1234, “unless that would lead to some absurdity, or some repugnance or inconsistency, with the rest of the instrument, in which case the grammatical and ordinary sense of the words may be modified as to avoid that absurdity and inconsistency but no further.”

Also in Innscor Africa Limited & Anor vs Competition and Tarrif Commission SC 52/18 at p 11, the court reiterated the above principle when it held as follows:

“Interpreting words in their context requires the courts to pay due regard not only to the meaning assigned to the grammatical use of language but also the context which requires consideration of the rest of the statute as well as its subject matter and its content.”

In the present case, the Court has to interpret s 30 as read with the 17th Schedule of the Income Tax Act in a manner that gives effect to the true intention of the legislature in enacting the relevant provisions.

APPLICATION OF THE LAW TO THE FACTS AND ANALYSIS

The appellant’s local branch did not withhold non-resident tax fees on intra-company fees that it paid to its head office based in Portugal.  The appellant’s position was that the local branch was not a separate legal person and as such did not have to withhold NRTF.  A reading of s 30 and the 17th Schedule of the Act however reveals a contrary position.  Payers who are subject to withhold tax are clearly identified as payers of fees to a non-resident person.  The relevant provision is couched in peremptory language as it spells out that these payers “shall” withhold non-resident tax on fees.  It is clear in para 2 thereof that in instances where fees are being paid to a non-resident, there is a liability to withhold such tax fees.  The local branch fits squarely into the definition of payer as outlined in the Act. The local branch is the one that was paying fees to the appellant.  In turn the appellant qualifies as the payee because it is the non-resident entity to whom fees were paid by the local branch based in Zimbabwe.

It is common cause that the appellant was incorporated in terms of s 330 of the now repealed Companies Act [Chapter 24:03].  This section applies to foreign companies like the appellant and such companies are recognised under the Income Tax Act as non-resident persons for Zimbabwean tax purposes.  The appellant is a non-resident person to whom the payer as the local branch, was paying fees for various technical and managerial services.  The local branch being ordinarily resident in Zimbabwe and paying fees to a non-resident was by operation of law obliged to withhold NRTF.  The local branch paid fees which are deemed to be from a source within Zimbabwe.  The payment by the local branch as the payer to the appellant, a non-resident payee, is a clear indication that the appellant is liable for non-resident tax fees which fees were not withheld in clear contravention of s 30 as read with the 17th Schedule of the Act.  The local branch is a separate person from its head office for tax purposes.  The appellant was properly found liable by the court a quo.

In their book Unpacking Tax Law Practice in Zimbabwe, (2015 Ed), authors Tapera and A. F. Majachani at p 45 of the book state:

“4.1.7 Non-residents

Non-residents carrying on business through a fixed place in Zimbabwe are also liable to pay income tax in Zimbabwe. A place of business can be in the form of an office, place of management, a branch e.t.c.  Thus, a branch of a non-resident is a taxable entity in Zimbabwe and treated as an ordinary company in respect of profits accruing to it as a result of business operations in Zimbabwe.  It must register for income tax and other taxes in Zimbabwe.”

They go further at p 337 to state

“18.4.10 Branch of a foreign company.

A branch of a foreign company located in Zimbabwe is a resident taxpayer. It [is] liable to income tax rules just like resident companies. However, a branch is not liable to withholding tax on dividend.  The profits are repatriated free of tax. It is liable to withholding tax on outward bound fees, royalties, remittances (i.e. paid to a non-resident person) including its head office ……” (Underlining my emphasis)

In accordance with the principles expounded by the said authors, it is clear that the local branch of the appellant is liable to withholding tax as provided in the Seventeenth Schedule.  The conclusion that the local branch was obliged in terms of the law to withhold NRTF disposes of the first issue.

As regards the penalty, the court a quo’s finding that the appellant failed to pay the Commissioner the NRTF cannot be faulted.  In terms of s 63 of the Act, the Commissioner acted lawfully in imposing a penalty after finding fault with the appellant’s conduct.  It is clear the decision is based on the exercise of discretion. In the absence of any unreasonableness, I find no reason why this Court should interfere with the finding of the court a quo.

DISPOSITION

It is common cause that the local branch of the appellant was ordinarily resident in Zimbabwe and it made payment of fees to the appellant which is a non-resident person.    The fees were paid to the appellant from a local source but non-resident tax fees were not withheld in violation of s 30 as read with the Seventeenth Schedule of the Act.  The decision of the court a quo in this case is unassailable.  The appeal has no merit.

I find no reason to depart from the general and normal trend that costs follow the result.

Accordingly, it is ordered that:

“The appeal be and is hereby dismissed with costs.”

GWAUNZA DCJ	:	I agree

MUSAKWA JA	:	I agree

Dube Manikai & Hwacha, appellant’s legal practitioners

Kantor & Immerman, respondent’s legal practitioners