HE Limited v Zimbabwe Revenue Authority

In 2011, the Zimbabwe Revenue Authority (respondent) conducted a tax investigation into HE Limited (appellant), a public company listed on the Zimbabwe Stock Exchange, covering 2009-2011. The investigation revealed that the appellant was cessionary to technical assistance agreements with a South African company providing skilled personnel and technical services, and had computer software licensing agreements with Australian and South African companies. The appellant paid license fees to foreign companies but failed to withhold non-residents tax for fees or remit them to the respondent for October 2010 to November 2011. The appellant also failed to withhold 10% of gross income payable to a parastatal offering transport services during July-December 2010 when the parastatal lacked a tax clearance certificate, breaching s 80(2) of the Income Tax Act. The appellant admitted liability for principal amounts and paid during investigations but disputed penalties and interest on penalties. Under the technical assistance agreement, fees were payable monthly based on 2% of gross turnover, to be calculated from management accounts, confirmed by audit certificate, and then remitted. The appellant compiled management accounts between the 13th-15th of each month following service provision, but the audit certificate for April 2009-March 2011 was only issued on 16 December 2011. Fees were paid in December 2011 and March 2012, but withholding tax was paid on 13 May 2011, predating both the audit certificate and fee payments.

• When does non-residents tax on fees become due and payable as a matter of law under paragraph 1(2)(c) of the 17th Schedule to the Income Tax Act?
• What constitutes 'deemed payment' of fees under paragraph 1(2)(c) of the 17th Schedule - crediting to account or fulfillment of conditions of entitlement?
• Was payment of the non-residents tax effected as and when it was due on the facts?
• Is the imposition of penalties and interest on such penalties justified in the circumstances?
• Does the doctrine of fictional fulfillment apply where a taxpayer deliberately fails to obtain timely audit certification required by contract?

1. The appeal against the respondent's decision imposing penalties of 50% and interest on such penalties for non-residents tax on fees for technical and management fees payable to a connected foreign payee is dismissed. 2. The appeal against the respondent's decision imposing penalties of 10% and interest on such penalties for license fees paid to two unrelated foreign parties and withholding tax on a local parastatal is dismissed. 3. The respondent shall compute interest on penalties for technical and management fees within ten days from the date on which the audit certificate for each month was due. 4. Each party shall bear its own costs.

Under paragraph 1(2)(c) of the 17th Schedule to the Income Tax Act, fees are deemed to be paid to a non-resident when they are credited to the payee's account or dealt with so that conditions of entitlement are fulfilled, whichever occurs first. Where a taxpayer deliberately fails to fulfill contractual conditions (such as obtaining audit certification) that would trigger the obligation to withhold and remit non-residents tax, the doctrine of fictional fulfillment applies, and the conditions are deemed to have been fulfilled at the time they reasonably should have been completed. The obligation to withhold and pay non-residents tax arises within 10 days of the deemed payment date under paragraph 2(1) of the 17th Schedule. Penalties under paragraph 6(1) are calculated from the date tax should have been paid, and while the Commissioner has discretion to reduce penalties from 100% where there is no intention to evade tax, interest on penalties is mandatory as compensation for the time value of money lost and cannot be waived absent special circumstances under paragraph 6(3).

The court observed that a new ground of appeal based on the 1965 Double Taxation Agreement between Zimbabwe and South Africa raised for the first time on appeal without complying with s 65(4) of the Income Tax Act (failing to seek consent or leave) would be declined, and in any event would be a red herring where the appellant had accepted liability for the principal tax amounts. The court noted that the difficult questions of law involved in the appeal justified each party bearing its own costs. The court commented that the appellant's failure appeared to stem from ignorance of legal provisions rather than deliberate evasion, as evidenced by paying principal amounts without demur once convinced taxes were due. The court characterized the appellant's conduct regarding technical fees as 'grossly negligent' warranting a 50% penalty, while the failures regarding license fees and parastatal withholding reflected 'lack of diligence' warranting a 10% penalty as personal deterrence.

This case establishes important principles for non-residents withholding tax in Zimbabwean tax law. It clarifies the meaning of 'deemed payment' under paragraph 1(2)(c) of the 17th Schedule to the Income Tax Act, establishing that deemed payment can occur when fees are credited to a payee's account in the payer's books, subject to any conditions of entitlement being fulfilled. The judgment applies the doctrine of fictional fulfillment to tax law, holding that where a taxpayer deliberately fails to fulfill contractual conditions that would trigger tax obligations, the conditions will be deemed fulfilled at the time they reasonably should have been. The case provides guidance on when the obligation to withhold and remit non-residents tax arises, distinguishing between crediting accounts, conditional entitlements, and actual payment. It also clarifies the Commissioner's discretion to reduce penalties under paragraph 6 of the 17th Schedule where there is no intention to evade tax, while upholding the mandatory nature of interest on penalties as compensation for time value of money.