Answers

Professional Level – Options Module, Paper P6 (ZWE)

Advanced Taxation (Zimbabwe) June 2009 Answers

1 (a) Tax implications of forming the holding company

The formation of the holding company and the exchange of shares would result in the following tax implications:
Exchange of shares between Robert Greenfield and his wife on one side and the Greenfield Holding Limited company:
From a tax perspective Robert Greenfield and his wife are deemed to have sold their shares, and the disposal should be
subjected to a capital gains tax review. The issue of shares by Greenfield Holdings Limited does not have a capital gains tax
implication.
However, on the basis that the exchange of shares is in essence a reorganisation of the group structure of companies under
the same control, it should be possible for Mr and Mrs Greenfield to make an election to have the gain deferred until such
time as they dispose of their shares in Greenfield Holdings Limited. When the eventual disposal of the shares on the Holdings
company occurs, the cost of the shares will be deemed to be the original cost of the shares previously held in the subsidiary
companies. The exchange of shares would not affect the trading status of the companies and there is no transfer of losses or
assets.
[Election under s.15 of Capital Gains Tax Act Chapter 23:01]
Per legislation the exchange can be undertaken on the basis of the election that the value of shares transferred is, for capital
gains tax purposes, equal to the deductions available to the transferor. This has the effect of deferring the payment of potential
capital gains tax to the time when the shares in the Holdings company are eventually sold. The approval should be sought
on a prospective basis, that is, before the transfer is effected.
Payment of management fees and value added tax (VAT) registration
The payment of management fees by the subsidiary companies to the newly constituted holding company would be classified
as a payment for service and in that respect the holding company would have to consider registering for VAT purposes if the
registration thresholds are exceeded.
Other obligatory registrations
The holding company would also have the obligation to register for corporate tax purposes, which will entail submission of
the quarterly provisional tax returns together with estimated quarterly provisional tax.
As the holding company will also be the employer of senior management, it would be required to register for employee’s tax
purposes.

(b) Award of shares to Management Trust

The award of the shares as an incentive for senior managers is a clear testimony to the link between the award and the
services rendered by the managers. In that respect, the award is for services rendered or to be rendered and would be subject
to employee’s tax. The holding company would have to account for the attributable employee’s tax.
If the holding company were not to account for the employee’s tax, then ZIMRA could, on discovery of the background to the
award, classify the transaction as a scheme designed to avoid tax. Under such a situation, ZIMRA would have the discretion
to cause the transaction to be undone, or to collect the taxes due plus a penalty.

(c) Resolution (iii)

In terms of legislation, all remuneration payable to employees, whether onshore or offshore, should be subjected to employee’s
tax unless specifically exempted. Under the present scenario, the deliberate non-taxation of the foreign currency denominated
portion of the remuneration would fall into the classification of a tax evasion scheme. This non-taxation would be subject to
penalties and interest. There are also personal sanctions that can be imposed by the relevant Professional Association.
The company would be carrying an employee tax risk payable in foreign currency, a difficult proposition in Zimbabwe under
the current operating environment.
It is admirable that the scheme is primarily designed to benefit employees. However, from a professional point of view it would
be prudent for the group to reconsider the resolution on remuneration in terms of what the group has to do with respect to
the correct tax administration to comply with the law.
In order for the scheme to comply with the law, the group could consider grossing up the foreign currency portion of the
remuneration and taking the responsibility of paying the attributable tax, however this would be considered as a taxable
benefit in kind, which would create further tax liabilities. This would be an expensive option for the group. The group should
comply with its legal requirements and account for employee taxes properly under Zimbabwean law, whether the
remuneration is paid in US$ or Z$.

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2 (a) Fund raising strategies
(i) Raising an off-shore loan
From a Zimbabwean perspective a loan raised at an interest rate of 10% would be very attractive. There are certain
limitations, however, that would need to be taken into consideration as follows:
Any local entity that aims to raise foreign funding has to obtain Exchange Control approval as all subsequent outflows
of foreign currency would be closely scrutinised by the authorities and approvals for those outflows have to be granted
as well. A US$ loan would create exchange risks since the interest (and eventually the capital) would have to be paid
in US$ in a climate where the Z$ is depreciating against the US$. The interest payments would have to be made from
the outset, whereas revenues from the project are not expected until year 3.
From a tax point of view, the deductibility of debt servicing expenditure is also subject to a prescribed maximum limit.
Interest on that portion of a loan that makes the debt equity ratio exceed the ratio of 3:1 is a prohibited deduction in
terms of the Zimbabwean Tax legislation.
In the case of this option, a loan of US$40 million would be US$10 million above the limit, hence a quarter of the
interest would not be deductible from day one.
The interest payable would also be subject to a non-resident tax of 10% and this tax is payable to ZIMRA on accrual of
the interest, notwithstanding failure to make the actual payment of interest. The interest would be subject to withholding
tax under the terms of the UK/Zimbabwe double tax treaty.
(ii) 10% Redeemable Preference Shares
This method of fundraising is certainly more preferable than the offshore loan option raised above. The exchange control
authorities may be more inclined to approve this method as the payment of the return on investment is dependent on
profitability and as this is not likely to occur for a few years yet, it is attractive.
It is also attractive as it is from the parent company.
From a tax point of view a withholding tax of 20% would be deductible on payment of the preference dividend once
profits are made. It is also useful to note that the tax is payable even though the dividend may only have been accrued
and not paid. Again, credit will be given for tax suffered under the double tax treaty.
From an investor return point of view this method may not be too attractive.
(iii) Listing on the stock exchange
If the company were able to raise the funding from local sources like the stock exchange, it would be a bonus for its
activities as it spreads risk. The limitation is the likelihood of success in the currently volatile and hyperinflationary
Zimbabwe operating environment. Furthermore, there is the problem of struggling to convert any funds raised in
Zimbabwe dollars to the requisite internationally acceptable United States dollars. The Zimbabwe dollar is not
convertible at present whether internally or externally.
The parent company may have reservations on this method of fund raising as it would weaken their control on the
business. Flotation costs would not be deductible for tax purposes.
From a tax point of view this method is also practically risk free.
The second option, raising funding from the parent company seems to be the most appropriate under the circumstances. The
foreign currency outflows from the business are limited for a significant number of years, considering that the production stage
is still a few years away.
Resources raised would thus be directed to the targeted areas without having to budget for outflows for the foreseeable future.

(b) Tax treatment of mining capital expenditure and development expenditure prior to reaching the production stage.
In terms of legislation, a mining company can elect to use any one of three methods of accounting for capital expenditure for
tax purposes. These methods are commonly referred to as:
Life of mine basis, New mine method and the Mixed method
Life of mine
Under this method, capital expenditure incurred prior to production is accumulated and, from the first year of production, the
current capital expenditure is added to the accumulated balance to get the unredeemed capital expenditure (UCE). The UCE
is then divided by the projected life of the mine and the quotient is the portion that is allowed as a deduction from the taxable
income for that year. In the subsequent year, the capital expenditure incurred during the year is added to the UCE brought
forward and the new total is again divided by the freshly assessed life of the mine from that year.
New mine method
The capital expenditure (and the development expenditure) incurred prior to production is accumulated to the first year of
production where it is claimed in full for tax purposes. Any capital expenditure incurred during the year is also claimed in full
as well. Subsequent capital expenditure incurred is claimed in full in the year incurred.

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 Mixed Method
The accumulated capital expenditure is spread over the assessed life of the mine while the current capital expenditure is
claimed in full. In the subsequent year, the UCE is again divided by a freshly assessed life of the mine while current capital
expenditure is claimed in full.

(c) Treatment of tax losses

In general losses cannot be carried forward for more than six years from the year the loss is first incurred. In relation to mining
however, losses can be carried forward indefinitely.
The only limitation is the ring fencing of losses for each independent mining location. Specifically, where the operations at a
mining location are carried out independently to operations at another company mining location, losses incurred at each of
the mines will be carried forward and can only be set off against profit from that particular location.

(d) Set off of losses incurred at Mvura mine against the potential profits from the chrome mine
The chrome mine operations would be distinctly different from the operations of the tantalite mine. In that respect, losses
incurred on the tantalite mine cannot be set off against the potential profits to be earned on the chrome mine.

3 (a) Firstly the issue of shares to the buyer’s nominee shareholder by the Duckworth Investments (Private) Limited, at a fair value,
does not have an immediate tax implication and it is within the law. The essence of the transaction is that it is a disguised
disposal. It is in the interest of the buyer to keep a record of the purchase price for capital gains tax purposes in case a disposal
of the shares is contemplated in the future. Presumably the amount will be banked in a Duckworth Investments (Private)
Limited account offshore.
Secondly, the receipt of the proceeds offshore, however, has exchange control implications as it is a requirement that any
Zimbabwe resident who is entitled to receive foreign currency outside Zimbabwe in connection with a Zimbabwean
transaction should repatriate the foreign currency to Zimbabwe as soon as possible. In order to access the funds, you will
have to remain a director of the company. Although by agreement the purchase price can physically be banked offshore in
the couple’s personal account, it would be a breach of accounting and exchange control provisions. The funds clearly belong
to the company on the basis of shares issued.
Signing of blank transfer forms
The signing of the blank forms for the suspensive sale of shares currently held by yourselves is a transaction which will have
capital gains tax implications on expiry of the suspensive period in a year’s time. The market value of five shares will be
minimal compared to the 95 shares held by the diplomat. You will need to make some provision for the potential liability.
Statutory obligations
As a Zimbabwean resident company Duckworth Investments (Private) Limited will have the usual tax obligations of submitting
corporate returns together with the relevant financial statements to the Zimbabwe Revenue Authority, as before the change in
its shareholding, and the company would be expected to continue to pay tax on the rent.
You will be required to pay capital gains tax on disposal of the five shares.
On review of the transaction ZIMRA could consider declaring the transaction a tax avoidance scheme.

(b) Tax avoidance

A transaction which is undertaken in a manner which is unusual and which creates unusual rights and obligations not
normally created in an arm’s-length transaction; and whose main reason or motivation is to avoid tax, in the opinion of the
Commissioner, can be classified as a tax avoidance scheme.
The Commissioner has the discretion to undo such transactions and to levy the appropriate tax that results from the
rearrangement of the transaction.
Although the transaction proposed by the Duckworths is legal at face value, it is clearly a scheme which has been undertaken
in a manner that makes it possible to avoid capital gains tax.
The probability of the transaction being classified as a tax avoidance scheme by the Commissioner is quite significant in this
case. There is a possible risk of a penalty.

4 (a) Although at face value the contract seems straight forward, certain features of the contract are inconsistent with an
arm’s-length relationship between Smoothbrew and the person who will perform the services in Zimbabwe. The features
outlined below point to a much closer relationship between Smoothbrew and Goran Gwemende, specifically, an
employer/employee relationship is implied.
Goran Gwemende is specifically required to perform the services in Zimbabwe, although on behalf of his own one man
company; and this company, though registered in Mauritius, is in essence a Zimbabwe resident company and to all intents
and purposes is dormant. On analysis of the substance of the transaction, Goran Gwemende is a substantive employee of
Smoothbrew and the imposition of the Mauritius incorporated Technical Services is no more than a tax avoidance ‘scheme’.
The conditions of the contract militate against Technical Services being a substantive company.

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 On the other hand even if we were to accept that Technical Services is a Mauritius company in theory, the performance of
the substantive contract in Zimbabwe would make it a Zimbabwe tax resident company.
The payment of the fees is on a monthly basis and is not directly linked to any specific performance of the services and there
is no provision of the raising of fee notes.
The company contracted does not seem to be involved in anything else.
These features support the notion that Goran Gwemende is in fact an employee of Smoothbrew. In that respect, Smoothbrew
is carrying an employee’s tax risk in relation to the service contract.
ZIMRA are likely to lift the corporate veil of Technical Services Limited in which case there would be implied obligations on
Smoothbrew as follows:
The company should register for employee’s tax purposes in Zimbabwe and should administer employee’s tax on the
payments made to Technical Services Limited as these payments are in essence remuneration for Goran Gwemende.
It is perhaps worth noting that the employee’s tax payable is in foreign currency as the payment for the services is in foreign
currency. It is thus recommended that Smoothbrew review the contract in order to minimise the tax risk, and any potential
penalties.

(b) Summary of the Zimbabwe tax obligations of Technical Services Limited

Technical Services, as a company which is supposedly operating in Zimbabwe for a period in excess of six months would be
deemed to have a permanent establishment.
The permanent establishment status would entail the company registering for corporate tax purposes and being obliged to
submit quarterly returns to the Zimbabwe Revenue Authority.
The company would also have to consider registration for value added tax purposes.
The contractual receipt of service income offshore creates an Exchange Control issue in that the Exchange Control Regulations
specifically provide that such receipts due to a Zimbabwe resident business be repatriated to Zimbabwe without delay; and
deposited in a local foreign currency account or be sold to an authorised dealer.
A portion of the income, which must be repatriated to Zimbabwe and banked in a local foreign currency account, would be
automatically converted to Zimbabwe dollars in terms of the law at a controlled rate of exchange which is far removed from
the real ruling rate. The balance would usually have to be used within a prescribed period otherwise these funds would also
be converted at the official rates.
As the company has the one employee/director, Goran Gwemende, it would be required to register for employee’s tax purposes
and administer the employee’s tax system on any remuneration paid to Goran.
In this administration, the company would have to take note that the employee’s tax should be paid in foreign currency on
the basis that the payment of remuneration to Goran Gwemende would be in foreign currency.
Technical Services would be liable to Zimbabwean corporation tax on the profits attributable to the permanent establishment,
and would have an obligation to pay quarterly provisional business tax.

5 (a) (i) Estate duty treatment of the assets on inventory

Matrimonial residence
The matrimonial residence is exempted from estate duty.
The rest of the assets comprising: block of flats, cash at bank; the shares; and the greengrocer business asset would be
subject to estate duty.
The pension to be paid to Dorothy Drew is not subject to estate duty.
(ii) Taxation
Prior to confirmation of the Liquidation and Distribution Account
Rentals from the block of flats
The rentals will now be taxed in the hands of a new taxpayer, Estate Late Dick Drew until the final liquidation and
distribution account is confirmed by the master of the High Court.
The interest from the cash held is taxable in Estate Late Drew.
The dividends will be taxable in Estate Late Drew.
The business income from the greengrocer
The income from this business will also be taxed in the hands of ‘Estate Late Dick Drew’ until the confirmation of the
Liquidation and Distribution Account.
The pension receivable will now be taxed in the widow’s hands from the date of her husband’s death.

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 After confirmation of Liquidation and Distribution Account
The net rentals and net income from the greengrocer business would be taxed in DD Trust excluding the annuity payable
to Dorothy Drew and any distribution made to the Drew grandson.
Dorothy would be taxable on the distribution received, and on the annuity as well as the pension and the grandson
would be taxable on any amount distributed to him.

(b) Exotic Curios (P/L)

(i) As the business is being conducted in two currencies, it will be necessary to complete two returns, one for the local
currency sales and one for the foreign currency sales. This is the current ZIMRA practice as trading in more than one
currency has only recently been introduced in Zimbabwe.
The current legislation on refunds provides that refunds of VAT shall be made in Zimbabwe dollars only. The Exotic Curios
refund of the net foreign currency input tax, though reasonable, is not going to be entertained by ZIMRA.
In view of this problem, the only way to get the relief is the setting off of the VAT against future output tax for now.
Hopefully legislation will be improved.
(ii) ZIMRA practice on untaxed sales
The ZIMRA practice is that VAT should be paid on all sales whether or not the VAT has been collected from the customer.
As a concession, where VAT was erroneously not levied, the total of such sales will be deemed to be inclusive of the
VAT. In that respect the VAT payable would be determined by multiplying the total sales figure by the fraction 15/115.
ZIMRA will implement the above practice only if they are convinced that there were clear business problems militating
against the levying of the appropriate tax. Where ZIMRA does not accept the explanations, it is likely to compute VAT
on the sales (sales x 15/100) and may even impose a penalty. The penalty would be equal to the amount of tax due.

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Professional Level – Options Module, Paper P6 (ZWE)
Advanced Taxation (Zimbabwe) June 2009 Marking Scheme

Marks
Maximum Available
1 (a) Tax implications of forming holding company
– Deemed disposal on exchange of shares 1
– Capital gains tax chargeable 1
– Issue of holding company shares not a taxable event 1
– Election to minimise tax impact available 1
– Shares to be transferred at deductions available to transferor 1
– Commissioner’s approval for election required 1
– Election must be approved prior to implementation 1
Management fees and registrations required
– Management fees payable subject to VAT 1
– Management fees deductible subject to limitation 1
– Holding company to register for – VAT 1
– PAYE 1
– Corporate tax 1
– Pay provisional tax 1
– Lodge quarterly provisional; tax returns 1
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14 11

(b) Award of shares

– Award linked to services rendered 1
– Subject to remuneration tax 1
– ZIMRA could classify structure as tax avoidance 1
– Power to undo transaction vested with ZIMRA 1
– Failure to tax award could be penalised 1
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5 5

(c) Resolution (iii)

– All Income receivable for services rendered is taxable 1
– Whether receivable on shore or offshore still taxable 1
– PAYE payable in foreign currency where foreign currency received 1
– Non payment of tax classified as evasion 1
– Non-taxation subject to penalties 1
– Personal sanctions imposed by Professional Association 1
– Construction of proposal is faulty 1
– Proposal should be reviewed 1
– Option to pay all legal taxes 1
– Option to gross up salaries 1
– Grossing up entails employer paying PAYE on behalf of employees 1
– Grossing up is an expensive option 1
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12 8

Professional marks
Awarded for presentation and relevant reasons supporting points 2 2
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19
 Marks
Maximum Available
2 (a) (i) Offshore loan
– Prior exchange control approval required 1
– Foreign exchange risk potential 1
– Interest payment to be made from the outset 1
– Limitation of deduction of debt servicing costs 1
– Debt threshold of 3:1 debt equity ratio 1
– Reference to Double Taxation dispensation 1
(ii) 10% Redeemable shares
– Preferable option compared to foreign loan 1
– Dividend payouts dependent on profitability 1
– Exchange control also required 1
– Parent company injection of funds attractive 1
– Dividends subject to 20% withholding tax 1
– Dividend tax payable on accrual not payment of dividend 1
– Double taxation treaty dispensation 1
(iii) Zimbabwe Stock Exchange Shares
– Local source least expensive from exchange control view 1
– Given local conditions, prospects of success minimal 1
– Zimbabwe dollar currently not convertible 1
– Zimbabwe dollar therefore of limited use 1
– Parent company may be averse to dilution 1
– Floatation costs would not be deductible for tax purposes 1
Parent company finance is therefore the best option 1
Foreign currency outflow would be limited for some time 1
Inflow of funds now would thus be utilised to maximum advantage 1
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Professional marks 3 3
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(b) Capital redemption allowances

– Three methods of determining capital redemption allowance deduction 1
– Life of mine; new mine method; and mixed method 1
Life of Mine:
Capital expenditure (Capex) brought forward plus current capex and the sum divided by the
estimated life of the mine. 3
New mine method:
All capex prior to production, and in year, deductible 1
All capex in subsequent years deductible in year incurred 1
Mixed method:
Accumulated capex is spread over the assessed life while current capex is claimed in full. 1
Subsequent year, the UCE is divided by freshly assessed life of the mine, while current
capex is claimed in full. 1
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9 9

(c) Tax losses

– In general loss cannot be carried forward for more than six years 1
– Mining losses an exception, carried forward indefinitely 1
– Ringfencing of independent mining locations 1
– where operations are carried out independently, losses incurred at each of the mines will be
carried forward and can only be set off against profit from that particular location. 2
– Tantalite and chrome mines independent of each other 1
– Each mine’s loss would be ringfenced 1
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7 7
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20
 Marks
Maximum Available
3 (a) Receiving amount for shares offshore
– Issue of new shares to diplomat not taxable 1
– Essence of transaction is that it is a disguised disposal 1
– Diplomat should keep cost records for future use 1
– Funds should be banked in company account 1
– Exchange control breach 1
– Repatriation of funds per exchange control 1
– If funds banked in company, only accessible to sellers if they remain as directors. 1
– Although by agreement purchase price can physically be banked offshore in the couple’s
personal account, it would be a breach of accounting and exchange control provisions. The
funds clearly belong to the company on the basis of shares issued. 2
Blank transfer forms
– This is a suspensive sale of shares 1
– Will be subject to capital gains tax after one year 1
– The market value of five shares will be minimal compared to the 95 held by diplomat 1
Tax obligations
– The company would be expected to continue to pay tax on rent 1
– The couple would be required to pay capital gains tax on disposal of their five shares. 1
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14 14

(b) Tax avoidance

– Transaction constructed in an unusual manner 1
– Designed to avoid or postpone tax 1
– Commissioner has discretion to undo the transaction 1
– Current transaction has been constructed abnormally 1
– Probability of it being undone is high 1
– Penalty risk possible 1
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6 6
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20
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4 (a) – Structure of contract more employer/employee related 2

– Contract not arm’s length 1
– Contract performance tends to support notion that Gwemende is an employee of Smoothbrew 1
– Technical Services seems to be a tax avoidance imposition 1
– The company has no other activity 1
– The payment of the fees does not seem to be tied to clear deliverables 2
– Monthly payment of fees is like payment of a salary 1
– Smoothbrew may actually have a PAYE risk in relation to Goran 1
– In such an event, PAYE would be payable in foreign currency 1
– Potential ZIMRA penalties possible. 1
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12 10

(b) Tax residency

– Technical Services operating and managed in Zimbabwe 1
– Contract exceeds six months 1
– This creates a permanent establishment status 2
– Technical Services should theoretically register for VAT in Zimbabwe 1
– Receipt of service income creates exchange control issue 1
– Receipts should be repatriated to Zimbabwe and deposited in local foreign currency account 1
– Income converted to Zimbabwe dollars 1
– Technical Services should theoretically register for PAYE 1
– Employee’s tax payable in foreign currency 1
– Technical Services should theoretically register for corporate tax 1
– Obligation to pay quarterly provisional business tax 1
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12 10
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20
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21
 Marks
Maximum Available
5 (a) (i) Estate Duty
– Matrimonial home exempt 1
– The following assets dutiable:
– Block of flats 1/
2
– Cash at bank 1/
2
– Shares 1/
2
– Greengrocer business 1/
2
– Pension not dutiable 1
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4 4
(ii) Taxation
Prior to liquidation
Rent from block of flats is taxable in Estate Late Drew 1
Interest from cash held is taxable in Estate Late Drew 1
Dividends taxable in Estate Late Drew 1
Greengrocer business income taxable in Estate Late Drew 1
Pension taxable in widow’s hands 1
After liquidation of Estate
All income taxable in hands of the DD Trust except for the distributed income. 2
Widow taxable on distribution received 1
Derek taxable on distribution received 1
Widow also taxable on pension received 1
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10 7

(b) (i) Exotic Curios

– Separate VAT returns for each currency in which traded 2
– Refund of VAT in foreign currency not supported by legislation at present. 2
– Refund currently only possible in Zimbabwe Dollars 1
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5 5
(ii) ZIMRA reaction
– Proceeds may be deemed to be inclusive of VAT 1
– In such a case, VAT determined by applying tax fraction 15/115
Against the proceeds 1
– ZIMRA may decide to just apply the 15% on proceeds 1
– ZIMRA may also consider penalties 1
– Amount of penalty 1
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5 4
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20
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