SHEENA FLOWERS (PVT) LTD & ORS v COMMISSIONER-GENERAL, ZIMBABWE REVENUE AUTHORITY 2012 (2) ZLR 280 (H)

Flynote

Revenue and public finance — income tax — deductions — allowable deductions — costs associated with export of goods — export market development expenditure entitling taxpayer to a double deduction — distinction from normal costs incurred for purposes of trade — costs incurred must relate to export market and be over and above usual expenses associated with export of goods — wholly and exclusively for export development

Headnote

The appellants were companies whose main business was horticulture, focussed on the growing of flowers and exporting cut flower stems to external markets. Many expenses are incurred in the process of exportation of the flowers, including special packaging, air-freight, port fees and agents' commissions. It was a trade practice to employ marketing agents, who use their expertise to decide the best market destination for the flowers, organise the most appropriate method of transportation of such flowers and advise on selling arrangements. Such agents were employed on an informal basis, without any long term agreement between the grower and agent, who is simply notified once any shipment has been dispatched. The rates of commission varied from agent to agent. The responsibility of the agent was focussed on the disposal of the shipment to prospective buyers, who in turn used the services of the agents to identify sellers and advise on their requirements on a regular basis. The flowers remained the property of the grower.

The appellants sought tax relief in terms of s 15(2)(gg) of the Income Tax Act [Chapter 23:06] in respect of the expenses incurred in the process of exportation of the flowers, including packaging costs, air freight, port fees, agents' commissions and marketing charges. That provision allowed for a double tax deduction. It gave the taxpayer a deduction in respect of the amount of any "export market development expenditure" incurred by him, together with an amount equal to 100% of such expenditure. Such expenditure is defined as being expenditure, not being expenditure of a capital nature, that is proved to the satisfaction of the Commissioner to have been incurred wholly or exclusively for the purpose of seeking opportunities for the export of goods from Zimbabwe or of creating or increasing the demand for such exports, and includes such expenditure as market research, advertising, participating in trade fairs, and bringing prospective buyers to Zimbabwe. It was argued on behalf of the appellants that the payment of agents and air-freight charges associated with export of flowers created and increased the demand for such exports and that the intention of the legislature in enacting the section was to provide an incentive to exporters who in fact are providing foreign currency to the state. The respondent maintained that the intention of the legislature was to encourage the development of new export markets in addition to those export markets which already existed, or to create or increase the demand for such exports, again in addition that which already existed. The costs incurred by the appellants in exporting the flowers to the foreign markets did not fall within the definition of "export market development expenditure", but were simply costs incurred for the purposes of trade and therefore allowable in terms of s 15(2)(a), under which the deductions allowed are "expenditure and losses to the extent to which they are incurred for the purposes of trade or in the production of income except to the extent to which they are expenditure or losses of a capital nature".

Held, that not every item of expenditure incurred in the export of goods qualifies for the double deduction. The basic distinction is between expenditure falling under s 15(2)(gg) and that which can be subsumed under s 15(2) (a). It is conceivable that a given item of expenditure might be partially for export development (s 15(2)(gg)) and partly for the purposes of trade or the production of income (s 15(2)(a)). Such expenditure would not qualify for the export development double deduction as it would not have been incurred "wholly or exclusively" for the purpose of seeking opportunities for the export of goods from Zimbabwe, or of creating or increasing the demand for such exports. Generally speaking, expenses incurred for the purpose of obtaining an order or a contract in a foreign country would qualify for the double deduction. Such expenses would usually be connected or concerned with opportunity or creating or increase in demand for export of goods. On the other hand, expenses incurred for the purpose of fulfilling an order or contract so obtained or entered into would not qualify unless any item connected with the fulfilment of the contract could be proved to have been incurred for the purpose mentioned in the definition.