DELTA CORPORATION LTD v ZIMBABWE REVENUE AUTHORITY 2015 (2) ZLR 83 (H)

Flynote

Revenue and public finance — income tax — taxable income — bonus shares — what are — issue of dividends by company with option given to shareholder either to accept cash or shares in lieu — such shares not bonus shares and liable to withholding tax

Headnote

In 1996 a firm of accountants wrote to the Commissioner of Taxes, asking whether, where a company, in declaring a dividend, allows its shareholders the option of accepting cash or shares, those who opt for shares receive "bonus shares", which are not taxable. The Commissioner wrote back to say that in that situation no dividend is paid and the shares are bonus shares. What the company was doing was capitalising a portion of its profits. The appellant company, acting on the strength of that letter, did not pay withholding tax on scrip dividends issued after the letter was written.

Ten years later, the Commissioner-General of the respondent (the successor to the Commissioner of Taxes) wrote to the appellant, requesting it to deduct and account for withholding tax for the previous three years on scrip dividends issued, as these were dividends and not bonus shares. The appellant objected, averring that in 1996 the Commissioner of Taxes had given a ruling upon the strength of which the appellant had acted. Such ruling was binding on the respondent. On appeal, the respondent argued that the letter to the accountants did not amount to a tax ruling, and in any event if any benefit did accrue from the letter, it accrued to the accountants.

Held, that an advance tax ruling is defined at length in the 4th Schedule to the Revenue Authority Act [Chapter 23:11], which sets out in detail the steps that must be taken to get such a ruling. All those requirements must be present for any enquiry to be classified as an application for a tax ruling. Once the enquiry made is lacking in one or more material respects, it cannot be said to be an application for a tax ruling and in the absence of such application, any correspondence from the taxing authority cannot be construed as a tax ruling. One cannot obtain one without the other. The letter by the accountants fell woefully short of the requirements set out in the Schedule.

Held, further, that even if the letter to the accountants could qualify as an advance tax ruling, under s 5(3) of the 4th Schedule any written statement by the Commissioner-General issued before January 2007 was by operation of law a non-binding private opinion unless the Commissioner-General had directed otherwise, which he had not done. Such an opinion may not be cited in court in proceedings that do not involve the person to whom it was issued: in this case, the accountants.

Held, further, that in terms of ss 26 and 28 of the Income Tax Act [Chapter 23:06], shareholders are liable to pay tax on their dividends. The company distributing such dividends is at law required to withhold such tax when it distributes the dividends and remit the tax to the respondent. The very act of declaring a dividend is distribution of an amount to the shareholders. At this stage, before any further considerations are made, the amount so declared is a dividend and subject to withholding tax. The fact that the shareholders are then allowed an election after the declaration of the dividend matters not. By then, taxes would already have accrued by operation of law. The act of declaring a dividend is not linked to the choice the shareholders are given in whether to accept cash or take a scrip dividend.

Held, further, that for the shares to be considered bonus shares, it must have been a capitalisation of the undistributed profits at the instance of the company. "Bonus shares" are shares which are given out by the company to its shareholders on a pro-rated basis and they are paid for from the company's undistributed reserve profits. The declaration of a dividend is in its own a distribution of profit. Once a dividend is paid out and the shareholder is given the option to use such cash dividend to buy more shares, such shares so bought are not bonus shares. This was no more than the shareholder electing to use his dividend to purchase more equity in the company. The election to receive shares in lieu of a cash dividend in itself is a purchase of shares. The choice given to the shareholder is that which shows that the profits have been distributed and the shareholder has elected to use his dues to buy more equity. Since a shareholder who accepts the dividend in cash is liable to pay tax, the fact that another has elected to deal with his dividend in a different manner does not make the dividend so received and utilised any less a dividend.

Held, further, that regarding the retrospective effect of the respondent's measures, the revenue authority is not entitled at law to give anyone unlawful tax breaks and prejudice the fiscus. Where the revenue authority has made an error, it is allowed to rectify it, even retrospectively. The authority is not precluded from assessing a tax legally due only because the taxpayer has relied upon the authority's prior mistaken view of the law. The appellant could not require the respondent to continue acting unlawfully in order that its actions be fair. The main duty on the respondent is to act lawfully and, in demanding the withholding tax, it acted lawfully. There can be no question of the respondent actingunfairly when it acts in accordance with the law, in other words lawfully. Implicit in lawfulness is fairness. Tax law is strict liability law. The fact that the respondent's predecessor made a mistake upon which it relied could not save the appellant. It would be still required to remit all taxes as is required at law.