About the abolition of foreign currency, transitionary matters and the future of taxes

In my last week article, I mentioned that the paying taxes in foreign currency has been part of our law since the introduction of multi-currency in 2009 and that the ZIMRA as the administrator of the law is reaffirming this position. Now with the re-introduction of the Zimbabwean dollar through Statutory Instrument 142 and the abolition of the use of foreign currency in domestic transactions, it appears there is an end to this era. Before we quickly jump to this conclusion, we should put things into perspective. Firstly there are taxes on transactions in foreign currency arising before the 24th June 2019. Secondly there will be transactions in foreign currency because someone has disobeyed the law and thirdly transactions in foreign transaction because these will be international transactions. The ZIMRA has through its public notice issued on Friday the 28th of June 2019 gave guidance regarding the first part. It provided that “All taxes that were collected, received or accrued prior to SI 142 of 2019 are paid in terms of the provisions of the prevailing legislation. Tax returns and payments shall be prepared and submitted in the manner provided in the legislation and as guided by the Commissioner General of ZIMRA. The taxes should be paid in local currency and in foreign currency as provided in the legislation. This requirement applies to all tax heads without exception”. This article fully discusses these three scenarios, but should not be construed to be a legal opinion.    

Regarding transactions happening before 24th of June 2019 in foreign currency, SI 142 of 2019 which reads in part as follows is relevant: (1) Subject to section 3, with effect from the 24th June, 2019, the British pound, United States dollar, South African rand, Botswana pula and any other foreign currency whatsoever shall no longer be legal tender alongside the Zimbabwe dollar in any transactions in Zimbabwe..” (Underlined words own emphasis). The Cambridge dictionary defines transaction as “an occasion when someone buys or sells something, or when money is exchanged (underlining own emphasis) or the activity of buying or selling something; or the process of doing business”. The term exchange is defined in turn as “the act of giving or taking one thing in return for another” (Merriam-Webster online dictionary). It appears from these definitions the remitting of taxes to a tax authority is not a transaction.  The relevant transaction therefore is that between the taxpayer and its customer, employee etc. If such transaction was denominated in foreign currency before 24th of June 2019 tax, it appears liability for taxes arises in foreign currency. To buttress this point, taxes such VAT, PAYE and withholding taxes are “trust taxes”. They are collected and remitted to ZIMRA by the person who is not the ultimate payer but as an agent of the government. The agent has no transaction with the ZIMRA but duty bound to hand over the money he has collected. The doctrine of unjust enrichment refrain him from pocketing what is not his. It is also a common law principle that he cannot make any profit or acquire any benefit in the course and in the matter of his agency without the knowledge and consent of his principal. Where he uses property entrusted to him by the principal to make a profit for himself and without the principal’s consent is in breach of his duty not to make secret profit. Some people could still argue there is no unjust enrichment where the person has paid the equivalent of foreign currency in RTGS dollar using the interbank rate. This argument is difficult to sustain in light of the explicit tax laws which states payment of taxes on in foreign currency where transactions are in foreign currency and these laws are still in force.

Addressing the second category transactions i.e. transaction in foreign currency transactions against the spirit of SI142, it is a trite at law that tax follows a transaction regardless of its legal status. It was held in MP Finance Group CC v Commissioner, SARS, 69 SATC 141 that income “received by” a taxpayer from illegal gains will be taxable in the hands of the taxpayer. The English case of Commissioners of Inland Revenue v Aken 63 TC 395, [1990] STC 497 is also in support of this view. It held that; “…. if the activity is a trade, it is irrelevant for taxation purposes that it is illegal …I do not think that the word ‘‘trade’’ in itself has any connotation of unlawfulness. There may be lawful trade; there may be unlawful trade. But it is still trade”. The case of CIR v Delagoa Bay Cigarette Co Ltd 1918 TPD 39, also held that “the taxability of a receipt is not affected by the legality or illegality of the business through which it was derived.” Therefore it appears where a person has traded in foreign currency liabilities for taxes will arise in foreign currency, regardless of the fact he has breached the law.

In respect of sectors such tourism, mining etc where foreign transactions (international transactions) will be prevalent the laws for payment of taxes in foreign currency will continue to apply. Statutory Instrument 142 of 2019 is about banning foreign currency on domestic transactions by making the Zimbabwe dollar the sole legal tender. In conclusion, taxes with regard to transactions in foreign currency whether or not they arise legally or not appears required in foreign currency because the laws which requires taxes to be paid in foreign (section 4A of the Finance Act and s38 (4) (a) of the VAT Act) continues in existence. The ZIMRA has also confirmed this position regarding transactions occurring before 24th June 2019, which appears correct interpretation of the SI142. Taxpayers are therefore urged to comply with the ZIMRA directive in order to avoid penalties which may arise from not complying with the law.

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