Back-dating Tax Exemptions and Refunds

BILL WATCH 4/2020

Introduction

On the 31st January the Minister of Finance published two statutory instruments in the Gazette, numbers 24 and 25 of 2020, back-dating exemptions from income tax and refunds of value added tax (VAT) granted to the giant Chinese telecommunications company, Huawei.

Background

The background to the instruments, so far as can be gathered from their contents, is as follows:

  • On the 25th August 2014 the government entered into a “framework agreement” with the Export-Import Bank of China for the financing of infrastructure modernisation projects using equipment provided by Huawei.  The agreement presumably stated that Huawei would be given exemptions from income tax and refunds of VAT [This is not stated in the two instruments but it can be inferred from their contents].
  • Five years later, on the 25th October 2019, the Minister of Finance published two instruments, SIs 227 and 228 of 2019, exempting Huawei from paying income tax on income accruing from the framework agreement, and granting refunds of VAT on goods and services supplied under the agreement.  The exemptions and refunds were back-dated to the date of the agreement, namely the 25th August 2014.  No reason was given for the five-year delay in granting them.
  • Three months later, on the 31st January this year, the Minister published the two instruments mentioned at the beginning of this bulletin, back-dating the exemptions and refunds even further, to 30th December 2009, before the framework agreement was concluded.  Again no reason was given for publishing the instruments.

Acts Under Which Exemptions Ostensibly Granted

According to the instruments, the exemptions and refunds were granted under the following provisions of the Income Tax Act and the Value Added Tax Act:

Income Tax Act:  Paragraph 3(g) of the Third Schedule

This paragraph allows the Minister of Finance to exempt from tax the receipts and accruals of anyone who:

  • is entitled to such an exemption in terms of an agreement between the Zimbabwean Government and a foreign government or organisation, and
  • is approved by the Minister by notice in a statutory instrument.

Quite clearly no one can get an exemption under the paragraph until the Minister publishes a statutory instrument approving them for the purpose of the paragraph.

There is nothing in the paragraph, nor in any other provision of the Act, that says the Minister’s approval can be back-dated.

Value Added Tax Act:  section 45A(1)

This section empowers the Commissioner-General of ZIMRA to refund VAT paid “on such goods and services as may be prescribed [i.e. prescribed in regulations under section 78 of the Act] which are purchased by or sold to a prescribed person”.

The section does not say that the refunds may be made retrospectively – i.e. that they may be made in respect of purchases or sales that took place before publication of the regulations which prescribed the goods, services and person.

Back-dating or Retrospectivity

The law is wary of back-dated or retrospective legislation, for at least two good reasons:

  • The law must be certain.  People should be able to conduct their lawful business without fearing that the law will be changed retrospectively so that their lawful business is rendered unlawful.
  • If a change to the law is back-dated it often takes away vested rights, and under section 3(2)(k) of the Constitution vested rights must be respected.

It is therefore a rule of law that only Parliament has the power to legislate retrospectively or to authorise the making of retrospective statutory instruments ‒ and if it does authorise them it must do so in the clearest terms.  Hence Ministers cannot make retrospective statutory instruments unless the Act under which the instruments are made clearly authorises them to be made.

As we have said, neither the Income Tax Act nor the Value Added Tax authorises the making of statutory instruments granting retrospective exemptions from tax or refunds of tax.  It follows that all four SIs mentioned in this bulletin ‒ SIs 227 and 228 of 2019 and 24 and 25 of 2020 ‒ are illegal and void to the extent that they purport to grant retrospective exemptions and refunds.

No Inherent Power to Waive Tax

A further point of law is relevant here:  taxes, including income tax and VAT, are debts due to the State and no official, not even a Minister or the Commissioner-General of ZIMRA, has power to waive payment of taxes unless he or she is authorised to do so by an Act of Parliament.  Hence it is not open to the Minister or the Commissioner-General to say that even though the SIs may be invalid they can grant the exemptions and refunds to Huawei administratively.  They cannot.

Yet Another Point

It may also be noted that even if the Value Added Tax Act did give the Commissioner-General of ZIMRA power to make retrospective refunds of VAT, SIs 228 of 2019 and 24 of 2020 would still be invalid.  Section 45A(4) of the Act states that any application for a refund must be made within three years from the date on which the VAT was paid, so Huawei could only claim refunds of VAT it paid during the last three-year period, not the 10-year period the SIs purport to give it.

Consequences of Illegality

All four SIs mentioned in this bulletin are invalid, as we have said.  The consequences of this cannot be assessed properly because the Minister has not explained why it was necessary to make the SIs retrospective ‒ why, in other words, they were not published as soon as the framework agreement was concluded in August 2014.  Nor is it clear whether Huawei has paid any tax from which it should have been exempted under the agreement or been refunded any VAT that it paid.  If it has not paid the tax, then the tax is still due and payable;  if it has been refunded VAT then the refunds should be recovered from it.

Huawei has every right to feel aggrieved.  Presumably through no fault on its part, the delay in publishing the requisite SIs has denied it the tax exemptions and refunds to which it was entitled under the framework agreement, and it may be exposed to claims by the Government for arrears of tax and for recovery of VAT refunds.

The only way forward now is for the Minister to go to Parliament and try to secure the passage of a Bill giving Huawei the exemptions and refunds to which it is entitled under the framework agreement.  He will have to explain to parliamentarians why he or his predecessor in office delayed for five years before implementing the agreement and he may perhaps have to justify why the agreement allowed Huawei the exemptions and refunds;  he will also have to explain why he wants to give Huawei exemptions and refunds pre-dating the agreement.  He may find it embarrassing to do this, but it is what democracy is all about:  openness and transparency and persuasion.

In fact, getting parliamentary authority before granting tax exemptions to investors should be the default mode for the Minister, rather than a last resort when things have gone wrong.

A Final Point

If the framework agreement entitled Huawei to exemptions and refunds of tax, as is suggested in SI 227 of 2019, then the Government has failed dismally to comply with its obligations under the agreement.  This failure has almost certainly been noted by potential investors who may contemplate signing similar agreements with the Government.

Veritas makes every effort to ensure reliable information, but cannot take legal responsibility for information supplied.

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