Pacific, Zimra US$20m tax impasse could spill into courts

PACIFIC Cigarette Company (PCC), an indigenous tobacco processing firm fronted by businessman, Adam Molai, says it will mount a legal challenge against a US$19 million plus $79.8 billion tax liability claim from the Zimbabwe Revenue Authority (Zimra) if ongoing negotiations to resolve the tax dispute do not yield desired outcome.

The company, formerly Savanna Tobacco Company, had said earlier in a statement this week that the tax liability also plunged it into an insolvent position.

Molai told journalists during a webinar following the company’s placement under business rescue, to avoid complications arising from the tax dispute with Zimra, that the company had proposed a payment plan for the settlement of the alleged liability while negotiations to resolve the dispute proceeded.

In the event an agreement is reached and a determination is made that the company does not owe the tax authorities, Molai said the payment made would then be credited back to the company’s bank account.

However, PCC said if Zimra insists the company owes the alleged outstanding tax obligations, the firm would proceed to challenge the claim before the courts of law for recourse.

“We have lodged an objection to say that we do not have that liability, but because, statutorily once an assessment is issued it is a liability. We then said as a way forward, in the interim, while we find each other, we are proposing a payment plan, which once it is deemed that we actually do not owe, (the money) is then credited (back) to our account.

“That is how these tax matters are treated,” he said. “It is very different from all other dates, where you negotiate and then pay after negotiation. So, you pay first, negotiate later.”

Molai said the company had received strong legal counsel to the effect that in the event the company chose to contest the matter before the courts of law, it had strong grounds to get a favourable ruling.

Contacted for comment, Zimra head of corporate affairs, Francis Chimanda, said his organisation did not comment in the public domain on the tax affairs of an individual taxpayer.

“The Zimbabwe Revenue Authority is not in a position to comment in the public domain on the tax affairs of an individual taxpayer as the law through the Preservation of secrecy protects clients’ right to confidentiality,” he said.

PCC earlier said the financial mess the company finds itself in had its roots in the foreign currency challenges faced by the country in 2005 when the company entered into a partnership with the Reserve Bank of Zimbabwe (RBZ) and piloted toll manufacturing to survive the introduction of the 50 percent compulsory foreign currency surrender requirements on exports.

The cigarette maker said the foreign currency surrender policy threatened the survival and viability of many businesses and livelihoods in Zimbabwe.

“Through toll manufacturing, PCC and other businesses were able to source raw materials from their customers, ensuring their sustainability, while complying with the RBZ’s 50 percent foreign currency surrender requirements.

“The then Reserve Bank governor (Gideon Gono) promoted toll manufacturing as a durable business model for companies facing similar foreign currency challenges.

“Since then, the toll manufacturing model has been our accepted raw material funding model, removing the need for PCC to finance the working capital for export raw materials.

“In June this year, without any notice, Zimra performed a spectacular U-turn that has undermined the stability of the business and deemed the raw materials funded by our customers as income, subject to VAT,” said PCC.

According to Molai, Zimra’s decision to levy cost of sales was akin to making the wrong assumption that PCC produced at Zero cost and that all the company’s sales revenue was profit.

“They also levied an arbitrary markup and interest and penalties on PCC for the tax assessment period 2018 to 2020, to which we have objected.

“The issued tax assessments against the company impose tax liabilities amounting to US$19,3 million and $79,8 billion.”

PCC, which is Africa’s second-largest indigenous tobacco company and Zimbabwe’s first locally-owned cigarette company, alleges that Zimra garnished all its bank accounts.

“Next, Zimra took the unprecedented step of instructing our customers to pay Zimra any monies owed to PCC, effectively closing off all the company’s income streams.

“In an effort to get the garnishee lifted, PCC submitted a payment plan proposal while awaiting the determination of the objection which payment plan was rejected by the tax authority,” said the cigarette manufacturer.

At law, PCC said it has an obligation to pay the assessed taxes despite challenging the tax assessments.

“Zimra’s unprecedented actions on false tax violations have regrettably placed PCC in an insolvent position, forcing the company’s directors to place the business under voluntary business rescue to safeguard the interests of all creditors and stakeholders, whilst the company continues to try and amicably resolve the matter with the tax authority.

PCC applied to be placed under voluntary business rescue on October 2, 2023 and the Master of the High Court October 4, 2023 appointed Reuben Mukavhi of Rubaya-Chinuwo Law Chambers Legal Practitioners as the corporate business rescue practitioner,” it said.

The arrangement, Molai said, would allow the company to continue to manufacture and sell its popular brands, maintain competitiveness and guarantee the going concern of the company and put it in good steady to meet all obligations.

Molai said PCC had used the raw material funding model since 2005, and since that time through 2020 the company was audited by Zimra and found to be compliant with little to no issues arising about unpaid taxes.

Given that the arrangement allowed the business to support its raw material requirements while also generating foreign currency for the economy during a difficult period, Molai said it was strange why the arrangement would be looked today “with disdain”.

During the discussion, Molai said it was highly possible Zimra had made an honest error of judgment on whether PCC actually owed anything in outstanding taxes, but dismissed the matter had any politically motivated nuances.-ebusinessweekly