Zimra loses Zimasco royalty, penalty battle

ZIMASCO, a leading ferrochrome producer in the country, has successfully challenged the Zimbabwe Revenue Authority (Zimra)’s demand for mining royalties and penalties.

In its ruling on the dispute between the parties, the High Court found that Zimasco was not liable to pay mining royalties on chrome ore concentrates and ferrochrome disposed of between January 2019 and September 2022, based on Zimra calculations.

Justice Paul Musithu declared schedules issued by Zimra to Zimasco on March 24, 2023, totalling $881 544 511 (Zimbabwe dollars) and about US$10,5 million as alleged shortfalls in mining royalties invalid.

Consequently, the High Court ordered Zimra to refund the company $389 606 502 and approximately US$2,5 million, representing the amounts paid by Zimasco to settle the disputed royalties and penalties.

THE Zimbabwe Revenue Authority (Zimra) has announced that Tax clearance certificates will be accessible only through the new tax and revenue management systems (TaRMS) through the self-service portal.
Zimbabwe Revenue Authority (Zimra)

The ruling marks a significant victory for Zimasco, which had been embroiled in a legal battle with Zimra over the calculation and payment of mining royalties.

Zimra conducted a review of the applicant’s tax affairs and claimed that from 2019 to 2022, the ferrochrome producer had used an incorrect formula to calculate royalties.

Instead of basing them on the ex-work value, which excludes distribution costs, Zimra argued that the royalties should have been calculated using a formula that included these costs.

The position was communicated in a letter from Zimra to Zimasco dated December 8, 2022. Zimra asserted that the use of the ex-works value was incorrect, citing Section 37 of the Finance Act. This section stipulates that mining royalties must be calculated based on the face value of the invoice.

Zimra’s letter concluded with a recalculation of mining royalties for the period 2019 to September 2022 and the imposition of a penalty. The total amount due, including both the recomputed royalties and penalties, was $604 922 007.31 and US$7,1 million.

Money – Image taken from Pixabay

Zimasco responded to Zimra on December 13, 2022, disagreeing with the findings and asserting that the mining royalties had been calculated and paid correctly.

Zimasco argued that royalties should not be calculated incorporating transport and logistics costs and that the ex-works value was the face value of the invoice, as it clearly showed the amounts due to the tax collector and to other logistics parties while the payment of withholding tax on selling commissions to selling agencies confirmed that the amounts were not for Zimasco’s account.

In addition, Zimasco argued that correspondence from the Reserve Bank of Zimbabwe (RBZ), received on November 17, 2022, confirmed that the central bank no longer required Zimasco’s foreign exchange surrender portion to be based on gross sales value but rather on the ex-works value. On December 16, 2022, Zimra sent a letter to Zimasco reiterating its previous position on the royalties.

Zimra stated that Section 37(9) of the Finance Act required royalties to be calculated on the “gross sales value” without any deductions. The revenue authority also argued that this position was not based on the RBZ retention threshold but rather on relevant legislation. The letter concluded by demanding a payment plan for the outstanding royalties.

Reserve Bank of Zimbabwe (RBZ)

The parties continued to exchange correspondence, culminating in Zimasco’s letter of February 7, 2023.

The company argued that the gross fair market value of the mineral produced was the ex-works value, supported by the Government’s requirement for all chromite ore concentrates to be exported ex-works.

Zimasco explained that it had an exemption from selling ex-works, allowing it to sell FOB (Free on Board) through the ports of Maputo and Beira. The difference between the FOB price and ex-works represented the cost of transporting the cargo to various destinations.

Zimasco asserted that the logistics cost did not add up to the gross fair market value of the chromite concentrates in its possession. Additionally, it argued that all other exporters used the ex-works basis for royalty payments.

Finally, Zimasco requested that the penalty be waived, citing a previous attempt to obtain an advance tax ruling on the issue, which Zimra refused to provide. Further discussions did not resolve the matter, with Zimra maintaining its position.

Zimra subsequently increased the penalty with revised computations, totalling $881 544 511 and US$10,5 million.

Zimra had already collected $389 606 502 and about US$2,5 million by offsetting these amounts against the Valued Added Funds (VAT) refund shown to Zimasco.-chroicle