What, if any, is the relevance of the ‘residence’ of the taxpayer in the determination of tax liability in

Zimbabwe?

In Zimbabwe, the nature and the source of the income determine whether or not it is taxable. The
identity and country of residence of the recipient are often irrelevant. Thus, generally, all receipts (not of
a capital nature) arising from a source within Zimbabwe are taxed, irrespective of the residential status
of the taxpayer. Income arising from sources outside Zimbabwe is taxable only if its source is “deemed”
by the legislation to be within Zimbabwe. Zimbabwe presently operates on a source-based tax system.
This means that income from a source within, or deemed to be within Zimbabwe will be subject to tax in
Zimbabwe unless a specific exemption is available. The specific circumstances of a transaction should
always be considered to determine whether the transaction gives rise to taxation in Zimbabwe.

Since the Income Tax Act [Chapter 23:06] does not define the “source", guidance on the subject is
derived from case law. In  CIR v Lever Bros and Unilever Ltd (1946) the applicable principle was that the
source of receipts, received as income, is not where they come from, but the originating cause of their
being received as income is the work which the taxpayer does to earn them.

The principle laid in the Lever Bros and Unilever Ltd case sets the pace for determining the source of
income in Zimbabwe. The work which a taxpayer does may be a business which he carries on, or an
enterprise which he undertakes, or an activity in which he engages and it may take the form of personal
exertion, mental or physical, or it may take the form of employment of capital either by using it to earn
income or by letting its use to someone else. Often the work is some combination of these.

One notable aspect in this regard though, is that the matter of whether receipts are remitted to
Zimbabwe or not, is not relevant, thus making a taxpayer liable even for offshore receipts. 1

TAX AVOIDANCE DEFINED

Tax avoidance is a legal way to some extent if it passes all the test of section 98 of the Income Tax Act
and one posed by common law of standards set out by case laws as there is such risk of failing that test
if not properly exercise. Section 98 of the Income Tax Act defines Tax Avoidance as the arrangements
by tax payers of their affairs so as to limit or reduce or postpone their tax liability within the scope of the
law. It is entirely rational and is permissible provided only legal means are used to reduce tax
obligations2. In the leading case of IRC V Duke 0f westminister3, Lord Tomlin alluded that every man is
entitled if he can to order his affairs so that the tax attaching under the appropriate Acts is less than it
would otherwise be. If he succeeds in ordering them so as to secure this result, then, however
unappreciative the Commissioners of in land Revenue or his fellow taxpayers may be of his ingenuity, he
cannot be compelled to pay an increased tax.

It follows therefore that tax avoidance is one of ways of minimisation of tax liabilities by arranging one’s
affairs in a manner legalised by law unlike tax evasion where illegal means are invoked to avoid tax at all
cost. If one pays homage to the rule of law and as a compliant citizen the best way to plan about tax is to
go the avoidance route instead of the evasion one which is characterised by criminal sanctions and
1
https://www.alliottglobal.com/insights/taxation-law-in-zimbabwe-an-overview/
2
Income Tax Act chapter 23:06
3
IRC V Duke of Westminister 1936AC 1 @19
prosecutions if caught. Examples of tax avoidance involve using tax deductions or in some jurisdictions
making use of havens.4. In the case of Lord Vestey’s Executors & Vestey V IRC the court held, that tax
avoidance is an evil but it would be the beginning of much greater evil if the courts were to overstretch
the language of the statute in order to subject to taxation people of whom they disapproved 5.

Beric Croome, Annet Oguttu and others6 define Tax avoidance as the reduction of a taxpayer’s tax
liability using the provisions of the fiscal legislation to his or her advantage a principle which was also
supported in the case of Levene v IRC7 as quoted in the book8 that taxpayers are free, if they can, to
make their own arrangements so that their cases may fall outside the scope of the taxing Acts. They
incur no legal penalties and strictly speaking, no moral censure if having considered the lines drawn by
the Legislature for the imposition of taxes, they make it their business to walk outside them.

Silke9 also provides for the definition of tax avoidance as a situation in which a taxpayer has arranged his
affairs in a perfectly legal manner, with the result that he has either reduced his income or has no
income on which tax is payable. He states that a tax payer cannot be stopped from entering into a bona
fide transaction which will result in the reduction of his tax liability provided that there is no statute
which prohibits that avoidance or reduction of tax. From the above assertion, tax avoidance is generally
achieved by making necessary arrangements in advance through tax planning. There are various
strategies which are used for tax avoidance is illustrated by M. Tapera & A. F. Majachani10 which include
Low tax Jurisdiction were by countries pursue low-tax policies in the hope of attracting international
businesses and capital, Tax Haven where by certain taxes are levied at a low rate or not at all.

Here in our jurisdiction our tax legislation the Incomes Tax Act promotes legitimate tax planning. Section
98 of the Income Tax Act which is referred to as the principal Section which deals with tax avoidance. It
empowers the Commissioner to strike down impermissible tax avoidance arrangements if the
arrangement in the commissioners opinion was done solely for the purposes of avoiding tax liability or
where is such a real potential of avoiding tax and not for any other purposes and in an abnormal way.
Hence the application of the abnormality test in such scenarios. If the scheme has been formulated only
for tax avoidance purposes it will not survive the fate of being hit with section 98 of the Act. The
commissioner’s powers are so wide in this area and can exercise his discretion so long with element of
reasonability. For the scheme to fall within the purview of section 98 of the act, it is not enough for the
commissioner to say that it was intended solely for the purpose of the avoiding tax. He is obligated and
duty bound to demonstrate that it (the scheme) was also tainted with abnormalities. Therefore the
scheme is subjected to the abnormality it must pass. There are two important aspects which are the
purpose of the transaction and whether or not it may be characterised as normal or abnormal. In the
case of COT V Ferreira 1976 (38)SATC 66 a company was formed to take over shareholding status of the
directors and admittedly for no other purposes and for the other schemes which were abnormal ,
section 98 was invoked and was made to pay tax. 11

4
5 above
5
Lord vesteys’s Executors & Vesteys V IRC
6
Beric Croome Annet Oguttu & others.
7
(1928) AC 217 227
8
Tax Law An Introduction
9
South African Income Tax
10
ibid
11
COT V Ferreira 1976 SATC (66)
In CIR v King, as quoted in the book Unpacking Tax Law & Practice in Zimbabwe, the court held that a
transaction, operation or scheme that is susceptible to the avoidance section must be one that is
intended by a taxpayer to avoid liability for tax which will be incurred in the future. 12

It is my view therefore that Section 98 seeks to preserve legitimate business transactions even if the
consequence of their existence is to avoid tax. In the case of CIR V Forsyth13 a company with unlimited
liability was formed to take over the business of consulting engineers. The company undertook to
employ the three former partners at a salary. It also agreed to pay the partnership and a sum of money
for goodwill equivalent to three years of partnership profits. No employment contracts were signed. The
payment for goodwill was not guaranteed the commissioner wanted to treat this scheme as a tax
avoidance scheme that was not acceptable. The court held that tax avoidance was not the soul or main
purpose of the scheme.

Section 23 of the Act also illustrates how our Zimbabwean Law promote tax planning to a lesser extent.
It provides that where a person carrying on a trade in Zimbabwe either (a) purchases property at a price
in excess of the fair market price or (b) sells at less than the fair market price, the Commissioner may
determine a fair market price for the purposes of that person’s assessment. In the case of Elite
Wholesale (Rhodesia) Pvt Ltd v COT14 the court found in favour of the taxpayer on the following basis’’ if
the transaction is a perfectly innocent one, if it is not fictious or colourable, the mere fact that a
reduction in income has resulted is not a sufficient justification for the exercise of the power. An
occasion for its exercise arises when there is something about the transactions which indicates an
intention to evade assessment of tax, something which shows a lack of good faith or the presence of
moral dishonesty in the tax payer’s mind’’.

Section 24 aimed at countering tax avoidance, despite not being specifically so termed 15. It provides
that; any person—(i) carrying on business in Zimbabwe participates directly or indirectly in the
management, control or capital of a business carried on by some other person outside Zimbabwe; or (ii)
carrying on business outside Zimbabwe participates directly or indirectly in the management, control or
capital of a business carried on by some other person in Zimbabwe; or

(iii) participates directly or indirectly in the management, control or capital both of a business carried on
in Zimbabwe by some other person and of a business carried on outside Zimbabwe by some other
person; and (b) if conditions are made or imposed between any of the persons mentioned in paragraph
(a) in their business or financial relations which, in the opinion of the Commissioner, differ from those
which would be made between two persons dealing with each other at arm’s length;

determine the taxable income of the person carrying on business in Zimbabwe as if such conditions had
not been made or imposed but in accordance with the conditions which, in the opinion of the
Commissioner, might be expected to have been made or imposed between two persons dealing with
each other at arm’s length. This is a clear provision that is meant to counter transfer pricing thereby
making it difficult for tax payers to engage tax avoidance.

12
CIR V King quoted in Unpacking Tax Law & Practice in Zimbabwe
13
1971 (33) SATC 113
14
(1955) 20 SATC 33
15
L.W. Hill 5th edition
In summation it is now beyond disputation and can be safely said our tax Legislation although it accepts
tax avoidance as a means of tax planning, it is to a lesser extent as it gives by the right and takes away
with the left. The above critic have clearly demonstrated that though allowed to plan lawfully for
avoidance means the discretion lies with commissioner. Tax avoidance may be regarded as evil but as
long as the legislation so permits the final say lies with the courts if the scheme is challenged and taken
before a court for interpretation

Conclusion

While at first sight residence-based taxation may address some of the shortfalls of source-based
taxation, namely tax competition through tax rates in source countries and the need for complicated
profit allocations among different source countries, a second look confirms that residence-based
taxation also faces various difficulties. Still, it does provide some protection from tax avoidance, and
despite the trend toward territorial taxation, residence-based elements remain in most tax systems, at
least in the anti-avoidance legislation.16

Residency-based taxation is appealing to expatriates because when you reside in another country, you
will likely have to pay taxes there, too. In this system, you’d only have to pay taxes to your country of
origin on any income earned there. By adopting residency-based taxation, countries receive taxes only
from residents, not citizens living and working elsewhere. However, the United States doesn’t follow
residency-based taxation.17

With Residence-Based Taxation, the idea is that unless a person is a resident of that country — they are
not taxed on their worldwide income. For example, Taxpayer is a citizen of Foreign Country 1 but not a
resident of country 1. He earns some interest income from foreign country 1 because he still has some
bank accounts in that country — but he lives in Foreign Country 2 — and earns nearly all of his income in
foreign country 2. Under the Residence-Based Taxation model, the taxpayer is not subject to worldwide
income from Foreign Country one, because he is not a resident of Foreign Country 1. Taxpayer will still
pay tax on the interest that was generated in foreign country 1 — and the tax rates may vary (based on
whether Taxpayer is a resident or nonresident of that country) — but Foreign Country 1 does not collect
income that the taxpayer earned while residing in Foreign Country 2  for income generated in Foreign
Country 2.18

16
https://www.elibrary.imf.org/display/book/9781513511771/ch007.xml
17
https://www.ustaxhelp.com/difference-between-residency-based-taxation-and-citizen-based-taxation/

18
https://www.irsstreamlinedprocedures.com/citizen-based-taxation-vs-residence-based-taxation-overview/
http://www.nishithdesai.com/Content/document/pdf/Source_Versus_Residence_-
_An_Indian_Perspective.pdf