AFDIS fights ZIMRA US$1.8m penalty in currency dis...

AFDIS fights ZIMRA US$1.8m penalty in currency dispute

Audrey Galawu

Assistant Editor

The Zimbabwe Revenue Authority and African Distillers are entangled in a legal dispute after the tax authority issued a US$1.8 million penalty against the beverage bottler, citing a dispute over the currency used for income tax payments between 2019 and 2022.

According to the company's recently issued report, the disputed sum, which includes penalties and interest, stems from ZIMRA’s claim that the company should have settled tax obligations in foreign currency instead of the Zimbabwean dollar, which was used during the specified period.

The dispute hinges on ZIMRA's stance that taxes for specific transactions conducted between 2019 and 2022 should have been paid exclusively in US dollars. At the time, Zimbabwe's currency policies were undergoing significant shifts, with the local currency fluctuating dramatically and the government reintroducing the Zimbabwean dollar after years of dollarization.

AFDIS board chairman Matlhogonolo Valela said this created a complex tax environment as businesses navigated currency instability and regulatory ambiguity.

“As previously reported, there were areas of disagreement with the Zimbabwe Revenue Authority regarding the applicable currency of income tax payments for the period 2019 to 2022. ZIMRA issued an additional income tax assessment, including penalties and interest against the company amounting to US$1.8 million for obligations that had been settled in local currency.

“ZIMRA contends that the tax should have been paid exclusively in foreign currency. This assessment is being contested at the courts and could have a material impact on the Company’s operations, if it materialises,” Valela said.

ZIMRA’s additional assessment has now prompted the company to challenge the penalties in court, arguing that it acted within the then-acceptable norms, making payments in the local currency as per the understanding at the time. The outcome of this legal dispute could set an important precedent, as many companies in Zimbabwe have faced similar questions regarding the correct currency for tax obligations during the transitional period.

If enforced, this penalty could have significant repercussions on the company’s financial stability. In the most recent financial report, the company acknowledged that the US$1.8 million assessment could pose a “material impact” on its operations. With an operating income of US$1.5 million for the period, the penalty would substantially strain its finances, likely influencing liquidity and potentially diverting funds from essential business functions such as product innovation and market expansion.

The company’s statement on the matter emphasized that it is hopeful for a favourable outcome in court, citing compliance with standard practices for tax payments at the time. However, until the case is resolved, the penalty remains a looming risk, impacting investor confidence and prompting caution among stakeholders.

AFDIS earlier this year reported a 392%jump on profit after tax for its financial year ended March 31, 2024 to US$7,62 million after changing its functional currency to USD.

This case highlights the ongoing challenges businesses in Zimbabwe face regarding foreign currency requirements and tax compliance. With exchange rate volatility and inflation at play, determining the correct currency for tax and transaction purposes has proven complex.

Industry analysts suggest that clearer, more consistent guidelines on tax obligations in relation to currency use could help prevent similar disputes in the future. The court’s ruling on this case may serve as a critical benchmark for other companies, as it could clarify expectations around currency compliance amid fluctuating economic policies.

While the penalty is under review, the company remains optimistic about its long-term prospects, supported by a stable agricultural forecast and growth in mining, tourism, and infrastructure sectors.

Management has emphasized plans to focus on market share growth, cost containment, and increased efficiency to remain competitive despite the economic challenges. However, any adverse outcome in the ZIMRA case could require a recalibration of these strategies.