Zimra delays $100 million facility

Published: 22 June 2018

A US$100 million commercial loan recently advanced by the United Kingdom (UK) government, through the state-run Commonwealth Development Fund (CDC), to Zimbabwe's private sector has been delayed by the Zimbabwe Revenue Authority (Zimra) over tax clearance issues.

This comes as it emerged this week that Standard Chartered (StanChart) Zimbabwe had been unnerved by a possible tax charge running into millions of dollars for being a financial intermediary in the transaction which will see the bank earning income on 40% of the total loan it will handle onshore.

The bank a few years ago was slapped with a US$3,9 million tax bill in an almost similar tobacco offshore loan transaction.

Banking sources told the Zimbabwe Independent this week that the funds could have reached the intended beneficiaries by now had Zimra provided tax guarantees to the local bank earlier. Some of the intended beneficiaries are local private sector companies, Delta Corporation and Unilever Zimbabwe.

The funds, US$60 million from CDC and US$40 million from StanChart, are expected to start flowing and reach local beneficiaries at the end of the month once Zimra tax guarantees have been obtained.

The loan, the first direct commercial loan by the United Kingdom to Zimbabwe in more than 20 years, is expected to re-equip companies, increase capacity utilisation and propel the turnaround of the depressed economy.

The CDC, the UK's development finance institution, will provide a US$60 million offshore facility, while StanChart will give the balance onshore.

However, the allocation of the US$100 million has been delayed by Zimra, which is yet to provide tax clearance assurances to the CDC to ensure the funds are not liable to local charges at StanChart.

This requirement has been necessitated by the need to avoid a similar dispute which emerged several years ago between tobacco companies, StanChart and Zimra over US$3,9 million tax charges on an offshore loan.

In a letter dated June 18, 2018, seen by the Independent, to Zimra commissioner-general Faith Mazani and copied to Reserve Bank of Zimbabwe (RBZ) governor John Mangudya, Standard Chartered chief executive Ralph Watungwa sought assurances that the loan would not be liable to local charges by the taxman.

"We are writing to seek your guidance on the tax implications of the recently announced Commonwealth Development Corporation (CDC) and Standard Chartered Bank Zimbabwe Limited (SCBZL) arrangement which we intend to disburse shortly. The structure is similar to the tobacco offshore loans that resulted in a tax dispute where the bank was compelled to pay US$3,9 million in additional taxes," Watungwa wrote. "In a meeting attended by our group financial officer with the Governor of the Reserve Bank of Zimbabwe (RBZ) on the 5th of June 2018, we registered our concerns regarding a potential repeat of the tax dispute referred above. A decision was taken to approach the Zimbabwe Revenue Authority by way of this letter, which we have copied the RBZ governor for alignment, to clear any potential tax issues prior to disbursement of the facilities."
He said clarification was necessary to avoid disputes which occurred in the past.

"As a result, the bank engaged its parent company, Standard Bank Plc through Standard Chartered Bank London (SCB London), for support to fund local businesses to increase their production capacity," he said.

"The arrangement was such that the bank's parent company would avail funding to local entities with the principal repayments and interest thereon being paid direct to SCB London. SCBZL (Standard Chartered Bank Zimbabwe Limited) only acted as an agent whose role was to select the local customers and was compensated through arrangement and transaction related fees which were duly included in the taxable income."

Watungwa said all the loans were approved by the RBZ's external loans co-ordination committee.

However, when Zimra audited the bank's financial transactions between 2009 and 2011, the tax collector took the view that SCBZL had borrowed funds from its parent company and had to on-lend to its local customers thus earning taxable interest income.

"The interpretation resulted in a deemed tax liability of USD3,9 million calculated on the deemed gross interest income. Unfortunately there was no relief by way of a tax credit for the corresponding deemed cost of funding," Watungwa pointed out.

He said although the dispute "significantly dented" his bank's appetite "for similar structures", its parent bank and the CDC are still keen to provide funding to local companies to resuscitate the production capacity of local industry. Watungwa said should the initial tranche of US$100 million perform to the satisfaction of the stakeholders in the deal, particularly on legal and tax issues, the funding could be increased.

"The CDC funding will be channelled through SCB London. Should the customers want to import goods/services, the payments will be effected through SCBZL nostro accounts with funds provided by CDC through SCB London," Watungwa explained.

He further pointed out that all the facilities with the local bank's customers will be negotiated and executed by them, adding that the bank, along with its parent bank, will act as lenders and both parties will sign the loan agreements with the customers.

"All repayments (principal and interest) for the offshore funding portion will be made by the customers to SCBZL who in turn will repatriate the same to SCB London for the benefit of CDC in the United Kingdom," Watungwa said.

He revealed that the deals will be for a maximum tenure of three years with a maximum loan amount of US$25 million per customer of which 60% will be funded by the CDC in foreign currency and the remaining 40% funded by SCBZL. He said the income accrued from these facilities would be shared between the CDC and SCBZL on a 60/40% basis respectively.

Watungwa said that since 60% of the funding is coming directly from the UK with the corresponding income being remitted to the UK, SCBZL should not be taxed for such income.

He added the local bank should only be taxed for the 40% of the net interest income which is the portion they will be funding, 40% of the 1% drawdown fees of the total facility amount and 40% of the 2% commitment fees of any undrawn/cancelled facility amount and 100% of all other transaction fees and charges that will accrue to SCBZL in line with local banking practices.
- Zim Ind

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