*While not an advocacy piece, this legal development reopens the debate on balancing finality with revenue protection. A tension that may warrant eventual legislative review.”
Zimbabwe’s tax system is built on the principle of legal finality, offering a six-year prescription period within The Income Tax Act prescribes a six-year period within which the Zimbabwe Revenue Authority (ZIMRA) may issue tax assessments. This statutory limitation is intended to bring closure and certainty to both taxpayers and the fiscus. However, this assurance is being steadily eroded by an expansive interpretation of a single concept, “misrepresentation.”
While the law allows ZIMRA to lift the prescription period in cases involving fraud, willful non-disclosure, or misrepresentation, recent court rulings have broadened the scope of “misrepresentation” to include mere incorrectness in tax returns, regardless of the taxpayer’s intent. This shift has significant implications for audit risk, record retention practices, and the principle of finality in tax matters, allowing ZIMRA to revisit tax years long considered closed. The courts have ruled decisively on this issue in several landmark cases, setting precedent for the reopening of a prescribed assessment.
Case Background:
1. In Bath Ltd v ZIMRA HH 552/20, the court ruled that it is immaterial whether the taxpayer acted willfully or innocently; what matters is that the statement was false in substance and effect. It further held that qualifying the term “misrepresentation” with any reference to state of mind, such as “willful,” would render the term meaningless.
2. This interpretation was reinforced in SZ (Pvt) Ltd v ZIMRA HH 142/20 and NT Zimbabwe (Pvt) Ltd v ZIMRA HH 257/20, where the courts confirmed that misrepresentation includes incorrect statements that are prejudicial to the fiscus, even where there is no fraud or willful concealment.
3. In DEB (Pvt) Ltd v ZIMRA HH 664/19, the court reached the same conclusion. The taxpayer’s state of mind is irrelevant when a false statement exists in substance and effect.
Legal Interpretation: The Supreme Court has now interpreted “misrepresentation” not as requiring dishonesty or deception, but as encompassing any incorrect statement made in a return that leads to under-assessment. The courts have emphasized that the test is objective. If the return contains incorrect information that results in the understatement of tax, the prescription does not apply. This effectively makes most tax positions permanently open to reassessment unless fully accurate and properly substantiated.
Decision Impact: Taxpayers can no longer assume closure after six years, as the current provisions create a ticking tax time bomb beyond the prescription period. This interpretation imposes an indefinite audit exposure for returns that are incorrect, even if the taxpayer acted in good faith. It erodes the protective function of prescription and places greater weight on the quality of disclosure, the accuracy of self-assessments, and the retention of contemporaneous documentation.