All amounts include VAT and are in Zimbabwean Dollars (ZWL) unless otherwise stated

Group 10 Ltd (G10) is a Johannesburg Stock Exchange (JSE) listed holding company,
headquartered in South Africa and with subsidiaries in 39 countries across the globe. G10 is a
construction and concessions group with operations mainly in Sub-Saharan Africa operated by
subsidiaries registered in different countries. All the companies in the group have a 30
September Financial Reporting year end. G10Zim (Pvt) Ltd (G10Zim) is a 68% owned subsidiary
of G10 and G10Zim was incorporated in Zimbabwe in the year 2005 as a category C VAT
registered operator as well. The year ended 31 December 2018 saw very weak markets
resulting in sharp decline in demand across the G10 group except in a few regions where the
decline was not so sharp. The combination of external and internal challenges necessitated
focussed crisis management from the management team and the board of directors. Below is
a summary of the group’s financial performance:

FINANICAL PERFORMANCE

Revenue [Continued operations] R8.7 billion F2017:R12.3 billion

Operating loss R1.7 billion loss F2017:R413 million loss

Total Order book R13.7 billion F2017:R22.3 billion

Cash and Cash Equivalents [Continued

R1.7 billion F2017:R2.4 billion
operations]

Earnings per share 1 445 cents loss F2017:435 cents loss

STRATEGIC PERFORMANCE

Core Operating Loss

Revenue from over the R314 million

border operations
Value of Investments in service concessions
25%
R314 million
During the 2018 financial year the Angola operation entered into a loss making contract and
absorbed a material amount of the group’s free cash and this contract was terminated on 15
June 2018. In order to stabilise the liquidity of the group, the group was forced to alter its risk
bearing capacity and risk appetite and aggressively borrowed across the group. In Zimbabwe,
G10Zim had to secure bridging finance through a short-term overdraft facility of ZWL 12
million, running over 3 years beginning 31 March 2018 at a compounding 10.15% per annum
interest rate. These challenges on the G10 group impacted on stakeholder perceptions leading
to a reputational damage on the G10 group. The group had to take a restructuring and
rationalising exercise with a total 1,000 retrenchments across the group during the year 2018
financial year.
You are a CTA graduate and work for G10Zim as a Financial Accountant reporting to the Chief
Financial Officer, Ms Chito Mburinga. G10Zim’s is preparing to submit its annual tax return and
it is due on the 31st of January 2019. G10Zim successfully shifted its tax year to start from 01
October to the 30th of September of the following year and this was accepted by the
Commissioner General at Zimra. Chito gave you a few queries from the draft tax computation
that had been submitted by an external tax consultant and requires you to research and
respond to each of the queries as below:

1. Query 1 - Transfer Pricing

G10Zim imports its key raw materials and some of the raw materials are manufactured
by other entities in the G10 group. The prices of these materials between the group
companies are aimed at maximising the profits for the group and Chito seeks to
understand whether this is appropriate for Income Tax purposes. In light of the changes
in the Zimbabwean transfer pricing tax legislation, Chito also wants you
i. To clarify when and how to use the transaction net margin method (TNMM),
the Comparable Uncontrolled Price (CUP) method or the Cost-Plus method by
comparing and contrasting these methods.
ii. To advise the impact of transfer prices amongst the G10Zim divisions which
internally to G10Zim, transfer products and services amongst themselves and
report performance divisionally on the Income Tax payable of G10Zim.

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2. Asset Disposals
In line with the rationalisation exercise and liquidity management, G10Zim disposed of
the following assets:

i. Equipment
Equipment imported for 1,370,000 (excluding VAT) in 2006 was disposed of for
2,502,000 in June 2018. The equipment had a carrying amount of 125,500 and
depreciation of 185,500 had been correctly charged in the books of accounts
during the year of assessment.

ii. Office Buildings

G10Zim disposed of office buildings that had were acquired from a non-
registered operator in July 2007 and at acquisition the building had an invoice
value of 350,000. G10Zim paid for the buildings by transferring its shares in
Econet Ltd to the seller when the shares had a market value of 353,000 and
stamp duty was 5% of the invoice value. The buildings were sold for 500,000 on
the 13th of June 2018 to a non-registered operator.
G10Zim’s peri-urban land was compulsorily acquired by the government
despite G10Zim’s objection to the move. The market value of the land was 1.38
million (excluding VAT) and the government compensated 850,000 (excluding
VAT) of this. The land had cost G10Zim 110,000 in 1982 and was being held to
further development of factories had the markets not weakened.

iii. Investments
G10Zim had treasury bills of 100,000 that matured in May 2018 and the RBZ
paid G10Zim the entire 100,000 amount as a lumpsum. The treasury bills were
for three years, at market rate of 9.80% and a zero-coupon rate.
On the 20th of August 2018, G10Zim disposed of shares in AFDIS for 540,000
and had acquired the shares for in January 2013 for 104,000 and was charged
1,500 in transaction costs.

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 Chito would want you to recompute the Capital Gains Taxes, if any for the tax period
under review and to outline the VAT treatment on the acquisitions and disposal of
these assets.

3. Overdraft
G10Zim’s overdraft facility resulted in finance costs of 1.25million for the year under
review. The overdraft was applied to working capital management when the average
debt to equity ratio after applying the overdraft was 7:2. Chito is concerned that the
treatment of the Finance costs may have not been appropriate and requires you to
discuss the full tax treatment so that she will be able to thoroughly review what was
done.

Question Sub-Total Total

a) Respond to each of Chito’s queries
a. Query1 10
b. Query 2
Part (i) 9
Part (ii) 5
Part (iii) 10
c. Query 3 5
Communication skills – Presentation and layout 1 40
Total 40

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