Pacific Cigarette Company, Zimbabwe’s second-largest indigenous tobacco producer, has secured approval from the High Court for an urgent hearing regarding its ongoing tax dispute with the Zimbabwe Revenue Authority (ZIMRA).
This follows a significant US$19 million tax demand issued by ZIMRA, which pushed the company into voluntary business rescue.
The Tax Dispute
The tax demand, which totals US$19,315,233.82 and Z$79,845,954.36, has rendered Pacific insolvent, with the company’s operations now under serious threat.
The dispute stems from Pacific’s contention that the tax demand infringes upon the protection granted to companies under corporate rescue procedures, which are designed to allow financially distressed businesses to reorganize and recover without being burdened by excessive liabilities.
Pacific’s argument centers on its formal request to ZIMRA for a tax clearance certificate, which it believes should be granted based on compliance with established conditions outlined in Public Notice 91/2023.
However, the company now faces contested tax obligations due to ZIMRA’s revised taxation approach for toll manufacturers.
The Background to the Dispute
The heart of the dispute lies in a change in ZIMRA’s taxation policy, which, according to Pacific, has unfairly saddled it with the disputed liabilities.
Pacific has historically relied on toll manufacturing agreements, where it produces cigarettes for other companies.
This shift in policy, which ZIMRA implemented after the notice in December 2023, altered how toll manufacturers are taxed, leading to the liabilities now in question.
In an attempt to ensure payment, ZIMRA has garnished Pacific’s bank accounts, further compounding the company’s financial difficulties.
Despite this, Pacific maintains that it has complied with all the tax conditions set by ZIMRA, and that the demand for payment should be set aside as part of its corporate rescue efforts.
Legal Proceedings and Court Ruling
In response to the tax dispute, Pacific filed an urgent application under a certificate of urgency, requesting that the court intervene in the matter.
ZIMRA, however, objected to the application, raising procedural concerns and urging that the case be placed on the ordinary roll for hearing when it reached the top of the list.
ZIMRA argued that there was no immediate need for the case to be expedited.
But Justice Gibson Mandaza, presiding over the case, rejected ZIMRA’s preliminary objections, affirming the urgency of the matter and allowing the case to proceed.
Justice Mandaza ruled that the tax dispute required adjudication on its merits, particularly the question of whether a company under corporate rescue, like Pacific, is exempt from certain tax obligations.
In his ruling, Justice Mandaza emphasized that the corporate rescue process was designed to allow companies to reorganize without facing undue liabilities.
However, he also noted that any exemptions granted during this period must be assessed on a case-by-case basis, and could not be presumed at the early stages of the proceedings.
The judge further stated that the determination of Pacific’s eligibility for tax exemptions would be made during substantive hearings, where both parties would present their cases in full.
Pacific’s Legal Representation and Corporate Rescue
Pacific is being represented in the corporate rescue process by Reuben Mukavhi of Rubaya-Chinuwo Law Chambers.
Mukavhi was appointed as the business rescue practitioner on October 4, 2023, following the company’s decision to enter voluntary business rescue in response to its mounting financial difficulties.
Pacific, which was founded in 2005 by businessman Adam Molai and was formerly known as Savanna, produces the Pacific, Pegasus, and Branson cigarette brands.
The company has relied heavily on toll manufacturing agreements, wherein it produces cigarettes for other companies, to sustain its operations.
The Future of Pacific Cigarette Company
As the legal battle continues, the key issue remains whether the tax obligations imposed on Pacific during its corporate rescue violate the protections offered under insolvency laws or if they are legitimate liabilities that must be enforced.
This case has significant implications for both Pacific’s survival and the broader tobacco manufacturing industry in Zimbabwe, which has long faced regulatory challenges.
The court’s decision to allow the case to proceed is a critical development in what has become a pivotal legal dispute for the future of the company.
With its operations on the line, Pacific hopes that the High Court will rule in its favor, allowing the company to move forward with its business rescue efforts and continue its operations without the heavy burden of the disputed tax demand.
