Taxes, indigenisation and transparency: How Mthuli’s new fiscal regime impacts on Zimbabwe mining
Open for business? Totemic. That is the word which perhaps aptly sums up the potential of Zimbabwe’s huge and diverse mineral wealth to propel the country’s socio-economic development agenda. Early this year, the Minister of Finance and Economic Development, Mthuli Ncube, declared that mega mining deals worth US$8 billion have been sealed. It is anticipated that mining will generate US12 billion annually by 2023. In 2018, the mining sector earned US$3.4 billion.
Mukasiri Sibanda
Government is on record declaring that “Zimbabwe is open for business”, a slogan tailored to resonate with investors. But what it is at stake for citizens? Is government keen to be open about mining contracts and the sector’s contribution to the national purse? Against this backdrop, and clutching on the 2019 Mid Term Budget Review Statement, this article tries to decipher the implications of the Budget Review on transparency and accountability in the management of mineral revenue.
The signature objective is to help citizens – through the Publish What You Pay (PWYP) campaign – and legislators to easily figure out how agile or fragile the mining fiscal transparency reform agenda is. Obviously, the way mineral wealth is managed determines whether citizens enjoy a fair share of mining benefits. Interest in the status of mining fiscal transparency regarding the 2019 Midterm Budget Review is due to the fact that the 2019 National Budget included progressive policy proposals for improving mining sector transparency.
Key transparency reforms missing
Key policy proposals for improving mining sector transparency contained in the 2019 National Budget Statement included the implementation of the Extractive Industry Transparency Initiative (EITI), funding for modernisation of the mining title administration system; mining cadastre, monitoring and tracking of tax incentives for cost benefit analysis purposes. Sadly, the Midterm Budget Review failed to give updates on implementation of the 2019 proposed mining sector transparency reforms.
A positive, though, is that the Ministry of Mines and Mining Development together with the Zimbabwe Environmental Law Association (ZELA) organised a multi-stakeholder meeting on implementation of EITI in July 2019. Perhaps, the information blackout on implementation of EITI in the Budget Review is a sign that two Ministries, Finance and Mining, must work closely together to ensure successful implementation of EITI.
Silence on progress regarding the computerisation of the mining title administration system is a serious indictment on a government that purports to open Zimbabwe for business. The current mining title administration system is outdated, heavily susceptible to corruption and is also festering numerous claim ownership disputes.
Disclosure of tax revenue forgone
Although there was no update on tax incentives given to the mining sector, a notable exception concerns the disclosure of tax revenue forgone because of the Clothing Manufacturers Rebate. As at April 2019, revenue forgone, or tax incentives given since the start of this rebate facility amounted to US$14 million against imports worth US$43.9 million. Likewise, Treasury must disclose revenue forgone to spur growth in the mining sector. Such disclosure is important considering the Budget Review highlighted that “in the case of imports, the mining sector largely benefits from a rebate of duty regime that supresses both customs duty and Value Added Tax (VAT).”
Disclosure of tax incentives given to the mining sector, a mega economic activity, is crucial to enable the public to assess whether government is negotiating fair deals which harness well finance for development from the finite mineral resources. This domestic resource mobilisation opportunity must not be squandered, it doesn’t last forever.
Significantly, the Budget Review raised concern that beneficiaries of the Clothing Manufacturers Rebate are allegedly profiteering illicitly by “disposal of fabrics intended for value addition on the domestic market and transfer pricing.” While government hinted that an investigation will be done to bring the culprits to book, government must extend the investigation to the mining sector rebate facility to check whether similar malpractices are at play.
Mining’s dominance: Not a good sign
Mineral export earnings continue to underpin the country foreign currency earnings. According to the Budget Review, mineral exports raked in US$1.3 Billion during the first half of the year. An enormous 68% contribution to the country’s total exports of US$1.9 billion. So many indicators can be used to depict how dire the economic situation is currently. One such prominent indicator for our sick economy is the heavy reliance on mining. And this is a major concern because of several reasons which include the finite nature of mineral resources, volatility of mineral prices, and evinces a mining sector growth which is unhinged from other economic activities.
Ministry of Finance & Economic Development@ZimTreasuryMining remains our major source for export earnings, GDP and employment. During the first half of the year, the sector contributed US$1.3 billion, which is 68% of the total exports of US$1.9 billion #MidTermBudget2019
Race to the bottom?
It is disturbing to note that the Budget Review proceeded further to weaken mining fiscal linkages by giving in to industry demands on deductibility of royalties for the purpose of calculating taxable income. Starting 1 January 2020, royalties will be recognised as an allowable deduction for tax purposes. Noting the mining sector’s poor tax contribution, the 2014 National Budget Statement directed that mineral royalties will no longer be an allowable cost for the purposes of calculating taxable income.
Referring to regional best practice, the Budget Review reversed this position. However, the Budget Review failed to realign Corporate Income Tax (CIT) rates of between 15% and 25% which were noted as below the regional average. Rather, the CIT rates were deemed as competitive, a major worry because Zimbabwe must not take a leadership position on race to the bottom – using lower tax rates to woo investors. The Budget Review admitted that production in the mining sector was not responsive to a favourable tax regime, a clear sign that tax incentives are not working as intended. So why continue the same path.
Rear-view mirror forgotten?
Sadly, the Budget Review failed to make good of the promise made by the 2018 National Budget Statement to review platinum royalties in August 2019. A promise that was made when the platinum royalty rate was reduced from 10% to 2.5% in order to ensure tax fairness and equity. At the time, holders of ordinary platinum mining lease holders like Mimosa were paying 10% royalties whilst special lease holders like Zimplats and Unki were paying 2.5%. August 2019 is significant in the sense that Zimplats had a 25-year 2.5% royalty stabilisation agreement with government which was set to expire that same period.
In 2015, Zimplats won a court dispute against the Zimbabwe Revenue Authority (ZIMRA) on the legality of the royalty stabilisation agreement. Consequently, US$101.55 million was gobbled from the national purse in 2015. This is a clear testimony that stabilisation agreements can weaken government’s fiscal capabilities. Citizens, PWYP, and Parliament must pressure the Treasury to make good of its promise to review platinum royalties to ensure the platinum sector contributes fairly to the national purse.
Progressive royalty regime
Commendably, the gold royalty regime is now self-adjusting, at 3% below US$1,200 and at 5% above US$1,200. It must be noted that between 2010 and 2014, gold royalty rates were changed three times in response to gold price movements. ZELA intensively pushed for Treasury to adopt a progressive royalty regime with rates increasing or falling depending on the price. Treasury must not limit the self-adjusting royalty rate to the gold sector, this should be applied to all minerals.
The Treasury also moved upwards the gold royalty rate for small scale producers from 1% to 2% in order to prevent arbitrage. The Budget Review Noted that the gulf between royalty rates for small- and large-scale gold producers “created an opportunity for tax avoidance whereby some mining houses may sale gold through small scale producers, in order to benefit from lower royalty rates as well as higher foreign currency retention thresholds.” A situation that is made possible because of the no questions asked basis on gold deliveries to Fidelity Printers and Refiners (FPR) and higher retention thresholds then given to small scale miners.
Differentiation of royalty rates for small and large-scale producers is a product of the 2014 National Budget Statement which sought to incentivise small scale producers to channel gold into the formal market. The Budget Review was supposed to bring back traceability of gold as required by the Gold Trade Act and in line with international best practice like OECD due diligence guidelines on responsible mineral supply chains.
Considering wanton violence in artisanal and small-scale gold mining, it is important to curb raising criminality by restoring sanity in the sector. Of course, gold traceability must not be used as an excuse to criminalise artisanal mining, an important source of livelihood for over a million people in Zimbabwe. Precisely why the Mines and Minerals Amendment Bill must have a special permit for artisanal gold miners.
How multiple taxes hurt mining
The Budget Review noted “the mining sector has also been constrained by some levies and charges imposed by Government Departments and Local Authorities. These include fees levied Unit Tax paid to Local Authorities, mining fees & charges payable to the Ministry of Mines & Mining Development, and Environmental Fees payable to the Environmental Management Agency, among others.”
Therefore, it was proposed that the fees be streamlined. Parliament, citizens and the PWYP campaign must be on guard to ensure that the Constitutional right of local authorities to mobilise finance for development from the mining sector is not undermined.
According to Section 276 (2) (b) of the Constitution, local authorities have “power to levy rates and taxes and generally to raise sufficient revenue for them to carry out their objects and responsibilities”. This is one of the avenues for complying with the Constitutional principles on devolution, Section 274 and Section 13 (4) which compels the State to put mechanism for communities to benefit from resources in their localities.
Alignment of mineral definition
The Budget Review must be commended for aligning the Mines and Minerals Act and Income Tax Act on the definition of mining and quarry concerning dimensional stones like black granite. The Mines and Minerals Act deems 327 dimensional stones extracted from quarries as a mineral. Whilst the Income Tax Act did not deem such activities as mining but quarrying. The effect was that black granite mining producers were not enjoying the mining fiscal regime eg allowable deduction on Corporate Social Investments (CSIs) and recoupment of capital expenditure.
Indigenisation’s death certificate
Finally, platinum and diamonds were removed from complying with the indigenisation requirements. A death certificate, therefore, was issued to the indigenisation framework. It was proposed that a new empowerment framework will be crafted. Prior to this, all mineral sectors, apart from diamonds and platinum were excluded from complying with the indigenisation framework at the behest of the 2018 National Budget Statement.
It is understandable that government must make Zimbabwe a mining attractive investment jurisdiction because mining is a capital-intensive business. Certainly, foreign direct investment is crucial.
DROPPING INDIGENISATION TOTALLY “IS A CLEAR VIOLATION OF THE CONSTITUTION WHICH COMPELS THE STATE TO PUT IN PLACE MECHANISMS TO ENSURE COMMUNITIES BENEFIT FROM RESOURCES…”
Zimbabwe is ranked among the 10 least attractive investment jurisdictions in the world according to the Policy Perception Index (PPI) produced in 2018 by Fraser Institute. The Index factors in both policy and mineral potential. According to Fraser Institute “The survey is an attempt to assess how mineral endowments and public policy factors such as taxation and regulatory uncertainty affect exploration investment.”
The challenge with entirely scrapping the indigenisation requirements is that community share ownership trusts (CSOTs) no longer have any legal backing. In the platinum sector, for instance, districts such as Tongogara and Zvishavane received a massive infrastructure development boost through CSOTs.
This is a clear violation of Section 13 (4) of the Constitution which compels the State to put in place mechanisms to ensure communities benefit from resources in their localities. Also, this is a major dent on political will for devolution as communities are now dislocated from ownership and control of resources without any clear alternative.
Partial privatisation of ZMDC
To ensure State participation in the mining sector, government established the Zimbabwe Mining Development Corporation (ZMDC), a State-Owned Enterprise (SOE) through an Act of Parliament. Against the backdrop of poor performance by SOEs, the Transitional Stabilisation Programme (TSP) “recognized the need for more accountable, transparent and economically viable SOEs.” ZMDC is one of the SOEs earmarked for partial privatisation. Because of high corruption risks, the partial privatisation of ZMDC must be carried out in a manner which prejudices national interests.
Parliament must be involved in the whole tendering process to ensure that a bidder with a high development proposition is selected. If this route is taken, it resonates well with the aspirations of the Africa Mining Vison (AMV), a blueprint for guiding mineral rich African countries on how to unlock sustainable and broad-based socio-economic development hinged on mining. More so, Section 315 (2) (c) of the Constitution, requires an Act of Parliament to guide negotiation and performance of mining agreements. It is important to note that already, Anjin and Alrosa were selected as ZMDC’s partners in the diamond sector in a manner which was not open.
Conclusion
Citizens are keen to see the totemic role of mining in terms of domestic resource mobilisation. That is, mining sector contribution to improved opportunities to fund health and education sectors. The slogan “Zimbabwe is open for business” is failing to resonate with citizens because government in not open about business, mining is a case in point.
Government must disclose mega deals, it must come up with a clear plan for implementing EITI and give constant publicly updates. Citizens, PWYP campaign and Parliament must crank up pressure to compel government to comply with the Constitution, Section 298 which among other requirements calls for transparency and accountability in the handling of public finances.
The cost of revenue forgone to incentivise the mining sector must be monitored and publicly accounted for to weed out overgenerous tax incentives. Government’s move to open Zimbabwe for business must not fuel the race to the bottom, the tax regime must be aligned to regional trends to ensure mining tax contributions are not undermined.
Certainly, investors are needed to unlock value in the mining sector, but government must not prejudice the constitutional right of communities to benefit from resources in their localities. As it stands, mining fiscal transparency reform agenda is quite fragile.
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Mukasiri Sibanda is with ZELA, a public interest environmental law organisation that seeks to promote economic, social, cultural and environmental rights of communities in Zimbabwe.
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