Transparency needed to curb illicit financial flows
25 April 2017
Where can the government of Zimbabwe get much needed resources to invest in social service delivery in form of health, education, clean and safe water among others? What has this to do with transparency in the mining sector? In 2017, $110 million was required to fund the Basic Education Assistance Module that enables poor children to go school. However, only $10 million was availed by the national budget.
Curbing Illicit Financial Flows (IFFs) has been identified as critical to mobilise development finance in Africa by the 2015 Addis Ababa Action Agenda of the Third International Conference on Financing for Development. Failure to curb IFFs can result in government resorting to regressive taxation frameworks that burden taxes on the poor. No wonder why government had broadened Value Added Tax to include basic foodstuff such as meat.
Despite Zimbabwe’s abundant mineral wealth, the treasury along with civil society organisations like Publish What You Pay (PWYP) Zimbabwe are on the record of decrying trickling mining tax revenue flows. Commendably, the Reserve Bank of Zimbabwe (RBZ) came up with a raft of measures to curb IFFs in its 2016 monetary policy statement. This included stopping the of shifting income through inflated management fees or service fees paid to offshore related companies. “To guard against externalisation by related companies through service payments, management fees, technical fees, service fees or by whatever name they come under, shall not exceed an aggregate of 3% of revenue and shall require Bank approval” RBZ.
However, without contract transparency, it is difficult for citizens to see if they are getting a fair share of tax revenue from the exploitation of their finite mineral resources. Therefore, the story that featured in The Herald on 20 April 2017 titled “ASA loses $4.3 million, fires executives” is a timely reminder on why transparency is critical for citizens to hold to account government and mining companies on curbing IFFs. In this story, it was reported that ASA holdings, largely owned by Chinese investors, China International Mining Group is receiving management fees from Freda Rebecca gold mine and Bindura Nickel Corporation (BNC). Questions automatically arise on how much management fees are being paid to ASA and what is government doing to curb abuse of management or consultancy fees.
Interestingly, in 2016, the government of Zimbabwe and China concluded a Double Taxation Agreement (DTA). The research carried out by PWYP Zimbabwe with the support of Oxfam Zimbabwe titled Government Revenue from Mining, A case Study of Caledonia’s Blanket mine warned against the risks posed by DTA. In this study, Caledonia a Canadian company went on to set up a management company in UK immediately after agreeing to ceding 51% shareholding to indigenous partners in Zimbabwe. This is what is known as treaty shopping. The motive was to exploit the DTA between Zimbabwe and UK and avoid paying a fair share of taxes on management fees. According Association of Certified Chartered Accountants, a DTA “is an agreement or a contract regarding double taxation or, more correctly, the avoidance of double taxation.” DTAs are not necessarily bad, if well negotiated, they can promote foreign direct investments and exchange of tax information.
If Zimbabwe is to reap a fair share of taxes from the exploitation of her abundant mineral wealth, embracing transparency initiatives such as the Extractive Industry Transparency Initiative (EITI) is a necessity. Interestingly, Section 315 (2) (c ) of the constitution provides for contract disclosure of mineral concessions of mineral and other rights. Government can borrow a leaf from Uganda which suspended DTAs until there it is clear how the country is benefiting from such arrangements. In the meantime, CSOs must work with Parliament to review DTAs to close loopholes that can lead to revenue leakages.
Mukasiri Sibanda (@mukasiri) is an economic governance officer. He is interested in mineral resource governance. He blogs at Mukasiri's Blog. Mukasiri works with the Zimbabwe Environmental law Association