Budget Review: How Agile or Fragile Is the Mining Fiscal Transparency
By Mukasiri Sibanda
Totemic. That is the word which perhaps sums up
aptly the potential of Zimbabwe’ huge and diverse mineral wealth to propel the
country’s socio-economic development agenda. Early this year, the Minister of
Finance and Economic Development (MoFED), Hon Prof 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.
Government is on record that “Zimbabwe is open for business.” A slogan
best tailored to resonate with investors. But what 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, Publish What You Pay
(PWYP) campaign in Zimbabwe, 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 benefit. Interesting interest in
the status of mining fiscal transparency regarding the 2019 Midterm Budget
Review is due to the fact the 2019 National Budget included progressive policy
proposals for improving mining sector transparency.
Update on key mining fiscal transparency
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
(MMMD) 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, MoFED and MMMD 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 to 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.
Disclose tax revenue forgone, to incentivise
the mining sector
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 of the mining
sector. Such disclosure is important considering the Budget Review highlighted
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, which is 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, as 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 transferring pricing.” While government hinted
that an investigation will be done to bring the culprits to book, government
must extend the investigation into the mining sector rebate facility to check
whether similar malpractices are also at play.
Mining economic 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 of mining sector growth unhinged from other
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 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 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
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 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 Zimbabwe Platinum Mines (Zimplats) and Unki Mine
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 country’s tax
collector, 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
Progressive royalty regime for the gold
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 on 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, which is an
important source of livelihood for over a million people in Zimbabwe. Precisely,
this is why the Mines and Minerals Amendment Bill must have a special permit
for artisanal gold miners.
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
The challenge with entire scrapping of the
indigenisation requirements is that community share ownership trusts (CSOTs) no
longer have any legal backing. In the platinum sector, for instance, districts
like 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 dislocated from ownership and control of resources
without any clear alternative.
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 and 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 public updates. Citizens, PWYP campaign and Parliament must
crank up pressurise 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, the mining fiscal transparency reform agenda is quite