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How the 2021 National Budget opens opportunities for strengthening mining fiscal linkages

16 December 2020

Introduction

This article provides an analysis of the 2021 National Budget that was presented by  Minister  Mthuli on the  26th of November, 2020 with the view to ventilate prospects for  harnessing the potential that the mining sector has in contributing towards domestic resource mobilisation and sustainable development. Domestic resources mobilisation is at the heart of the Sustainable Development Goals (SDGs) that Zimbabwe is signatory to. With a diverse mineral wealth potential[1], mining could be leveraged to support Zimbabwe’s domestic resource mobilization, economic recovery, investment, stabilization and growth agenda and the country’s vision of turning the country into a middle-income country by 2030. Despite the dependence of the economy of Zimbabwe on the mining sector, the sector has delivered less on domestic resource mobilisation and social -economic development. There are weak linkages between mining and service delivery.

What Have Been the Major Concerns?

ZELA and other CSOs such as the Publish What You Pay have in the past years increased their participation in the budget process and scrutiny of the country’s fiscal policy tools for obvious reasons. The National budget spells out the overall fiscal policy direction of the country in terms of the policy measures and instruments to collect and widen its tax base and publishes information on how tax revenue is distributed to impact on the economic social well -being of citizens.  It is the tool that shows the policy intentions of government on mineral resource management and allocates resources to achieve this policy intentions. Before delving into the 2021 National Budget analysis, it is important to highlight specific issues that have demanded attention from the Public What You Pay (PWYP).  

Mining Fiscal Transparency

There has not been much progress in terms of putting in place policy or legislative mechanism to allow citizens to access information of public interest when it comes to the operations of the mining companies.  Zimbabwe has not kept pace with international best practises on disclosure of mining contracts and payments that mining companies pay to central and local governments. The Government has been clear on the adoption and implementation of the Extractive Industries Transparency Initiative (EITI). Citizens have mainly relied on open data sources such as online annual financial reports that are produced by stock exchange listed companies to get a glimpse of the payments that they are making to government. There has been also reliance on information from ZIMRA revenue performance reports and the Auditor General’s Report. However, these open data sources are not adequate in providing a comprehensive picture on the performance of the mining sector on tax mobilisation issues. For example, ZIMRA’s revenue  performance reports  do not show  mining sector performance  per each tax revenue head (Corporate Tax, Pay as You Earn,  Value Added Tax, Withholding Tax and Capital Gains tax) and revenue performance of key mineral sectors like gold, platinum and diamond. Currently, royalties are the only mineral revenue stream that are separately accounted for.    

Mining Cadastre System

We have been calling for the government   to expedite the computerization of the mining Cadastre system to increase transparency in the awarding of mining claims.  Corruption in the awarding of claims has been fuelling disputes and corruption leading to loss of claims by women and men in the sector. Ultimately, this has affected livelihoods for several women depending on ASM sector in Zimbabwe.  In its submission into the National Budget consultations, PWYP called on the government to allocate resources to complete the modernization of the mining cadastral system.

Mining Fiscal Regime

There is still a huge gap in terms of aligning the mining taxation governance to the 2013 constitution provisions on access to information. The mining fiscal regime itself has been prone to tax leakages and Illicit Financial Flows (IFFs) as a result of a number of issues including transfer pricing and this has undermined the capacity of the mining sector to contribute significantly to domestic resource mobilization. Commendably, there is a transfer pricing policy that is now in place to address IFFs in form of trade mispricing.  

Furthermore, there has been a concern over tax incentives that the government awards to the mining sector. Tax incentives are a source of Illicit Financial Flows (IFFs) if there is no adequate systems of monitoring their cost and benefits [2]. The Public Financial Management Act requires that the revenue forgone from tax incentives be published. On a positive note, in 2019 national budget, government partly honoured its commitment to monitor tax incentives and make information available on the impact of these tax incentives tax (revenue forgone to incentivise the industry) as per the requirements of Public Finance Management Act (PFMA). Only one revenue head, duty concessions given from January 2011 to May 2019 were disclosed[3]. There was disclosure of information on the revenue that was forgone in incentivising importation of goods.

Benefit Sharing: Communities

According to Section 13 of theConstitution,communities have a right to benefit from extraction of mineral resources in their areas. The government of Zimbabwe established the Community Share Ownership Trust Schemes (CSOTs) in 2010 through the Indigenisation and Economic Empowerment (IEE) Act. Through this arrangement, foreign-owned companies involved in the mining sector were required to cede 10% equity to the local community. CSOTs no longer have a legal backing, because government reversed the IEE Framework through the repeal of the Finance Act in 2018. The 2019 Midterm Budget review statement and supplementary budget confirmed an end to the indigenization framework. Despite the challenges that were associated with CSOTs, the policy remained the mechanism for communities hosting mining activities to benefit directly from the mineral resources. As part of its submissions in the 2021 national Budget, the PWYP lobbied the government to come up with a new policy on benefit sharing.

Benefit Sharing: Local authorities

Mining tax revenue accrues to the central government because mineral rights are owned by the state. Resource rich RDCs have a limited legal and political space to collect revenue from mining activities in their areas. Local mining taxes are collected through land development levies according to the RDC Act. However, these are not adequate enough to cater for the service delivery needs of local authorities hosting mining activities. The COVID -19 has even escalated the inequalities that mining communities face. Local Authorities’ ordinary revenue sources have been disrupted by the COVID -19 pandemic resulting in the failure of local authorities to provide adequate services such as water, health and sanitation to communities. Corporate Social Responsibility (CSR) programmes that mining companies undertake are not a panacea to the developmental and inequality challenges that mining communities are facing since these programmes are not mandatory. To balance out equity issues, the PWYP coalition has been calling for a benefit sharing formula where a certain percentage of mineral royalties is channelled to the local authorities for service delivery.

The 2021 National Budget and Cost of Doing Business Reforms

The National Development Strategy (2021-2025) and the 2021 National Budget recognize the need to improve the ease of doing business as a key strategy to improve the country’s competitiveness in attracting investment.  Zimbabwe was rated as one of the top 20 in the world and top five in Africa doing business reformers according to the 2019 World Bank Doing Business Report[4].  Quite evidently, notwithstanding the narrative on Zimbabwe being Open for Business mantra, investment levels have remained stagnant. The country’s Cost of Doing Business Agenda in the mining sector is hinged on finalisation and implementation of mineral specific policy frameworks and a comprehensive review of the Gold Trade Act, Precious Stone Trade Act and Amendment of the Mines and Minerals Act.  It is important to complement such efforts with policy measures to increase access to reliable robust and credible data that is transparent and easily accessible on the Zimbabwe investment climate. Adoption and Implementation of international transparency initiatives  present opportunities  for the country to boast its ratings on Corruption index, Ease of Doing Business Index, Competitiveness Index, Open Budget Survey  and Fraizer Perception Index which  in turn could potentially result in the country attracting the much needed  Foreign  Direct Investments ( FDI) in the mining sector.

Allocation of resources to finalise a computerised Mining Cadastre System

Progressively, the 2021 budget allocated resources to the tune of ZWL$247.4 million to meet the early next year target upon which migration should be completed from existing manual to computer based cadastral system. The migration to a computerised mining cadastre system will not only minimise mining claim disputes but it will also foster revenue collection and accountability which is critical in the attainment of the US12 Mining economy and the country’s development goals.

Promoting Cost – Effectiveness and Competitiveness in Investments Projects including Mining Concessions

Commendably, the National Development Strategy (2021-2025) makes an acknowledgment that the country has failed to realise the full value of its mineral resources due to vulnerabilities related to inadequate scrutiny around agreements with investors, including fiscal concessions. In order to bring transparency and fair share of Government in minerals exploitation, NDS1 will prioritise formation of an investment committee comprising of Office of the President and Cabinet (OPC)  Ministry of Mines and Mining Development and Treasury, chaired by the Zimbabwe Investment Development Agency (ZIDA) in assessing capable investors and overseeing investment agreements. This is an important step towards improving the efficiency of government systems on promoting cost – effectiveness and competitiveness in investments projects including mining contracts. However, there is need for government to subject mining agreements to public scrutiny in the spirit of transparency and accountability that the constitution talks to. There have been genuine concerns from citizens that the government has been failing to negotiate good mining, energy or infrastructural contracts. According to Section 315 of the constitution, an Act of Parliament must provide for the negotiation and performance of Joint Venture Contracts and concessions of mineral and other rights to ensure transparency, cost effectiveness and competitiveness. There is need for government to speed up the process of coming up with the act.

Disclosure of Revenue Forgone on Awarding of Tax incentives in the Mining sector

Sadly, an opportunity to disclose the impact tax incentives as per the commitment by government in the 2019 National Budget was missed.  The 2021 National Budget does not give an updated information with regards to revenue forgone out of tax incentives such as duty concessions. However, there is disclosure of information with regards to types of duty concessions that are being accessed in all sectors of the economy including mining.   Existing duty concessions that are currently being accessed by the mining sector are; rebate of  duty on goods ( chemicals) for the mining industry, rebate of duty on goods for prospecting and search for mineral deposits), rebate of duty on goods imported in terms of an agreement entered into pursuant to a special mining lease and suspension  of duty on goods imported for specific mine development operations. There are also duty concessions for goods that are imported into Special Economic Zones ( SEZ) and the mining sector is benefitting from these duty concessions. A review of information from the Zimbabwe Special Economic Zone Authority (ZIMSEZA) website shows that  Afrochine Smelting company and Salene Chrome mining Zimbabwe are both recipients of Special Economic Zone status.  AfroChine Pvt limited among the nine companies that were granted Special Economic Zone status in 2018.[5]ZIMSEZA also declared a portion of Selous measuring  50 667 hectares belonging to Tharisa’s integrated resource group in October, 2019[6]. No information has been disclosed with regards to the status with regards to the tax incentives and the impact of they have had if at all they were awarded to the mining companies. There are high chances of  redundancy  of tax incentives if there is no monitoring is done and this result in government losing a lot of revenue  

As has been the case, the government’s policy position on tax incentives is very progressive. According to the National Development Strategy 1 (2021-2025) articulates the government’s policy direction on tax incentives.   “Tax incentives represent forgone fiscal revenue. Notwithstanding the nexus between fiscal incentives and economic growth, the government will continuously Cost Benefit Analysis of the existing fiscal incentives in order to guide the review and streaming those found to be reductant.  It is important for government to own up to its commitments on monitoring impacts of tax incentives going forward

 Widening tax base in the ASM sector and Fighting Leakages 

Commendably, through the National Development Strategy 1, the government commits to widen tax base in the mining sector and reduce tax leakages through beneficiation of minerals and formalisation of the ASGM sector. Providing access to finance is one of the government’s key strategy on the formalisation of the sector. Much as  providing  finance to ASMers are critical among other issues are all critical to the formalisation of the ASM and the government’s domestic mobilisation strategy in the ASGM sector, there is need for a holistic  approach  to  ensure that all aspects of the formalisation process are addressed.  There is need for government to ensure that the  legal framework recognize the operations of the ASMers. This is an important part of the formalisation agenda that needs to be addressed through the Mines and Mineral Amendment Bill.

 In one of the meetings that ZELA organised to discuss mining  sector transparency with government institutions( Ministry of Finance and Economic Development , Reserve Bank of Zimbabwe( RBZ), Fidelity Printers and Refiners) in September, it was revealed that  the ASM sector is very complex and such as, it demands more attention from a research perspective. The meeting highlighted the need to carry  out a study that profiles this sector adequately in terms of who the miners are,  the promoters and the challenges the sector faces from a legal and tax compliance aspect and what practical steps can be done to address these issues. This research would also assist tax payers’ awareness raising programmes that are critical to the sector as part of the formalisation agenda.  

Benefit Sharing laws and community benefits

Sadly, like the 2020 Mid Term Budget review, the 2021 National Budget was silent on mineral revenue sharing. The issues of financing of the Community Share Ownership Trusts is now off the government’s policy radar.

 Recommendations

  • Government must enhance mining fiscal transparency. There is need for government to reconsider coming up with concrete steps to adopt and implement international standards  ( e.g EITI)  as part of its cost of doing  busines reform agenda
  • Government must provide for disclosure of information on the impact of tax incentives  in line with Public Finance Management Act 
  •  In the spirit of principles of public financial management as outlinde in Section 298 of the constitution, ZIMRA ‘s revenue reports must be enhanced on data disaggregation. Further disaggregation of revenue performance is required to show mining sector performance on each tax head and revenue performance of each major mineral.
  • An act of parliament must be enacted to empower parliament to play a role in contract negotiation, review and performance monitoring
  • Government must address the legal status of the ASM sector
  • There is need to carry out a comprehensive study on the formalisation model for the ASM sector
  • Government must come up with a new mining fiscal regime in line with African Mining Vision
  • The government must develop a legal and policy framework on revenue sharing arrangements between the national government and resource rich local authorities.

[1] Zimbabwe is highly rated in terms of mineral wealth potential according to 2018 Annual Survey of Mining Companies conducted by Fraser Institute https://www.fraserinstitute.org/studies/annual-survey-of-mining-companies-2018

[2]http://iffoadatabase.trustafrica.org/iff/The%20socio-economic%20impact%20of%20Illicit%20Financial%20Flows%20_%20The%20Source.pdf

[3] 2019 National Budget

[4]https://www.google.com/search?q=2021+national+budget&oq=2021+national+Budget&aqs=chrome.0.35i39j0i20i263i457j0i20i263i395j0i395l5.6910j1j7&sourceid=chrome&ie=UTF-8

[5] http://www.veritaszim.net/sites/veritas_d/files/Declaration%20of%20Special%20Economic%20Zones.pdf

[6] https://www.miningreview.com/platinum-group-metals/sez-to-benefit-tharisas-zimbabwean-pgm-subsidiary-karo/

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