26 February 2021
On the 27th of January 2021, the Government through the Ministry of Finance and Economic Development granted a 5-year tax exemption to Great Dyke Investments (GDI) through a Statutory Instrument 26/2021 cited as Income Tax (Exemption from Income Tax) (Great Dyke Investments (Private) Limited) Notice, 2021, effective from 1 January 2021. The move will see the platinum mining company being exempted from paying.
(b) resident shareholders’ tax payable on dividends paid to shareholders of Great Dyke Investments (Private) Limited resident in Zimbabwe in connection with special mining lease operations of Great Dyke Investments (Private) Limited; and
(c) additional profits tax for a period of five years commencing from the date of receipt of income from mining operations and sales of mining output payable in respect of the special mining lease area for any year of assessment.
World over, tax exemptions are awarded to green investments and the argument is that green investments require a lot of capital to be pumped in before returns on investments start to trickle in. Against this background, tax exemptions serve a purpose of incentivising investors to pump more capital into the company and allowing the mining company to grow its operations without being burdened by too much taxation. By giving tax exemptions, government anticipates that the economic benefits (employment, foreign currency earnings and future taxes) to be derived after the end of the tax exemption period will outweigh the revenue that is forgone during the period of the tax exemption. However, the pertinent question is whether the general citizens stand to benefit from the tax exemption? The development comes at a time when there are genuine concerns from Civil Society Organisations (CSOs) working on the extractive sector that despite the fact that mining underpins the country’s economic performance, mining has not been contributing significantly to the fiscus and service delivery due to a number of reasons including awarding of harmful tax incentives. The paper unpacks several issues including the legal framework around the tax exemption, the governance challenges that surround the tax exemption, the likely implications of the tax exemptions and what can potentially be areas of advocacy for CSOs and parliament going forward.
Understanding legislation on tax exemptions
In Zimbabwe there are three key pieces of legislation that give the Minister of Finance and other government entities power to award tax incentives such as tax exemptions and these are,the Income Tax Act [Chapter 23:06], the Mines and Minerals Act [Chapter 21:05] and the Zimbabwe Investment and Development Agency Act (Chapter 14:37).
- The Income Tax [Chapter 23:06]
The Minister of Finance and Economic Development granted the company the income tax exemption in terms of subparagraph (g) of paragraph 3 of the Third Schedule to the Income Tax Act. Section 3g of the Third Schedule to the Income Tax Act provides for income tax exemption for receipts and accruals of any person who;
(i) is entitled to an exemption in respect of such receipts or accruals in terms of any agreement entered by the Government of Zimbabwe with any other government or organization; and
(ii) is approved by the Minister by notice in a statutory instrument; to the extent provided in the agreement concerned.
Furthermore Section 36 of the Income Act also gives discretionary power to the Minister of Finance to exempt holders of special mining leases from certain taxes. Section 36(1)“ Where, after consultation with the Minister responsible for the administration of the Mines and Minerals Act [Chapter 21:05], as the Minister is satisfied that it is in the interests of Zimbabwe to exempt the holder of a special mining lease, wholly or partly from any tax charged under section twenty-six, twenty-seven, twenty-nine, thirty, thirty-one or thirty-two, he may, by statutory instrument declare the holder concerned to be an approved holder of a special mining lease for the purposes of any of those sections. According to Section 36(2), the Minister may impose limits or conditions on any declaration in terms of subsection (1). Section 36(3) says” Where the Minister has published a statutory instrument in terms of subsection (1);
- the approved holder of a special lease concerned shall be exempt, subject to the statutory instrument, from any tax specified in the instrument;
- any other person who, in terms of any other provision of this Act, is required to collect any tax specified in the statutory instrument shall be exempt, subject to the provisions of the statutory instrument, from any such requirement.
Through the General Notice 77 of 2021 (GN 77 of 2021), the Minister of Finance and Economic Development declared The Great Dyke Investment (Private) Limited company to be an approved holder of a special mining lease with effect from 1 January 2021, for the purposes of section 26, 30, 31 and 32 of the Income Act [23:06] in respect of non-resident tax chargeable on dividends, fees, remittances and royalties, respectively. This means that Great Dyke Investment was exempted from income taxes mentioned in both the SI 26 of 2021 and GN 77 of 2021.
- The Mines and Minerals Act [21:05]
In terms of Section 254 of the current Mines and Minerals Act, the President may also remit in whole or in part, the royalty payable on any mineral for such period as he may determine as an inducement to commencement or continuation of mining operations or processing or refining within Zimbabwe of minerals or the development of any export market. From the research that has been done so far, the income exemption that was granted to GDI does not affect royalties. Royalties are charged as a percentage of mineral value produced and are levied in terms of section 244 of the Mines and Minerals Act[Chapter21:05], whilst the royalty rates are fixed through the Finance Act. The definition of taxes under the Income Tax Act does not include royalties charged under the Mines and Mineral Act[21:05] (read with Chapter V11 of the Finance Act [Chapter 23:04]. The income tax exemption relates to income taxes (Corporate Income Taxes) that are charged on a company after deducting operational costs and relevant capital allowances as wear and tear or/and special initial allowance on capital assets. It is important to note that there is a host of other taxes and fees that GDI will be paying during the subsistence of this exemption. The most important of these is royalties that are charged at 10% of gross sales value and yields far more significant revenues to government than the Corporate Income Tax (CIT) charged at 15% on profits. However, there is a possibility of a preferential treatment that Great Dyke Investments enjoys on royalties that are administered under the Mines and Minerals Act through an agreement between the Minister of Mines and Great Dyke Investments in this case.
- Zimbabwe Investment and Development Agency Act (Chapter 14:37)
Section 30 of the Zimbabwe Investment and Development Agency Act (Chapter 14:37) empowers the Zimbabwe Investment and Development Agency (ZIDA), in consultation with the Minister responsible for finance, to publish guidelines for investment which shall mention general incentives that may be applicable to licensed investors, whether foreign or domestic, special incentives that may be applicable to specific categories of licensed investors such as primary producers, exporters, and investors involved in value-addition and import-substitution projects (whether domestic or foreign) and any other incentives and conditions that may be applicable to investors. The Agency may specify different incentives for domestic and foreign licensed investors.
Was Government justified in granting the tax exemption based on the conditions stated in the Income Act
According to the Income Tax Act [26:03], income tax exemptions are given in terms of any agreement entered by the Government of Zimbabwe with any other government or organization and in case of a special mining lease, the Minister must be satisfied thatit is in the interest of Zimbabwe to exempt the holder of a special mining lease, wholly or partly from certain taxes charged.GDI is a holder of a special mining lease. The sheer size, at least on paper for now, of the investment and its potential to provide huge economic benefits to the country could have significantly influenced the decision to warrant the project a Special mining lease. It is one of the mining projects that Government expects to contribute significantly to the achievement of the country’s 12 Billion Mining strategy by 2023 and the nation’s Vision 2030. It is clearly critical at this stage that GDI’s cashflows be healthy looking at what needs to be done (continuing with mine development, mining, processing,) before the company is expected to reach its full throttle in 2024. There are also plans to set up a platinum refinery to increase beneficiation and the company needs a strong foundation in terms of cash flows and investment. Local beneficiation is an important economic thrust in the context of promoting future increase in export revenue, local absorption of profit margins in the higher levels of operations, employment creation, economic diversification through upstream and downstream linkages, improved accounting for PGM exports, and industrialization. An incentive to such a company makes sense, theoretically given these plans and proposals.
One could argue that it is the potential economic value that formed the basis of the decision to grant GDI the income tax exemption. However, the discretionary powers given to the Minister and President (in case of the Mines and Minerals Act) to grant tax exemptions can be easily abused in a political and economic context where contract disclosure is lacking and where political actors may hold economic interests or intend to benefit from the tax exemptions. While the factors that can be considered for remission of royalties by the President in terms of Section 254 are stated as including inducement to commencement or continuation of mining operations or processing or refining of minerals within Zimbabwe or the development of any export market, the reasons for granting Great Dyke Investment a tax incentive are not clearly stated. The good intentions of this exemption can be theoretically deduced. However, the possible abuse of discretionary powers can also be deduced. The discretionary powers given to the Minister may lead to unjustifiable tax exemptions.
It is also not clear if there were any clear and published guidelines that informed the decision of the Ministry of Finance to grant the tax exemptions as an incentive as contemplated in Section 30 of the Zimbabwe Investment and Development Agency [Chapter 14:37]. In the absence of such guidelines, the decision to grant tax incentives to investors may be based on discretionary powers of the Minister of Finance. This may lead to granting of harmful tax exemptions. This may also show a policy and legislative gap in tax legislation. The Great Dyke Investment tax exemption case squarely falls within the ambit of projects whose tax exemption, if proper and justifiable, should be guided by the Incentives Guidelines contemplated in Section 30. One would expect to easily get the guidelines online if they exist. However, there is no information relating to such guidelines on institution’s website. Chances that the institution has information on incentives and any conditions applicable to investors in respect of general incentives or sector specific incentives (for example in the case of special mining lease) or incentives that are awarded to projects that are given a national economic status) cannot be ruled out since the institution has been in existence for more than a year now. The problem could be that these are not publicly available. However, failure to make this information publicly available especially online leaves room for speculation. Lack of publication of such information points to a transparency gap. The organisation’s website (Under section on incentives and schemes) only provides information on the areas that are designated for Special Economic Zones (SEZ) and the list of tax incentives that are given to a project with a Special Economic Zone status.
As mentioned earlier, GDI’s tax exemption was made in terms of subparagraph (g) of paragraph 3 of the Third Schedule to the Income Tax Act [Chapter 23:06] which provides that there has to be an agreement between the Government of Zimbabwe and another government or an organisation. As it stands, the agreement in terms of which the exemption was made, was not made public by the government thus limiting the ability of citizens and CSOs to hold the government to account. So, it is difficult to say that there was merit in government granting the income tax exemption because there is no public disclosure of the terms and conditions that were agreed upon.
It is also important to note that this is not the first time a fiscal incentive based on a mining contract has been awarded to a holder of a special mining lease by the Government of Zimbabwe. In1994, the Government of Zimbabwe signed an agreement with a 25 year (1994-2019) fiscal stabilisation clause with one of the biggest platinum mining companies, ZIMPLATS. The stabilization clause entitled the company to a 2.5% royalty rate over the 25-year period. However, between 2004 and 2014 ZIMRA levied the company royalties at rates that were determined by the Minister of Finance through amendments to the Finance Act and this led to a legal dispute. The High Court in 2015 made a ruling which made the hike in royalties after 1994 non-binding to ZIMPLATS because it had struck an agreement with government to peg the royalties at 2.5% of fair market values. Consequently, the national fiscus suffered a major blow as ZIMRA refunded ZIMPLATS royalty funds to the tune of around US$100 million. This pointed to one key lesson, a fiscal stabilisation clause in a mining contract can be costly to the government’s coffers because it does not allow the government to change any conditions of the agreement even if feels to do so.
Who is Great Dyke Investments (GDI)?
Great Dyke Investments (GDI) is proposed as a 40-year project aimed at integrated development of one of the world’s largest Platinum Group of Minerals (PGM) deposits located in Darwendale. The Darwendale deposit is part of the Great Dyke and one of the world’s largest deposits of PGM resources. Initially, in 2018, it was reported that Great Dyke Investments (Pvt) Ltd was a Joint Venture between Russia’s Vi Holding ( JSC Afromet) and Zimbabwe’s Pen East Limited. However, information on the Vi Holding’s website shows that GDI is a joint venture established on 50/50 basis between Vi Holding and Landela mining venture Ltd, a private company . In December 2020, it was reported that the Great Dyke Investment had sold 4.4% stake to Fossil Mines as COVID-19 interrupted fundraising, implying a reduction in shareholding for both JSC Afromet and Landela in the GDI company. If Zimbabwe Pen East limited is not the same as Landela, this could probably mean that the former sold its shares to the later. According to the company’s website, phase 1 of the project comprises an underground mine and a concentrator with an ore throughput of 3.5Mtpa and a targeted annual production of circa 290 koz PGM in flotation concentrate. It is reported that the production of concentrate will be in 2022. An important issue to note from the shareholding structure of the company is that the government does not not have a stake in the GDI unlike in other joint venture deals that have been signed. This limits the opportunities for Zimbabwe to benefit from the project during the five-year tax exemption period and beyond. Having a government stake in such a project would generally increase mineral benefit sharing between the government and the mining company as the government would also get dividends.
Beneficial ownership and Illicit Financial Flows (IFFs) Concerns
One of the questions that is pertinent to this tax exemption is that who are beneficial owners of GDI? Given the opaqueness of the extractive sector, it is very difficult to identify the persons who control the platinum mining project. Commendably, in January last year, Zimbabwe included beneficial ownership disclosure requirements in the new Companies and Other Business Entities Act [Chapter 24:31]. Under the new Company’s Act companies are obligated to keep an up-to-date list of their beneficial owners and must frequently update the Registrar of Companies that will also keep a register of beneficial owners. However, the major challenge is that there is no public disclosure of the beneficial registry, a situation that can lead to corruption and money laundering. Secretive corporate structures and anonymous business entities scattered in various jurisdictions are a breeding ground for tax evasion and profit shifting to tax havens. Already it has been reported that the biggest shareholder of the Landela Mining Venture Limited (Sotic International) is already linked to Mauritius, which is a known tax haven. Also, Landela Mining Venture, one of the companies that has a controlling stake in GDI  is alleged to be linked to Kudakwashe Tagwirei a businessman who is alleged to be very close to Zimbabwe’s political ruling elite.
There is thus a huge possibility that, the decision to give Great Dyke Investment (GDI) the income tax exemption, is not only motivated by genuine national economic considerations, but also by narrow economic interests of elites. If indeed the proximity to power of the owners played a role in the awarding of the income tax exemption, then this confirms the narrative around state capture or regulatory and policy capture in Zimbabwe’s mineral resource governance. If it is true that Zimbabwe Pen East Limited sold its shared to Landela, then the timing of the pronouncement of this exemption becomes suspicious.
Lack of transparency in the mining sector fuels suspicion.
According to media reports, the tax exemption to GDI was based on a mining agreement which was signed in Moscow in the presence of President Putin and His Excellency President Mnangagwa in 2019. The agreement between the Government of Zimbabwe and Russia may have more information with regards to the terms and conditions that were agreed upon, despite its non-availability to the public. Another pertinent question is, what other promises were made by Government in that agreement and at what cost? Does the agreement contain a stabilisation clause that may affect other revenue streams like the ZIMPLATS agreement mentioned above? Whilst the tax exemption was granted in terms of the Income Act, there could be other fiscal incentives that the Government of Zimbabwe agreed to award the company at a cost. The agreement may have other clauses which needs to be analysed in a transparency country as they would have long term impacts on the economy and benefit sharing between government and the mining company. These clauses may include on Human Resource Development (HRD), Research and Development (R&D) employment, technology/skills transfer and local procurement. The major challenge is that negotiation and performance monitoring of contracts or agreements that the government sign with foreign investors is secretive prompting the public to suspect that the deals are targeted to benefit the investors at the expense of the country and a sense that the burden of taxation is unfair.
While the Statutory Instrument gazetted by government triggered public discussion on the necessity, efficiency, and effectiveness of tax incentives, it illustrates the general need for disclosure of mining contracts/agreements and all relevant documents that relate to the awarding of mining rights. Given the huge implications of mining contracts or agreements on domestic resource mobilisation and public finances of the country, there is need to ensure that there is transparency and accountability as per section 298 of the Constitution. To increase contract transparency, parliament should exercise its oversight role through contract performance monitoring and during approval of agreements with foreign entities and organisations. Recently the government made a positive move by launching the Zimbabwe Investment Development Agency (ZIDA) “to improve effectiveness and competitiveness in investment projects through assessing the capable and overseeing investment agreements”. Much as the one stop shopfor assessments of Investments projects is important in improving competitiveness and effectiveness in investments projects including joint venture mining projects, it falls short of the oversight role of parliament on contracts as required by Section 315 of the Constitution. Parliament’s oversight is critical in ensuring that bad deals are avoided as both government and corporate negotiators will be aware that there is a third eye watching. The parliament must access the contract signed with the Russians and investigate it.
Lack of access to information makes it difficult to estimate the potential revenue loss
Mining tax serves to raise revenue for the government. In this instance, the government is giving away its rights to tax the mining project, a situation that may in the immediate term undermine government’s obligation to promote the quick realisation of economic recovery. It would have been possible to estimate the potential revenue that the government will lose because of the tax exemption if information on forecasted capital investment, operating profits and projected revenues and profits was easily accessible to the public. According to Section 159 of the current Mines and Minerals Act, it is a requirement that a special mining lease applicant should submit a mining development plan including feasibility plan relating to the development of the proposed mine, financial plan including the type and source of finance to be obtained and economic evaluation of the proposed mine (including a detailed forecast of the capital investment, operational costs and proposed revenues and profits) as part of the special mining lease application. Without such information publicly available, one may assume government indeed used this information to do a cost benefit analysis of the tax exemption and guide its decision to grant the company the income tax exemption. It is also possible that such analysis may have been disregarded. ZIMRA’s revenue reports are not disaggregated enough to show the contribution of the mining sector to each tax revenue heads and the revenue performance per each mineral. There is need for parliament to get access to contracts and other related information and partner with CSOs to make sense of the information in terms of the rationality of the tax incentive. For a detailed analysis see link http://www.zela.org/download/zelas-analysis-of-great-dyke-investment-s-5-year-income-tax-exemption/
 Section 315 of the Constitution says that an act of parliament must be enacted to provide for negotiation and performance of joint ventures, contracts and concessions and other mining rights to ensure