An Outline Of The Mining Taxation Regime In Zimbabwe

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Taxation Regime In Zimbabwe European Union Compiled by Zimbabwe Environmental Law Association (ZELA) Published by: Zimbabwe Environmental Law Association (ZELA) Sponsored by: European Union Copyright:
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Taxation Regime In Zimbabwe European Union Compiled by Zimbabwe Environmental Law Association (ZELA) Published by: Zimbabwe Environmental Law Association (ZELA) Sponsored by: European Union Copyright: Zimbabwe Environmental Law Association (ZELA) This publication may be reproduced in whole or in part and in any form for educational or non-profit uses, without special permission from the copyright holder, provided full acknowledgement of the source is made. This publication may not be offered for sale or other commercial purposes without the prior written permission of ZELA. Disclaimer: While this document has been produced with the financial assistance of the European Union, the contents of this document are the sole responsibility of the Zimbabwe Environmental Law Association (ZELA) and can under no circumstances be regarded as reflecting the position of the European Union. Year of Publication: 2012 Available from: Zimbabwe Environmental Law Association (ZELA), No. 6 London Derry Road, Eastlea, Harare, Zimbabwe: Tel: ; , Website: ABOUT ZELA The Zimbabwe Environmental Law Association (ZELA) is a public interest environmental law group formed in 2000 and registered as a Trust (MA1669/2001). As a public interest non-governmental organisation ZELA seeks to promote environmental justice, sustainable and equitable use of natural resources, democracy and good governance in the natural resources and environment sector in Zimbabwe. ZELA seeks to accomplish its mission through legal and policy research, advocacy, impact litigation, conflict resolution and civic education. Its work includes helping poor communities to assert and claim their environmental, economic, social and cultural rights within the natural resources and environmental sector. The organisation also seeks to ensure environmental and natural resources management policies, strategies and legal frameworks respond positively to the needs of marginalized women, men and youths living in urban and rural communities. ZELAS's work cuts across different environmental sectors such as mining, forest management, wildlife management, water management and provision of adequate social and environmental services in urban areas. Direct and indirect beneficiaries of its public interest legal services include; rural and urban communities, community based organisations, local authorities, parliamentarians, government departments, industry and civil society organisations. In carrying out its work ZELA firmly believes that government and private sector operators have a duty to uphold democratic values, human rights and be transparent and accountable to the people in the extraction and exploitation of natural resources as well as the management of revenues and payments for the benefit of affected communities and the whole nation. Mission Using the law to protect the rights of communities and to conserve the environment and natural resources. Vision Environmental justice through sustainable and equitable utilization of natural resources and environmental protection. ACRONYMS CSOs CBOs CGT DTAs EITI GDP ITF MDG MMCZ PAYE PWYP SMEs VAT ZELA ZMRTI ZIMRA Civil Society Organisations Community Based Organisations Capital Gains Tax Double Taxation Agreements Extractive Industries Transparency Initiative Gross Domestic Product Income Tax Form Millennium Development Goals Minerals Marketing Corporation of Zimbabwe Pay As You Earn Publish What You Pay Small and Medium Enterprises Value Added Tax Zimbabwe Environmental Law Association Zimbabwe Mining Revenue Transparency Initiative Zimbabwe Revenue Authority ACKNOWLEDGEMENTS The Zimbabwe Environmental Law Association (ZELA) would like to thank all community groups, civil society organisations and government officials who attended the meetings at which mining taxation issues were discussed in 2012 and contributed to the ideas and issues raised in this book. ZELA would also like to thank the European Union for providing the financial resources that enabled ZELA to synthesise the information and publish this book. INTRODUCTION Taxation in the mining sector provides scope for government to receive revenue and payments from the mining industry to cater for social services, government operations and other important state activities. In Zimbabwe there are various forms of taxes and charges that are paid by mining companies. These taxes and charges include royalties, income tax (corporate tax), Pay As You Earn (PAYE), non-residents tax, Additional Profit Tax, Value Added Tax (VAT), marketing commission, customs duty, presumptive tax for small scale miners, capital gains tax, withholding tax, licencing fees, environmental charges and in some cases charges by local authorities among others. Among the pieces of legislation that require mining companies to pay taxes are the Mines and Minerals Act, the Income Tax Act (Chapter 23:06) and the Finance Act. The purpose of this book is to give an outline and to an extent analysis of the mining taxation regime in Zimbabwe. The book is meant for use by civil society organisations, community groups, decision makers and other stakeholders. The book is a synthesis of research papers and a number of presentations were made by tax experts and government officials on mining taxation issues in 2011 and 2012 under ZELA's Extractive Industries Programme. Given this context, this book is in no way exhaustive of all the issues in the mining taxation sector, however, it raises some of the fundamental issues in the sector. The topic is contextually relevant because many stakeholders are currently debating the potential role that the mining sector, especially taxation, can play in the economic revival of the country. The book is therefore meant to be a reference book for various actors who are interested in understanding the mining taxation regime in Zimbabwe. This book will define some of the concepts and terms related to taxation in general and to the mining sector in particular. It will explain the significance and importance of mining taxation from an economic development perspective. The different types of taxes paid in Zimbabwe's mining sector will also be outlined. The book will attempt to explain challenges that tax authorities face in the collection of taxes in the mining sector. A comparison of Zimbabwe's current mining taxation system with those in other countries will also be done. The book will conclude with recommendations targeted at policymakers, civil society and other stakeholders with an interest in the mining sector. Preparing this book was not easy due to the prevailing secrecy and mistrust within key institutions linked to the topic. ZELA therefore had to rely on information in the public domain such as workshop papers and media reports to fill in gaps in many areas. Despite this, ZELA hopes this information will be sufficient to explain some concepts and create debate on the role of mining taxation to development in Zimbabwe. THE SIGNIFICANCE OF MINING TAXATION Tax is a compulsory levy on privately held assets, work, transactions and other activities and flows as 1 prescribed by a country's laws. In addition, taxation has always been viewed as an important source of funds for any government to ensure that it caters for the basic needs of its citizens. In this case without sufficient funding, citizen's rights to things like housing, security, health and education among others 2 will remain mere aspirations. People are concerned with utilities such as hospital services, education, transport, water supplies, security, training and development. All these functions of the government need money in order to function properly. What this simply means is that revenue from taxation is supposed to be used for the fulfillment and realization of the economic, social and cultural rights of citizens and poverty reduction. This is because all the essential services that government is expected to cater for fall, squarely within the realm of poverty rights or economic, social and cultural rights. Accordingly, the following are some of the benefits that communities should get from revenue generated through taxation by the government; health delivery systems roads, bridges and dams, education, security services in form of army, prison services and police, food security through establishment of food storage, procurement and distribution channels and civil services and payment of the diplomatic postings among others. Christian Aid and SOMO (2011: 2) summarise the importance of taxation in general as the 'Four Rs'. These are Revenue, Redistribution, Representation and Repricing. Briefly, by revenue, they refer to the funding required by governments to deliver the services which citizens need. By Redistribution they mean the ability of a government to channel resources from the richest towards the poorest and most vulnerable. In line with this, taxation is considered to be 'progressive' when the rich pay a higher share of their income in taxes compared to their poorer counterparts. When the opposite happens, taxes are 'regressive'. By Representation, Christian Aid and SOMO assert that taxation is instrumental in building accountability of governments to citizens. According to them, empirical evidence shows a close correlation between taxation and democracy. Lastly, Repricing refers to the ability of governments to incentivise behaviour which is considered to be beneficial to society, whilst making it costly for citizens to engage in socially undesirable behaviour. To illustrate this, they give an example of how increasing taxation on tobacco can limit the damage to health. It has also been argued that in Africa tax revenues are essential for establishing independent states of free 3 citizens, less reliant on foreign aid and the vagaries of foreign capital. In this case, one way of viewing taxation as an important source of revenue for poor countries is to assess the impact of aid. 1. Tax Us if You Can: Why Africa Should Stand Up for Tax Justice; (2011 Tax Justice Network - Africa Page 2 2. Ibid page Ibid page 2 It can be noted that Sub Saharan Africa has tended to receive more aid per capita than any region. In fact, external aid constitutes more than 50% of GDP in many countries. Despite this, the region has poor human development indicators and this includes the fact that it is the epicentre of the HIV/AIDs scourge when statistics are considered (18 million related deaths recorded to date). Inequality is prevalent, with four of the world's top ten most unequal societies being African. The region is also lagging behind in achieving the Millennium Development Goals (MDGs). Zimbabwe specifically was ranked 173 out of 187 countries, in the Low Human Development category with an HDI of in the UN Human Development Index The country is also lagging behind in its commitments towards meeting the MDGs. Aid to Zimbabwe rose in the 1980s but declined after 2000 due to the country's internal problems. At present, donors are concentrating on providing humanitarian assistance to the country, mainly outside the fiscus. They have withheld direct support to the government over the slow pace of political reforms and the human rights situation. This means the country needs to optimise on its internal resources in the short to medium term. Taxation, especially in the mining and natural resources sector will therefore be crucial in this view. In this context, about 80% of Africa's exports are mainly raw materials and African governments depend so much on resource rents from these commodities. A large part of government revenue in Africa comes from natural resource rents especially in some of the mineral and oil rich countries. For example in Libya natural resource rents represent 90% of government revenue, DRC 86%, Nigeria 81 and in 6 Botswana mineral taxation represents 36% of government revenue. For Zimbabwe, mining export revenue figures have been increasing over the past 2 years although the country is still emerging from more than a decade of economic, social and political problems that affected revenue generation. The contribution of the mining sector to the total national exports was about 65% in 2010 while in 2011 it cemented its position as one of the major Gross Domestic Product 7 drivers along agriculture. In his 2011 National Budget Statement, the Minister of Finance noted that the mining sector has been the fastest growing sector since 2009 with growth up from 33% to an estimated 47% in The country's economic blue print, the Medium Term Plan ( ) notes that the mining sector has the capacity and potential to create substantial impetus for economic growth and value addition. 4.UNDP 5. Tax Us if You Can: Why Africa Should Stand Up for Tax Justice; (2011 Tax Justice Network - Africa Page 8 6. Ibid at page 8 7. Ministry of Finance 2010 Budget Statement and 2011 Mid-Year Fiscal Policy Review Statement 8. Ministry of Economic Planning and Investment Promotion These figures show that government is hoping that revenues, through taxation as well as dividends in the mining sector will significantly contribute to national economic growth. However, the collection of mining revenue in Zimbabwe as well as other African countries has been hindered by tax leakages that occur through a variety of channels including corruption, illicit outflows and tax incentives. Like elsewhere in Africa the mining sector in Zimbabwe has been associated with corruption, greed, secrecy and human rights violations. Corruption and illicit trade are being fuelled by lack of transparency and accountability in the contraction processes and even in the distribution and use of the revenue. A case in point are allegations of failure by some diamond mining companies in Marange to pay all the taxes they are supposed to be paying to the treasury. In many cases, mining rights are acquired without following proper tender procedures and bribes are paid. At another level, production figures and statistics of rough diamonds from the mines are not known and the exports and auctions are not publicized. Worse still, disaggregated data on revenue generated from mining is not publicly known and the little that goes to the treasury is not used for uplifting the lives of people. 9.Mutuso Dhliwayo and Shamiso Mtisi (2012); Towards the Development of a Diamond Act in Zimbabwe; Analysis of the Legal and Policy Framework on Diamonds and Zimbabwe's Compliance with the Kimberley Process Certification Scheme (KPCS) Minimum Requirements TYPES OF TAXES IN ZIMBABWE'S MINING SECTOR This section provides an overview of the different taxes that are paid by the mining sector in Zimbabwe. Royalties In general, royalties apply to payment for the use of copy right of literary, artistic or scientific work (including films, taps and others), patents or trademarks or use of formulae in the manufacturing industry or any other industrial know how. This payment will be made to the person meaning any legal persona including individuals,companies, partnership trustee, co-operate boards or clubs that would be the source of the document or idea forming part of the needed expertise's and for which royalties are paid. The rate of tax for royalties is at 10 % of the total amount paid. Royalties also apply in the mining industry, and these emanate from the mining right acquired by mining companies from the government, for the right to extract minerals from the ground. Royalties are paid in terms of the Mines and Minerals Act [Chapter 21:05), the Finance Act 23:04 and the Income Tax Act (23:02). The basis for which the royalties takes its charge is from the percentage of the mineral value produced and not the quantity. The government charges tax on royalties for minerals operated by foreign registered companies. Tax on royalties can also be charged where individuals exchange or transfer mining rights between themselves and a percentage of money paid to the owner of the claim is charged tax. In this instance the word money is in quotes because it represent even kilogram of gold or platinum paid to the owner of the claims in form of royalties. Royalties' rates depend on mineral and diamonds are charged 15%, gold 7% and platinum 10 %. It is not easy to get able indicating the royalties paid by each mine since the tax depends on the production output in value and the records are only available to few top management of ZIMRA and a few individuals in the ministry of mines and ministry of finance. Income Tax This is also known as corporate tax. Income tax refers to tax charged on a company after deducting operational costs and relevant capital allowances as wear and tear or/and special initial allowance on capital assets. The relevant sections for the purpose of taxation of mining operations under the Income Tax Act (Chapter 23:06), are found in Section 15 (2) (f) as read with the fifth schedule of the Act. The Minister of Finance may from time to time, issue instruments to guide on the administration of taxation for the mining sector. In the mining business, corporate tax is charged on sale of minerals locally or exported minus operational costs and capital redemption allowance. The capital redemption allowance is calculated from all capital goods that are purchased or constructed (in the case of buildings i.e. schools, dams, clinics etc.) and are first used for the purpose of mining operations. Like any other business, save for Capital allowances, Pre-operational Expenditure and other circumstances, taxation of a miner relates to all income derived from the sale of minerals extracted from within the earth's surface and in accordance with the charging Act (Finance Act Chapter 23:04). The rate of tax is 25% for a general mining operation or 15% for those with Special Mining Leases, as provided in Section 22 and the 22nd schedule of the Income Tax Act. It is also important to note that income from mining operations does not attract the 3% Aids Levy on tax. Income from royalties on minerals vary according to the type of mineral, like diamond royalties which is taxed at 15%, while Gold is at 7% and Platinum 10%. The tax on royalties therefore is charged on the total produced value by every mining company whose schedules are submitted to ZIMRA. Presumptive Tax Paid by Small Scale Miners In terms of Section 36C of the Income Tax Act (Chapter 23:06) as read with the 26th Schedule to the Act, small scale miners are required to pay presumptive tax. The section states that the tax shall be charged, levied and collected throughout Zimbabwe for the benefit of the consolidated Revenue Fund. The tax is accordingly paid on the basis of the presumed income. The Act provides that to enable collection of the presumptive tax the following shall be agents Minerals Marketing Corporation, the Reserve Bank of Zimbabwe in its capacity as the buyer of precious metals, Fidelity Printers and Refineries, any holder of a gold buying permit granted in terms of the Gold Trade (Gold Buying Permits for Concession Areas) Regulations, 2002 or any person appointed by the Zimbabwe Revenue 10 Authority Commissioner-General. In terms section 7 (3) of the 26th Schedule, every agent who buys any precious metals or precious stones from a small-scale miner shall notify the Commissioner in writing of the name, home address and address of the mining location of the small-scale miner concerned. The agent is required to maintain such records of any small-scale miner from whom he buys any precious metals or precious stones as the Commissioner may require from time to time. Accordingly, agents are required to withhold the prescribed presumptive tax from amounts that are payable to the small scale miners and remit the amount to ZIMRA in terms of section 8(1) to the 26th Schedule of the Income Tax Act. 10 Section 7 (1) of the 26th Schedule to the Income Tax Act (Chapter 23:06) The payment of presumptive tax was identified as important for certain industries whose operations
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