eBusiness Weekly
Mukasiri Sibanda
As Zimbabwe positions itself to turnaround its moribund economy — luring investment, especially Foreign Direct Investment (FDI), is one of the fundamental pillars to support this quest. Borrowing heavily from the debate that took place during Sadc regional workshop on Tax Justice in Mozambique recently, this article will largely focus on stimulating public discourse on whether tax incentives are detrimental or beneficial to socio-economic development.
The article will focus on the mining sector as a leverage to broad based economic development in line with Africa Mining Vision (AMV). The Tax Justice workshop was organised by Action Aid (AA) Mozambique. It was also attended by other AA country organisations from Malawi, Tanzania, Zambia and Zimbabwe.
The Zimbabwe Environmental Law Association (ZELA) also took part as a lead partner on Tax Justice with AA Zimbabwe. Tax Justice is a lobby group will primarily advocates to a fair tax regime to ensure more revenue is collected from the mining sector.
Understanding
tax incentives
Before delving into the discussion on how harmful or helpful tax incentives are, it is important to understand what tax incentives are and types of tax incentives offered in Zimbabwe. According to the Zimbabwe Revenue Authority (Zimra) “tax incentives are generally defined as fiscal measures that are used to attract local or foreign investment capital to certain economic activities or particular areas in a country”.
One can look at Zimra’s website to have an appreciation of tax incentives offered in Zimbabwe or refer to the Finance Act, the Income Tax Act and Double Taxation Agreements (DTAs).
Among tax incentives offered in Zimbabwe are; tax holidays — waiver to pay tax for a certain period, for example five years for Built Own Operate and Transfer (BOOT) infrastructure; 15 percent preferential corporate income tax for holders of special mining leases; all capital expenditure on exploration, development, operating incurred wholly and exclusively for mining operations is allowed in full; and perpetual carry over of mining losses.
DTAs are tools used to avoid double taxing of the same income twice from the same entity or individual with investments in two countries concerned. DTAs can limit the capacity of our Government to collect maximum taxes, for example, withholding tax on dividends.
Proponents for tax incentives argue that, fiscal linkages although appear to be low hanging fruits from mining, they are not the only tool in the box for unlocking sustainable development.
An effective mining tax regime must embrace desirable trade-offs between tax and other development drivers like transfer of technologies, skills development, enhanced supply chain capabilities, employment creation, export earnings and infrastructure development. Rightly so, Zimra acknowledges such attendant economic benefits accruable to a nation through using tax incentives.
Of course, Zimra is not blind to the fact that tax incentives are a cost to the Government in its interpretation. That is why a cost benefit analysis is critical always to ensure that the Government does not bear an unfair burden of tax discount in the bid to stimulate economic growth. Hence tax incentives must be publicly accounted for just like tax revenue.
Unfortunately, Zimra does not publicly account for the costs incurred through tax incentives in its revenue performance reports, produced quarterly, semi-annually and annually. Another shortfall is limited transparency of the amount of taxes received by Government from mining operations. Apart from mining royalties, mining performance in other tax revenue heads like corporate income tax, custom duty, withholding taxes and Pay as You Earn (PAYE).
A government eager to usher in a new dispensation must embrace international best practice like Extractive Industry Transparency Initiative (EITI) to keep citizens in the loop on mineral tax revenue performance.
Currently, what is clear for all citizens to see is that the budget size is thin. There is very little left to fund service delivery as 90 percent of revenue generated is sunk into recurrent expenditure. Yet citizens are not sure if the thinning effect is caused by excessive tax incentives. Mozambique is losing $400 million annually through tax incentives and Tanzania lost around $790 million in 2014 /2015.
Overgenerous tax incentives erode government funding for better schools, clinics, water and roads. Thereby worsening inequality and allowing corporates to enjoy public services that they are not willing to fairly pay for through taxes. A point that was well argued by critics.
Tax incentives if aligned with what regional counterparts offers, can easily stimulate a race to the bottom. Some scenario where regional countries, Sadc for instance, compete to on lowering tax rates to attract FDI. Sadc, interestingly, is in the process of formulating the Regional Mining Vison (RMV). ZELA is honoured to have led the participation of civil society from the region in this important process. One of the issues discussed in the RMV is harmonisation of tax incentives to stifle the race to the bottom.
However, if used well, tax incentives can spur inclusive and sustainable development. Power, for instance, a critical enabler to mining development is in short supply in Zimbabwe. To cover for the deficit, power is imported from Mozambique and South Africa. Therefore, if mining companies are given tax incentives to set up their own power stations, which will then feed excess electricity to the national grid. Ultimately, this promotes growth of other industries like agriculture and manufacturing — economic diversification. The nation can stop importing electricity and ease the foreign currency crisis.
Critiques argued that in the mining sector, tax incentives rank list in influencing investment decision according to World bank report. Investors consider geological potential, ability to repatriate profits, political stability, policy consistency, infrastructure and labour among other factors.
Fitly, in zones where the mineral wealth potential is very high, incentivising investors may not be ideal. Rather fiscal linkages, more tax revenue can be raised progressively by taking the competitive bidding route in the disposal of minerals.
Sadly, the Mines and Mineral Act is not aligned with AMV on harnessing competitive bidding to strengthen fiscal linkages. The Act relies on first in first assessed principle, even in zones where mineral wealth potential is high, the Great Dyke for example. Mineral rich countries must therefore invest in geological information to guarantee economic rationale in the disposal of mineral rights.
Further, critics accused mining companies of cheating, using aggressive tax planning methods to avoid payment of taxes in jurisdictions where they are mining. The process is known as Base Erosion and Profiting Shifting (BEPS), which weakens domestic capabilities to mobilise finance for development. Income is unfairly shifted to lower or free tax jurisdictions — Tax Havens. The Government, therefore, must not give away freely its taxing rights to mitigate development revenue losses from illicit financial flows.
Attracting FDI is important but the nature of investment is critical to decipher whether it is in form of equity or loans. FDI which comes inform of equity investment is preferable in that only dividend need to be repatriated. Whereas debt finance requires is costly in terms of repayment of loan interest in addition to dividends. When giving incentives, equity investment must have preference against investment financed by debt.
In Zimbabwe, the challenge is that mining deals are secretly negotiated even though the Constitution, Section 315 (2) (c) requires Parliament oversight in the negotiation and performance monitoring of mining agreements. Although the previous Parliamentary Portfolio Committee on Mines and Energy (PPME) did a sterling job to try to hold Government accountable on management of Marange diamonds, Parliamentary scrutiny on several mega mining deals announced in the first half of 2018 was lacking.
Without Parliamentary scrutiny, there is a risk that bad deals with toxic incentives can short change public service delivery. As an illustration, the Zimra refunded about $100 million in 2015 after losing a tax dispute on legality of stabilisation clause that pegged royalty rates at 2,5 percent for 25 years while Zimra argued for a rate of 10 percent prescribed by the tax code. Bad agreements are a result of either lack of poor technical skills to negotiate with corporates who can afford highly skilled technical persons or through corruption. Mining benefits are skewed in favour of few well political well-connected persons and corporates.
Arguments against tax incentives in the mining sector were that, mining companies are chief culprits when it comes to eroding the tax base of resource rich countries by transferring profits mostly to tax havens. This is tantamount to give away freely taxing rights to corporates that are bleeding resource rich Africa of its ability to use domestic resources to finance development.
To wind up, Zimbabwe’s desire to attracts FDI and grow the mining sector as a leverage to achieve middle income status by 2030 need to be complemented by transparency and accountability of tax incentives. In its revenue performance reports, Zimra must make full disclosures with regards to tax incentives and tax discount given to investors by the Government.
This will enable citizens to assess the impact of tax incentives on funding service delivery programmes.
No room should be left for discretionary negotiation of tax incentives which undermine the country’s tax laws. As required by Section 315 (2) (c) of the Constitution, oversight in negotiation and performance monitoring of mining agreements must be a key priority for the 9th session. Instead of allowing full recoupment of capital expenditure costs in the first year, the government should spread capital recoupment over four years. Perpetual carry over of mining losses should be abolished.
A period of six to 10 years could be ideal to allow carry-over of the mining losses. Already, the Government has softened indigenisation requirements for all minerals, except for platinum and diamond sectors which are still subjected 51/49 percent threshold in favour of indigenous people.
