An Outline Of The Mining Taxation Regime In Zimbabwe

Transcription

1 Taxation Regime In Zimbabwe European Union Compiled by Zimbabwe Environmental Law Association (ZELA)

2 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: ; , zela@mweb.co.zw, Website:

3 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.

4 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

5 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.

6 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.

7 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

8 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

9 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

10 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.

11 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)

12 The payment of presumptive tax was identified as important for certain industries whose operations are difficult to assess in terms of their performance and hence the problem of charging tax on specific rates. These include the transport industry where record keeping is not properly done and also the small scale miners. Presumptive tax is a fixed value or amount that is not based on volumes of revenue generated in the business but may depend on the 'presumed' quantities of production. Small scale miners are charged presumptive tax of 15% per quarter. Therefore, the charging of presumptive tax is based on the assumption that there are no proper records in small business operations and no proper audits are often carried out for such business. The assumption is also that it improves on compliance by small scale business operators since the fixed amounts are neither too small nor too high for them to evade tax. Additional Profit Tax Additional profits are profits that are generated by the holder of Special mining Lease as provided by the Income Tax Act in Section 22 as read with the 22nd and 23rd schedules. The computations are quite complicated but they relate to the first accumulated net cash position and the second accumulated net cash position, as so determined, after taking into consideration the special deduction allowable to the holder. Currently, in Zimbabwe only, ZIMPLATS and Unki Mines have special mining leases. In 2010, ZIMPLATS made the additional profits and paid over $23 million in taxes. This tax is over and above the normal income tax payable by these companies. Pay As You Earn (PAYE) Pay as You Earn (PAYE) refers to a form of income tax levied on the income of the employees in a mine. PAYE is paid in terms of Section 8(1) (b) of the Income Tax Act as read with the 13th Schedule to the Act. This means mining companies are required to deduct PAYE from the salaries, allowances among other benefits accruing to employees and pay to ZIMRA. In this case, taxation of mines employees' remuneration [income and benefits] is in accordance with the tax bands under use as is provided by the Minister of Finance in the National Budget for each year. Benefits means any advantage that can be quantifiable in monetary terms that accrues to an employee [including executives], as a direct result of his/her employment contract. Examples include; housing, motor vehicle, school fees for children, allowances and subscriptions for DSTV, etc. The value of the benefits are added to the salary or wage and then taxed. Where however, there are benefits accruing to mining executives who are not working, a summary schedule of such benefits is to be submitted to the Revenue Office (ZIMRA).

13 Value Added Tax (VAT) The legislation that deals with the administration of Value Added Tax is the Value Added Tax Act (Chapter 23:12). It is tax on value addition on goods and services at every stage in the production chain line. This is in terms of Section 6 of the Value Added Tax Act. This means value addition is obtained as a result of a further process or change in shape, quality or packaging of manufactured goods traded as intermediary goods, assessor goods, and component goods, semi-finished and finished goods in the value chain. A business has to be registered with ZIMRA, to charge, collect and remit the VAT in terms of Section 23. The Act stipulates that VAT is a concept of netting off input tax (tax from purchased goods) against Output Tax (tax on Sales) and the difference is either tax payable to ZIMRA or tax refunded by ZIMRA. The netting off applies to transactions of the same period usually same month although a business entity is allowed to claim input tax from purchase invoices within a 12 month period at the time of claim. Only valid tax invoices from the purchases are allowed on claims and these should bear the full names and addresses of the supplier and customer, the VAT numbers for both, date of invoicing, description of goods and value explicitly shown on the invoice. The invoice should also be inscribed TAX INVOICE at the top or somewhere where it is displayed prominently to show it is a Tax Invoice and not a mere common invoice. For the mining sector, the rate of tax on minerals is 0% and other sales are 15%. In order to claim refunds, the tax payer should complete forms even when the mineral is Zero (0%) rated. Capital goods that are imported for operations are charged VAT at the rate of 15% though there is no duty payable. Where the mine is for exports only, VAT charged on imported Capital goods can be refunded. With Fiscalisation, where a fiscal device or electronic signature machine is used to separate zero rated, standard rated (15%) and exempt goods, the work of calculating the total tax due or refundable is easier for both ZIMRA and the business entity. Depletion Fees are VAT Chargeable The state owns all mineral resources in Zimbabwe. In some instances, it assumes that miners are consuming the resource by extraction and therefore charge a fee. This is called tax on depletion fees. The fees are VAT chargeable. Depletion fees are calculated by subtracting used up reserve of the mineral resource from the total reserve and the result is called a balance reserve. The basis for depletion fees is that all minerals can be exhaustive if extracted after a certain period thus there are different life spans for different minerals like iron- 5 years, zinc or lead -10 years and any other mineral 20 years. Due to continuous extraction of such minerals, the life span or reserves of the minerals will continue to be threatened and thus the need to collect revenue in form of depletion fees.

14 Customs Duty Customs duty is charged in terms of the Customs and Excise Act (Chapter 23:02). Mine and Mining operations often require the importation of raw materials and finished goods as well as capital goods into Zimbabwe. While other materials imported attract customs duty at specified rates according to the Customs and Excise Act as read with the Tariff Hand Book, capital goods can be exempted from paying duty where an application for rebate is made. A rebate is a concession or reduction or complete waiver of duty on certain goods due to their nature and purpose for which they are imported. This applies to Capital Goods for the purpose of mining operations. Where a rebate of duty is applied for the capital goods a complete waiver of duty (rebate) is granted by the Commissioner General. There is no duty on export of minerals from Zimbabwe. However, in January 2010 the Minister of Finance introduced a VAT of 15% on the value of gross exports of proceeds of unbeneficiated chrome ores and fines, before chrome exports were completely banned in Before the ban, raw chrome exports were subject to this tax. The introduction of tax on unbeneficiated chrome was a result of the tax on income derived from exported chrome as ore. The value of the chrome in ore form is very low hence revenue generated from such sales would be very low. This almost amounted to externalization of funds from Zimbabwe. If the chrome is smelted or processed before exportation the revenue generated would be very high. The ban on chrome ore export is still in place. Withholding Taxes Withholding taxes is tax on services or supply of goods which is withheld on behalf of the government by agents appointed by the Commissioner General voluntarily or otherwise by their nature of business and in accordance with the Income Tax Act (Chapter 23:06). Withholding Tax on Technical Fees [Income Tax Act, Section 30] Technical fees are for the services rendered by highly specialized companies and individuals in such areas as, mining, aviation, medicine, military and construction of dams, bridges or stadiums. The fees so obtained are charged withholding tax at the rate of 10% or any other rate as may be deemed fit by the Minister of Finance subject to Double Taxation Agreements [DTAs], where applicable. A miner has to withhold the tax before paying the invoice value to the foreign technical expert. The withheld amount should be remitted to ZIMRA on or before the 10th of the month following the deduction.

15 Withholding Tax on Remittances [Income Tax Act, Section 31] The Finance Act in Section 21 stipulates that remittances for non-residents' tax is charged at the rate of 20%. Remittances are amounts paid from Zimbabwe to another country for expenditures incurred outside Zimbabwe in connection with business by any person from trade within Zimbabwe. The tax is supposed to be paid within 30 days of making such remittances since the source of income is from Zimbabwe. A notable example is where company X, being a subsidiary of company Y whose Head Office is in a foreign country and incurs some expenditure at the Head Office and requires Company X to remit for the expenses incurred at the Head Office in connection with the business of Company X. Tax at 20% will need to be withheld for such remittances by company X to company Y. Supply of Local Goods without a Tax Clearance Certificate [Income Tax Act, Section 80A] A tax clearance Certificate also called an Income Tax Form (ITF) No.263 provides that a person holding such a tax form has been assessed and found out to be a compliant tax payer with all tax obligations having been met. All business transactions, of US$250 and above, carried out in Zimbabwe for local goods would require both parties to have the ITF.263, failure of which the party who has an obligation to pay the other should withhold 10% of the total amount due to that other party where the ITF.263 is not available. A tax payer is not allowed to produce the tax clearance certificate at a later date in order to get the full payment due to be paid by the other party for the transactions made currently. The 10% withholding tax should still be taken from the total amount to be paid. This also applies to the mining sector. Non-Residents Shareholders' Tax The government through the relevant Ministries has adopted legislation in line with businesses which are owned by foreign residents in Zimbabwe. The Ministry of Youth, Indigenization and Empowerment has reiterated that foreign residents who own companies in Zimbabwe should have a 49% share Capital of which the other 51% should be owned by local residents. This is in line with the Indigenisation and Economic Empowerment Programme. The programme is also being applied to the mining sector. Section 24 of the Income Tax Act as read with the ninth Schedule stipulates that tax on dividends, interest fees and royalties for non-residents is charged at the rate of 20%. Before a local subsidiary remits the said dividend, interest, etc, it should deduct the 20%.

16 Non Executive Directors Fees [Income Tax Act as read with the 33rd Schedule] The income tax Act defines non executive directors as sleeping directors who are not directly involved in running of the business of the company. These directors do not receive salaries like other working directors and only get income inform of fees or director's fee when the company's performance is favourable. When non-working directors do receive their fees, a 10% withholding tax a non-executive director's fee is withheld by the company. This should then be remitted to ZIMRA and a summary schedule provided at the time of submitting returns to the ZIMRA offices. In the mining industry, non-working directors can be residents or non-residents to Zimbabwe and the treatment of their directors' fee for the purpose of withholding tax is the same. Capital Gains Tax [CGT] Capital gains tax is a tax on sale of specified assets and is according to the Capital Gains Tax Act (Chapter 23.01). Specified assets are immovable property and marketable securities. Examples include, land and buildings and shares. The tax is specifically on the gain from the sale of such asset as given and at a profit after considering expenses and an inflation allowance calculated from the time when such an asset was acquired at the rate of 2,5%. Capital gains can also be calculated at 5% on gross sales as the gain if the asset was acquired before the 1st of February 2009 and sold after that date. In the mining industry capital gain tax is on sale of the mining claims by individuals and companies. Mining claims in Zimbabwe are usually found in the chrome, coal and gold mining sectors. Where the claims are sold, capital gains tax is calculated like the sale of the common capital goods as stated above and is charged at the rate of 20% on the gain according to the finance Act chapter However, if a miner or a business person regularly buys and sells the claims, such that the claims becomes his trading stock, the income there from will be taxed under income tax not capital gains tax.

17 Other Administrative Fees Paid by Mining Companies Mining companies are also required to pay other administrative fees to various government departments. Examples of administrative fees that may be paid by mining companies include application fees for acquisition of mining licences, registration fees, environmental fees and local authority levies among others. On fees that are paid to the Ministry of Mines and Mining Development, in January 2012 for example, the Ministry raised mining fees by up to 5,000 percent.according to Statutory Instrument 11 of 2012 registration of diamond claims was increased from US$1 million to US$5 million with a new ground rental fee of US$3,000 per hectare per year. Application fees for prospective coal investors were increased from US$5,000 to US$100,000, while the registration or renewal fees are set at US$500,000. Application fees for platinum claims for both ordinary and special prospectors was pegged at US$ , up from US$200. However, registration fees for platinum were raised from US$500 to US$2,5 million. A licence to deal in precious stones (cutting and polishing) and a gold-buying licence has been raised to US$ and US$5 000, up from US$20,000 and US$2,500 respectively. Many other increases were made. The fees go to the Ministry of Mines. However, there is lack of transparency in the utilisation of the revenue as this is not being paid directly to the treasury.

18 COLLECTION OF TAXES IN THE MINING SECTOR The Zimbabwe taxation laws places the Zimbabwe Revenue Authority at the centre in the collection of all taxes. In terms of enforcement of the taxation system, the Income Tax Act in 37B (1) places a duty on every person whose gross income does not consist solely of salary, wages or similar compensation for personal service, to keep proper books and accounts of all his or her transactions. More importantly, section 40 of the Income Tax Act gives power to the Commissioner-General of ZIMRA to have access to all public records. The Commissioner or any person authorised by him may inspect any registers, books, accounts, records, returns, papers, documents in the custody of any officer in the Public Service. The inspection may tend to secure any tax or to give proof or lead to the discovery of any fraud, offence or omission in relation to any tax. Public officials are required to furnish the 11 Commissioner or an authorized person such information as may be required. Section 252 of the Mines and Minerals Act also gives power to the Commissioner-General of ZIMRA or any person duly authorized by him to have access for the purpose of inspection of all books and records, reports and other documents relating to the acquisition, disposal or removal of any mineral for the purpose of ascertaining or verifying any return, details, solemn declaration, certificate or document rendered. Any tax payer may also be required by the Commissioner to furnish him information on his 12 shareholding and dividends received. The Income Tax Act also requires every company in section 42(1) to furnish the Commissioners with returns and a copy of the memorandum and articles of association within 30 days of its incorporation. It is an offence to fail or refuses to file with the Commissioner a copy a company's memorandum or articles of association. Other offences related to the mining tax system include; failure to furnish or submit any return or document required by the 13 Commissioner, failure to keep proper accounts, obstruct or hinder any officer in the discharge of his duties, failure to submit correct returns and information and willfully making false statements and 14 keeping false accounts and fraud. When royalty has not been paid the Commissioner-General of ZIMRA or an officer of the Authority appointed for the purpose by the Commissioner-General may issue an order prohibiting the disposal of any minerals or mineral-bearing products from such location or from any other location which is being worked by the miner in terms of section 253(1) of the Mines and Minerals Act. 11. Section 40(2) 12. Section 41(1) 13. Section 81 (1) 14. Section 82, 84 and 86

19 Further, in terms of section 253 (2) of the Mines and Minerals Act if the Commissioner-General of ZIMRA or an officer of the Authority has reason to believe that minerals have been produced or disposed of from any registered mining location and he has not received the return, details, solemn declarations, certificates and documents he may issue an order prohibiting the disposal of any minerals from that location until the return, details, solemn declarations, certificates and documents have been rendered and any royalty due has been paid or until an arrangement has been made which is acceptable to the Commissioner-General or officer for the payment of such royalty. From the above it is clear that the Commissioner-General of ZIMRA has a lot of powers that may enable him to carry out inspections or investigations for taxation purposes. However, it is surprising that the Ministry of Finance under which ZIMRA falls stated in its 2012 Mid-Year Fiscal Policy Review Statement that Anjin has not provided information on its output and revenue to the fiscus. The powers vested in ZIMRA should have been exercised in such cases. In addition, ZIMRA has the power to inspect any records of any company and this may include the mining contracts since they will form part of the records and documents contemplated in section 40 or section 37B of the Income Tax Act. In the 2012 Mid-Year Fiscal Policy Review Statement, the Minister of Finance stated that ZIMRA should be involved at all stages of the mining chain from mining to marketing. He stated that in practice ZIMRA only stationed its officials at selected mining locations only through negotiation with mining companies since this is not legally provided for. This means ZIMRA should not only go to the mines after the sales and exports have been done, but before, during and after, hence checking the whole mineral supply chain. In the collection of royalties the Finance Act (Chapter 23:04) states in section 37B (a) that in respect of precious stones the MMCZ or any person authorised by the MMCZ to export minerals shall act as agents for and on behalf of Commissioner-General of ZIMRA. As agents they will be authorized to deduct royalty on the minerals at source, based on the face value of the invoice therefor. The royalties deducted will then be remitted to the Zimbabwe Revenue Authority no later than the 10th day of the month following the month in which the proceeds from which the royalties were deducted are

20 CHALLENGES IN COLLECTION OF TAXES IN THE MINING SECTOR There are a number of challenges that hinder the collection of mining taxes and deprive the treasury of revenue for promoting national economic development. Tax administrators such as the officers in the Zimbabwe Revenue Authority (ZIMRA) face a lot of problems in trying to collect revenue from the potential tax payers in the mining sector. These challenges may result from the nature of the business of the potential tax payer, the size of the business and also the staff compliment as well as necessary resources by the department of tax and customs (ZIMRA). Below are some of the problems and challenges that are often faced tax administrators. Registration [Income Tax Act, Section 42 and Value Added Tax, Section 23] Registration of potential tax payers by ZIMRA has not easy especially Small and Medium Enterprises (SMEs) and these include small scale miners. The small scale miners tend to operate somehow informally. The collection of tax process requires that all potential tax payers whether small scale business operations or large scale be registered with ZIMRA. Registration with ZIMRA enables tax payers to obtain a Business Partner Number [BP], which is an identity and machine generated number that links the business operator with ZIMRA for all transactions that are done with ZIMRA in the form of tax payments or assessments. The client can be given accounts through the B.P Number such as Income Tax, PAYE, VAT and Customs Duty and others. These accounts have certain specific numbers which distinguish each tax head from another and these are called contract accounts for VAT, PAYE, Income Tax or Others. The problem is that registration is of voluntary and not all would come forward to register. The other problem of registration is that the requirements for registration are a bit complex since special documents are needed such as Company Certificate, Memo and Articles of Association, Proof of Residence, copies of Public Officers' identity cards and even Certificates for operations from relevant authorities, in this case Ministry of Mines. These are sometimes not available with small scale miners. Record Keeping Proper administration of tax requires that correct records of accounts be kept at the premises or ideal places for the potential tax payers even in the mining sector. This is in terms of the Income Tax Act section 37B and the Value Added Tax, Section 57. The problem of record keeping especially by the Small Scale Miners is caused mainly by the sources of goods and the market for the goods. Most of these businesses buy their goods from individuals and black market businesses where there are no records such as invoices, receipts and accounts books. These SMES will then sell their goods via the same black markets and it will not be easy for tax administrators to trace the transactions in order to charge and collect tax. For example many small scale gold miners have over the years not been selling their gold through the formal market due to lower prices offered by Fidelity Printers.

21 The Income Tax Act stipulates that when charging tax, correct records must be produced and where there is reasonable ground to suspect that declaration of income for calculation of tax purposes is not proper, estimated tax can be charged through estimated assessments. Making estimated assessments by tax administration is not easy especially that they need firstly to suspect that some information was hidden. Deliberate Non-Compliance Like poor record keeping, compliance with the requirements of the Act by the potential tax payers is not easy. Most Small and Medium Enterprises especially in the mining and retail sectors deliberately pretend ignorance of the obligation to pay tax. Although some of these groups comprise of individuals who are driven into business because they see an opportunity of making money without even the knowledge of business and idea of how tax issues operate, some of the SMES see tax payment as a loss to their businesses and as a burden imposed by government. They are therefore not willing to comply and would do all what it takes to avoid paying tax. The Income tax Act stipulates that any business operator is supposed to be registered with ZIMRA and subsequently furnish ZIMRA with returns, which show a breakdown of transactions that involve tax for a specified period of time such as one month in VAT, PAYE, withholding tax and quarterly for Income Tax. These returns will then be assessed by the tax administrators to see if proper and correct tax was collected and paid with the bank ZIMRA account. Interpretation of Statutes The taxes and customs legislation is a bit complicated especially from a layman point of view and this will mostly apply to small scale miners. It is often difficult for business operators who do not engage expert tax consultants or employ staff with the requisite skills. Concepts such as withholding tax, presumptive tax, informal traders' tax and others which have some form of similarity particularly in rates applied confuse business people. This is the breeding ground for non-compliance. In the mining industry, there are taxes that are charged on special mining leases and special grants and to small scale miners, it is very difficult to collect revenue through these revenue heads due to lack of knowledge. Tax on mining leases come from leases that are established from mining claims by holders of these claims who sublet or lease out the mining claims to individuals and small scale miners. The tributary agreement is signed and gives mining rights to the lessee and all payments or subscriptions made to the holder of the mining claims should be taxed. Similarly, where mining grants are obtained especially from the government for coverage of certain expenditures such as building a mining dam, roads, bridge, stadiums or others, the subsidies or grants so granted should be grossed up in the mine's income, which will then be taxed at the rate of 25% with other mining incomes.

22 This is normally not done in most mines due to lack of knowledge of the tax systems in Zimbabwe. It will therefore, be difficult for administrators of taxes to deduce this because sometimes the records are not clear. Registration and Taxation of Foreign Contractors Foreign contractors are normally contracted to perform certain professional jobs in the mines for specified periods of time. Examples of works where contractors may be engaged by mining companies include construction of and installation of machinery in the mine and other geophysical works. Where contractors stay in Zimbabwe for 183 days or more in a specific tax period or in the year of assessment (usually between January and December) registration with ZIMRA should then be done to ensure revenue collection through taxes. This registration is sometimes not complied with by these contractors and sometimes the mining companies that contract these companies also fail to recognize the legislation pertaining to registration of the contractors after 183 days. Certain companies may even stay longer than a year or will continuously renew their contracts with those who contract them to do business or perform some special duties. These contractors therefore, would need to seek permanent establishment registration since their stay and operation in Zimbabwe may be indefinite or is from 5 years and above. Major foreign contractors in the mining industry in Zimbabwe are: DRA minerals [South Africa], Sandvik [Ireland], SRK [United Kingdom], Atlas Copco, TWP Projects [South Africa] among others. The failure to pay tax or registration for permanent establishment by the sub-contractors is however, not deliberate from the research carried out. Their main problem is the lease agreements for the mines by the Ministry of Mines and/or with the Ministry of Finance. Some lease agreements exonerate some mining companies from paying VAT on purchases, but however does not stipulate that the sub-contractors should not charge VAT to the mine who contracted them when they supply goods or services. ZIMRA sometimes has difficulties in collecting tax as a result of these contracts due to lake of knowledge by the contracting companies and the contractors about certain lease obligations or agreements. ZIMRA lacks adequate resources to investigate such cases or to carry out audits unless there is whistle-blowing or any tip-off. Related Party Transactions [Income Tax Act, Section 23, 98] The administrators of taxes are facing difficulties in establishing and collecting revenue from taxes on transactions that are done by related parties even in the mining sector. These transactions can involve subsidiary and holding companies, also sister companies with another sister company down the line, branch and inter branch transactions as well as group companies' transactions. Normally dealings of that nature are dealt with differently from normal business transactions according to the Income Tax Act (chapter 23:06) section 98.

23 Transfer pricing/profit shifting Prices for goods charged between related parties is called a transfer price. The challenge arises on whether the transfer price is at arm's length as required by legislation or not. Tax jurisdictions the world over require that branches, sister companies or head offices be treated as independent companies when pricing goods and services, among themselves. Normally this is not the case as related companies can deliberately underprice or overcharge the goods and service depending on where they want their taxes paid. For instance: if company A in Zimbabwe mines platinum concentrate, which it sells to company B [a related party] in Mauritius who will do the refining process before final sales at minerals market; then company A can sell at very low prices to B, so that B makes a huge profit when selling at world market. Company A will make losses in Zimbabwe [where tax is at 25%] while B will make huge profits but taxed at say only 5% in a tax haven Mauritius. The Zimbabwean loss does not matter as long as the overall group profits are taxed at 5%. Re-invoicing Related party companies or mines may create a fictitious company or have head office in a low tax regime or tax haven. This means profits which were supposed to have been earned by a high tax regime like Zimbabwe will be taxed in a low tax regime, thereby benefiting the group income position. For instance, Mine P in Zimbabwe may sell its minerals to companies X [in Zambia], Y [in South Africa] and Z [in Russia]. However, the shareholders of mine P register a mineral broking company Q in the Isle of Man near the United Kingdom. Mine P will invoice company Q for all the sales it makes, at very low prices. Company Q then sells to XYZ companies around the world at a very high profit margin. Mine P may make a small profit or even a loss, so that no tax is charged in Zimbabwe at 25%, while all the profit is made by Q where there is no Income tax in the tax haven, Isle of Man. Thin Capitalization Holding mining companies or related parties may capitalize their subsidiaries in high tax regimes through provision of loans. The loans will be repayable at very high rates but the related party will accept the conditions. The implication is that the local company will pay so much of its income as interest on loan, leaving it with losses or reduced profits, while the related party earns the interests and taxed at low rates or no tax all.