Cash-strapped Zimbabwe, which has been forced to pay civil servants’ salaries for December on 5 January, could be losing a lot of revenue due to the uncertainty in the taxation system in the mining sector.
The chairperson of the Portfolio Committee on Mines and Energy Jennifer Mhlanga said the mining sector had a great potential to contribute more tax revenue to the treasury but this was being hampered by frequent tax changes.
“The frequent tax changes in the mining sector tax regime contradicts the need for certainty in the taxation system as one of the key principles of taxation. During the previous Budget, Treasury has adopted piece-meal amendments to the mining tax regime. The lack of certainty in the tax system makes it much harder for businesses to undertake long term planning around investments and operations,” she said in her comments on the 2016 budget for the Ministry of Mines.
“The tax regime should promote transparency in the mining sector, have a long term focus, protect mining investments and generate adequate tax revenue. This will ensure that Government collects a fair share of tax revenue from the sector and also guarantees growth and sustainability of the mining sector.”
Full contribution:
HON. MLANGA:
INTRODUCTION
The Committee on Mines and Energy has an oversight responsibility over the Ministry of Mines and Mining Development and Energy and Power Development. Post Budget consultations conducted with the two Ministries showed that there was a reduction in Budget allocations to the two Ministries for the 2015 allocations. The Ministry of Energy and Power Development was allocated US$ 6 810 000.00 whilst Mines and Mining Development was allocated US$5 964 000.00. The amount allocated to the Ministry of Mines and Mining Development represents 0.18% of the total budget which is lower than the allocation for 2015 which was US$8 909 000.00 when the Ministry’s allocation accounted for 0.25% of the total budget. The allocation for Ministry of Energy and Power Development decreased by 35.7% from US$10 592 000.00 in 2015 to US$6 810 000.00 in 2016.
It is disappointing to note that despite the power shortages which the country is currently experiencing the Ministry of Energy’s priority in the total budget is declining over the past four years.
Ministry of Mines and Mining Development
2.1. Overview of Ministry’s budget allocation
The Ministry of Mines and Mining Development’s budget constitutes 0.18% of the total budget for 2016 which is lower than its allocation in 2015 when it got 0.25% of the total budget.
The overall allocation of the Ministry decreased by 33% from US$8.909 million in 2015 to $5.964 million in 2016. In addition to the allocated amount of US$5.964 million, the Ministry is also expected to get about US$10. 699 million from statutory funds. This amount although is still lower than the Ministry’s requirements, it will go a long way in ensuring that the Ministry will achieve some of its set objectives.
The Ministry is not among the top 10 priorities of Government as judged by the share of the total budget allocated. The Ministry’s allocations declined for the first time since 2012 and it is also important to note that the allocations have remained lower than those for other Ministries.
2.2. Economic Classification of the Ministry’s budget
In terms of economic classification, the Ministry’s budget is skewed towards funding current expenditures at the expense of capital expenditures. Of the Ministry’s allocation in 2016, 87.9% will go towards capital expenditure 2.2% will go towards current transfers whilst 9.8% will go towards capital expenditure. This is in contrast to the 2015 budget when there was a balance between current and capital expenditures. The change in expenditure distribution is a sad development as capital expenditure contributes more to economic growth than consumptive expenditures.
2.3. Positive measures relating to the mining sector in the 2016 National Budget:
2.4. Key achievements in 2015
Since the adoption of the multicurrency system in 2009, the mining sector has emerged as one of the largest contributor to the country’s total exports. Despite poor funding from Treasury, in 2015 the mining sector made significant contributions to the Government revenue and economic growth. Some of the major achievements by the Ministry of Mines and Mining Development and the mining sector in general include the following:
2.5. Key Priority areas for the Ministry of Mines and Mining Development in 2016
Zimbabwe continues to rely on natural resources for its economic development, and the Ministry of Mines and Mining Development plays a critical role in this development. The Ministry’s priorities over the coming years all contribute to this. These priorities begin with balancing the Ministry’s budget, to control spending and to support the overall Government budget. Working with its stakeholders, the Ministry develops polices, programmes, legislation and regulations to maintain Zimbabwe’s mining sector competitiveness and encourage investment in mineral exploration and mining in the country. Some of the key priority areas for the Ministry of Mines and Mining Development include the following:
2.6. Activities with potential to raise revenue and contribute to economic growth
Mining growth has consequences for downstream industries such as power generation, steel making and aluminium, and therefore on manufacturing (e.g., auto, chemicals, cement) and infrastructure (e.g., road, rail, real estate). Zimbabwe’s mining sector has great potential to contribute more tax revenue to the Treasury if well managed. In the past few years, the mining sector has been among the top recipients of new investments. In light of the new investments and increased mineral production levels, mining tax revenue contribution to the tax should increase. In the 2016 Budget, Government has taken progressive steps in adjusting some of the fiscal issues in the mining sector to improve the competiveness of the mining industry. For example, in the 2016 Budget, reduced royalty on gold for large scale producers to 3% from 5%. This will go a long way in improving the viability of gold miners and increase gold output which will lead to increased revenue to Government in the long term. The Committee feels that the following Ministry activities have the potential to increase revenue and contribute to Government revenue.
2.7 Recommendations
Zimbabwe’s mining sector has great potential to contribute more tax revenue to the Treasury. In light of this, the Committee recommends that there is need for the development of a comprehensive and stable settlement on taxation of mining in Zimbabwe which provides clarity and stability over the long-term. The frequent tax changes in the mining sector tax regime contradicts the need for certainty in the taxation system as one of the key principles of taxation. During the previous Budget, Treasury has adopted piece-meal amendments to the mining tax regime. The lack of certainty in the tax system makes it much harder for businesses to undertake long term planning around investments and operations. The tax regime should promote transparency in the mining sector, have a long term focus, protect mining investments and generate adequate tax revenue. This will ensure that Government collects a fair share of tax revenue from the sector and also guarantees growth and sustainability of the mining sector.
The Committee notes with appreciation measures that have been proposed by Treasury to encourage increased mining sector output especially with regards to gold. In light of the current viability challenges facing the industry on the back of depressed commodity prices, the Committee appeals to Treasury to extend the reduction in royalty (that was proposed on gold) to other minerals.
The 2016 National Budget provides for the reduction in royalty for large scale producers to 3% (from 5%) on incremental output using previous year production as base year. Unfortunately, this measure can only be enjoyed by a few mines that have the capacity to increase production. Majority of small to medium producers who are currently facing viability challenges will not benefit from the reduction in royalty as it is most likely that their output may come down in 2016 due to viability challenges. The Committee appeals to the Ministry of Finance and Economic Development to ensure that this royalty reduction can be used as a reprieve to high cost as well as incentive to increase production. More so, the royalty must benefit the mining companies at the point of sale as opposed to claiming it at the end of the year.
The Budget did not address the mining sectors’ request to allow royalty as a tax expense. The current situation where royalties are not tax deductible (which was effected in 2014 Budget) has seen the total mining cost going up across all minerals. Important to note, as the case in most countries, royalties which are levied on gross revenue are considered a direct cost and hence must qualify for tax deductibility. Zimbabwe royalty charges remain amongst the highest on the continent and currently affecting the viability of the mining companies.
While appreciating the effort by Government to review the EIA levy, the reduction is inadequate as the fee remains significantly above what obtains in the region. A cap of US$2 million compares unfavourably with other countries in the region such as South Africa which charges R10 000, Kenya US$9 6000 and Uganda, US$1 378. The Committee appeals to Treasury to further revise the levy in line with regional best practices.
The Mines and Minerals Amendment and the Minerals Exploration and Marketing Corporation Bill have been approved by Cabinet and awaiting Parliamentary consideration. The Committee urges the expedition of the finalisation of the two laws as they present an opportunity for the mining sector through providing a framework for growth and development of the industry.
The Committee appreciates the downward review of mining fees and charges in the first quarter of 2016. However, it is saddening to note that the reprieve is coming at a time when most small scale miners have already forfeited their claims due to non payment of the fees. The Committee therefore recommends that those who have lost their claims be reinstated back to their mines and benefit from the reduced mining fees.
The Committee noted that in the 2016 Budget, Treasury allowed the Ministry to retain US$9 1999 million statutory funds. Whilst this is a noble idea as it will increase the Ministry’s revenue base for its operations, this might result in failure by the Ministry to significantly review downwards mining fees as this will have direct effects on their revenue. To avoid the conflict of interest, the Committee recommends that all the statutory fees collected by the Ministry be submitted to Treasury and the Ministry gets appropriations from the Consolidated Revenue Fund.
In the year 2015, provisions for a $100 million loan facility was to be availed to the small scale miners and out of this, 30% was expected to come directly from Treasury. However, it is saddening to note that the Government failed to meet its part of the bargain. The Committee therefore, recommends that the Government avails the 30% it had promised so that miners will access the loan.
In the Budget, Treasury proposed the creation of the Sovereign Wealth Fund to be financed by 25% charged on royalties and dividends collected from the minerals sales. However, as what has been the case with other funds, it is likely that Government might fail to finance the fund from the revenue generated from royalties. It is therefore recommended that Treasury takes this fund seriously and finance the fund as this is key to sustainable development.
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