Zimbabwe’s new royalty law – a positive step towards more equitable value share, but…….

Tax incentives equate to a discount on tax revenue, if not managed well, which can be a huge cost to the fiscus, depriving much-needed public expenditure of universal access to health and education. Great Dyke Investments, a platinum mine, for example, was awarded a five-year tax holiday on corporate income tax, additional profit tax, and withholding tax on resident shareholders. Smuggling linked to gold alone is bleeding the country US$1.2 billion a year, according to the Minister of Home Affairs, Kazembe Kazembe.

Interestingly, one of the mechanisms for resourcing the Sovereign Wealth Fund (SWF) established under an Act of Parliament in 2014 was the ringfencing of a portion not exceeding a quarter of mining royalties. The revenue was to be deposited in an account held at the Reserve Bank of Zimbabwe (RBZ).

Since the SWF was established, this financing arrangement was not followed and that is why the move to fine-tune the financing options to include precious and high-valued minerals is commendable. Indeed, through his weekly column, the President had hinted that the new royalty policy will need to be reconciled with the SWF Act.

According to Investopedia, investing in precious metals is a hedge against inflation, and it’s another option to diversify an investor’s portfolio. While gold is the most preferred among precious metals, silver, platinum, and palladium are all commodities with unique risks and opportunities that can be included in a precious metal investment portfolio.

Therefore, the government is certainly not caught offside because of its intent to build reserves of PGMs, diamonds, and lithium in addition to gold. It is noteworthy that the government expressed that the policy will be flexible to accommodate scarcity and global demands for minerals.

Citizens must be aware that the value of minerals is quite volatile depending on supply, demand, and geopolitical issues. For instance, during times of war, political instability, and global pandemics as the case with COVID-19, investors go into gold hoarding mode. On geopolitics, the sanctions imposed on Russia have caused further constrained the supply chain of PGMs which augurs well for favourable international market prices for PGMs.

Mining royalties, together with corporate income taxes and state equity participation characterise the mining fiscal regime in Zimbabwe, just like in many African countries. The Mines and Minerals Act is the principal legislation that governs mining royalties. And it is complemented by the Finance Act in terms of changes to the royalty rates applicable for each group of minerals. Royalties, broadly, make government revenue more predictable, and they are easier to administer.

Unlike corporate income tax, royalties are payable whether the company is profitable or not. They are easier to administer in the sense that the royalty rate is applied on the gross invoice value of the minerals compared to corporate income tax which involves several deductions that are prone to aggressive accounting. This makes mining royalty revenue less prone to illicit financial flows.

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