COLUMN | How the 2021 Budget can dig into the mining sector to raise resources for economy

NDS1 plans to push for platinum refinery, but this may face opposition

By Mukasiri Sibanda

As a concerned citizen, and a socio-economic justice activist, I am disturbed by how the pandemic, COVID-19, is piling more pressure on progress towards the realisation of socio-economic rights.

Before COVID-19, developing countries like Zimbabwe were struggling to provide access to quality, reliable and affordable essential services. Education, health, water, food and shelter are part of the basic rights guaranteed by the Constitution. Openly, the Constitution acknowledges that the provision of essential services to the public is subject to the limitation of resources available.

Obviously, how government intends to mobilise and utilise revenue has a huge bearing on the realisation of the socio-economic rights. Citizens must therefore hold government accountable by actively participating in the design and implementation of fiscal policies that has a direct bearing on the fragility or strength of the State to provide them with essential services. And public pre-budget consultations are an important space for stakeholders, particularly citizens, to influence how government plans to raise and spend revenue.

Taxation critical to closing inequality gap

Government’s primary source of revenue is taxation; citizens and corporates are the contributors. Before we jump to the expenditure side of the budget, taxation is the first port of call when it comes to the agenda of fighting inequality in line with the Sustainable Development Goal (SDG) number 10.

For those who love soccer, the jersey number 10 is usually imperatively reserved for the most creative and influential player in the team, like Lionel Messi for Barcelona. This is just to illustrate how important the fight against inequality is, hence the symbolic number 10 of the team of UN’s Sustainable Development Goals (SDGs).

Understanding the roles of taxation

The four roles of taxation are quite crucial for citizens to understand its massive influence to their standard of living. Taxation is a tool of revenue raising for government to fund the delivery of essential services to its citizens; it can be used to redistribute wealth; it can be used to discourage the consumption of toxic goods like alcohol and tobacco; and it gives citizens a voice in the generation and utilization of public funds.

If the wealthy individuals and corporates are not paying their fair share of taxes, the poor citizens are incidentally saddled with the burden of contributing a higher proportion of their income as taxes compared to the rich. In this case, tax is deemed to be regressive and the opposite scenario is deemed as a progressive tax regime. Taking into consideration that Zimbabwe is a mineral rich country, and increasingly the economy is dependent on mining and minerals, a finite resource, domestic resource mobilisation from this sector deserves greater public attention in the formulation of the national budget.

ZAMI influencing budget input

Rightly so and as used the information gathered from the 9th edition of Zimbabwe Alternative Mining Indaba (ZAMI) held at Holiday Inn, Bulawayo from 30 September to 02 October 2020.  ZAMI has emerged of the past decade as an important platform for communities and citizens to engage with stakeholders- government, industry and Parliament on how mining can deliver a sustainable national dividend.  Befittingly, the 9th edition of ZAMI was themed “Towards an inclusive and equitable US$12 billion mining industry anchored on sustainable mineral resource management.”

The report of the high-level panel on illicit financial flows (IFFs) showed that Africa is prone to huge revenue leakages. Challenges highlighted in the report are “transfer mispricing, secret and poorly negotiated contracts, overly generous tax incentives and under-invoicing.” The fact that for the past decade, mining contributed over 50 cents to every dollar earned from total export earnings makes the country taxation regime highly regressive – greater likelihood of mineral wealth not contributing a proportionate share of taxes from mineral revenue because of huge IFFs risk.

Platinum royalties must be reviewed to be a progressive tool for domestic resource mobilisation

In 2015, the country’s purse suffered haemorrhage of US$101 million after the Zimbabwe Revenue Authority (ZIMRA) lost a court battle against one the country’s biggest mines, the Zimbabwe Platinum Mines (Zimplats). The battle was on the legality of the 25 year (1994-2019) stabilization clause, pegging the royalty rate at 2.5%. ZIMRA had proceeded to garnish funds from Zimplats using the 10% royalty rate prescribed by the Finance Act. The court ruled that royalties are principally administered under the Mines and Minerals Act and the agreement between the Minister of Mines and Zimplats takes precedence over the Finance Act.

A commitment was made in the 2019 national budget that platinum royalty rates were going to be reviewed in August 2019, the period marking the lapse of the 25-year royalty stabilization agreement. This opportunity was missed by the 2019 midterm budget review and subsequent fiscal policies have been mum on the issues. Given the multiplied pressure on government to raise revenue under the strain of COVID-19, accordingly, government must review platinum royalty rates upwards using a sliding scale.

The royalty sliding scale is self-adjusting; the higher the mineral prices, the higher the royalty income, and vice versa. In the gold sector, a royalty sliding scale was introduced in October 2018.

Although generally referred to as platinum, the mineral is a group of metals; in addition to platinum, there is palladium, rhodium, ruthenium, iridium and osmium. Other by-products include gold, silver, copper, nickel and cobalt.

Despite COOVID-19 related challenges, platinum mines in Zimbabwe recorded bumper revenues. This was attributed to favourable market prices for palladium, rhodium, nickel and gold. The sliding royalty regime for the platinum sector must target specific minerals that are part of the Platinum Group of Metals (PGMs) as other related minerals are high performers compared to platinum.

Weed out harmful tax incentives

Another commitment that the Treasury has not fully complied with is transparency and accountability of tax incentives; tax revenue forgone in the quest to attract Foreign Direct Investment (FDI). Tax incentives, if not well administered, can deflate government’s domestic resource mobilisation drive. The 2021 budget must disclose tax revenue forgone and carry out a cost benefit analysis of tax incentives to weed out toxic tax incentives.

No backsliding on mining sector transparency reforms

Another commitment that government must not backslide on is to improve transparency and accountability in the mining sector by joining the Extractive Industry Transparency Initiative (EITI).

Focus on EITI must not overlook low hanging fruits to improve transparency in the mining sector. ZIMRA’s revenue performance reports that are produced quarterly and annually can be improved to show mining sector performance per each tax revenue head – Corporate Income Tax (CIT), customs duty, withholding taxes, Value Added Tax (VAT) and Pay as You Earn (PAYE).

Currently, royalties are the only mineral revenue stream that is separately accounted for. Further disaggregation is required to show mining sector performance per each major mineral sector like platinum, gold, nickel, diamonds, chrome and lithium. These reforms are aligned to the principles of public financial management included under Section 298 of the Constitution requiring revenue and expenditure transparency and accountability.

Embrace contract disclosure and competitive bidding

Existing contracts and those that are in the pipeline must be subjected to Parliament and made public as required by the Constitution under Section 315 (2) (c). Such a move is crucial to ensure that bad deals are avoided as both government and corporate negotiators will be aware that there is a third eye to the contract negotiations. Competitive bidding, when disposing of mineral rights in areas with high geological potential, such as the Great Dyke, must be harnessed to ensure investors that offer a higher development dividend are selected.

Areas for assessment include tax linkages, technological transfer, local procurement, employment and skills development and infrastructure linkages.

Investments from tax havens are a poisoned chalice

Competitive bidding is also an opportunity to quarantine investors that are linked with tax havens who carry a high risk of shifting profits from producer countries to lower tax or no tax jurisdictions that are secretive.

As Leonard Wanyama, Coordinator of East Africa Tax and Governance Network (EATGN) aptly sums up in his article,  secretive, aggressive and extensive jurisdictions help multinationals escape paying taxes, eroding revenue collection measures in other countries.

To root out endemic corruption, the budget must push for beneficial ownership disclosure. Knowing the real beneficiaries behind the “mega deals” sealed in the mining sector and recipients of public procurement contracts who use the mask of corporate bodies and trustees to hide their shameless acts is quite critical.

It was a positive step that in January 2019, the Companies and Other Entities Act accommodated beneficial ownership as part of the new legal requirement. However, it fell short as the beneficial ownership registry is not publicly accessible. Nigeria has made beneficial ownership disclosure as part of the reforms to step corruption and illicit financial flows.

Open for business but don’t shut the door on community benefits

Under the “Zimbabwe is open for business” drive, the indigenisation and economic empowerment framework was dismantled, and with it, legal backing for Community Share Ownership Trusts was affected.  To redress this situation which conflicts with Section 13 of the Constitution on national development, compelling the State to put mechanisms for communities to benefit from resources in their localities, the budget must plough back a portion of resources to areas where the resources are extracted.

To respond to this threat, the budget must promote transparency in the mining sector. Tax revenues, contracts and beneficial ownership disclosures, including monitoring and evaluation of tax incentives, must be part of the measures adopted to curb corruption and IFFs.

The royalties for all minerals, particularly the PGMs, must have a sliding scale to capture a proportionate share of revenue during the commodity price boom. Investors are needed to unlock the growth potential of the mining sector. However, investments channeled through tax havens like Mauritius are a poisoned chalice and must be quarantined.

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Read more from Mukasiri on his blog https://mukasirisibanda.wordpress.com/

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