Too much of a good thing: How Zimbabwe’s generous tax incentives are undermining public investment in health and education

Development at GDI's new platinum mine at Darwendale: Investor is one of many granted tax concessions (G. Marawanyika/Bloomberg)

By Darlington Chidarara and Mukasiri Sibanda

Africa is shouldering an overweight sustainable development problem of poverty, inequality, instability, and conflict that COVID-19 has aggravated.

There are many contributing factors, undoubtedly, to the continent’s stunted socio-economic growth. The dominant one is the lack of financial firepower by governments to make significant investments in basic service provision and social safety nets essential to ameliorate the suffering millions and millions of Africans.

A case in point is that Africa accounts for 1% of the global spend on health, with a global population size of 15%, and 24% of the world’s health problems. While COVID-19 is ravaging the continent, medieval diseases like cholera still pose a huge challenge, Nigeria, for example, is facing a severe cholera outbreak. More than 2,300 lives have been lost from suspected cholera cases.

Crucially, much-needed financial power can be gained by stopping the bleeding of resources to finance development from the continent. The High Level Panel (HLP) report in 2015 disclosed that more than US$50 billion annually is lost from Africa through illicit financial flows (IFFs). A grimmer picture is presented by UNCTAD’s report, Tackling Illicit Financial Flows for Sustainable Development in Africa, which recently pointed out that the problem of IFFs is growing; roughly US$89 billion is now being lost annually.

A major finding in that report is that countries that are highly vulnerable to IFFs, as is the case with resource-rich African countries, spend 25% and 58% on health and education in comparison with countries that are less susceptible to IFFs. Although commercial transactions — abusive transfer pricing, under-invoicing, unequal trade, and investment contracts, account for the largest chunk of IFFs, 65%, governments are exacerbating the challenge because of overly generous tax incentives.

Generally, tax incentives are characterised by opaqueness, a huge leakage of government revenue, often politically motivated, highly prone to corruption, and ineffective. Research shows that tax incentives given to attract Foreign Direct Investment may not be necessary as investors consider other factors like policy predictability, infrastructure, rule of law, and ability to repatriate profits, among others.

Even when pressed with the widening finance gap for health and education induced by the pandemic, the African governments continue to give tax incentives.

Zimbabwe’s costly tax holidays

In January 2021, the government of Zimbabwe awarded a five-year income tax holiday to Great Dyke Investments, a platinum mining company. Civil society in Zimbabwe, with the support of the Stop the Bleeding Campaign, produced a protest statement imploring the government not to surrender its taxing rights. Action Aid Zimbabwe has organised a summit on Tax Justice and Gender Responsive Public Services (GRPS) that decried the disastrous impact of tax incentives on poor service delivery hurting most of the poor — women, youth, and people with disabilities.

The government of Zimbabwe, though, is not oblivious to the havoc that tax incentives can cause on domestic resource mobilisation. Through the 2019 National Budget Statement, it noted that the absence of a tax incentives monitoring and evaluation framework (tax holidays, losses carried forward and VAT refund levels) was a huge challenge.

The government then committed to “develop a tax incentive monitoring and evaluation framework to facilitate the management of timed tax expenditures as well as to inform Cost-Benefit Analysis of tax expenditures by Treasury, on an annual basis, with effect from 1 January 2019″. According to International Budget Partnership (IBP), “tax expenditures arise as a result of exceptions or other preferences in the tax code provided for specified entities, individuals, or activities. Tax expenditures often have the same impact on public policy and budgets as providing direct subsidies, benefits, or goods and services”.

Remarkably, the Zimbabwe Revenue Authority (ZIMRA)’s 2020 annual report included an estimate of revenue forgone via tax incentives — a tax expenditure report. ZIMRA’s annual report noted that: “A total of ZWL$111.55 billion was foregone through tax expenditures, an increase of 555.79% from the ZWL$17.01 billion recorded in 2019.”

Using the current official exchange rate of US$ being equivalent to ZWL86.3010, tax revenue forgone in 2020 was equivalent to US$1.29 billion.

Tax disclosures: Cost, benefit analysis

If we compare the tax revenue forgone of ZWL$111.55 billion against actual revenue collected by the government in 2020 of ZWL$171.9 billion, an equivalent of 65% of total government revenue was gobbled up by tax expenditures. Much as it is commendable that the government is now disclosing publicly the cost of tax expenditure annually, significant gaps remain on adequately informing and engaging the public on such crucial decisions that impact their lives. In line with best practice, the national budget statement does not include an estimate of revenue forgone via tax expenditures.

Hence this indirect budget subsidy is not subjected to public scrutiny and parliamentary oversight as the direct government expenditures that comprise the national budget statement. ZIMRA’s annual report does disclose beneficiaries — companies, individuals, and activities that received indirect budget support in form of tax expenditures. It is not clear from the annual report if a cost-benefit analysis of tax expenditures is regularly done to assess whether the intended policy objectives are being met.

A look at what the government spent in 2020 as per the Fourth Quarter Treasury Bulletin uploaded online on 31 March 2021 on the Treasury’s website clearly illustrates the diabolic costs of tax incentives. Tax revenue forgone by the government in 2020 accounted for 74% of the entire compensation of government employees in that same year, totaling ZWL$151.17 billion.

Thus, if the tax expenditure was redirected towards civil servants’ salaries, the demoralised civil servants would have earned decent wages. The government spent a combined total of ZWL$1.13 billion on medical and health education supplies and services in 2020.

Similarly, redirecting tax expenditure would have boosted investment in these services by 9,868%, wiping out the sharp shortage of essential drugs, boosting maternal health care, and helping to modernise the education sector.

Social safety nets vs Tax holidays

According to the World Bank’s economic and social update report in June 2021, limited social safety nets are forcing the poor to resort to negative coping strategies. The report noted that “poor households are likely to forgo formal health care as they are unable to pay for services, and to keep children out school to avoid education costs, such as for school fees, uniforms, and textbooks.”

This was corroborated by Action Aid Zimbabwe’s Tax Justice and GRPS summit, which stated: “Overall, the Zimbabwean education budgets continue to rely on parents and families through user fees. For example, in 2018, the government allocated US$905 million to primary and secondary education. In the same year, it is estimated that parents contributed approximately US $1 billion in school fees and levies.”

It is obvious that if the government of Zimbabwe stopped giving away too-much-of-a good-thing in the form of overly generous tax incentives, yielding windfall profits to corporates, Zimbabweans would enjoy the quality health and education services that they deserve.

Platinum mining companies are recording bumper revenue from buoyant commodity prices, yet the inflexibly fiscal regime is failing to capture a commensurate share of government revenue.

__

Darlington Chidarara is Project Coordinator at Action Aid Zimbabwe, and Mukasiri Sibanda is Stop the Bleeding Consortium Coordinator