Holding a mirror for Artisanal and Small-Scale Mining taxation challenges in Zimbabwe
Mining is the spine of the economies of many African countries. For all its mineral wealth, African countries are spineless concerning capabilities to mobilise resources to finance sustainable development on the continent. The poor, and marginalised groups particularly women, youth, people with disabilities, and the elderly are the hardest hit as they largely depend on public services — health, education, water, and sanitation.
Mineral dependant countries, as noted by the report of the High-Level Panel (HLP) on Illicit Financial Flows from Africa, are highly vulnerable to illicit financial flows (IFFs). Although there is no consensus on what IFFs are, the HLP report’s definition covers both criminal and immoral components — tax evasion and aggressive tax planning to exploit legal grey areas. Large scale mining companies are the main culprits when it comes to tax fraud in Africa as revealed by the HLP report.
Double jeopardy is suffered because on top of tax shenanigans by large-scale miners, artisanal and small-scale mining (ASM), mainly informal, gives nightmares to tax collectors. A colossal annual loss of US$1.8 billion through smuggling, illegal dealing in gold and precious stones, corruption, fraud, tax evasion, and externalisation, among others, was revealed by the Zimbabwe Treasury in 2015.
Unlike large-scale mining, ASM is a major source of employment and income generation in Africa. More than 1.5 million in Zimbabwe directly depend on ASM, with 3 million people indirectly benefiting. Essentially, the ASM sector is an important buffer against poverty, lack of formal employment opportunities, limited community enterprise development avenues, and unreliable agriculture production due to climate change effects. That is why ASM is recognised by the Africa Mining Vision (AMV), a blueprint that was adopted by the African heads of states and government in 2009, to leverage mining for sustainable economic growth and broad-based economic development.
This article takes special interest in the taxation of the ASM sector, with Zimbabwe as the main reference point. What motivated this article is the discussion that was organised by the Zimbabwe Miners Federation (ZMF) on Thursday, 09 September 2021, to try to solve ASM taxation challenges. The speakers comprised the Zimbabwe Revenue Authority, civil society, academia, and the leader of Parliament portfolio committee on mines and mining development.
Fiddling with tax rates for ASM
The government of Zimbabwe has numerously fiddled with the taxation of the ASM sector, a delicate balancing act of trying to ensure compliance levels by stifling the black market for gold and the mobilisation of tax revenue. Prior to 2014, the royalty rate for ASM and large-scale miners in the gold sector were similarly pegged at 7%. As an incentive for selling gold on the formal market, the 2014 National Budget Statement lowered the royalty rate for ASM from 7% to 3% for gold output not exceeding half a kilogram per month with effect from 01 January 2014. Further, the ASM gold royalty rate was slashed to 1% from 3% with effect from 1 September 2015. All along, the government was lauding the impact of a lower ASM gold royalty rate as a significant driver of increased gold deliveries on the formal market.
There was a policy U-turn when ASM gold royalty was increased to 2% from 1% with the effect of September 2019. Although the lowering of ASM gold royalty was well-intentioned, the Treasury noted that it has side effects on tax revenue collection. There was a huge risk that some unscrupulous large mining houses were selling gold through small-scale producers, to benefit from lower royalty rates as well as higher foreign currency retention thresholds. Royalties for large-scale gold producers were pegged at 5% and 3% for any annual incremental production. In the same period that ASM gold royalties were increased to 2%, sliding gold royalty rates were introduced — 3% for prices below US$1,200 per ounce and 5% for the price above US$1,200 per ounce. Faced with a sharp decline in ASM gold deliveries, the royalty rate was slashed back to 1% from 2% in 2021. Presumptive taxes for ASM were scrapped in 2014. Before that, presumptive tax for all informal businesses was pegged at 5% in 2009 and slashed to 2% in 2011.
A huge tax burden contributes to informalisation and loss of revenue
According to the 2016 midterm Monetary Policy Statement, the number of registered custom millers reduced to 51 from 485 after annual registration fees were raised sharply from US$2,000 to US$8,000. The Statement noted that there are many millers who cannot afford to pay the required fee of US$8 000 but they are still operating and selling their gold on the black market and/or smuggling gold out of the country. Likewise, the number of permit holders for explosives in the ASM was about 5,000 when the fee was US$100 and fell to 300 when the fee spiked to US$2,000.
Challenging the false narrative that ASM doesn’t pay taxes
It is a stylised fact that ASM does not pay taxes. One of the major sources of government tax revenue is Value Added Tax (VAT). For the first half of 2021, according to Zimbabwe Revenue PZIMRA’s revenue performance report, VAT contributed 23.92% to total tax revenue. Because of their strong consumptive power, artisanal and small-scale miners (ASMers) are key contributors to VAT. Notably, because of the informal nature of ASM, it is safe to say that most players are not registered for VAT. On that note, they cannot claim their VAT refunds as opposed to large-scale miners.
ASM is also burdened by underground taxes especially bribes. It is not easy to get a mining title with others waiting for more than 3 years for the permits to be processed. Some end up paying bribes to speed or the processing of mining permits. Those that are not connected and cannot afford bribes end up mining without the permits paying owners of mining permits huge royalties, normally 30% of net proceeds after deducting costs. Ultimately, the government loses out.
Significant inroads made with taxpayer registration but no clarity of what this means for ASM
In the hunt for more tax revenue, 21,643 new taxpayers were registered in 2020 with a revenue contribution of $558,234 million, according to ZIMRA’s 2020 Annual Report. This was attributed to tax education and engagement programs. No disaggregated data was availed to sift the information on newly registered taxpayers to see how many were from ASM.
Snapshot interviews I had with local ASM leadership in Gwanda, Bubi, Shurugwi, Zvishavane, and Mberengwa, some of the key ASM gold mining producing districts in Zimbabwe revealed there was hardly any significant interventions undertaken by ZIMRA to register new taxpayers among their constituency. ZMF says that there are roughly 40,000 fully registered ASM players out of 1,5 million, and there is a need to dig for more information on those fully registered also tax compliant.
An ideal scenario would be a computerised mineral rights cadastre, managing the application, award, maintenance, and forfeiture of mining titles to be integrated into ZIMRA’s database of taxpayers. That way, ZIMRA, for example, would have a fair chance of collecting taxes like capital gains in case of changed ownership of claims or mineral rights through buying and selling as speculative practices are alleged to be rife.
Above all, ZIMRA collected ZWL$1.81.96 billion which was 5.85% above the target of ZWL$171.9 billion. Considering the strong evidence that the mining sector is highly prone to IFFs due to poorly negotiated contracts, under-invoicing, abusive transfer pricing, corruption, and smuggling of minerals, recording a positive revenue tax collection could be a mask the true tax collection challenge.
Ring fence government revenue from ASM
One of the important roles of taxation is representation, it creates a social contract between the taxpayer and the government. Transparency is a key enabler for a strong social contract between government and players in the ASM sector. Several high-ranking government officials and political heavyweights are involved in ASM and the suspicion that they are not paying taxes because of high levels of corruption can dissuade others to pay taxes. When government improves local public service provision in communities where resources are mined and acknowledge the ASMers for their contribution.
For example, if ASM gold deliveries amount to US$1 billion in one given year, a 2% royalty fee is applied, it means that the government would have collected US$20 million. The government ploughs back ASM royalties to improve rehabilitation of the environment, access to finance, mechanisation, skills building, bolster investment in education, health, water, roads, power, and communication, ASMers can be motivated to comply with their tax obligations. Also, the government must widely consult with ASMers on taxation of the sector to ensure that they have a voice on matters that affect them as part of their constitutional rights. Policy inconsistencies must be avoided. Government must stop going around in circles concerning tax rates like royalties and other charges. Tax administration must be simplified to ensure that ASMers are not dealing with multiple government institutions that are not coordinating their charges and tax collection.
Tax collection must be supported by fair payment methods for gold deliveries
While unfair tax rates have acted as an impediment to ASM formalisation, or even erode some gains made, the unfair payment mechanism has pushed many to go underground and deal with the black market that pays fairly and promptly in US dollars. ASMers have been losing more money from the manipulated exchange rate when part of their proceeds was collected by the government as part of the local content policy for enhances foreign currency linkages for procuring fuel, electricity, raw materials, and machinery among others. Importantly, the government is now paying ASM 100% foreign currency for gold deliveries but for roughly four years, ASMers were robbed by unfair payment methods that meant that the part payment in local currency was liquidated at an unfavourable official exchange rate compared to the black-market rate.
