Cholera, the scourge currently haunting Zimbabwe is indicative of the sorry state of public service delivery – health, water and sanitation and education. A clear violation of socio-economic rights  provided in the Constitution. It is pertinent, therefore to focus on how government can mobilise finance to revamp public service delivery. Amidst measured excitement over government’s quest to re-engage with the West and the luring of Foreign Direct Investment (FDI), it should not be lost that tax is the most sustainable tool in government’s hands to finance development. Borrowing heavily from the debate that took place during a SADC regional workshop on Tax Justice in Mozambique from 10-13 September 2018, this article ventilates tax incentives – whether are detrimental or beneficial to development.

The Tax Justice workshop was organised by Action Aid (AA) Mozambique. It included other AA country organisations from Malawi, Tanzania, Zambia and Zimbabwe. The Zimbabwe Environmental Law Association (ZELA) also took part as a lead partner on Tax Justice with AA Zimbabwe. Tax Justice ensures more tax is raised fairly, allocated and spent equitable to ensure provision of essential public services.

Understanding tax incentives

Before delving into the discussion of how harmful or helpful tax incentives are, it is necessary to gain an understanding of what tax incentives are and the types of tax incentives offered in Zimbabwe. According to the Zimbabwe Revenue Authority (ZIMRA) “tax incentives are generally defined as fiscal measures that are used to attract local or foreign investment capital to certain economic activities or particular areas in a country.”  One can look at ZIMRA’s website to have an appreciation of tax incentives offered in Zimbabwe or refer to the Finance Act, the Income Tax Act and Double Taxation Agreements (DTAs).

Among tax incentives offered in Zimbabwe are; tax holidays – waiver to pay tax for a certain period, for example 5 years for Built Own Operate and Transfer (BOOT) infrastructure; 15% preferential corporate income tax for holders of special mining leases; all capital expenditure on exploration, development, operating incurred wholly and exclusively for mining operations is allowed in full; and perpetual carry over of mining losses. DTAs are tools used to avoid double taxing of the same income twice from the same entity or individual with investments in two countries concerned. DTAs can limit the capacity of our government to collect maximum taxes, for example, withholding tax on dividends.

Debate on Tax Incentives  

Proponents for tax incentives argues that, fiscal linkages although appear to be low hanging fruits from mining, they are not the only tool in the box for unlocking sustainable development. An effective mining tax regime must embrace desirable trade-offs between tax and other development drivers like transfer of technologies, skills development, enhanced supply chain capabilities, employment creation, export earnings and infrastructure development. Rightly so, ZIMRA acknowledges such attendant economic benefits accruable to a nation through using tax incentives.

Of course, ZIMRA is not blind to the fact that tax incentives are a cost to government in its interpretation. That is why a cost benefit analysis is critical always to ensure that government does not bear an unfair burden of tax discount in the bid to stimulate economic growth. Hence tax incentives must be publicly accounted for just like tax revenue. Unfortunately, ZIMRA does not publicly account for the costs incurred through tax incentives in its revenue performance reports, produced quarterly, semi-annually and annually.

Another shortfall is limited transparency of the amount of taxes received by government from mining operations. Apart from mining royalties, mining performance in other tax revenue heads like corporate income tax, custom duty, withholding taxes and Pay as You Earn (PAYE). A government eager to usher in a new dispensation must embrace international best practice like Extractive Industry Transparency Initiative (EITI) to keep citizens in the loop on mineral tax revenue performance.

Currently, what is clear for all citizens to see is that the budget size is thin. There is very little left to fund service delivery as 90% of revenue generated is sunk into recurrent expenditure. Yet citizens are not sure if the thinning effect is caused by excessive tax incentives. Mozambique is losing $400 million annually through tax incentives and Tanzania lost around $790 million in 2014/2015. Overgenerous tax incentives erode government funding for better schools, clinics, water and roads. Thereby worsening inequality and allowing corporates to enjoy public services that they are not willing to fairly pay for through taxes. A point that was well argued by critics.

Tax incentives if they are not aligned with what regional counterparts offers, they can easily stimulate a race to the bottom. Some scenario where regional countries, SADC for instance, compete to on lowering tax rates to attract FDI. SADC, interestingly, is in the process of formulating the Regional Mining Vison (RMV). ZELA is honoured to have led the participation of civil society from the region in this important process. One of the issues discussed in the RMV is harmonisation of tax incentives to stifle the race to the bottom.

However, if used well, tax incentives can spur inclusive sustainable development hanged on mining.  Power, for instance, a critical enabler to mining development is in short supply in Zimbabwe. To cover for the deficit, power is imported from Mozambique and South Africa. Therefore, if mining companies are given tax incentives to set up their own power stations, which will then feed excess electricity to the national grid. Ultimately, this promotes growth of other industries like agriculture and manufacturing – economic diversification.  The nation can stop importing electricity and ease the foreign currency crisis.

Critiques argued that in the mining sector, tax incentives rank list in influencing investment decision according to World bank report. Investors consider geological potential, ability to repatriate profits, political stability, policy consistency, infrastructure and labour among other factors. Fitly, in zones where the mineral wealth potential is very high, incentivising investors may not be ideal. Rather fiscal linkages, more tax revenue can be raised progressively by taking the competitive bidding route in the disposal of minerals.

Sadly, the Mines and Mineral Act is not aligned with AMV on harnessing competitive bidding to strengthen fiscal linkages. The Act relies on first in first assessed principle, even in zones where mineral wealth potential is high, the Great Dyke for example. Mineral rich countries must therefore invest in geological information to guarantee economic rationale in the disposal of mineral rights.

Further, critiques accused mining companies of cheating, using aggressive tax planning methods to avoid payment of taxes in jurisdictions where they are mining. A process known and Base Erosion and Profiting Shifting (BEPS) which weakens domestic capabilities to mobilise finance for development. Income is unfairly shifted to lower or free tax jurisdictions – Tax Havens. Government, therefore, must not give away freely its taxing rights to mitigate development revenue losses from illicit financial flows.

Wooing FDI is important but the nature of investment is critical to decipher whether it is in form of equity or loans.  FDI which comes inform of equity investment is preferable in that only dividend need to be repatriated. Whereas debt finance requires is costly in terms of repayment of loan interest in addition to dividends. When giving incentives, equity investment must have preference against investment financed by debt.

In Zimbabwe, the challenge is that mining deals are secretly negotiated even though the Constitution, Section 315 (2) (c) requires Parliament oversight in the negotiation and performance monitoring of mining agreements. Although the previous Parliamentary Portfolio Committee on Mines and Energy (PPME) did a sterling job to try to hold government accountable on management of Marange diamonds, Parliamentary scrutiny on several mega mining deals announced in the first half of 2018 was lacking.

Without Parliamentary scrutiny, there is a risk that bad deals with toxic incentives which can short change public service delivery. To illustrate, the ZIMRA refunded around $100 million in 2015 after losing a tax dispute on legality of stabilisation clause that pegged royalty rates at 2.5% for 25 years whilst ZIMRA argued for a rate of 10% prescribed by the tax code. Bad agreements are a result of either lack of poor technical skills to negotiate with corporates who can afford highly skilled technical persons.  or through corruption.  Mining benefits are skewed in favour of few well political well-connected persons and corporates.

Arguments against tax incentives in the mining sector were that, mining companies are chief culprits when it comes to eroding the tax base of resource rich countries by shifting profits mostly to secretive and tax free or lower tax jurisdiction – Tax havens. Therefore, government to give away freely their taxing rights to corporates that a bleeding resource rich Africa of its ability to use domestic resources to finance development.


To wind up, Zimbabwe’s desire attracts FDI to grow the mining sector as a leverage to achieve middle income status by 2030 need to be complemented by transparency and accountability of tax incentives. In its revenue performance report, ZIMRA must publicly disclose tax incentives, tax discount given to investors by government. This will enable citizens to assess the impact of tax incentives on funding service delivery programmes which reduce inequality – schools, hospitals, water and roads.

No room should be left for discretionary negotiation of tax incentives which undermine the country’s tax laws. As required by Section 315 (2) (c) of the Constitution, oversight in negotiation and performance monitoring of mining agreements must be a key priority for the 9th session.  Instead of allowing full recoupment of capital expenditure costs in the first year, government should spread capital recoupment over 4 years. Perpetual carry over of mining losses should be abolished. A period of 6 to 10 years can be ideal to allow carry over of mining losses. DTAs should be reviewed urgently to weed out clauses which weakens government’s fiscal capabilities.  Already, government softened indigenisation requirements in the mining sector, only platinum and diamond sectors are required to cede 51% equity to indigenous partners. Pressure, therefore should be less to unnecessarily give away the taxing rights through tax incentives.