Zimbabwean taxation system increasing the cost of doing business
By Byron Mutingwende
Taxation is one of the factors leading to the high cost of doing business in Zimbabwe, delegates at a workshop by the National Economic Consultative Forum (NECF) held in Harare on Thursday 27 July 2017 have said.
“Taxation however, is central to development and provides governments with the funding required to finance economic development and growth. Tax revenue generated from the private sector form an important component of overall tax raised by government. In Zimbabwe, de-industrialisation over the last decade has led to numerous company closures and thus inhibiting the capacity of government to raise sufficient revenues and build infrastructure that creates a conducive business environment for small and large businesses,” said Norman Chakanetsa, the NECF Executive Secretary in his welcome remarks.
He said numerous taxes and government levies are levied on the private sector in an effort to raise government revenue. The multiplicity of taxes however, restricts the ease of doing business and competitiveness within the private sector and in the process exacerbating de-industrialisation in Zimbabwe.
“To stimulate industrial growth, there is therefore, a need to have a tax regime that fosters an improved business environment and enables large, medium, small and micro business enterprises to consistently pay tax. The NECF recognises the dichotomy between government’s need to generate sufficient tax revenue and the private sector’s need to reduce the cost of doing business,” Chakanetsa said
The dialogue ran under the theme “Tax For A Competitive Business Environment in Zimbabwe: a Win-win solution” and was meant to integrate recent research evidence on Zimbabwe’s tax environment, new ideas and perspectives from government and the private sector to enable inclusive dialogue to move Zimbabwe forward.
The dialogue aimed to facilitate the co-creation of tax models and strategies that can be applied by Zimbabwe to optimise tax revenue, stimulate economic competitiveness and facilitate vibrant private sector growth for large, medium, small and micro enterprises in Zimbabwe.
Professor Albert Makochekanwa, the Chairman of the Department of Economics at the University of Zimbabwe said the mining sector was one of the important economic sectors in the country as it contributes significantly to economic activities as measured by the gross domestic product (GDP), employment, investments, tax contribution to government revenue and to export receipts.
“The sector is considered as the centrepiece of economic growth in the country. Zimbabwe’s production of minerals is diversified considering the mineral types that are produced, the number of operating mines and the mine production dispersed control. The country produces more than forty (40) different minerals, with an estimated number of operating mines between 800 and 900, ranching from artisanal and small scale mines to world class mines,” Makochekanwa said.
The Economist said the mere fact that mineral resources are finite provides the rationale behind government capturing extra rents whilst the minerals are extant. Several government agencies are involved in the collection of mineral revenue and these include the Zimbabwe Revenue Authority (ZIMRA), local authorities, Environmental Management Agency (EMA), Ministry of Mines and Mining Development (MMMD), Zimbabwe Mining Development Corporation (ZMDC), and the Minerals Marketing Corporation of Zimbabwe (MMCZ).
This has raised concern that the various uncoordinated collections not only compromise viability of the mining sector, but also present transparency and accountability challenges over mineral revenues accruing to the country.
In an effort to redress these challenges government is in the process of reviewing the mining fiscal regime to ensure that the country maximises the benefits from its mineral resources, while at the same time encouraging investment in the sector.
Currently mining companies are subject to the three types of taxation regime, namely Direct taxation, Indirect taxation and Non-tax instruments.
Withholding taxes are payable on dividends remitted outside the country. The withholding tax is levied at 15% for both resident and non-resident shareholders. Currently rates are considered to be high for non-resident shareholders and needs to be reviewed.
Capital Gains Tax (CGT) is a tax levied on the capital gain arising from the disposal of a specified asset. Specified asset means immovable property (e.g. land and buildings) and any marketable security. Pay As You Earn (PAYE) is a method of paying income tax on remuneration whereby the employer deducts tax from salaries or pension earnings before paying the employee the net salary or pension. PAYE is one of the largest contributors in terms of revenue heads.
The AIDS levy pegged at 3% of individual or company assessed income tax was introduced on January 1, 2000 in order to raise funds for HIV/AIDS related support programmes. Prior to 2015, the levy did not apply to tax payable by a company or trust engaged in the mining business. The government has since extended the AIDS Levy to mining companies starting 1 January, 2015.
Indirect taxes include royalties on different minerals payable and are determined by multiplying the stipulated percentage by the revenue generated by each metal.
“A comparison between Zimbabwe’s mining corporate income tax with other mining jurisdictions reveals that most countries apply a standard national rate in the range of 15% to 35% which is in line with Zimbabwe’s corporate tax rate of 25%, although Zimbabwe also offers a reduced rate of 15% to holders of special mining leases, which are mining firms with investment in excess of US$100 million.
“Ghana has the highest corporate income tax at 35%, followed by Australia (30%), South Africa (28%), Burkina Faso (27.5%), Chile (24%) and Canada (15%). Despite Canada appearing to have a low corporate income tax, provincial general corporate income tax and branch profits tax are also levied at mining companies at 11-16% and 25%, respectively. In South Africa corporate income tax is levied at 28% for both resident and non-resident companies, with gold mining companies taxed according to a special formula (Deloitte, 2016),” Makochekanwa said.
He said the main sticking points on the mining fiscal regime in Zimbabwe are the royalty and the multiplicity of the regime in terms of tax heads and collection agencies and regulatory instruments. For some minerals mining royalties in Zimbabwe are high relative to other mining jurisdictions. This coupled with the fact that they are in rem (based on gross revenue, not profit), which makes them an effective variable cost of production, could have resulted in resource sterilisation.
Dr. Gibson Chigumira, the Executive Director of the Zimbabwe Economic Policy Analysis and Research Unit (ZEPARU) said the government should consider setting up a one stop shop facility to aggregate and facilitate the tourism sector licensing requirements without taking away the compliance and supervisory role from the parent government department but to facilitate compliance.
“Government should fully fund tourism related Government agencies from the national budget to prevent the commercialization of the licensing requirements in order to meet operational requirements. This might lead to reduction of fees and levies charged which in-turn can improve sector competitiveness. Rebate to acquire capital goods for the tourism sector should be announced to cover five continuous years as opposed to the current yearly announcement to give operators ample time to plan for recapitalization,” Chigumira said.
He added that there was a need for the establishment of a tax ombudsman to independently arbitrate tax appeals within the tourism sector and urged revisiting of the penalty system, which in some instances lead to garnishing of accounts through negotiating payment plans to foster a win-win outcome between the companies.
Economist Dr. Nyasha Kaseke said there was a need to segment tax collections for small to medium enterprises (SMEs).
“We need to report taxing in terms of classification of business eg Small, Micro, Medium and Large companies. Location Based Collection of taxes in terms of industrial or area of operation is important and so is the use of Advanced ICT and Tax Incentives for SMEs,” Kaseke said.
He also called for the implementation of Inward Processing Rebate (IPR) (S I 59 of 1997) to ease the processing of rebates.