Zimbabwe: Ministerial Powers to Grant Tax Incentives Prone to Abuse - Zela

2 March 2021

The granting of tax exemptions to Great Dyke Investment (GDI) reflects unlimited ministerial powers which can be abused if there are no 'clear and published guidelines' on the granting of tax incentives, a local environmental lobby group has said.

In an analysis of the tax exemption policy, the Zimbabwe Environmental Law Association (ZELA) said the lack of transparency and access to information in the mining sector fuels suspicions and makes it difficult to estimate the potential revenue loss.

ZELA said the GDI tax exemption saga is complicated by lack of 'public disclosure of the beneficial registry, a situation that can lead to corruption and money laundering' and fuel Illicit Financial Flows (IFFs).

"Given the opaqueness of the extractive sector, it is very difficult to identify the persons who control the platinum mining project. Secretive corporate structures and anonymous business entities scattered in various jurisdictions are a breeding ground for tax evasion and profit shifting to tax havens.

"There are risks of Illicit Financial Flows (IFFs) in the project as it is alleged that the biggest shareholder of the Landela Mining Venture Limited (Sotic International) is linked to Mauritius, which is a known tax haven.

"The major challenge is that negotiation and performance monitoring of contracts or agreements that the government sign with foreign investors is secretive prompting the public to suspect that the deals are targeted to benefit the investors at the expense of the country and a sense that the burden of taxation is unfair. To increase contract transparency, parliament should exercise its oversight role through contract performance monitoring and during approval of agreements with foreign entities and organisations.

"Parliament's oversight is critical in ensuring that bad deals are avoided as both government and corporate negotiators will be aware that there is a third eye watching. The parliament must access the contract signed with the Russians and investigate it," said ZELA.

ZELA said while the Minister of Finance may grant tax incentives to investors, he can also use discretionary powers without due diligence, as could be the case with this exemption, which raises transparency concerns.

"As it stands, the agreement in terms of which the exemption was made, was not made public by the government thus limiting the ability of citizens and CSOs to hold the government to account. So it is difficult to say that there was merit in government granting the income tax exemption because there is no public disclosure of the terms and conditions that were agreed upon.

"The sheer size, at least on paper for now, of the investment and its potential to provide huge economic benefits to the country could have significantly influenced the decision to warrant the project a Special mining lease.

"However, the discretionary powers given to the Minister and President ( in case of the Mines and Minerals Act) to grant tax exemptions can be easily abused in a political and economic context where contract disclosure is lacking and where political actors may hold economic interests or intend to benefit from the tax exemptions.

"Dyke Investment a tax incentive are not clearly stated. The good intentions of this exemption can be theoretically deduced. However, the possible abuse of discretionary powers can also be deduced. The discretionary powers given to the Minister may lead to unjustifiable tax exemptions," read part of the statement.

The Ministry of Finance and Economic Development granted a 5-year tax exemption GDI on the 27th of January 2021 through a Statutory Instrument 26/20211 cited as Income Tax (Exemption from Income Tax) (Great Dyke Investments (Private) Limited) Notice, 2021, effective from 1 January 2021.

The move will see the platinum mining company being exempted, on three fronts, from paying, income tax for a period of five years, forego paying resident shareholders' tax payable on dividends paid to its shareholders resident in Zimbabwe and any additional profits tax.

ZELA called for the Ministry of Finance to 'urgently develop Guidelines on granting incentives for investors including those for the mining sector, or if the guidelines already exist, they should publish them to promote transparency and accountability'.

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