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New mining tax law could unsettle sector

“Retroactive application of the special capital gain tax to 10 years ago affects transactions undertaken when the law was not there. This may dampen investor confidence and bring about uncertainty over business laws. In my respectful view, the tax ought to be based on capital gain realised or accrued on the transfer of the mining title not the full value of the transaction."

A new special capital gains tax has been introduced where the purchaser of a mining title now has to pay a tax of 20 percent of the value of the transaction.

The new law implemented through Finance Act Number 13 of 2023 and back-dated to 1 January 2014, entails a 20 percent levy on the purchase of the mining title including transactions from the past 10 years.

This could be a major barrier to entry as it makes it more difficult and expensive for companies to enter the Zimbabwean mining sector or expand their existing operations.

A mining title under the special capital gains tax law includes a claim, block of claims, mining lease or special grant and (depending on the context).

It also includes any document evidencing a mining right that is precedent to obtaining any of the foregoing titles, such as an exclusive prospecting license or exclusive exploration license. In addition, it can be a share, stake or interest in any mining title.

The new taxation is different from regular capital gains tax.

It is based on the value of the entire mining title transaction instead of the capital gain made by the seller of the title and unlike most capital gains taxes, it is payable by the purchaser.

It has the characteristics of Value Added Tax (VAT).

The new policy significantly increases the tax burden for the purchaser compared to a traditional capital gains tax where the seller pays based on profit accrued from the transfer of the mining title.

For example, under a typical 20 percent capital gains tax, if the seller of the mining title sells for US$1 million, having purchased it for US$500 000, the tax would be calculated on capital gain of US$500 000 and the tax on the capital gain at the rate of 20 percent will be US$100 000.

However, under the new law, the tax will be US$200 000, being 20 percent of the transaction and borne by the purchaser.

“The need to collect taxes to fund Government expenditure and projects is well understood,” said Godknows Hofisi, the managing partner at Hofisi Partners Commercial Attorneys.

“There is no doubt. Over and above that there is need to strike a balance between current and future revenue collection and the interests of the business and investors,” Hofisi said.

Companies that purchased mining titles in the past decade may not have factored in this additional tax burden, potentially impacting their profitability.

“Retroactive application of the special capital gain tax to 10 years ago affects transactions undertaken when the law was not there. This may dampen investor confidence and bring about uncertainty over business laws. In my respectful view, the tax ought to be based on capital gain realised or accrued on the transfer of the mining title not the full value of the transaction.

“The tax ought to be paid by the seller not a purchaser who is described in the Act as a transferee entity.

“A purchaser does not make a capital gain upon acquiring the right but upon sale unless tax is meant to be in indirect VAT. The law could have been crafted differently.”

A Harare-based corporate lawyer also noted that unlike where the seller who has a capital gain pays the tax, the new policy makes the purchaser, the transferee entity, liable for the special capital gains tax.

It is more akin to a VAT than a traditional capital gains tax,” said the lawyer who declined to be named for professional reasons.

He said the retrospective application of the capital gains tax “creates significant uncertainty for investors.”

“It is a disincentive for new investment and could ultimately harm the mining sector,” he said.

However, some analysts believe the tax aims to deter investors who acquire mining titles solely for speculative purposes, hoping to quickly resell them at a profit without actually developing the resource.

The analysts said this could potentially free up mining titles for more serious investors willing to invest in exploration, development and long-term production.

In interviews, mining analysts said the policy created a substantial financial burden for potential investors. Unlike a traditional capital gains tax based on profit, tax is levied on the entire transaction value, significantly increasing the upfront cost.

“The retroactive application makes it especially risky and undermines investors’ confidence in the long-term stability of the tax regime,” said a representative from a mining consultancy firm involved in Zimbabwe’s and South Africa’s mining sector.

Economic analyst, Carlos Tadya, said while the immediate impact will be felt by investors, “the true cost of this policy could be a decline in exploration and development activity.”

“This could stifle future growth and innovation in Zimbabwe’s mining sector, ultimately harming the economy as a whole.”

Overall, the new law could lead to decreased investment, reduced mining activity and potentially lower government revenue from the sector in the long run.

Apart from 20 percent special capital gains on the value of the transaction, 5 percent is applicable if there is express provision in the mining law for the approval of the Minister responsible for administering the mining law (or by any other person or authority specified in that law) of the transfer of the mining title, according to the new law.

No special capital gains tax applies if the mining title transferred has ceased to exist due to cancellation, forfeiture, surrender or extinction.

Over the past five years, Zimbabwe’s mining sector has witnessed a surge in investment focused on several key minerals.

Leading the charge is lithium, driven by the global demand for electric vehicle batteries. This essential mineral has become a major focus for exploration and development, positioning Zimbabwe to capitalise on the clean energy revolution.

Investment has also reached the iron ore sector, with a significant example being the US$1.5 billion investment in Manhize, Chivhu by a Chinese investor. Iron ore, a vital component in steel production, is another critical mineral found in abundance within Zimbabwe. – (Business Weekly)

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