Taxation of Mining Companies in Zimbabwe

⛏️ Taxation of Mining Companies in Zimbabwe: The Fifth Schedule Advantage

The mining industry in Zimbabwe operates under a unique tax regime, codified primarily in Section 15(2)(f) read with the Fifth Schedule of the Income Tax Act [Chapter 23:06]. While a miner’s assessment largely follows the principles of a corporate trader, specific, favourable exceptions are granted to recognise the capital-intensive and depleting nature of the business.

I. Favourable Tax Provisions for Miners

Miners enjoy several advantages compared to standard corporate taxpayers:

• Corporate Tax Rate: Mining companies are taxed at a corporate rate which has historically been set to encourage investment, currently standing at 25% (as of the latest Finance Act changes) on their taxable income. Holders of a Special Mining Lease (SML) are subject to a preferential rate of  15% (though this may attract Additional Profits Tax).

• Assessed Losses: Assessed losses from mining operations may be carried forward for an indefinite period, unlike the restrictions faced by other traders (Section 15(3)).

• Housing Allowance: The cost restriction on houses built for mine employees to qualify for capital allowances is typically less restrictive than for non-mining businesses. Specifically, houses for mine employees generally do not have the strict cost limit (e.g., $3,000,000) applied to other corporate staff housing, though houses for ancillary services like nurses and teachers may have a restricted cost of $1,000,000.

• Ring-Fencing: With effect from January 1, 2001, the principle of ring-fencing was introduced, requiring each mine to be assessed separately. This prevents losses from an unprofitable mine from being offset against profits from a profitable mine, ensuring earlier revenue collection for the fiscus.

   

II. The Heart of Mining Tax: Capital Redemption Allowance (CRA)

The most significant difference lies in how capital expenditure is claimed. Miners do not claim standard Special Initial Allowance (SIA) or Wear and Tear (Depreciation); instead, they claim the Capital Redemption Allowance (CRA).

Capital Expenditure (CE) is defined broadly to include expenditure on mine buildings, works or equipment, lease premiums, shaft sinking, and general development costs. CRA is granted only after the mine reaches the production stage.

There are three methods for calculating CRA:

A. New Mine Basis

This method offers the maximum allowance and is available to a person who conducts mining operations in a new mine (or one that has been reopened or substantially re-organised).

• Election: The miner must elect to use this method.

• Deduction: The miner is allowed to deduct 100% of all capital expenditure (accumulated pre-production and current year post-production expenditure) in the year of assessment in which production commences.
• CRA = {Unredeemed Balance b/f} + {Current Year Capital Expenditure}

B. Life of Mine Basis

This is the default method if no election is made, and it generally provides the minimum allowance.

• Life of Mine: The taxpayer must make an estimate of the mine’s life span, certified by an expert and approved by the Commissioner.

• Deduction: The CRA is computed by spreading the total redeemable capital expenditure over the estimated life of the mine.
• CRA = (Unredeemed Balance b/f} – {Recoupment)} + {Current Year Capital Expenditure}}{{Life of Mine (in years)}}

• Note: Life of Mine is computed from the beginning of the current year of assessment.

C. Mixed Basis

This method is a hybrid, granting an immediate $100\%$ deduction for current capital expenditure while spreading the accumulated unredeemed capital expenditure over the life of the mine.

• Deduction:CRA = {Unredeemed Balance b/f} – {Recoupment}}{Life of Mine}} + {Current Year Capital Expenditure}

III. Other Key Tax Provisions

A. Recoupment (Section 8(1)(i))

When a mining asset is sold, any resulting recoupment (sale proceeds less unredeemed balance) is treated as follows:

• New Mine Basis: Recoupment is simply the sale proceeds (not restricted to allowances previously granted) and is brought directly into gross income.

• Life of Mine/Mixed Basis: The recoupment is offset first against the unredeemed balance of capital expenditure. Only the excess recoupment (if any) is then brought into gross income.

• Exception: Where an asset subject to a replacement election or a claim for recovery from insurance is sold, the recoupment is generally restricted to the allowances previously granted.

B. Prospecting Expenditure (Section 15(2)(f)(ii))

Expenditure incurred by the miner in searching for minerals is allowable in the year it is incurred. If there is insufficient income to cover this expenditure, it may be carried forward and allowed against subsequent income from the mining operations.

C. Replacement Election (Paragraph 6, Fifth Schedule)

A miner with a producing mine, regardless of the CRA basis chosen, may elect to deduct the cost of replacing any capital asset in full in the year the cost is incurred, provided the cost does not exceed a specified threshold ( subject to periodic statutory review).

D. Anti-Avoidance Measures

Recent legislation has introduced measures to address Base Erosion and Profit Shifting (BEPS) risks in the mining sector:

• Thin Capitalisation (Interest): Interest paid by a local subsidiary to a foreign holding company for debt financing mining income is disallowed as a deduction to the extent the debt-to-equity ratio exceeds 3:1. The disallowed interest is then treated as a deemed dividend, attracting non-resident shareholders’ tax.

• Management Fees: General administration and management fees paid by a local subsidiary to a foreign Head Office are restricted as a deduction to a percentage (e.g., 0.75% pre-production and 1% post-production) of the total qualifying expenditure less certain expenses.

IV. Cessation of Mining Operations

The treatment of the unredeemed balance of capital expenditure (UBCE) upon cessation depends on the reason:

• Life of Mine End/Concession Expiration: The full balance of the UBCE is allowable as a deduction in the year of cessation.

• Abandonment/Forfeiture: The UBCE is not deductible unless the miner can demonstrate a material change of circumstances necessitating a revision of the mine’s life.