The missing diamond revenues: A need for transparency and tax reforms in the Zimbabwean Mining Sector

Zimbabwe is home to a vast amount of precious mineral resources and gemstones. With a range of companies conducting mining operations in Zimbabwe, the country needs an effective taxation system to get the most out of these minerals. The mining industry has also shown some growth over the past few years whereas, the Zimbabwean economy in general, has failed to score any significant growth since recovering from the hyperinflation that began around 2000. The country faces many challenges including high levels of unemployment, heavy financial debt, cash shortages, uncertain investment policies, international sanctions, slow economic growth and an uncertain political climate. Growth in the economy is therefore desperately needed.

In the midst of all these challenges, the president claimed in 2016, on state television, that whereas the diamond industry had supposedly earned over $15 billion during the 2016 financial year, the country had not benefited from these earnings. The accuracy of these claims is questionable, with some reports indicating that the revenues from the diamonds industry were not being processed properly. In 2011 already, the former Minister of Finance Tendai Biti disclosed that proceeds from diamond sales were not being remitted to the treasury.[1] More recently, Member of Parliament James Maridadi lamented the situation at the Ministry of Mines and Development and specifically referred to missing diamond revenues. 

The story of the missing diamond revenues testifies to the inadequacy and lack in transparency of the current taxation system. In 2015, the Minister of Finance announced that the government was working to introduce a new, more transparent, mining taxation system. The Minister did not explicitly address the lack of transparency in the handling of revenue from the sales of diamonds, but he did raise other concerns: On the one hand, the current mining fiscal regime is making too many concessions to mining companies in attempts to attract investment. On the other hand, concern is raised over allowing many government agencies to claim various levies from mining companies – making it difficult to determine incoming revenue.

The move to introduce a new taxation system for the mining sector comes at a time when the government is also looking at expanding its mineral beneficiation through the processing of minerals like platinum and chrome within the country.[2] Whilst these beneficiation plans are noble, they may amount to nothing if the taxation system is ill equipped to get the most from the sector.

The current fiscal and taxation system in Zimbabwe must conform to section 298 of the Constitution of Zimbabwe.[3] Section 298 provides that public finance management must be underpinned by transparency and accountability and that the burden of taxation must be shared fairly. Section 243 of the Mines and Minerals Act,[4] which deals at length with the payment of royalties by mining companies, therefore, must also be read to be in line with this constitutional provision. Irrespective hereof, currently, there is no publicity in the determination by the Minister of royalties’ payable by mining companies.[5]

In spite of the Constitutional promotion of transparency in taxation, it, therefore, seems that transparency is not at the order of the day and that any new taxation regime will have to do more to promote transparency. In drafting the new taxation system, the EITI principles can provide guidance to promote an open and accountable management of the mineral resources.

The EITI principles, which form part of the EITI standard, promote, amongst other aspects, the accountability and transparency of governments and mining companies regarding mining operations, contracts and revenues obtained from the extractive industry. It can be argued that these principles of the EITI are already underscored within the Constitution, but Zimbabwe has not adopted the EITI principles.

Increased transparency, in this instance regarding what the government is earning from mining contracts, not only instils public confidence within the sector but can also help in attracting investment. Furthermore, promoting transparency will inevitably prevent corruption, which has resulted in Zimbabwe losing about US$144 billion since 2009 in potential revenue from the mining sector. Countries that have adopted the EITI have been reported to do much better than those without, in terms of revenue management [https://eiti.org/sites/default/files/migrated_files/progressreport.pdf]

Zimbabwe faces many challenges with corruption, poor public financial management and an ineffective taxation system acting as major inhibitors for the mining sector to realize its full potential.[6] Since the announcement by the Minister of Finance to introduce a new taxation system in the mining sector, nothing has been done to introduce these reforms. It is hoped that the principles underpinning public finance administration as provided for in the Zimbabwean Constitution and the EITI principles will guide the legislator in drafting, and finalizing, the amendments as soon as possible.

Written by Godknows Mudimu