Zimbabwe’s mining sector, which has seen a surge in investment in recent years, could be facing a significant hurdle with the introduction of a new special capital gains tax. The tax, revealed by Business Weekly, imposes a 20% levy on the purchase of mining titles, including transactions dating back to 2014.
This new policy is raising concerns among industry experts who fear it could discourage investment and stifle growth. Godknows Hofisi, managing partner at Hofisi Partners Commercial Attorneys, highlighted the potential impact on profitability for companies that acquired mining titles in the past decade without anticipating this additional tax burden. “There is a need to strike a balance between current and future revenue collection and the interests of the business and investors,” Hofisi said.
The retroactive application of the tax is a particular point of contention. “Retroactive application of the special capital gain tax to 10 years ago affects transactions undertaken when the law was not there,” Hofisi argued. “This may dampen investor confidence and bring about uncertainty over business laws.”
Another concern is that the tax falls on the purchaser, the “transferee entity” as defined in the Act, rather than the seller who actually makes the capital gain. A Harare-based corporate lawyer, who wished to remain anonymous, pointed out this distinction. “The new policy makes the purchaser…liable for the special capital gains tax. It is more akin to a VAT than a traditional capital gains tax,” the lawyer said.
This shift in who pays the tax, combined with the upfront cost of the levy based on the entire transaction value, creates a substantial financial burden for potential investors according to mining analysts interviewed by Business Weekly. “Unlike a traditional capital gains tax based on profit, tax is levied on the entire transaction value, significantly increasing the upfront cost,” a representative from a mining consultancy firm said.
The long-term consequences of the policy are also a cause for concern. “The retroactive application makes it especially risky and undermines investors’ confidence in the long-term stability of the tax regime,” the consultancy representative added. Economic analyst Carlos Tadya echoed this sentiment, predicting a decline in exploration and development activity that could ultimately harm the entire economy. “The true cost of this policy could be a decline in exploration and development activity,” Tadya said. “This could stifle future growth and innovation in Zimbabwe’s mining sector, ultimately harming the economy as a whole.”
While the government aims to collect more tax revenue and potentially deter speculative investors, the new policy may achieve the opposite. By discouraging investment and hindering exploration and development, the special capital gains tax could lead to decreased mining activity and ultimately lower revenue for the government.