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Economy

Treasury loses ZW$112bn to dodgy crony tax exemptions

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TREASURY, always in financial dire straits, lost about ZW$112 billion in potential revenue last year (approximately US$1.3 billion on the official exchange rate) through tax expenditures consisting of uncollected tax due to exemptions and incentives to corporates, including dodgy companies, an official Zimbabwe Revenue Authority (Zimra) report says.

DUMISANI NYONI

If value-added tax (Vat) refunds are included, the figure rises up to ZW$118 billion. This was a dramatic 555.79% increase in the loss from 2019’s ZW$17.01 billion. The ZW$112 billion loss could have built road, dams, schools, hospitals, fix water systems and sewage reticulation, while ensuring improved social service delivery. It could also be used to fixed some ailing utilities.

Tax expenditures, also consisting of trade agreements or concessions, are similarly known as revenue foregone. Annual foregone revenue for 2020 comprised ZW$76.76 billion and ZW$34.79 billion from domestic taxes and trade taxes respectively.

This comes Zimra, and by extension Treasury, also lost ZW$6 483 624 570.48 in Vat refunds precipitated by Covid-19. The tax collector last year responded to Covid-19 by increasing Vat refunds from an average of 19% between January and March to as much as 51% in April, averaging 21% by the end of the year.

The total amount of foregone revenue and Vat refunds becomes ZW$118 billion. Zimra’s actual net revenue for 2020 was ZW$182 billion against a target of ZW$172 billion.

The ZW$181.9 billion collected was 5.85% above target. This included US$791 million in foreign currency collections. It represented 74.93% growth over 2019 when inflation peaked 785% in May last year before going down to 50% in August this year.

In a bid to attract investment, the government has been offering tax incentives to some foreign companies, a move once described by the economic and social justice watchdog, the Zimbabwe Coalition on Debt and Development, as harmful and unfair.

For instance, last year the government exempted Chinese telecommunications giant Huawei Technologies from paying income tax dating back 11 years to December 2009.

In January this year, Great Dyke Investments, which is developing a platinum mining project in Darwendale, Mashonaland West province, was granted a five-year tax exemption by the government. This was done by Finance minister Mthuli Ncube (pictured) through an Extraordinary Government Gazette dated 27 January 2021.

GDI is a joint venture between Russia’s Vi Holdings and Zimbabwe’s Landela Mining Venture (Pvt) Limited. It is reportedly investing US$3 billion into platinum mining. Exemptions to run until 2025, include income tax and tax on dividends earned by shareholders.

Landela Mining Venture is owned by a Zimbabwean business magnate Kudakwashe Tagwirei, President Emmerson Mnangagwa’s close ally.

The government has also said it will offer tax incentives to companies operating in the special economic zones in certain industries such as manufacturing as a way of attracting foreign direct investment.

Tax incentives, according to experts, refer to a deduction, exclusion, or exemption from a tax liability, offered as an enticement to engage in a specified activity such as investment in equipment goods for a certain period.

Zimra acting commissioner-general Rameck Masaire said in the tax collector’s 2020 annual report released last Thursday:

“Out of the ZW$76.76 billion revenue foregone, which is 38% of potential for the year, 69% was in respect of domestic taxes, while 31% was in respect of trade taxes.”

Masaire said the authority swiftly responded to Covid-19 by increasing Vat refunds from an average of 19% between January and March last year, to as much as 51% in April, averaging 21% by end of year.

So far, Zimra has managed to surpass the net revenue target for the first half of 2021 despite the constant interruptions to business brought by the Covid-19-induced lockdowns.

In the first half of this year, net revenue amounted to ZW$195.18 billion against a target of ZW$180.45 billion, an 8.16% above target. Going forward into the second half of 2021, Zimra said it was confident of exceeding the remaining period’s targets, which will ultimately lead to surpassing the 2021 annual net revenue target of ZW$387.4 billion.

However, Zimcodd said in a report government should stop granting tax incentives to multinational companies as this was not in the spirit of tax justice, constitutionalism and progressive taxation in the country.

It said due to such practices, global inequality has increased by 11% in the recent past. The United Nations Development Programme indicates that the richest 10% have up to 40% of global income whereas the poorest 10% earn only between 2% and 7%.

“For there to be equality, we argue that there is a need for just and equitable distribution of the tax burden through the introduction of a wealth tax to ensure that the richest pay a fairer share of the resources required to ensure sustainable and inclusive growth,” the civil society group says.

“There is an urgent need for the government of Zimbabwe and other African governments to stop giving out harmful tax incentives to multinational companies.”

Zimcodd said it is a huge contradiction that corporates get tax exemptions, while the general citizenry is burdened by many taxes, further fuelling inequality.

The move to offer tax incentives to foreign companies was described by the then Zimra commissioner-general Gershem Pasi in 2015 as tantamount to surrendering the country’s taxing rights and would negatively impact on socio-economic development.

Pasi then said tax incentives mostly resulted in benefits accruing to the country of origin of the concerned companies, not the host country.

Tax, in most countries, is the main source of government income.

According to the Heritage Foundation Report (2012), tax in Zimbabwe contributes 49.3% of gross domestic product and in South Africa it contributes 26.9%. This shows in Zimbabwe tax contributes a large chunk of income towards the fiscus.

Meanwhile, Zimra revealed that the outstanding debt position as at 31 December 2020 closed at ZW$8.669 billion, which translates to a debt-to-revenue ratio of 3% against a target of 5%, a decrease from 21% in 2019.

Despite the increase in debt from ZW$4,791 billion, the authority said debt-to-revenue ratio improved due to increased revenue collected during the year.

Masaire said the authority continued with its drive of broadening the tax base through new registrations. “Active taxpayer education and engagement programmes implemented resulted in 21 643 new registrants who contributed ZW$558.234 million (19.48%). Management also enhanced the project on integration of databases between government agencies to facilitate registration in sync with the government`s thrust of widening the tax base,” he said.

 

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