Simbarashe Hamudi
THE concept of a “mining location” is more than just a geographical reference in Zimbabwe’s tax law. It is a foundational principle that determines how income from mining operations is assessed and taxed. Under the Income Tax Act, the distinction between mining income and other forms of income is critical, and the law goes even further by requiring separate assessments for each mining location.
For mining companies operating multiple sites or engaging in additional commercial activities, understanding these provisions is essential to ensure compliance and avoid costly disputes with the tax authorities.
Section 2(1) of the Income Tax Act defines “income derived from mining operations” as income derived from a particular mining location. The same section defines a “mining location” as a mining location registered as such in terms of the Mines and Minerals Act. This definition is significant because it establishes that mining income must originate from a specific, registered site. Unless income has its roots in a registered mining location, it cannot be classified as income derived from mining operations.
This emphasis on a “particular mining location” reinforces the principle that each mining site must be assessed separately. In practical terms, a mining company that operates several registered mining locations cannot aggregate the results of all its sites for tax purposes without restriction. Section 15(1)(c) of the Income Tax Act requires that each independent mining location be assessed separately, even where all locations are owned by the same taxpayer. This creates what is commonly referred to as “ring-fencing.”
Ring-fencing means that the income and expenditure of one mining location cannot automatically be set off against the income or losses of another. If one site is profitable and another is operating at a loss, the loss from the second site cannot simply be used to reduce the taxable income of the first. Each location stands on its own for income tax purposes. The intention behind this rule is to prevent the erosion of tax revenue by ensuring that profits from productive mines are not unduly offset by losses from unrelated or speculative operations.
However, the law does provide limited flexibility. Section 15(2)(f)(i) allows certain allowances and deductions, particularly capital redemption allowances (CRA) provided for in the Fifth Schedule, to be claimed across two or more mining locations under specific conditions. The Commissioner may permit such claims where satisfied that the mining operations conducted on the locations are inseparable or substantially interdependent.
The Finance Act No. 1 of 2019 introduced clarity to this area with effect from January 1, 2018. Previously, the Act did not define what was meant by “inseparable or substantially interdependent,” leading to disputes between taxpayers and the Zimbabwe Revenue Authority (Zimra). The amendment now specifies that the mining locations must be held by the same taxpayer and that the minerals produced at the locations must form part of an integrated process of beneficiation under the control of the taxpayer. This change has brought welcome certainty, reducing friction and providing clearer guidance for mining companies operating interconnected projects.
Beyond the issue of multiple mining locations, the Income Tax Act also distinguishes between mining operations and other trades conducted by the same taxpayer. Section 15(1) (c) states that where a person earns income from mining operations and income from other trades or investments, deductions may only be claimed against the income to which they relate. In other words, mining income and non-mining income must also be ring-fenced from each other.
This provision prevents taxpayers from offsetting mining capital expenditure or losses against profits from unrelated businesses such as manufacturing, retail, or investment activities. Likewise, losses from other trades cannot be used to reduce taxable mining income. The law therefore requires a clear distinction between mining income and non-mining income.
The challenge often lies in determining what qualifies as mining income. The courts have emphasised that there must be a nexus or direct connection between the income and mining operations. In Western Platinum Ltd v Commissioner for the South African Revenue Service 2004 4 All SA 611 (SCA), 67 SATC 1, the court held that income must have a sufficiently close connection with the extraction of minerals from the soil to be regarded as mining income. In that case, the taxpayer, a mining company, sought to deduct mining capital expenditure against interest income earned from various investments, including bank accounts and fixed deposits. The Commissioner denied the claim, and the court agreed that the interest income did not have the required direct link to mining operations.
These cases demonstrate that the phrase “income derived from mining operations” extends beyond the mere sale of minerals. Income will qualify as mining income if it has its roots in mining operations, even if it arises from ancillary or incidental activities. For example, income from the sale of metal scrap generated during the mining process would likely be regarded as mining income if it is ancillary to the extraction and processing of minerals.
Despite the legal requirement for separate assessments, practical challenges remain. In practice, taxpayers who carry on mining operations alongside other trades submit a single income tax return, namely the ITF 12C which is separated as per mining locations in the Zimra TaRMS.
This administrative reality does not override the legal obligation to ring-fence mining income. Taxpayers must maintain separate accounting records and prepare distinct tax computations to demonstrate compliance with Section 15(1)(c) of the Income Tax Act. Supporting schedules and reconciliations should clearly distinguish mining income and expenditure from non-mining income and expenditure. Failure to do so could expose taxpayers to adjustments, penalties, and protracted disputes with the tax authorities.
The taxation of mining operations is therefore governed by a strict and carefully structured framework. The requirement that income must stem from a registered mining location, the separate assessment of each location, and the ring-fencing of mining and non-mining activities all reflect the legislature’s intention to protect the tax base while recognising the unique nature of mining investments.
l Hamudi is tax partner at Baker Tilly Central Africa, based in Harare, Zimbabwe. He can be contacted at +263 775 399 536 or simbarashe.hamudi@bakertilly.co.zw