Additional profits tax on special mining lease areas

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Simbarashe Hamudi

ZIMBABWE’S mining tax regime contains one of the most technical but important revenue mecha­nisms in the Income Tax Act: the 23rd Schedule, which deals with the deter­mination of additional profits tax in re­spect of a special mining lease area. This schedule applies to holders of special mining leases and is designed to ensure that where a mining project becomes ex­ceptionally profitable, the State receives an additional share of the proceeds.

In a country where mining plays a major role in economic activity, export earnings and public revenue, the addi­tional profits tax system reflects the con­tinuing effort to balance investor incen­tives with national fiscal interests.

A special mining lease is generally associated with large-scale mining op­erations requiring substantial capital in­vestment, long exploration periods and major infrastructure development. Such projects often involve high risks in their early stages, including geological uncer­tainty, fluctuating mineral prices and the need for expensive machinery, process­ing plants and supporting facilities.

For this reason, the tax law recog­nises that investors must first recover qualifying expenditure before being subjected to additional taxation. The 23rd Schedule therefore does not simply impose a tax on gross mining revenue. Instead, it creates a structured formula that measures the project’s accumulated cash position over time.

An “allowable deduction” generally refers to a deduction permitted under the 22nd Schedule in respect of expenditure incurred. However, the 23rd Schedule expressly excludes certain deductions from being treated as allowable deduc­tions for its purposes. These include ex­penditure of a specified kind under the 22nd Schedule, training investment al­lowances and capital redemption allow­ances. The effect of these exclusions is to protect the additional profits tax base from being reduced by deductions that the legislature considered unsuitable for this special calculation. This distinction is important because an amount may be deductible for ordinary tax purposes but not necessarily deductible when deter­mining additional profits tax.

The concept of “net cash receipts” is the foundation of the entire system. For each year of assessment, the net cash re­ceipts from a special mining lease area are determined by deducting specified amounts from specified income. The re­sult may be either positive or negative.

This is significant because mining projects often produce negative cash positions during exploration and devel­opment before sales begin. The schedule allows these early negative positions to be recognised in the calculation so that additional profits tax is not imposed be­fore the project has moved beyond cost recovery and into genuine surplus prof­itability.

The income included in calculating net cash receipts covers amounts accru­ing from special mining lease operations in the relevant area. It may also include certain amounts connected to other spe­cial mining lease areas where the law permits such treatment. In addition, pro­ceeds from the sale of material, equip­ment, plant, facilities, data, information, intellectual property or rights may be included where their acquisition costs were previously deducted in calculating net cash receipts.

Amounts of a capital nature, or con­tributions received from any person for the use of facilities, may also be includ­ed if they are not already covered else­where. This broad approach prevents taxpayers from excluding significant economic benefits merely because they are not ordinary sales revenue.

On the deduction side, the schedule allows expenditure incurred or deemed to have been incurred by the holder of the special mining lease, provided the Commissioner determines that the ex­penditure is attributable to the relevant special mining lease area. It also allows income tax paid for the year of assess­ment on taxable income attributed to the area, as well as capital expenditure incurred solely in relation to the special mining lease area where such expendi­ture is deductible under the 22nd Sched­ule. Exploration capital expenditure in­curred before the first year of assessment is deemed to have been incurred in the first year of assessment for special min­ing lease operations and is deducted in full in the year in which it is incurred or deemed incurred.

The schedule also contains rules for holders of more than one special mining lease. Where income cannot be attribut­ed exclusively to one special mining lease area, it may be treated as accruing in equal parts from each of the areas. Where deductions relate to expenditure not incurred exclusively for one area, the deductions must be apportioned be­tween the leases in proportion to the in­come generated from each special min­ing lease area. These rules are designed to prevent manipulation of income and expenses between projects.

Without such provisions, a taxpayer could potentially shift costs to a profit­able lease area or allocate income in a way that reduces additional profits tax.

The schedule centres on calculat­ing the first and second accumulated net cash positions for a special mining lease area, beginning in the first year of assessment and continuing each year thereafter. The first position is calculated by taking the previous year’s balance, adjusting it by a benchmark rate and the Price Index, and adding current net cash receipts. The default benchmark rate is 15 percent, unless the lease agreement provides otherwise. This acts as a min­imum return threshold before additional profits tax applies. The second accumu­lated net cash position is calculated sim­ilarly but uses a higher benchmark rate of 20 percent, unless otherwise agreed. It also deducts any additional profits tax arising from the first position. This cre­ates a higher profitability threshold and gives the regime a progressive structure, allowing cost recovery and ordinary re­turns before heavier taxation applies.

The Price Index, based on the United States Industrial Goods Producer Price Index reported by the IMF unless re­placed by ministerial notice, adjusts for price changes over time. This is import­ant for long-term mining projects. If ei­ther accumulated position becomes pos­itive, it is treated as nil for the next year, preventing repeated taxation. Additional profits tax applies to positive balances, with further tax of 27,778 percent on any positive second position.

In conclusion, Zimbabwe’s addition­al profits tax ensures that special mining lease holders contribute more when proj­ects achieve exceptional profitability. By recognising costs, benchmark returns and price changes, the regime protects investors while securing public reve­nue. Its progressive structure supports fairness, fiscal stability and responsible exploitation of the country’s mineral re­sources.

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