Staff Writer 
Simbarashe Hamudi
ZIMBABWE’S tax framework for large-scale mining projects contains a highly specialised regime governing how income, deductions, taxable income and assessed losses are calculated for holders of special mining leases. Set out in the 22nd Schedule to the Income Tax Act, the provisions create a distinct tax code for mining operations conducted under special mining leases, reflecting the capital-intensive and long-term nature of the sector.
The Schedule begins with a broad set of definitions. It distinguishes between exploration expenditure and development expenditure, collectively described as capital expenditure. Exploration expenditure includes costs incurred in searching for minerals, such as geological, geophysical, geochemical, aerial, magnetic, gravity and seismic surveys. It also includes feasibility studies and environmental impact studies related to proposed mining or development operations.
Development expenditure, by contrast, relates to preparing a mining area for production. It includes the sinking of shafts, installation of machinery, construction of mineral production and treatment facilities, and the building of offices, residential units, schools, hospitals, clinics, roads and related infrastructure. The Schedule also recognises environmental protection measures as development expenditure where they are undertaken under a mining development plan approved by the Minister responsible for the Mines and Minerals Act.
Income attributable to special mining lease operations is not limited to cash sales. The Schedule includes the fair market value of chargeable minerals disposed of during the year of assessment. Minerals are treated as disposed of not only when sold, donated or bartered, but also when used to repay loans, appropriated for refining or processing in Zimbabwe, or exported before being sold. This ensures that minerals cannot escape the tax net merely because they are processed, exported or transferred before a conventional sale occurs.
Insurance recoveries are also included. If chargeable minerals are lost or destroyed and the holder receives compensation under an insurance policy or otherwise, that amount forms part of income attributable to special mining lease operations. The Schedule further includes interest or similar amounts connected with mining operations, as well as recovered or recouped deductions that were previously allowed.
A key feature of the regime is the role of the Commissioner in determining fair market value. Where a special mining lease agreement provides criteria for valuing minerals, the Commissioner applies those criteria. Where no such agreement or criteria exist, the Commissioner establishes value under prescribed rules. This mechanism is important in a sector where related-party transactions, export arrangements and mineral processing structures can complicate valuation.
The Schedule also sets out general deductions. A lease holder may deduct expenditure and losses, other than capital expenditure, incurred wholly and exclusively for special mining lease operations. Deductible items include interest and borrowing costs, royalties payable to the government on minerals won, commission payable to the Minerals Marketing Corporation of Zimbabwe, and other qualifying expenses. It also allows a training investment allowance equal to 50 percent of the cost of a qualifying training building, improvements to such a building, or qualifying training equipment brought into use during the year.
However, the deductions are tightly controlled. Where expenditure is incurred partly for mining operations and partly for another purpose, only the portion wholly and exclusively incurred for special mining lease operations may be deducted. The Schedule also allows assessed losses from the previous year to be carried forward and deducted after the current year’s allowable deductions have been applied.
Capital expenditure receives separate treatment. Exploration expenditure incurred in or before the year of production may generally be deducted in full in the year of production. Development expenditure is spread over four years, with one quarter deductible in the year of production and one quarter in each of the following three years. Similar rules apply to post-production expenditure: exploration costs may be deducted in full in the year incurred, while development expenditure is generally deducted over four years.
The Schedule also addresses exploration expenditure incurred before the issue of the special mining lease. In certain circumstances, exploration costs incurred within six years before the lease was issued may qualify for deduction, particularly where the exploration area and lease area were linked through an exclusive prospecting order under the Mines and Minerals Act. Conditions include approval by the Mining Affairs Board and confirmation that the expenditure has not already been deducted against other income.
Interest deductions are also restricted. Borrowing costs are deductible only where the Commissioner is satisfied that the loan or credit is used for special mining lease operations. Deductions may be denied to the extent that interest exceeds an arm’s-length commercial rate or where borrowing expenses exceed what independent parties would have agreed. For development loans, expenditure may be disallowed if it is not incurred under an approved financing plan or if debt exceeds specified debt-to-equity limits.
There are also caps on deductions for residential units, passenger motor vehicles, and buildings used as schools, hospitals, nursing homes or clinics. These provisions are intended to prevent excessive deductions for non-core or ancillary assets, even where they are connected to mining communities. For schools and medical facilities, additional conditions apply, including requirements that more than half the users be employees of the mining lease holder or their families.
The transfer of a special mining lease is also regulated. Where a lease is transferred wholly or partly, the transferor and transferee must jointly provide the Commissioner with a written statement within 30 days identifying relevant assets and allocating consideration or value to those assets. If the Commissioner accepts the statement, the amount may rank as exploration or development expenditure for the transferee and as a recovery of capital expenditure for the transferor. If not, the Commissioner may determine the value.
The Schedule further requires recoupment where assets previously qualifying for deductions are disposed of, lost, destroyed or transferred. In such cases, income attributable to special mining lease operations includes the amount of the deduction recovered or recouped. This prevents a taxpayer from obtaining a deduction for an asset and then avoiding tax when value is later recovered.
Compliance obligations are significant. Holders of special mining leases must file returns separately identifying income attributable to special mining lease operations. Required disclosures include the quantity of chargeable minerals won, quantities disposed of, the manner and fair market value of each disposal, minerals lost or destroyed, insurance recoveries, allowable deductions claimed, relevant assets, and tax payable. The Commissioner may also require additional information.
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
