Mining is one of the sectors that one can describe as the mainstay of the Zimbabwean economy. With optimal and robust taxation, the sector’s contribution to the country’s revenue could be much larger than it is now. For example, in 2019, total mining export receipts peaked at US$2.9 billion and this amount translated to about 55.2% of the country’s total export earnings. Recognising the great potential of mining in increasing the country’s revenue, the President Munangagwa’s government launched the ambitious US$12 billion mining economy by 2023, which is a 344% increase from the US$2.7 billion value as at 2017. 

However, this projection will remain a pipedream unless Zimbabwe arrests rampant IFFs within the mining sector. For instance, in September 2020, the Minister of Home Affairs stated that the country was losing an estimated US$100 million worth of gold every month due to rampant smuggling. This translates to a whooping US$1.2 billion per year, an amount that can adequately finance Zimbabwe’s annual financing needs in the education and health sectors and even some Zimbabwe’s poverty reduction efforts. Some studies have estimated that Zimbabwe lost about $11.2 billion to illicit financial flows between 2009 and 2018. In Zimbabwe, Illicit financial outflows are mainly on account of under-invoicing of mining commodity exports and trade mispricing mainly corporations.


The currently dominant fiscal regime for mining is based on a combination of royalties and corporate income taxes. The income-tax component is problematic, especially in relation to multinational corporations (MNCS), because their income tax liabilities depend on information that corporations are able and motivated to misreport and manipulate – e.g., through artificial transactions among national affiliates of the same MNC – and because it is difficult and costly for tax administrators of poorer countries to correct and deter such deceptive practices through effective legal action. MNCs can afford to hire better lawyers and accountants, and can even employ lucrative offers to induce the best tax administrators to switch sides. 

Moreover, the current system is irrational even under perfect conditions. Consider the hypothetical case of two companies bidding for the same lot of extraction rights. The highest bidder wins, thus ensuring that the selling country collects the highest possible royalties. But the seller’s true interest is not in maximizing royalties but in maximizing revenues, which also include corporate income taxes. If the highest bidder is a substantially less efficient extractor than the other bidder would have been, then the selling state loses more from suboptimal corporate income tax collection than it gains from optimal royalty collection.

QUESTION: How can the dominant fiscal regime for mining, based on royalties and corporate income tax, be improved, in design, implementation and effectiveness, especially for resource-rich developing countries? Are there alternative options available to resource-rich countries to maximize the revenues from their mineral wealth?

PROPOSAL: Developing countries should not tax the profits of natural-resource extracting firms at all. They should instead simply charge for a carefully formulated right of natural-resource extraction. This charge could be called a tax or fee or royalty, as convenient; and it should be determined through a competitive bidding process. The lots to be auctioned could be defined through spatial, temporal and (optionally) quantitative limits. Bids for particular lots could be formulated to take account of the quantity extracted and the relevant world market price during the custodial period. Bidders should be free to formulate their bids within a straightforward grid of parameters and be free also to submit several bids for the same lot (differing perhaps in their sensitivity to the quantity extracted or to the evolution of the world market price of the extracted resource). An independent expert committee should determine which bid promises the best revenue stream for the selling state.

The reason for giving firms the option to enter several competing bids is to elicit information about their attitudes to risk and predictability. For example, a firm may enter one bid involving a fixed charge per resource unit extracted and another bid involving a variable charge tied to the average world market price during the contract period. A comparison of these two bids reveals the company’s degree of aversion to risk from a decline in world market prices. The selling government can then accept the fixed-charge-per-unit bid if and only if it determines that it is more capable of shouldering this market-price risk than the company is revealing itself to be. Similar considerations apply to other kinds of risk, for instance the risk of quantitative shrinkage. If the selling government anticipates that it will have a hard time ensuring that extracted quantities are accurately measured and fully paid for, it may prefer a bid that offers a charge that does not depend on quantity (allowing the bidder, for one fixed payment, to extract all it can from the relevant site in the allotted time period). All such discrepant risk preferences between seller and buyer provide opportunities for additional efficiencies that increase the cooperative surplus generated by their transaction and hence the revenues the selling state can capture from it.   

COLLABORATIVE IMPLEMENTATION:  The revenue-enhancing effect of the proposal can be magnified through various supplementary efforts, especially through collaboration among resource-rich countries toward joint deceleration of sales and consequent ecological benefits. In theory, it makes sense for a resource-rich country to exploit its natural resources quickly because it can then invest the revenues into its development and thereby achieve a return above the rate of inflation in the price of the resources in question. In practice, however, two factors upset this conclusion: resource revenues are often poorly spent or even stolen; and a rush by many well-endowed countries to sell their natural resources results in these sales being consummated at depressed prices. Resource-rich countries are better off agreeing to maintain a slower sales pace: so as to fetch higher prices and to stretch out their resource income farther into the future. Such a collaboration (for which OPEC provides an imperfect model) can be extended to the idea of combining royalties and corporate income taxes into a single charge determined by auction: resource-rich developing countries are more likely to get buyers to accept such reformed arrangements if they join forces to hold out for them.

IMPACT: Relative to the status quo, the proposed policies would significantly increase realized per-unit revenues from natural-resource sales. They would also terminate the artificial advantage in competitiveness that shady corporations – those especially willing and able to use dubious accounting gimmicks to reduce or eliminate their corporate income tax liabilities – currently enjoy over their competitors. As things now stand, such shady firms can often submit higher bids for natural-resource lots in confident anticipation of their tax avoidance strategies. Under my proposals, they will lose this advantage.

A welcome effect of this is the strengthening of domestic resource extraction firms. Such firms are currently disadvantaged because they do not have, and cannot cost-effectively acquire, international profit-shifting opportunities involving tax-haven subsidiaries. Remove this unfair disadvantage and you will find such firms emerging and thriving, able to hold their own against MNCs. This in turn would have a positive impact on domestic skills and employment, seeing that MNCs are typically more prone to employ foreigners for the more highly-skilled positions.

These changes in the distribution of advantage among natural-resource-extracting firms would also reduce the likelihood of collusion. Shady firms that go to great lengths to dodge taxes are likely also to be tempted toward other shady practices such as collusion (“we let you put in the winning bid for this lot if you let us put in the winning bid for that one”). Once such shady firms become less dominant, their collusion efforts are more likely to fail because of the presence of other bidders.

Leave a Reply

Your email address will not be published. Required fields are marked *