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Friday, 9 May 2008

Lumwana & The New Mining Tax

The latest Equinox presentation on Lumwana was released this week. You can access it here. As always very visual, with interesting facts and figures e.g. Lumwana will add 35% to Zambia's copper mining tonnage in 2009 - equivalent to $1.4bn of additional copper revenues. The most eye catching section is on page 36, on "Zambia Tax Issues" which suggests the Equinox DA is still in force:

History of Tax Concessions:

  • Implemented in mid-1990s – early-2000s
  • Copper prices < $0.60/lb meant mines losing money – privatization process

But since Copper prices jumped in 2003:

  • Operating mines have made massive profits
  • This created the political imperative for “a better return to the Zambian people”

Tax Package introduced April 2008:

  • 30% Corporate Tax – 3%
  • Royalty Variable Profits Tax – Windfall Profits Tax (Cu prices >$2.50/lb)
  • Reduced capital write down – 25% per year

However, Equinox has a Development Agreement (“DA”):

  • Legally binding DA signed in Dec 2005 (already high Copper prices)
  • Lumwana is ‘greenfields’ development – unlike other mines that acquired existing operations and infrastructure
  • Equinox has not been making ‘windfall profits’ – it has been investing $800m
  • Zambian Government recognises that Lumwana is different

The terms of the Equinox DA have been applied to date and the Government continues to do so

17 comments:

  1. This is what I don't get:

    The idea of mining companies (or any other company for that matter) not paying Corporate or even Royalty Tax while they're not making profits makes total sense to me. However, why sign secret and specific DAs instead of changing the law code so that it actually takes into consideration the actual investments made ?

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  2. Zambia I think has definitely got the wrong system.

    It has imposed a revenue tax rather than a profit tax. According to the new legistlation Lumwana must pay even if their are loss making.

    Is the fair way forward actually to simply defer and backdate the taxes? I mean they pay but defer the payments and back date them when they can?

    I have always said new mines should have a tax holiday surely...depending on the size of the investment...

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  3. It has imposed a revenue tax rather than a profit tax. According to the new legistlation Lumwana must pay even if their are loss making.

    Is the corporate tax on the revenue ? if it's the case, that's bad, really bad.

    Is the fair way forward actually to simply defer and backdate the taxes? I mean they pay but defer the payments and back date them when they can?

    They'd still ask for a rebate or a DA or something.
    I mean the issue is the vicious circles of overtaxation and undertaxation.. Taxing the revenue is much more stable.

    I have always said new mines should have a tax holiday surely...depending on the size of the investment...

    Yup. But corporate taxes on profit have an implied "investment holiday", don't they ? And probably one that is more realistic, since it's the investments actually made and paid for that are counted and not promises and estimates.

    That said, it is risky to an extend. Companies, especially MNCs are very good at artificially modifying their real costs so that they can lower their tax burden. For instance, the timber company my mother worked for would have the french offices (that are a different company really) buy equipment, sell them at higher prices to the congolese one so that the profits would be reduced. Or they would litterally buy cars in Europe and sell them for a penny or two to the ones in Africa to avoid the 100% import duties.

    May be a dual system, with a corporate tax linked to profits and another linked to revenue would work better. Something like the american AMT: http://en.wikipedia.org/wiki/Alternative_Minimum_Tax

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  4. Lumwana is ‘greenfields’ development – unlike other mines that acquired existing operations and infrastructure Equinox has not been making ‘windfall profits’ – it has been investing $800m Zambian Government recognises that Lumwana is differentThe terms of the Equinox DA have been applied to date and the Government continues to do so

    Why would the state in effect have to pay for the $800 million capital investment? In the end, Lumwana is going to make a lot more profit than that.

    Because that is the implication of saying that Lumwana doesn't need to pay taxes, because they made capital investments. Companies make capital investments all the time - that doesn't preclude them from paying taxes.

    Usually, investors put up the money, and the company pays them back from the profits they make.

    Why does Lumwana need government support through tax exemptions?

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  5. Random,


    ”Is the corporate tax on the revenue ? if it's the case, that's bad, really bad.”

    The taxes mines face:

    Mineral Royalty
    Windfall Tax
    Company Tax (on interest income)
    Pay as You Earn (these are paid by their employees)
    Custom Duties
    Excise Duties
    Export tax on copper concentrates (15%)
    Rates (Local Taxes)

    Corporate tax is on profits, but the windfall tax is on revenue.
    Zambia never got anything on corporate tax because the DAs made sure they counted lots of losses! The move towards a “revenue” base approach for windfall is precisely to avoid this problem.


    ”Taxing the revenue is much more stable.”

    Yes, but to avoid the disincentive for investment you could be more flexible in the early years in terms of when you collect.


    MrK,

    ”Why would the state in effect have to pay for the $800 million capital investment? In the end, Lumwana is going to make a lot more profit than that.

    Because that is the implication of saying that Lumwana doesn't need to pay taxes, because they made capital investments. Companies make capital investments all the time - that doesn't preclude them from paying taxes.”


    Yes that is the implication.
    Lumwana has put up huge capital investment, the government is saying thank you with a tax break equivalent to the capital investment.

    The best way forward is for Lumwana’s payment to be backdated if paying “windfall tax” and other taxes proves difficult. What we should not accept is government effectively funding $800m when it does not own the mine.

    Remember Lumwana will have $1.4bn in copper revenues next year, according to them. This is how much they will add to Zambia’s copper revenues.

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  6. Cho,

    Yes that is the implication.
    Lumwana has put up huge capital investment, the government is saying thank you with a tax break equivalent to the capital investment.


    But that's not saying 'thank you', that is paying the bills for the mining industry. :)

    What we should not accept is government effectively funding $800m when it does not own the mine.

    Perhaps instead of paying taxes, Lumwana can pay with an equivalent number of shares.

    So much for privatisation. :)

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  7. This is all very confusing.

    I remember reading once that DAs included a lower Corporate Tax Rate for mines which was indeed the most shocking thing in my opinion. And unless I'm mistaken, the legislative package rectified that and lowered the capital write-off, right ?

    I thought the windfall tax was put forward in order for the Zambian government to benefit from high copper prices.


    Because that is the implication of saying that Lumwana doesn't need to pay taxes, because they made capital investments. Companies make capital investments all the time - that doesn't preclude them from paying taxes.

    It all depends on the taxes we're talking about. Making capital investment shouldn't prevent anyone from paying Pay As You Earn, Mineral Royalty, Custom Duties, Excise Duties, Export Taxes on concentrates and Local Taxes. In those cases, it's neither the revenue nor the profit that is taxed, so it's largely irrelevant.

    As far as the Corporate taxes, which are on profits, capital investments are deducted for any company, not just Lumwana. And it's not a subsidy or a tax break, it's just common sense: if capital investment is taxed, nobody will make any investment. And other industries do not have a windfall tax so their capital investments are definetly written-off in the calculation of the corporate tax.

    Now the windfall tax is really the heart of the matter here. Apparently the reasonning for windfall tax is to tax above average profits at a higher rate.Profits is the keyword. What Lumwana seems to be arguing is that because they're fairly new and because they're starting a mine and not just taking over existing activities, they haven't been making the exceptional profits other mines are making right now.

    But what makes it all odd is the fact that the Windfall Tax is on revenue. You can have 2 companies, one established with it's physical capital already depreciated and one that just made the investment paying the same share of their revenue (and not profit) in taxes. Not only that's unfair to the new company but it may make the new company unprofitable and depress investment in general.

    Post-poing the windfall revenue tax won't actually change much, since they'd still have to pay a windfall profit tax on windfall profit that they were not making.

    The odd thing is how we all insist on designing tax systems that require all sorts of particular adjustment instead of designing a system that from the jump acknowledges the possibilities.
    In this case, it would be a Windfall Profit Tax or Mineral Royalties with a Windfall-ish structure.

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  8. Yes, the windfall tax is a tax on profits. However, it should not be up to the mining companies to determine what their profits truly are. They should not be able to take their profits, and simply make capital investments with them, and then claim - but we didnt' make profits.

    If they want to do that, there should be a quid pro quo with the government.

    And in kind payment with Equinox shares would be good.

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  9. They should not be able to take their profits, and simply make capital investments with them, and then claim - but we didnt' make profits.

    1. the tax revenue is not lost, just delayed, when firms use their profits for capital investments. After all, those investments will generate even more profits in the future, right ?

    2. isn't capital investment good ? I mean should they invest less in Zambia ?


    However, it should not be up to the mining companies to determine what their profits truly are.

    But it's not.
    The government just reduced the capital write-off and is in charge of determining how the taxable profits are calculated anyway.


    If they want to do that, there should be a quid pro quo with the government.

    Didin't the DA teach you about side deals and particular arrangements ?
    The government should be smart enough to write a tax law that makes sense.

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  10. I repeat, the Windfall Tax as currently set out in the new act is REVENUE tax not a profit tax. It took a while for people to get this one...that is why Michael Sata turned around and asked whether that was wise.

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  11. ”But that's not saying 'thank you', that is paying the bills for the mining industry” - MrK

    It appears that what Zambia has actually is simply poor enforcement of its legislation. The reason for that is that we are not transparent in auditing the money that is coming in from the mines. The BOZ are even not transparent on the source of their numbers let alone the Ministry of Finance. It’s a black box.

    I mean I am sure the Lumwana DA is actually illegal under the new act. It must be. How else do you explain it? I might be wrong, but I would love to see a Zambian lawyer start a blog, I think there are many areas where our legal framework is being abused and it is about time these issues where being discussed.

    ”It all depends on the taxes we're talking about. Making capital investment shouldn't prevent anyone from paying Pay As You Earn, Mineral Royalty, Custom Duties, Excise Duties, Export Taxes on concentrates and Local Taxes. In those cases, it's neither the revenue nor the profit that is taxed, so it's largely irrelevant.” - Random

    I am confused. Where does the money comes from? Is it not from the revenue streams? We are probably confusing how the tax is collected from ultimately what it impacts the firm. I am pretty sure all taxes in the end are revenue taxes.


    ” Now the windfall tax is really the heart of the matter here. Apparently the reasonning for windfall tax is to tax above average profits at a higher rate.Profits is the keyword” - Random

    Zambia’s “windfall tax” is really a “variable revenue tax” within certain thresholds. In terms of its rationale. As you have noted, it is very difficult for developing nations to observe these profits. We are reducing the uncertainty and the painful process of verification by opting for some simple that every Zambian can observe (hopefully – I am already looking forward to posting my own calculations in July of how much Zambia should have got in April , May and June – under the new revenues ) . You are right that it carries costs, but the challenge is to strike the right balance. We just don’t know whether the benefits at the moment outweigh the costs.

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  12. Cho,

    I am confused. I thought that the royalties were a tax on revenues (turnover).

    The windfall tax is a tax which is calculated by the price of copper. However, the tax is set well beyond the actual cost to the mining companies (which is I think about 76 cents/lbs) - anything above that is pure profit. Therefore it is not a tax on all revenues.

    Therefore the windfall tax is a profit tax.

    Also, it is referred to as a profit tax here:

    47% AVERAGE TAX BURDEN
    Miners concerned about proposed Zambian windfall profits tax

    A recently proposed windfall profits tax—which would increase mining taxes from an average 31.7% to 47%-- has miners doing business in Zambia somewhat worried.
    Author: Ronald Mwila

    It appears that what Zambia has actually is simply poor enforcement of its legislation. The reason for that is that we are not transparent in auditing the money that is coming in from the mines. The BOZ are even not transparent on the source of their numbers let alone the Ministry of Finance. It’s a black box.

    And we hope that it is just a lack of developed systems. However, with all the vocal opposition to the introduction of the new mining tax, you would have to think that there are people who benefit from the present situation.

    There should be transparancy in all the government's financial matters.

    It is almost the same as with the roads contracts. I guess everything comes back to tranparancy. Transparancy in finances, in government contracts.

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  13. MrK,

    I suspect we are confusing the "spirit" of the taxes and how it will actually be applied.
    There should be no confusion of the latter surely. All the information is set out in public domain - The Income Tax (Amendment) Act 2008 and the Mines and Minerals Development Act (2008). All we need to do is read it for ourselves.

    Here is what I know on how these taxes are actually applied :

    The Mines and Mineral Development Act (2008) covers the Mineral Royalty Tax - section 133 (and other taxes). It makes it clear this is applied at 3% of norm value of the base metals and at 5% of precious metals. "gross value" being basically the realised price for a sale at the point of export from Zambia or point of delivery. So this is clearly a "revenue tax". Incidentally, there are provisions in the Act when the Commissioner General can defer these payments e.g. if the mine's OPERATING costs are greater than revenue it has generated for that period.

    The Income Tax (Amendment) Act has the following:

    (i) Introduce a Variable Profit Tax for the mining sector - [This is basically set at 15% of taxable income, which is above 8% of gross income]
    (j) Introduce a Graduated Windfall Tax for the mining base metals and precious metals [The formula for calculating this is in the Appendix section and it is evident it is based on value / revenue, with no reference to operating losses - but do check for yourself that is the case]
    (k) Introduce a reference price for determining the values for the windfall tax
    (l) Reduce mining tax expenditure deductions from 100% to 25% per annum for the mining sector

    On top of all these you have the following:

    Corporate tax rate of 30%
    Withholding Tax set at 15%
    Export levy of 15% on export of copper concentrates

    Note that capital expenditure on new projects is ring fenced and only become deductible when the projects start production.

    In general this does look like a onerous taxation regime.

    But my point was that Lumwana is not exempt from the Windfall Tax. They may avoid other taxes, but that certainly will need to be paid.

    What we need is for ZRA to start being more transparent with its books. May be they already do this. I need to check.

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  14. I am confused. Where does the money comes from? Is it not from the revenue streams? We are probably confusing how the tax is collected from ultimately what it impacts the firm. I am pretty sure all taxes in the end are revenue taxes.

    But the impact on the firm depends on how it's collected.

    Pay As You Earn or Mineral Royalty or Custom Duties or even the Export Taxes on concentrates are quite predictable and are embeded into some input costs.
    Basically, the firm calculates its payroll by adding Pay As You Earn to the wages, calculates the mineral price by substraction the Mineral Royalty, the Export Tax on concentrate the same way and whatever they import by adding Custom Duties.
    So yeah they come from revenue streams but they're not proportionnal to the revenue streams. They vary along other elements, just like both the cigarette taxes and the income taxes I pay come from my income but do not have the impact.

    Beyond that, Lumwana clearly is concerned about the Windfall tax.


    Zambia’s “windfall tax” is really a “variable revenue tax” within certain thresholds. In terms of its rationale. As you have noted, it is very difficult for developing nations to observe these profits.

    Yeah I understand that it's a "variable revenue tax".
    The issue of course is that Lumwana is the perfect example of why it's bad idea for reasons I've mentionned before.

    However, the tax is set well beyond the actual cost to the mining companies (which is I think about 76 cents/lbs)

    That's an average. The actual cost to mining companies varies depending on their output, their wages, their level of mechanisation, the particular conditions of the mine etc..etc..

    But my point was that Lumwana is not exempt from the Windfall Tax. They may avoid other taxes, but that certainly will need to be paid.

    Why would they avoid other taxes and not this one ? And How ?

    If it's by the government giving them a "don't pay this tax" card, it will be about the windfall tax if the government has some sense.

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  15. Random,

    However, the tax is set well beyond the actual cost to the mining companies (which is I think about 76 cents/lbs)

    That's an average. The actual cost to mining companies varies depending on their output, their wages, their level of mechanisation, the particular conditions of the mine etc..etc..

    I know all that. However, as you will admit, getting the actual profits made or cost per pound from the mining companies is like extracting teeth.

    I find the 76 cents per pound useful, because it was derived from an interview with one of the Managing Director (CEO) of Equinox Copper Ventures.

    If you have a better average of the profits or costs in the mining sector, please present it.

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  16. I know all that. However, as you will admit, getting the actual profits made or cost per pound from the mining companies is like extracting teeth.
    
If you have a better average of the profits or costs in the mining sector, please present it.


    But the point is that industry-wide averages are irrelevant when calculating profit margins for individual companies.

    Sure it is practical to know the state of the industry but since it's companies who are taxed, it's dangerous as it may penalize newer, lower-grade, less convinient facilities and help older, high-grade, develloped, established ones.

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  17. It is the hard information I have, so I am using it as a proxy.

    Again, if you have the industry average cost of production (per lbs or tonne of copper), please feel free to share.

    ReplyDelete

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