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Friday, 19 September 2008

Global Tax Trends

KPMG recently released its annual survey of worldwide tax rates. The key finding is that corporation tax rates have continued to fall in 2008. The average corporation tax rate in the 109 countries surveyed was 26 percent. Zambia's corporation tax is one of the highest in the world at 35% -

The corporate income tax rate is 35 percent. However, income earned by banking institutions is subject to 40 percent tax on profits in excess of ZMK 250 million. Profits from farming, chemical fertilizer production, and export of non-traditional items are taxed at a rate of 15 percent. Companies with a turnover of ZMK 200 million or less pay a turnover tax of 3 percent. Tax on foreign exchange earned by sun hotel is subject to tax at 15 percent. Windfall tax has been introduced on companies producing base metals of copper and cobalt which will be calculated on the basis of the price obtaining on the London metal exchange. Where there is no windfall tax, there will be variable tax. The variable tax rates will vary between 1 percent and 15 percent. The windfall tax rates will be 25 percent, 50 percent, and 75 percent.

High corporate income tax is generally regarded as bad for business - see In praise of larger and larger firms... , where the cited paper argues : "there is growing evidence that corporate income taxation deters investment and formal entrepreneurship. Using a new data set of corporate income taxes in a large number of countries, Djankov et al. (2008) find strong evidence that those taxes reduce investment, foreign direct investment, and entrepreneurial activity." Zambia of course is a low tax economy (see the blogs here and here). The real question therefore is whether Zambia's tax system is optimal i.e. are the taxes in the correct order or in the right places?

22 comments:

  1. Cho, when the budget ws released this year I argued on your blog that the new taxes were going to be detrimental in part due to poor timing. I don't disagree with windfall taxes especially that I don't see the benefits of investment trickle down to an ordinary Zambian. What I believed is that with the current global economis crisis it was just lack of understanding and foresight on the part of our government to increase corperate tax and impose a windfall tax as well as other taxes.

    What all this will lead to loss of jobs for majority of Zambians so that investors could maximize profits.

    I this it a right thing done at a wrong time and it's time to go back to drawin table and make adjustments.

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  3. Hi Lawrence,

    What I believed is that with the current global economis crisis it was just lack of understanding and foresight on the part of our government to increase corperate tax and impose a windfall tax as well as other taxes.

    There are going to joblosses anyway if there is a massive economic recession that affects the demand for copper from China.

    The problem is that we are not capitalizing on these record copper prices, so it doesn't matter.

    The mining sector does not exist to 'create jobs', but generate capital for the rest of the economy. Overall, there aren't a lot of miners, and all of them could find jobs in agriculture, with a fraction of the investment that goes into the mining sector. Or they could easily put to work on works projects to rehabilitate and create infrastructure.

    For job creation, the mining sector is not the most efficient application of resources at all.

    But right now, we are losing at least $2400 million in profits per year because they are in foreign hands and because of lack of taxation. Apparently of those $2400 million plus in profits, only $200 million will be collected in taxes this year.

    So the the argument that the windfall tax is somehow impeding investment in the coming harsh times rings hollow. A fall in the price of copper would have a much greater effect on corporate profits that even paying the $413 million windfall tax in full.

    What is really galling is that once again, Zambia is going to miss out on it's economic opportunities to develop.

    See:

    EAZ calls for replacement of windfall tax
    By Chiwoyu Sinyangwe and Kabanda Chulu
    Tuesday September 16, 2008 [04:00]

    GOVERNMENT will only collect US$200 million of the projected US$415 million from mineral taxes owing to low compliance levels among mining companies, the Economics Association of Zambia (EAZ) has predicted.

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  4. And another thing. The mining companies over the last agitation against the windfall tax have proven that they cannot be trusted. They cannot be relied upon to either make on honest argument, or even pay the taxes they are due to pay. Of all the mining companies, only KCM has complied.

    I would say it is time that the mines are returned to Zambian ownership.

    They pollute our air, they mistreat our workers, their trucks degrade our roads, but when it is time to settle the bill, they are nowhere to be found.

    I think the massive reneging of their civic, ethical and legal obligations to pay taxes in full and on time forfeits their right to be in foreign hands.

    So if they continue to refuse to pay the taxes set by parliament, they should see their mines confiscated as payment.

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  5. mrk, you are right and I am no sympathizer for the fox who have done all but game our system yet they leave our infrustracture crumbling. I still think a right move at a wrong time. Secondly I fault this leadership for lack of oversight and protective measures to ensure the system runs well. How could a government fail to collect taxes? I have never heard that before. It shows you how compromised our leadership is.

    I think part of the reason why we need more investment in any given sector is to generate capital and creat jobs. The job market in Zambia has never been a staedy one that's why it is pretty hard to find a job once you lose one.

    Here is my question though; what should be the priority of the next president?

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  6. I am an economist myself and I am appalled at a suggestion by EAZ that - low compliance levels means that windfall taxes should be replaced. What kind of thinking is that? What EAZ should be pondering about is to find ways to plug those non-compliance holes/reasons, or help the country to design an effecient compliance and tax collection system.

    You don't have to look hard to find such a system. Because our economists think and act like politicians that is why their skills are now so blunt that they're even unable to solve any simple problem. Do we need foreigners to tell us that?

    Also, mrk is right - Zambia is not taking advantage of super high copper prices. Anyone who has read economic history will realize that - when you have an exhaustible resource, the survival strategy to follow is - to maximize the use of revenues from that resource/s. You use its wealth to diversify or plan for the dark day. [In less 50yrs from now, copper will be exhausted, price will be too low, or become obsolete by artificial copper]. But we are behaving as if copper will last for ever. KK became too generous by funding all guerilla wars in Southern Africa. What happened? So when you have prices soaring to over US$8000 per MT, thats your chance to plan for a rainny day.

    This immediately ties in to another misconception Zambians have - you are not begging or shouldn't beg investors to come. What determines their coming is not Levy's clever talk to Chinese or Indians, but forces of Supply & Demand. All those who are really in need of copper, they'll come regardless.

    Also EAZ can help us by refuting the foreign miners' lie that - they can't pay taxes if they are to recoop their investments. Why doesn't economists over there clarify to them that - the 3% royalty and reasonable windfall taxes proposed by President Mwanawasa are quite standard through out the world. If we don't clarify these issues, the foreign miner would be emboldened by our ignorance.

    In short, lets talk some real economics and international development with these miners.OK!

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  8. Lawrence,

    How could a government fail to collect taxes? I have never heard that before.

    That may be because of general lack of capacity. On the other hand, the lack of capacity itself may be because of collusion between high level politicians and the mining companies.

    There is so much secrecy within this government that pretty much anything is possible.

    However, it is not uncommon for governments even in developed countries to fail to collect taxes.

    In this case, it may be difficult to collect taxes based on corporate profits, because the corporations will break the law and do anything to hide their profits.

    This in itself is proof that Zambia's mines should never have been placed in foreign hands. Even an inefficient parastatal that is Zambian, is better than a foreign corporations that efficiently fleeces the country of it's resources.



    Kaela,

    Without freedom, there is no development or commerce. And that is separate from the fact that racism and apartheid are evil systems that must be fought whereever they exist. Everything KK did to help the liberation movements around the region was spot on, and he must forever be commended for it.

    The only error governments have made, is to look negatively on the creation of a huge middle class. They have treated the economic emancipation of the people as a threat to their own monopoly on power. Possibly rightly, but true statesmen must take the long view and do what is best for the country and the continent. Which is what KK did when he supported the liberation movements.

    I'm not that worried about copper running out (let alone it running out 50 years from now), or even that it will be replaced by some new plastic or ceramic material.

    What I am ticked off about is the unwillingness by those in power to collect hundreds of millions of dollars, while borrowing and putting the country into debt. Or this socalled anti corruption government running a huge cabinet, not reducing the number of ministries, or otherwise show they are thrifty with the taxpayer's money.

    We should be using hundreds of millions of dollars from the mines to at least put all children in school, create universal access to healthcare, create tens of thousands of commercial scall medium sized farms, and rehabilitate and create new infrastructure.

    Any government that would do that has my full support, no matter what the name of the party, what tribe, what region, what religion or non-religion, and all those issues that are essentially irrelevant.

    As long as they won't tax the mines to the max, mind the taxpayer's money carefully and especially invest in the economy without borrowing, they are all the same party to me.

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  9. Lawrence,

    I know a way of collecting every cent owed by the mining companies.

    No copper should be shipped out of the country except through the GRZ.

    If companies fail to pay their taxes, keep their copper shipments at the border until they do.

    Tonnes of copper are very easy to keep track of.

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  10. Or just suspend the right to export copper or copper products for any company that is behind in paying it's taxes.

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  11. Why is that Zambian tax is amongt the highest in the world? I know of a listed company which is purportedly an agriculture entity and is only paying 10%.

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  12. Under the MMD, there was a massive shift in the tax burdon from the corporations to the workers.

    I think it is still 6% of GDP, but now it comes from PAYE, instead of corporate profits.

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  13. mrk
    Or just suspend the right to export copper or copper products for any company that is behind in paying it's taxes.

    I call this common sense and that is what has been lacking in Zambian politicians. I hope these idiots can starts planing for the future.

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  14. Lawrence,

    Or just suspend the right to export copper or copper products for any company that is behind in paying it's taxes.

    I call this common sense and that is what has been lacking in Zambian politicians. I hope these idiots can starts planing for the future.


    Sometimes it is corruption masquerading as incompetence. I don't know which is in effect. However, I always found it odd that the finance minister was so slow to adopt any kind of effective tax regime.

    And there is the usual chorus of pro-mining company individuals who come out when it appears the mine's taxes may be increased.

    I think the mines have bought a lot of influence, which is why it is important to frequently rotate the politicians out of office.

    And I think that too many positions are politicized in an undemocratic way. Instead of being open to election, they are appointed by the president personally. This creates a relation of depencency of those officials on the approval of the president. This discourages independent thinking, and putting professionalism before allegiance.

    Just generally speaking, of course, I don't really have anyone specific in mind.

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  15. http://www.mineweb.net/mineweb/view/mineweb/en/page36?oid=71013&sn=Detail
    this is an article I just read today. What's your take on his views of where the economy is heading? how worried should we be and can Zambia deal with these hard times?

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  16. how worried should we be and can Zambia deal with these hard times?

    If they diversify into agriculture and build infrastrucuture, they won't.

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  17. Lawrence,

    The dangers:

    - depreciation leading to rising inflation
    - weakening of demand for commodity
    - weakening of the “export led growth model that the govt has championed”
    - weak fiscal regime or rather the late implementation and subsequent renegotiation means that we have “no savings” to point to….
    - Unfortunately RB has been making useless promises and has done questionable things that will worsen our fiscal position going forward. Whoever wins will struggle with the excesses of recent months.

    The pluses:
    - Potential for weaker oil prices
    - Possibility of increased competitiveness from a weaker Kwacha if “inflation” can be managed better relative to our trading partners.
    - Mining is booming, and China remains hungry so in terms of quantity export we should be okay.
    - Economy has diversified….though still needs to be done…
    - For investors looking for reasonable returns, if inflation can be contained, Zambia would remain an attractive destination
    - 2010 is on the horizon…investment in infrastructure, especially aviation would bode well for an effective tourism “bounce”.

    I can go on…but in short, much depends on the government…

    In time of crisis, you need a plan…I have not seen one…..simply saying you have a Vision 2030 or Fifth Development Plan is not good enough… I am not seeing leadership in this crisis…I am seeing daily platitudes…

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  18. Oh...I should have added that one of the dangers is the hit on remittances....

    Again, government can respond to this by working better with the diaspora...

    PLAN PLAN PLAN is my chant....

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  19. As an investor in a miner who wants to start operating in Zambia, I'm looking at the recession developing all over the world, the banking fracas that has yet to be publicised from China. (They operate a very leveraged banking system), and I'm wondering why nobody on this blog is commenting on Zambian corporate taxes being the highest in the world, and the implications of a company who is paying the highest rate of corporate tax, plus average royalty tax PLUS a further windfall tax. If it was just a question of the 3% you probably wouldn't have a problem. Some projects are moving out, a continuation of that means foreign investment cash leaving Zambia when around 12 'growth' countries are so exposed financially at the moment they could end up bankrupt.
    The value of the Rupee has dropped by about 30% over these last few months. Lack of buying power means higher prices at home for imports, ie the potential to grow inflation.

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  20. Anonymous,

    I'm wondering why nobody on this blog is commenting on Zambian corporate taxes being the highest in the world, and the implications of a company who is paying the highest rate of corporate tax, plus average royalty tax PLUS a further windfall tax.

    According to Nation Master, Zambia is ranked 13th (35%), behind Qatar and Barbados. Ironically, Saudi Arabia has the highest level of corporate taxes, at 45%. Oddly, this does not diminish their standard of living. :) But then, they keep the profits from their oil, while in Zambia, neoliberal theory has ordained that 'creating jobs' is enough.

    But then, these 'foreign investors' and specifically the mines seem to do everything they can to avoid paying any taxes at all, no matter what the official tax policy is.

    However you turn it, Zambia is losing billions of dollars per year from the mines.

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  21. We are!

    This post is about corporate tax rankings!!

    lol!

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