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Wednesday, 1 April 2009

Oxfam on the "new mining fiscal regime"

A new short paper by Duncan Green (Oxfam) on impact of the global crisis on Zambia. There's nothing new there that we have not discussed on this blog, as the note merely repeats obvious facts and does not really analyse issues as such e.g. the shocking unqualified reference to the Economist Intelligence Unit's GDP projection of 1.8% this year. That projection is just poor because it fails to take into account that Zambia's recent growth has been spurred by other sectors (copper only accounts for 8% of GDP -see Five questions on diversification..). That copper does not have a greater share is the real crime.

That said, the paper is interesting because of its comments on the new tax regime :

In January 2009, barely nine months after its introduction, that system was abandoned as the downturn allowed the large, foreign owned copper companies to undertake what the Financial Times described as ‘intense lobbying’ of the government.13 The government gave the following concessions to the companies:

  • It scrapped the ‘windfall tax’ which fell due when copper prices exceeded a certain level. In fact, prices had fallen below this level in October 2008, so no further tax was liable. However, companies were keen to get rid of the tax, arguing that it penalized high cost mines because it was levied on the overall value of copper produced, not on profits.
  • The government allowed hedging income to be included as part of mining income for tax purposes. This is a serious setback as it is relatively easy to demonstrate a loss on hedging (and move any profits offshore), allowing companies to further minimise their tax payments.
  • It allowed companies to write off 100 per cent of any investment against tax as depreciation in the year in which the expense occurs – well beyond the international norm, according to tax experts.

What is left is the standard corporate tax, a mineral royalty of 3 per cent of gross value, and a variable levy on profits. The government and mining companies argue that this is fairer, since it does not penalize high cost companies, but in the words of one international aid official, ‘the tax on profits is excellent in theory, but the Zambian Revenue Authority can never have the internal capacity to effectively force the mines to comply. These are massive mining companies with the best tax lawyers – they will run rings round them.’14 It is bread and butter work for international tax lawyers and accountants to minimise tax liabilities by minimising the paper profits of their employer. The sense of helplessness is palpable. As one senior government official ruefully remarked, ‘those companies who didn’t pay the windfall tax owe us – but when my son is sitting where I am sitting, we will still be asking them!’

Especially that wonderful concluding statement :
There is a compelling case for reintroducing a proper system of mining taxation, so that Zambians all benefit when, as expected, mineral prices start to rise again.
You can feedback to Duncan Green directly here.


  1. I say screw the mines, drop all taxes, except the royalty tax on turnover, and raise it from 3% to at least 20% of turnover. Only the efficient mines will remain, but collecting taxes will be easy.

    And, taxes can be collected in copper, large reserves of which would help the currency.

    If these mines are only there to play games, it is better that they close.

  2. Interesting bit of video from Al Jazeera, 6 April 09, describing Australian politicians resisting FDI from Chinese sources:

  3. Yakima,

    Excellent video, and it shows that not only Zambia, but Australia itself is struggling with the same issues. From the video:

    Reporter: Conservative Australian senator Barnaby Joyce fears state owned chinese companies will use their stake in Australian mining, to manipulate global metal prices and harm Australian's export earnings.

    Barnaby Joyce: At the end of the day there becomes a divesture between the Australian people, who are a multicultural nation, and the ownership of their minerals which has been the reason we that have attained wealth. Now if you divest the Australian people of their ownership of their mineral base, then what we have become is servants in our own country.


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