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Thursday, 25 June 2009

Towards lower mining taxes...3rd Edition

Among the revelations from yesterday's press conference is the sad indication from President Banda that yet again the Government is again planning to reduce the mining taxes. More detail via Reuters.


  1. I have never seen such timidity in a govt. Its like every time Fred Bantubonse coughs on behalf of his employers the Rupiah govt starts quaking. Honestly what is so unacceptable about 30% corporate tax and 3% royalty levy? How much do miners get per month in Australia, Canada and the USA? Isnt it in thousands of dollars per month for mining the same copper that is sold on the same markets as Zambian copper? Zambian miners get less than S300 per month. Mines in Zambia get some of the cheapest electricity in the world so where does the high production costs argument come from? The weakness of the Banda administration is sickening.

  2. I say confiscate every fifth load leaving the mines - increase the royalty tax from 3% to 20% and drop all other taxes.

    The present finance minister even called the windfall tax 'onerous' on the mines.

    They're bought and paid for.

  3. Meanwhile, south of the border, the other corrupt 'neoliberal' party is busy selling out the nation's interests and assets:

    Indigenisation law unfair: PM

    Apparently Zimbabweans owning 51% of shares is 'unfair' to foreign corporations. It is 'too much', according to the prime minister.

    I have always thought and said that the MDC is a trojan horse to sell out the supposedly run down Zimbabwean economy. The economy was not run down, it was sabotaged, so western corporations could pick up the pieces, and they are falling all over themselves to get their hands on privatised mines and other state companies.

  4. RB just pushed mining tax up from 31% to 47% without consulting the tax payers. He said he is "willing" to engage the mines over the tax increment implemented last year. He did not say they were too high or too low. He just said he is willing to "engage" the mining firms over taxes. What’s wrong with negotiation? If he pushed up PAYE by 16% and agreed to engage stakeholders over the issue, would that not be an act of dialogue by which democracy is built upon? Don’t hate the player, hate the game!

  5. "RB just pushed mining tax up from 31% to 47% without consulting the tax payers."

    47% of what? Earnings?

  6. The very idea that an oversight entity, rather than a direct partner in a venture, would feel the need to tax at a full 47% rate, to me at least, means that the pool being tapped is significantly smaller than the whole investment pool. In the Zambian case, this is primarily due to those utilizing leveraged financing, where 80-90% of the capital being invested by FDI corporations is borrowed from overseas banks.

    Where stockholders would demand dividends, banks charge interest (the two are interchangeable for US tax purposes at least). Both demand a share of capital assets (read: collateral) in the event of enterprise failure and bankruptcy. Both are prepared to take up to a complete loss in such an event. However, interest paid to foreign banks is an expense, thus not a part of mine profits, thus not taxable under corporate tax laws. It is because only a small percentage of profits from Zambian mines as currently financed are taxable (or profitable for stockholders), that such high rates have been mandated by venture capital to achieve a reasonable return on investment from Zambian national resources.

    The stockholders are currently screaming for wont of profits. Understandable. That is the bet that they made when they leveraged what little real capital they had and then borrowed the majority of the remaining capital requirement from banks. No doubt the banks required that in the event of revenue shortfalls, they be paid before stockholders. In the event of default, liquidation of all assets, and likewise the bank gets paid in full before the stockholders can see a penny.

    The capital investors came in during good times, expecting to be able to earn 20-30% on their risky money, while the banks earned 7-8% on more certain money. What is happening now is that those who fully realize that in the current global climate 10-15% is still way better than 7-8%, and liquidation is expensive any way that you look at it, are sticking by their projects, watching as mineral prices rebound under pressure from infrastructure stimuli from a plethora of global governments, and not above seeing if they can leverage Zambian government revenue shortfalls into tax breaks.

    I sympathize with the frustration expressed by MrK, in that no accounting procedure thus far mandated by contract has yet allowed the Zambian landholders to earn a reasonable share of the profits from extracted mineral wealth. At no point has the government managed to negotiate terms on mineral export which result in significant economic empowerment of a high proportion of indigenous employees, nor a return on investment from privately operated mines commensurate with that earned by corporate shareholders or even their more sheltered financiers. Such conditions are bound to prompt calls for transfers of share ownership or even outright nationalization of mining assets. Unfortunately, this is in part exactly what the external financing of mining operations is designed to combat, and should Zambia take action against seemingly isolated and vulnerable mining companies, she may find herself embroiled in a feud with the international banks much as Zimbabwe has.

    From my perspective, this is why economic diversification and infrastructure development is so crucial, because until Zambia can demonstrate a positive balance of trade in general, and especially with regard to income from mines and expenditure on energy (and fertilizer!), she will be unable to effectively dictate the terms under which mineral extraction is to take place within the nation.

  7. FMD is correct and you Cho are misleading your readers! The active words are REVIEW and RE-ENGAGE "stakeholders on the matter of taxes"! The reality is that taxes were increased, and what RB is saying is that he is willing to revisit the matter.

    Cho, you and I know what steps Gordon Brown has taken to stave off economic catastrophe here including printing money and bailing out private companies. When RB suggests drastic action, somehow it becomes objectionable!

    I just fail to understand this amazing double standard particularly from people I know are exposed to the machinations of the global economy!

  8. What is so hard to understand about RB's statement which reads "It is the intention of my government to re-engage mining companies through dialogue in resolving any of the outstanding (tax) issues, which may have arisen."? Comments on this subject are prejudice and based purely on assumption.

  9. Taxes were pushed from 31% to 47% of profit. The private sector currently pays 35% of profit. The mining firms what to be at the same level as the rest of the private sector after all they pay many other taxes too like Mineral Royalty Tax, Mineral Export Tax, Mineral Transport tax, etc...

  10. FMD, 1C

    I think you are ignoring a fundamental point.

    The mining companies want a reduction in taxes. The Government wants to renegotiate.

    The direction is downwards. So I fail to see your point.

    As for 1C's point about Gordon Brown. I think it misses the point, which is we are talking about national mineral resources here. I have not seen other resource rich nations reacting the same way Zambia has done.

    All experts, including OXFAM do not share the Government's reaction in terms of reversing the Magande taxes.

  11. Just a brief illustration of how the internal structure of finance for an FDI investment can affect the return to Zambian taxpayers:

    Let us assume a mining development which requires a convenient $1 billion in order to develop to full operational status. Company A raises 80% of the required capital by issuing stock, and covers the remaining 20% with a credit line backed by tangible assets. Company B raises 20% of the required capital by issuing stock, and cover the remaining 80% based on speculation over future earnings as well as tangible assets. We will more than generously to Company B, but mostly for simplicity, assume that both companies nevertheless pay the same 8% annual interest rate on the borrowed sums. Both companies are also assumed to be able to conservatively generate earnings before interest and taxes equivalent to 12% of the capital base (or $120 million/year), and that interest payments during pre-production stages have been included in the capital cost (also more than generous, but simpler math).

    Company A starts with a gross $120M, but with debt of $200M@8%, $16M pays the interest. The company must then pay taxes on $105M, and whatever is left gets distributed to stockholders as dividends or re-invested into the company (which is then presumably reflected in the share price). Government share at a 31% rate would be $32.55M. The remaining $72.45M goes to the shareholders for a 9.06% return on investment (ROI).

    Company B starts with the same $120M, however their debt of $800M@8% requires $64M in interest, leaving $56M which is taxable. Assessed at the 47% rate this is still nevertheless only $26.32M (a bit under 81% of the revenue to government coffers even with the "tax hike"). The remaining 29.68M goes to shareholders @14.84% ROI.

    Ah, but that was a year ago, when copper was flying high and yet Icarus-like people still planned on it soaring further. Now we must imagine those gross earnings to be drastically reduced, by a third or more (but we will assume 33.3% because again, it is simple).

    Now Company A has $80M in gross earnings, with the same $16M cost deduction for interest payments to overseas banks. 31% of the remaining $64M leaves government with $19.84M (61% of previous revenue). Shareholder ROI from the $44.16M in after tax profits drops to 5.52%.

    Company B however has to pay $64M in interest to the banks out of their $80M no matter what, which leaves only $16M in taxable income, which even "at the full" 47% is only $7.52M, while the shareholder ROI drops to 4.42%.

    The math only gets worse for government and better for international banks when more real-world numbers are plugged into variables. Thus is the mechanism by which the vulture economy is prepared to feast upon the unsuspecting.

  12. [in response to this comment]


    I suppose that it depends on perspective, whether one thinks that the likes of Bush and Blair direct the multinational banks, or vice versa. From what I can tell, those in power never much cared whether or not the former-Rhodesian plantation owners stayed in Zimbabwe, they only seemed to care whether or not the banks those plantation owners owed money to were able to recover their loans. I'm not sure about Blair, but Bush certainly seems to have considered quite a few other governments as higher priority enemies than Zimbabwe (Iraq, Iran, N. Korea, Myanmar, Syria, Cuba, Venezuela, Sudan, Eritrea, and Somalia to name ten off the top of my head). My point is that nobody had to invade Zimbabwe in order to destroy its economy, all they needed to do was create a feud with the banks. My agreeing that such actions are morally or ethically wrong will not change the fact that it was just that easy. So while it is emotionally tempting to advocate a simple, unavoidable policy for taxpayer recovery of value from mining through seizure of 20% of the product itself, the fact that the mining companies are mostly mortgaged to the same banks which held the mortgages on Zimbabwean plantations, leads me to think that the reaction to their nationalization would be similar.

    Can we agree that economic diversification is not going to happen until the mines finance other economic sectors?

    I'm afraid not. Diversification can occur in any number of ways, with capital from any number of sources. The companies might all be Chinese or something, but they could still be diverse in their economic activity. My point was that for as long as Zambia needs the meagre share of mining revenues it currently gets just to keep treading water (or sinking slowly under mounting debt depending on your view), then she will be unable to negotiate from a position of greatest strength. If the balance of trade, and likewise the government budget, were in surplus, then it would be much easier to credibly negotiate on the basis that mine closures or refusal of permits would not plunge the nation into economic chaos.

    And why should Zambia's return on it's mines only be reasonable?

    I'm confused, as the alternative would seem to be an unreasonable return, and I am unclear on how one mandates such a thing without antagonizing other stakeholders. After all, if the current, unreasonably low return to Zambian taxpayers from the mining has us incensed and looking for ways to change the deal, then it is likely that others would react similarly were the situation reversed. I find it very interesting that by changing the capital to debt leverage ratio of our hypothetical mining company from 1:4 to 4:1, the government share of the same gross revenues increases dramatically. The fact that shareholders also get a more "recession proof" average return under such an arrangement, thereby reducing the incentive for flight during commodity downturns is also interesting. Actually, the only thing that I can think of which would add risk to this formula, and thus either scare away long term investors or increase the amount of return they would demand in order to invest at all, would be the threat to nationalize the assets. This may point to a means of getting more out of existing and/or future mines without massive controversy, and thus worth exploring.


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