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Wednesday, 28 October 2009

Zambia...the no tax economy

We know that Zambia is the low tax economy. But this revelation from Finance Minister Musokotwane shows how desperate we are to become the "no tax" economy :

“The reason for the revenue not coming from the mining companies is that we recognise that we have to allow them to recover the losses because they spent money to bring in equipment, things like hiring staff which all went up with the recent high international metal prices…so, we allow the companies to write-off losses against profits. I believe that at the moment, only First Quantum Minerals who operates Kansanshi has exhausted the right of that period to pay back the loans and are now in a position to pay normal taxes.”

5 comments:

  1. The price of copper just crossed above $6500 per tonne.

    I would say minister Musokotwane is bought and paid for.

    I say scrap all taxes except the royalty tax on turnover/revenues, raise it from 3% to 20%, but first raise it to 30% to have clawback of the over $10 billion in untaxed profits that have been lost due to privatisation, these closed door development agreements, and a clear buying off of senior government officials like the Finance Minister.

    Why should the mines profit from their crimes?

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  2. This post seems a little harsh. I confess I don’t understand the reference to loan repayment, but otherwise everything the Minster says is perfectly logical. (It’s not often I find myself thinking that!)

    When commodity prices went up, the mines invested in equipment and people (which probably cost more than usual due to the increased demand). When prices went down again, the mines were left with these overheads, increasing the negative effects of the downturn in the market on profitability. That such expenditure is tax deductible is standard throughout the world and surely not something we can seriously argue with? Removal of such provisions would act as a massive disincentive to invest: suddenly it would cost 35% more. Similarly, the ability of companies to carry losses forward to be used against future profits (in other words to tax on a cumulative profit basis) is also standard worldwide, and again its removal would act as a disincentive to invest as the cost of failure or bad years would increase sharply without any increase in rewards.

    There are other issues relating to taxing the mines, as Mr K touches upon, but in this instance I think the Minister is talking sense: no desperation and no desire for a “no tax” economy, just explaining how the tax system works.

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  3. Dominic,

    When commodity prices went up, the mines invested in equipment and people (which probably cost more than usual due to the increased demand). When prices went down again, the mines were left with these overheads, increasing the negative effects of the downturn in the market on profitability.

    If it is correct that the breakeven price is $2100/tonne, then the mines never stopped making profit. The copper price never went below $2900 after peaking at about $9000.

    More excuses from a minister who sounds tough when it comes to taxing workers, but is extremely timid when it comes to taxing the mines.

    So timid that he loses all credibility.

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  4. Mr K,

    Not sure where the $2,100/tonne breakeven price comes from: a quick scan of the segmental analysis of the 2008 financial statements for First Quantum suggest that at Kansanshi the price needed to be in the region of $2,700/tonne before there was any contribution to central overheads, never mind actually breaking even. In any case, the breakeven point will naturally vary from mine to mine and be highly dependent on volumes. My point was that the mines will have invested (hoping to cash in on high commodity prices), but that this will have lumbered them with increased overheads which will have persisted even after the price of and demand for copper plummeted (increasing the breakeven price). Reduced profits, if not losses, are the natural consequence.

    But perhaps that's all besides the point. You say the mines have been profitable, whereas the Minister - and presumably the mines - say they (mostly) have not. Is the implication that the mines are undertaking fraudulent financial reporting and the Government is turning a blind eye? Or is it that inadequate corporate reporting in Zambia/internationally is allowing tax avoidance?

    Taxing revenue instead of profit is a interesting proposal. But won't it stifle investment? Would you support a revenue tax on businesses besides mines?

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  5. Dominic,

    But perhaps that's all besides the point. You say the mines have been profitable, whereas the Minister - and presumably the mines - say they (mostly) have not.

    If they can't be profitable when copper is over $6500/tonne, they shouldn't be in business. Remember that during the 1990s, copper was consistently between $1500 and $2000 per tonne.

    Which is why I'm surprised you say that the breakeven point is over $2900 per tonne.

    From a letter to The Post:


    Mazabuka Windfall tax
    By P Mulenga - Development Economist Essex, UK
    Tue 20 Oct. 2009, 16:27 CAT


    Second, the financial reports of all publicly listed mining companies operating in Zambia are available online. These operations already enjoy substantial tax relief and the price of copper has averaged US $ 4,900 per tonne over the past five years.

    This is more than 100 per cent above the break-even price of US $2,100 per tonne assumed in the majority of business plans; therefore there is no plausible reason why any mine should declare losses. Furthermore, the development agreements signed in the late 1990s provided tax relief for expansion and growth up to the end of mine life. Mines do not spend on ‘expansion and growth’ until the last day of operations, they must make a profit for the shareholders at some time.


    Is the implication that the mines are undertaking fraudulent financial reporting and the Government is turning a blind eye?

    Absolutely.

    Or is it that inadequate corporate reporting in Zambia/internationally is allowing tax avoidance?

    Or both. I am saying that underdeclaring profits and avoiding taxation (on profits) is one of their basic business activities.

    MSNBC Investigation - Rachel Maddow Tax Shelter Crackdown

    ReplyDelete

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