"We have asked for a special audit to be done on the mining sector and if we find someone cheating, we will deal with that...Cheating is dealt with by punishing offenders, but you cannot deal with cheating by increasing tax rates, you can't....We need a strong mining sector to help us diversify the economy"
Finance Minister Musokotwane announcing over the weekend that the government plans to conduct an audit of mining companies to determine their earnings and will punish companies found cheating over declaration of profits. One can't help but wonder why Musokotwane now appears to have a "death bed" conversion to the idea that mining companies may well be cheating, when many of us have been saying this for years now!
What is sad is that Musokotwane still doesn't get it.
First, I don't think this audit will yield anything because the point is that multi-national companies are experts in this area and I doubt if any single company would be found at fault.
Secondly, even if Musokotwane were to find any mining company at fault, I doubt he has the ability nor the will to punish anyone. These cases take years to go through courts and the threat to mining companies is just not credible. Let us not forget that there's still the little problem of the windfall revenue which mining companies have refused to pay. Now if a company can owe tax revenues to government and fails to pay, what hope is there that a government can actually punish it for complicated accounting processes? Can you imagine if an ordinary Zambian refused to pay his tax? Let us also not forget that this is the same Executive Branch that has failed to take the report of the Auditor General seriously. People let us be serious and start looking at issues with objective assessment.
Thirdly, I just don't get what economic logic he is applying when he says "you cannot deal with cheating by increasing tax rates, you can't". Who said the point of imposing windfall tax was about punishing offenders? The reason for the windfall tax is to benefit Zambians period and ensure some guarantee of revenue when prices are above a certain threshold. The issue of cheating only becomes relevant when Musokotwane argues that the profit variable tax does the same job. That is when all well meaning Zambians rightly question that logic given the underlying incentive for mining companies to cheat. Do you see how our Finance Minister Musokotwane is getting the very elementary policy questions confused? He is inventing a problem that is not central to the original argument, and then he proceeds to argue with himself. This is poor analytical thinking.
Finally, nothing illustrates more the poverty of Musokotwane's economic approach than the statement : "we need a strong mining sector to help us diversify the economy". Contrast this with Bob Sichinga's insightful statement in the same piece that the government should reintroduce windfall tax to raise more revenue for spending in social infrastructure such as schools and hospitals. As we have said on this website many occasions ( see A mid-week rant.....on the state we are in.. and Five questions on diversification ) the key to diversification is not a strong mining sector it is strong revenues from mining. If you can capture that revenue you can use it like Chile has done to spend on critical infrastructure (and perhaps on more mining investment) with wider catalytic effects. The key thing we need to remember it is very easy to have a strong mining economy - just reduce all your taxes to 0% (note that the converse is not true for revenue - thanks to the Laffer Curve). The debate here is how to secure optimum revenues from mining. Unfortunately Musokotwane is just focused on making a strong mining sector which is why he constantly focuses on reducing taxes.