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Monday, 15 November 2010

A defence of the mining taxation regime (Guest Blog)

Of late, the taxation of mining companies operating in Zambia has become a highly topical issue. Currently, the mining companies are reportedly taxed as follows:

(a) 3% mineral royalty on income (that is, earnings) from copper sales;

(b) 30% corporate profit tax on profits declared after deducting costs and mineral royalties;

(c) 15% variable profit tax on all taxable income (that is, profits) earned that exceed 8% of copper sales;

(d) Deduction of 25% of expenditures on machinery and equipment from taxable income per year once a mining project starts operating;

(e) 15% income tax on foreign companies and expatriate consultants providing services to locally based mining companies; and

(f) Mining companies cannot deduct from taxable income on a profitable mining site its capital expenditure on another mining site.

There is dissatisfaction among some segments of Zambian society that this taxation regime does not provide for adequate contribution of tax revenue by mining companies to the country’s coffers, and that the government should not have shelved the idea of a “windfall tax,” which would have provided for a charge on the sales of copper for every US$0.50 increase in the price of copper per pound on international copper exchanges.

The government, however, wishes to maintain the existing taxation regime in order to foster the development of the mining industry.

Clearly, the two arguments are both reasonable. But since the 20-year development agreement signed between mining companies and the Zambian government is still valid, it may not be possible for Zambia to devise a new taxation regime for mining companies without losing its credibility in the eyes of potential foreign investors. Besides, there is a risk of legal action by mining companies against the government if it seeks to institute changes to the terms of the contract.

It is always a good idea to honor contractual obligations. We still have 17 or so years to think about negotiating a new contract with mining companies. We can start thinking about negotiating a contract which will increase the mineral loyalty from 3% to 5%, reduce variable profit tax from 15% to 13%, leave the other tax provisions at current rates, and without the contentious windfall tax.

We could also provide for a mining company to deduct from taxable income on a profitable mining site its capital expenditure on another mining site in order to induce the re-investment of profits by mining companies on Zambian soil.

There is, of course, no doubt that these suggestions are going to provoke unsavory comments from those who wish to extract more tax revenues from mining companies. But more government revenues from mining taxes or any other source will not likely culminate in meaningful improvements in our people’s lives if we cannot avoid wasteful spending on unnecessary expansion of ministerial and deputy ministerial positions, excessive number and staffing of our foreign missions, excessive and costly foreign trips by the Republican president, and on sinecures like the position of District Commissioner.

In fact, additional tax revenues will just be swallowed up by expenditures on the increase in the number of parliamentarians from 158 to 280 members that is recommended by the National Constitutional Conference, and on repayments of loans secured to buy the controversial mobile hospitals and the like!

We need to go through government expenditures line by line, program by program, agency by agency, department by department, and ministry by ministry in order to eliminate unnecessary application of public resources. The savings to be realized in the process could be invested in improving education and training, healthcare services, infrastructure, and agricultural production and food security, among other essential projects and programs.

In passing, we need to be mindful of the potential for foreign companies to engage in what is referred to as “transfer pricing” when devising a taxation regime for such companies—that is, a pricing strategy which a multinational company may employ to manipulate its intra-firm transfer prices by using its transnational network of affiliates in order to achieve a revenue-shifting effect and thereby cope with high corporate taxes, high import tariffs and/or restrictions on dividend repatriation in a host country as follows:

(a) Over-pricing finished, intermediate and capital goods transferred to subsidiaries in high-tax countries so that its profits in these countries are reduced or eliminated and shifted to subsidiaries in low-tax countries;

(b) Under-pricing finished, intermediate and capital goods transferred to subsidiaries in high-tariff countries (except in the case of specific tariffs) in order to reduce customs duties to be paid; and/or

(c) Over-pricing finished, intermediate and capital goods transferred to subsidiaries in countries where dividend repatriation is restricted so that its income is unscrupulously siphoned out of such countries in the process.

Henry Kyambalesa
The guest author is the president of Agenda for Change


  1. The government, however, wishes to maintain the existing taxation regime in order to foster the development of the mining industry. Clearly, the two arguments are both reasonable.

    They clearly are not both reasonable arguments.

    The ‘investors will leave’ argument is just cover for corruption. The MMD don’t want to collect, not only any taxes, but will not collect any dividends from the foreign mining companies.

    The only rational explanation is that they are receiving about $200 million a year in bribes. This is why the first thing they discuss when ZCCM-IH received $18mn in dividends (they should receive $300mn) – how they were going to give it back to the mines and buy their otherwise worthless stock.

    Privatisation, FDI are just opportunities for corruption.

    In Cho’s excellent post “Quantum arrogance” (zambian-economist /com), First Quantum did not show much confidence that they could win any legal proceedings – they state:

    the Company recognizes that resolving this dispute through arbitration may not be in the best interest of either the Company or the GRZ

    How considerate of them. The truth is that these Development Agreements were drawn up in secret, stamped ‘classified’, and I am sure both pressure and incentives were given to make them as beneficial to the mining companies as possible. If they (foreign) public officials and they are US citizens, they can go to jail for that. There was no discussion in the press, in parliament, among civil society organisations on the contents of these secret agreements.

    As such, the Zambian government will not lose much of whatever reputation it has among the business community if it walks back from them.

    Mines will not flee because they have to pay taxes, they will pack up and leave when copper prices are back to $3,000 per tonne. So the money is to be made NOW.

  2. I agree with Mrk - copper is going to finish one day. We are lucky the price is so high now - every effort should be made to ensure we benefit from that windfall. We will be biting our fingers and tapping our foreheads regretting why we did we not act sooner when these foreign companies abundon the mines and the mining waste they are generating on account that they cant make any profits now because the price of copper is so low. Can you imagine the government taking over these mines in an environment where the copper price is $2,500 per tone? We will go back to the 1980s era. It will be a shame.

    So please let us not think for Foreign Investor and guess what they will do - better we think for Zambians and what they will benefit and be bold enough to negotiate - even be ready to go for abitration should we go against these secretly developed mining development agreements for the sake of Zambian people. I know one may ask 'what if the abitration goes against the government?' - I would say the contrary is also possible of course. I am quiet confident that there are a lot of educated, level headed patriotic Zambians who can weigh the pros precisely to decide on how we negotiate...!

    I agree though that the money government generates by over taxing our workers and from other sources should be properly used rather than on tourist trips of the government officials - am told they have gone to watch Biofuel development in Brazil...! I remember I was a little boy when people laughed at Kaunda when he said - we can make oil from grass!!!

  3. I think we all agree here that – when it comes to extractive resource which has finite lifespan, the thing to do is to maximize earnings from that resource and develop alternatives before it runs out. Copper and other minerals will run out, what happens then? Why are our current officials so adamant about the re-introduction of windfall taxes? Don’t they understand what is at stake? Why are they refusing to increase copper revenues when the prices are good?

    Many people have counseled that we should levy these windfall taxes. Chares Milupi, Bob Sichinga and others have talked about it. Even some important cooperating partners like the US Embassy and IMF have also suggested that we should go for it. Nej, our people don’t see it that way. Here in Canada, Potash a strategic resource based in Saskachewan, has been protected by Federal government from aggressive (hostile) takeover by foreign companies. In other words, national interests superseded international open business concerns.

    MrK has part of an explanation – corruption. I also butted with MrK about ideology – [put differently, the belief that neo-liberalism as being the fault]. Corruption and reliance on capitalism may certainly be to blame. But we need to analyze more deeply to find a solution. For, we can’t go on like this. Explaining the theories and merits and demerits of windfall tax, has been done many times on this space. Cho, HK and others have given us before deeper analyses on this issue, yet nothing happens.

    Cho, did a comparative analysis of types of taxes being charged in other countries – and clearly disproved the argument that if windfall taxes were re-introduced, that would scare investors. Indeed, there are many places where tax schedules are much higher than those being proposed in Zambia, yet companies are still mining. I also did spell away fears of – the Rule of Law argument and the violation of international agreements. I argued that – where “sovereignty” counts, any agreement entered into can be undone. It happens every day. This is premised on the logic that – a country cannot work against ITS OWN interests. It is illogical to give away everything you own – in the name of being respectful, leaving nothing for yourself. [...cont]

  4. Perhaps what is missing in our case – is having a core of Zambians (minimum threshold) who understand the importance of this issue (mineral taxes & royalties). Do we have enough ordinary Zambians who clearly understand that, what is going on is a suicidal course? If there are, then they don’t show it. And why Zambians don’t react even when their interests are at risk is puzzling. One explanation is – ‘a curse of peace’. We think that, if you protest to protect your interest is unpeaceful. That is why even when you are shot at, you do not react. We’ve seen it in Sinazongwe. We’ve seen it when the “anti-corruption clause” is being removed. There are many examples.

    To make matters worse, we’ve wimpy opposition parties. The nearly 70% they represent in popular votes in Parliament is meaningless. The Minority government pushes down our throats anything they want without fear of any repercussions. Because opposition parties fail to publicly protest or block in Parliament any move that MMD takes regardless of its disadvantages to Zambians, they (government & MMD) get away with it. [Add this to the corrupt resources at their disposal]. Therefore, we depend on the goodwill of MMD. And because MMD is not willing to collect fair and reasonable taxes on behalf of Zambians, unless Zambians use their vote next time round to express their displeasure – Zambia risks becoming a resource grabbing ground for foreigners.

    During KK days – perhaps UNIP and its government, was a far much more superior model in looking after national resources and assets. For sure, the attitude then was pro-Zambian as opposed to pro-investors today. And unlike now, you had an “enforcer” force. Today, because there is no enforcer block any where in the system – that is why even if corruption is rampant, there is no body we can call on to stop it or discourage it. The people who are supposed to check it are either too ignorant, passive, or themselves bribed out or bought with forex, sugar or fertilizer packs. Until when the Youth or the slumbering Zambians wake up – we are on the road of being enslaved yet again by foreigners.

  5. The Zambian Law Professor25 November 2010 at 15:13

    I don't agree entirely with those that are suggesting ongoing corruption. The moot issue is that our government simply lacks the legal + financial capacity and acumen to re-negotiate a billion dollar deal with the mines.

    The only way they can get out of such an arrangement is with the help of international legal experts. We honestly don't have the skills set that is required locally!

    Further, a more plausible case for renegotiation is the fact that these agreements may have been corruptly entered into under duress or fraudulently (a probable source of the USD 8 million sitting in a known government account). All the investigative wings would need to show is that there is a direct linkage between the mining houses and the monies and, negotiations can be kick started.

  6. The Zambian Law Professor,

    Further, a more plausible case for renegotiation is the fact that these agreements may have been corruptly entered into under duress or fraudulently (a probable source of the USD 8 million sitting in a known government account). All the investigative wings would need to show is that there is a direct linkage between the mining houses and the monies and, negotiations can be kick started.

    If there are US owned mines, bribing a Zambian official by a US citizen would be directly illegal under the Foreign Corrupt Practices Act.

    " Requirements

    The anti-bribery provisions of the FCPA make it unlawful for a U.S. person, and certain foreign issuers of securities, to make a payment to a foreign official for the purpose of obtaining or retaining business for or with, or directing business to, any person. "


    Provisions and scope

    The anti-bribery provisions of the FCPA prohibit:

    Issuers, domestic concerns, and any person from making use of interstate commerce corruptly, in furtherance of an offer or payment of anything of value to a foreign official, foreign political party, or candidate for political office, for the purpose of influencing any act of that foreign official in violation of the duty of that official, or to secure any improper advantage in order to obtain or retain business.
    [edit] Persons subject to the FCPA

    Issuers – Includes any U.S. or foreign corporation that has a class of securities registered, or that is required to file reports under the Securities and Exchange Act of 1934

    Domestic concerns – Refers to any individual who is a citizen, national, or resident of the United States and any corporation and other business entity organized under the laws of the United States or having its principal place of business in the United States

    Any person – covers both enterprises and individuals

  7. Hi!

    While Musokotwane is making up his mind, the market doesn't wait for you. The good prices can evaporate in a minute. Read the article below.
    [[The December copper contract on the Nymex slipped five cents to $3.70 (U.S.) a pound. The base metals sector was down 2.9 per cent with Teck Resources off $2.09 at $48.82.]] -- This is a passage from the article.


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