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Friday, 14 January 2011

Mining Taxation In Zambia (A Response to Trevor Simumba) (Guest Blog)

The article by Comrade Trevor Simumba states that "Australia is now implementing the Mineral Resource Rent Tax (MRRT), which is a proposed tax on profits generated from the exploitation of non-renewable resources in Australia. It is the replacement for the proposed Resource Super Profit Tax (RSPT)The profits-based tax, to be levied on 30% of the ‘super profits’ from the mining of iron ore and coal in Australia, is proposed to be introduced from 1 July 2012.”

If this reflects the total of what Australia extracts as tax revenue from mining operations in the country, then Zambia extracts more in tax revenues than Australia. Currently, mining companies operating in Zambia are 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 currently the saga 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.

My initial position concerning the taxation of mining operations in Zambia was for an increase in the mineral loyalty from 3% to 5%, a reduction of variable profit tax from 15% to 13%, leaving the other tax provisions at current rates, and without the contentious windfall tax. Also, my position included the provision 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.

The problem I have noticed in arguments for “windfall tax” is the lack of specificity. How much should the windfall tax rate be?

There is a need to be mindful of the fact that mining companies make other contributions to the Zambian economy in addition to the taxes they pay. In Solwezi district, for example, local authorities are working in collaboration with the Kansanshi Foundation (which is funded by Kansanshi mine board to upgrade social and physical infrastructure in the district) in tarring and maintaining local streets—such as the Kimasala, Kyafukuma, Mbonge, Messengers, Kyalalankuba, and Kansanshi Mine streets. And construction of a dual carriage way from Chingola to the Lumwana Mine is entirely being financed by Australian Equinox Minerals. Mining companies are also providing healthcare services to their employees, employees’ dependents and local folk, thereby lessening the burden on the national government in providing for such services.

There are, of course, many other contributions we should expect mining companies and other multinational enterprises to make in efforts designed to uplift the socio-economic welfare of their host communities, including the following:

(a) Supporting the efforts of local communities in rehabilitating mentally deranged, physically handicapped, and other disadvantaged members of society;
(b) Making generous contributions to educational institutions, thereby helping to educate and prepare the citizenry for tasks that will eventually benefit the local communities and society at large;
(c) Working hand in hand with municipal authorities in providing low cost housing, and in combating crime; and
(d) Initiation of a “discretionary budget” to enable managerial and supervisory personnel to honor locally based charitable organizations’ requests for cash and/or merchandise donations, sponsor employees to participate actively in community projects, and support host communities in times of crises.

To flip-flop somewhat, I would recommend an increase in the mineral loyalty from 3% to 6% and an increase in income tax on foreign companies and expatriate consultants providing services to locally based mining companies from 15% to 20%, leaving the other tax provisions at current rates, and without the contentious windfall tax.

Henry Kyambalesa
The guest author is the Founder and President of the Agenda for Change (AfC) party.

(The Zambian Economist encourages guest contributions from leading Zambian thinkers on matters relevant to national development. The purpose of these notes is to stimulate discussion and ensure logic and impartial critique plays a leading role in shaping public debate. See the special guests page for more information).

9 comments:

  1. Prof. thanks. I agree with most your issues. Just one point of clarification. the 30% MRRT that Australia will start implementing in 2012 is in addition to corporate tax which is currently 30%. The government will also cut the company tax rate from 30 percent to 29 percent from mid 2013 and to 28 percent by mid 2014, and will refund state-based royalties currently imposed on mining projects.
    I think what we need in Zambia is a transparent mining tax regime that is sustainable over the long term and also that the Government uses this extra revenue on capital expenditure and not on salaries for civil servants.

    ReplyDelete
  2. Prof. Kyambalesa wrote:

    There is a need to be mindful of the fact that mining companies make other contributions to the Zambian economy in addition to the taxes they pay.

    The problem is that there about 2.5 billion in unpaid taxes and unshared profits leaving the country every year.

    ZCCM-IH should be collecting about $400 million a year in dividend payments - instead, they received $18 million, which they couldn't give back fast enough.

    The mines should be paying at least $700 million in corporate profit tax, which of course they are not.

    So whatever they are paying in other taxes is completely irrelevant to either their obligations in tax contribution or their obligation to the shareholders of ZCCM-IH. Which is probably prosecutable.

    There is the collectability of taxes to consider.

    ReplyDelete
  3. How about this for collectability:

    If this reflects the total of what Australia extracts as tax revenue from mining operations in the country, then Zambia extracts more in tax revenues than Australia. Currently, mining companies operating in Zambia are 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.


    Scrap all those taxes.

    Then raise mineral royalty (revenue) tax from 3% to 20%.

    We know how many tonnes are leaving the mines, and we know what the market price for copper is. Simple. Easy to monitor and collect. It will be very hard to evade.

    ReplyDelete
  4. Mr K

    Scrapping the current tax regime to replace it with one flat rate royalty of 20% would be complete folly.

    While royalties are the easiest tax for authorities to measure, BUT it is the very worse tax from the point of view of a mining company - as it takes no account of costs. Here are the reasons why countries do not rely exclusively on flat rate royalties:

    - High cost mines are penalised compared with low cost mines. This goes against the principle of equity and discourages the extraction of low grade ore - depriving Zambia of extra production and the corresponding benefits of this.

    - Royalty must be paid even if no profits are made. This can put firms under intense financial strain, leading to possible closure, and reduced investment in the long-run.

    - Royalties are not generally applicable in double taxation treaties (i.e. royalties cannot be deducted against source country profits in the same manner as company income tax), so that the global tax position of a multinational is much higher with a royalty as it is with an equivalent company tax.


    - No other mining country imposes such high royalties (given the risks faced in Zambia) - Zambia would drop from being relatively competitive now, to being one of the worse destinations for investment.

    People have been asking for better analysis of the mining situation, with data to back up the debate. Where do you get this 20% from? Is from a long study of the data? Would you like to reveal some of your thinking?

    ReplyDelete
  5. Cho and everyone

    I may have missed it in this website, but there has been no talk of the recent stability agreements that the government has made with the mines.

    Is it because these agreements have yet to be finalised?

    See:
    http://www.parliament.gov.zm/index.php?option=com_docman&task=doc_download&gid=770


    details:
    - mining companies pay off debt from the 2008 regime (specifically the windfall tax debt)

    - current tax structure stabilised for 10 years

    - windfall tax not to be introduced in this 10 years.

    Four points to make:

    - any talk of changing the tax structure must now relate to these new agreements

    - given the criticism that the government received over the lack of transparency of the Development Agreements, doesnt this come almost as close. yes, we know what the structure will be - but there did not seem to be much (any) consultation with other stakeholders before signing these agreements.

    - what scope does parliament have to stop this (if they even want to)? the Committee on Delegated Legislation has to write to query actions from the Minister of Finance and launch a parliamentary vote. Does it apply in this case?

    - if we accept that the tax structure is now set for the next ten years, what room do we know have to play with?

    ReplyDelete
  6. Richard,

    Mr K Scrapping the current tax regime to replace it with one flat rate royalty of 20% would be complete folly.

    While royalties are the easiest tax for authorities to measure, BUT it is the very worse tax from the point of view of a mining company - as it takes no account of costs.


    That is because the mines play footsie with what their costs actually are. As we have seen, when it is up to the mines to self-report what their costs and profits are, no taxes are paid, no matter how much profit they have made.

    Here are the reasons why countries do not rely exclusively on flat rate royalties:

    - High cost mines are penalised compared with low cost mines. This goes against the principle of equity and discourages the extraction of low grade ore - depriving Zambia of extra production and the corresponding benefits of this.


    That may be so, but it is their own fault. They have been evading taxes on a massive scale. Like I said, it is their own fault for trying to maximise profits through tax evasion.

    - Royalty must be paid even if no profits are made. This can put firms under intense financial strain, leading to possible closure, and reduced investment in the long-run.

    It is very easy to see how much profits the mining sector as a whole is making. If the mines have a breakeven cost per tonne of $2,000, and the international market prices is $9,000, they are clearly making $7,000 per tonne profits.

    If the government leaves it up to the mines to determine their own profitability, they might as well keep making capital investments just to avoid paying taxes to the state.

    - Royalties are not generally applicable in double taxation treaties (i.e. royalties cannot be deducted against source country profits in the same manner as company income tax), so that the global tax position of a multinational is much higher with a royalty as it is with an equivalent company tax.

    At the same time, multinationals are evading taxes in all countries by setting up headquarters in tax shelters - the cayman islands, the antilles, etc.

    How is that fair? And how would the Zambian government ever find out what their 'real' profits are, if they can move them around the globe at will?

    ReplyDelete
  7. It is ok to be 'fair' to the mining companies, but when are you going to be fair to the Zambian government or people?

    If anything has been shown, it is that the concept of fairness does not apply in international business. You take everthing you can get. And if the choice is between the mining companies winning and the government winning, I choose the government every time.

    - No other mining country imposes such high royalties (given the risks faced in Zambia) - Zambia would drop from being relatively competitive now, to being one of the worse destinations for investment.

    The copper isn't going anywhere. They'll still have to go to Zambia to get it if they want to go into the copper industry.

    People have been asking for better analysis of the mining situation, with data to back up the debate. Where do you get this 20% from? Is from a long study of the data? Would you like to reveal some of your thinking?

    I get the 20% from the fact that this is what they would be paying if they were actually fullfilling their present tax obligations.

    ZCCM-IH should be receiving about $300 million in divdidend payments - they received $18 million. The profit tax is 35%, that would mean they should be paying about $700 million - last year they paid $50 million.

    At the current rate of at least $6,000 profit per tonne, they would be paying $2.1 billion.

    If the mining industry now is $6 billion, at 20%, they would pay a mere $1.2 billion.

    So the difference is not really the amount, it is the collectability.

    We know what they should be paying in income tax and dividends, we also know that those seem to be pretty uncollectable, from the results we are getting today.

    So let's have a collectable tax, and if the mines object, they have been getting a free ride for the last 6 years anyway.

    ReplyDelete
  8. Richard,

    An astute observation.

    No that statement was made while we were on blogging leave.

    Perhaps it's the value of this website that if we don't mention such no other medium picks up the detail.

    I was planning to publish it as part of our extendive review of mining policy. A paper is being prepared for our leading voices agenda.

    But before doing that I am seeking clarification from Hon Musokotwane on the nature of the negotiated settlement under Zambian law. As I pointed out previously I believe any post 2008 Act DAs are illegal. That Act makes it clear that all DAs are null and void.

    I therefore suspect this is an MMD party commitment that has no force unde Zambian law.

    But thank you for raising it.

    I wish more people besides this website can be following up these things, but unfortunately when we are on leave, such important matters get lost by the way.

    ReplyDelete
  9. Zambian Economist

    It is interesting, did the Mining Act just abolish the old DAs, or ANY stability agreement between the GRZ and a mining company.

    Changing a tax rate needs the approval of parliament. But a stability agreement is not actually changing anything. I have no experience in law so, i am not sure about all of this.

    However, I agree with you about the quality of the media here. Nor did any of the NGOs pick this up, although I know their resources are very constrained.

    Again, this website is a really good resource on Zambia, keep it up.

    ReplyDelete

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