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Monday, 14 February 2011

The Case for Windfall Taxation

An interesting article from the PF Vice President appears to defend the logic of the windfall tax along the lines articulated on this website. Of course he has written this in his personal capacity, but it is encouraging that he has recognised the key problems with the status quo and how the windfall tax remedies that. 

The constant hubbub over the copper mining windfall tax, coming from opposition leaders and NGOs, must be disturbing to investors in the sector. Yes, they have guarantees from the current government that the dreaded WT will not come back for many years, but what is such a guarantee worth in a country where the government can change overnight (even if the Electoral Commission has zero credibility at present)?

I agree with those who say there should be a cross-party consensus on mining taxation – so that the likelihood of unexpected changes is minimised and the mining houses can get on with their business. However, to achieve a consensus some work is needed to address genuine concerns. For example our finance minister Situmbeko Musokatwane must go beyond the argument that he has been an economist since 1980 and therefore knows what is good for us. How is that supposed to convince those of us who have been economists since 1965? Or others amongst our talented policy analysts who may have been economists since 1985 or 1990?

One of the attractions of the windfall tax to many commentators is its apparent objectivity. You take the amount of copper produced, multiply by the LME price in excess of the various “trigger points”, and alleluia, you have Zambia’s share of the action. By contrast, the system currently in force is heavily dependent upon taxing computed profits, and many people suspect that profits are less than objective. There is too much fudge-factor: non-transparent “hedging”; losses carried forward; so-called corporate responsibility expenditure; these and those allowances; transfer pricing; negotiated exemptions.

Let me emphasise that, viewed purely as a mathematical formula, the present tax regime, if applied objectively, would yield about the same revenue as was targeted by the windfall tax (i.e. 40 per cent plus of genuine profit). So there is no real argument about targets. It is the ability and will of the Zambian authorities to collect all of it – i.e. to hit the objective level - that is of concern to those of us who know our country. And after all, if countries that enjoy the advantages of sophisticated administrative machinery such as the UK can suffer from corporate evasion of profits tax, then how can we to be sure we can collect all that is due to us?

In 1980, I was doing some calculations regarding the costs and benefits of electrifying what is today the Mpongwe district. I stumbled upon some information which, when interpreted, exposed the fact that Ian Smith & Co had helped themselves during the UDI period to about USD25 million of Zambia’s power generation capacity. I made a lot of noise and eventually the Zambian system bestirred itself sufficiently to politely request the interim Soames administration in Harare for the money. It was paid to us; but if I had not done the work nobody on our side would even have been aware that we were owed it. Various Commissioners of taxes assure me that things have changed; after many capacity raising workshops we are now more alert, more difficult to cheat.

I remain to be convinced that we are fortified against cheating, including cheating ourselves. I am told that a certain international company was given a tax exemption for the duration of the construction of a Lusaka shopping mall that it was orchestrating. The mall is long completed, but the exemption is still in force. Who is asleep on the job?

So the government has quite a way to go to convince most of us. The gulf between Zambia Inc and Zambia Left Out, between the elite and the rest of us, may not be as wide as it is turning out to be in Egypt, but it is widening. It will take more than Musokotwane’s CV to get that important broad-based agreement on how to tax the mines.

Finally, at the risk of being accused of harping on, let us note that the 2009 (current) tax formula allows 100 per cent capital expenditure write-off in the first year. This is, quite bluntly, stupid. One of the things Zambia wants from the mines is employment opportunities. Subsidising capital expenditure through tax write-offs biases the planning of mining companies in favour of high-capital, low-employment technology. Next time you are forced off the Great North Road by a brand new 100 tonne ore dumper truck do not rejoice: there are 100 miners waiting to be laid off when it gets to its destination. Capital expenditure can destroy jobs as easily as create them.

I seem to recall we once had something called “selective employment tax” which acted to give employers incentives to create jobs – reducing profits tax by an amount proportionate to the size of work force. Perhaps the young economics graduates in the Ministry of Finance, led by their youthful boss, can dust off some of its old files with a view to evaluating pro-employment taxation formulae. The files may of course have been lost in the process of computerisation; but even a computer should understand the simple point.


  1. Zambia needs to cultivate sectors other than mining. Mining is a passive strategy for growth. It is subject to abnormally drastic fluctuations and eventually ends once all the resources have been removed.

    A windfall tax is appropriate. Revenues from such a tax should be earmarked exclusively for government-sponsored maturing of an infant industry in which Zambia has some comparative advantage.

  2. One upcoming Leading Voices short paper for March deals with Diversification and makes that very point. We clearly need to move away from copper but we need its revenue more than ever. Policy development needs to recognise that.

  3. Offshore Banking and Tax Havens 1-2 Democracy NOW!

    This part of the Democracy Now! program of Amy Goodman illustrates perfectly why Zambia cannot depend on tax collection without major tax reform.

    We all know how Mopani and Glencore have been defrauding the Zambian taxpayer with their money laundering of Mopani's profits.

    This is not just about Zambia and local obstacles of collecting taxes from foreign mining companies.

    This segment is also available directly from Democracy Now!


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