We always encourage contrasting perspectives on Zambian Economist. The article below by the Chamber of Mines is a useful counter perspective on the windfall taxation debate. It represents the best that the mining companies have come up with in arguing for the status quo:
The issue of tax incentives for the mines vis-à-vis the call for higher taxes keeps popping up at various fora. People hold different opinions on the matter, but major stakeholders are generally agreed that whichever way it goes, it must be a win-win situation.We have made our position very clear over the current tax regime on the mines. Taxes should not cripple the industry because that would have an adverse effect on the economy.
Mines, some of which are barely breaking even, are already contributing trillions of Kwacha to the national treasury through various taxes. But still, there are proponents of more taxes, particularly the controversial windfall tax.This debate cannot be stifled, especially in a democratic dispensation such as ours, but it would be important to discuss it from a point of knowledge rather than emotion.Finance and National Planning Minister Alexander Chikwanda, an accomplished economist who understands every bit of our national economy, dismissed the call for windfall tax, almost unpalatably.The windfall tax, which was introduced in 2008 was abolished in 2009. It is important to note that the 2008 Income Tax (Amendment) Act, among other measures, increased mining taxation as below1. Company Tax was increased from 25 percent to 30 percent, Mineral Royalty Tax was increased from 0.6 percent to three percent, this year Mineral Royalty was increased to six percent.2. Capital Allowance was reduced from 100 percent to 20 percent.Chamber of Mines of Zambia general manager Frederick Bantubonse explained that if by windfall tax we mean taxing “super profits” then the 2008 Income Tax (Amendment) Act introduced two types of windfall taxe, that is, one based on revenue (what has been commonly refered to as windfall tax) and one based on profit called variable profit tax since this is triggered when profits are high.When in 2009 windfall tax was abolished the other windfall tax based on profit remained and is still applicable when a company makes operating profit of over eight percent.From where we stand, the abolition of the windfall tax has attracted more investors to the mining sector which was under threat when the dreaded tax regime was in place. The abolition of the windfall tax was aimed at making effective tax rate more comparable with what is prevailing internationally and, therefore, more manageable.Government’s position on the matter has not changed and that is our position, too, because it is in the interest of the mining sector as well as the national economy which has been growing at a greater rate since the windfall tax was abolished.Instead, Government should provide more tax incentives to encourage mining companies to undertake more mineral exploration, as Tranter Resources Zambia Limited chief executive officer, Dr Sixtus Mulenga, recently observed.Exploration would result into more mines being opened, and the more the mines, the bigger their contribution to the national treasury. Not only that, it would also generate the much-needed employment.Dr Mulenga, a mining expert, said Zambia needs a sustainable base on which to grow its mining sector. He urged Government to encourage international mining companies to partner with Zambian mining firms, through a deliberately-designed attractive tax incentive scheme to enable easy transfer of technology and business management skills to the locals.Despite lying in one of the world’s largest metallogenic areas, the country is yet to be fully explored. He said Zambia has a long history of mining stretching over 100 years, making it possible to attain higher levels of growth and socio-economic development. He, however, said the sector is challenged by inadequate basic geological data as less than 60 percent of the country is geologically mapped. Dr Mulenga said the sector also faces challenges of lack of adequate infrastructure in areas of high prospects and shortage of geologists.“Mineral exploration is long-term and requires high initial capital. Government should facilitate the creation of the funding facility for mineral exploration for Zambian entrepreneurs,” he said.He also called on Government to ensure that licences given provide sufficient period to cover full exploration, adding that mining is a serious business that attracts huge investments.As Chamber of Mines of Zambia, we support such progressive ideas. Zambia is rich in minerals and exploration works would add to the bulk of the mines’ contribution to Zambia’s socio-economic development.There are many companies involved in exploration work and one such is the China Non-ferrous Metal Corporation Luanshya Copper Mine (CLM) which has earmarked US$10 million for exploration of copper ore in Lufubu area to extend the mine’s lifespan.This project will see another open pit mine being opened in Luanshya for increased job creation. CLM has already spent US$2 million in the exploration works going on at Lufubu Block, a few kilometres from Muliashi Open Pit Mine, which is set for official reopening this month end.The Association of Zambian Mineral Exploration Companies (AZMEC) also acknowledges that the subject relevant to our national development is not the reintroduction of the windfall tax but investment in the sector.AZMEC president Gilbert Temba said increased investment in the sector will benefit the local people through employment-creation, skills and infrastructure development.“By increasing both local and foreign investment, the industry will develop and grow for the benefit of the local people. Citizens have the right to exploit natural resources extracted from their grounds,” he says.Mr Temba said Government should provide incentives for investors’ benefit by facilitating long-term borrowing and establishing more capital markets to achieve optimal benefit from the industry.Increased production in the mining industry generates more revenue and contributes positively to economic development. With more investment in the industry, Zambia’s annual copper production turnover could beat the current 750,000 tonnes.Such is the debate that relates directly to development and not windfall tax that may suffocate the industry.Below is a tabulation of Zambia’s tax regime as obtained from the Ministry of Mines, Energy and Water Development:Tax Regime and IncentivesSurcharges on mineral production compare very favourable with most countries in terms of royalties and taxes, and a number of financial incentives have been created specifically to encourage investment in the mining industry.RoyaltiesA royalty is payable calculated as two percent of the market value of minerals f.o.b. less the cost of smelting, refining and insurance, handling and transport from the mining area to the point of export or delivery within Zambia. Royalty payments may be deferred if the cash operating margin of a holder of a Large Scale Mining Licence falls below zero.Corporate TaxExporters of copper and cobalt are levied 35 percent of taxable income whereas other mineral and “non-traditional” commodities (that is, excluding copper and cobalt) attract a levy of 15 percent. Companies listed on the Lusaka Stock Exchange are levied at 30 percent of taxable income.
Relief from Income TaxAny investment in mining, including prospecting, attracts deductions from income tax on the following expenditures:•Capital expenditure; allowances of 25 percent on plant, machinery and commercial vehicles; 20 percent on non-commercial vehicles; five percent on industrial buildings.•Prospecting expenditure under special circumstances.•Mining expenditure under special circumstances•Mining expenditure on a non-producing mine•Mining expenses incurred by a mine of irregular production close to the end of its life.Relief from other surchargesA holder of a mining right is exempt from customs, excise and VAT (Value Added Tax) duties in respect of all machinery and equipment required for exploration or mining activities.RemissionThere are no restrictions in respect of the amount of profits, dividends, or royalties that may be externalised, although a withholding tax of 15 percent is levied.