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Thursday, 5 April 2012

The Case Against Windfall Tax

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 below

1. 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 Incentives

Surcharges 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.

A 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 Tax
Exporters 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 Tax
Any 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 surcharges
A 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.

There 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.


  1. 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.

    A windfall tax is a tax on revenues, not on profits. That is the whole point. They don't want it, becaus it is objective and can't be fudged, unlike taxes on 'profits'.

    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.

    When companies DECLARE 'profit over 8 percent'. Guess what, Mopani was caught transfer pricing copper to their subsidiary in Madagascar, for basically the cost of production. Obviously, they were not taxed on those profits.

    Does Frederick Bantubonse really believe that we are so stupid that we would confuse a tax on revenues with a tax on profits, just because he calls them both 'windfall taxes'?

    The abolition of the windfall tax was aimed at making effective tax rate more comparable with what is prevailing internationally and, therefore, more manageable.

    More manageable how? I understand that the coward will look for safety in numbers, but why is it so beneficial that Zambia's tax rate is 'more comparable with what is prevailing internationally'?

    How is this a good thing? And how is the tax rate 'therefore, more manageable'?

    Translation: without the 'dreaded' Windfall Tax, mining companies know they can continue to evade taxes.

    All the more reason to introduce it, even make it retroactive, considering it was already passed before.

    Here is a question: can the government prove that they are collecting more taxes, now that they are relying on the variable profit tax again?

  2. This is how Guy Scott, now VP, described the need for a collectable tax like the Windfall Tax in The Post, in an article aptly named Getting Our Pound Of Flesh (no cartilage, no bone, just flesh):

    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?

    1. MrK,

      Thanks for flagging this up.
      We had shared it back in 2011.

  3. Hi Cho,

    Thanks for flagging this up. We had shared it back in 2011>

    And yet, how quickly they forget. Now they are saying - oh no, we don't want taxes, you just 'bring jobs'. Even though only 40,000 of Zambia's 5,300,000 strong workforce (and growing) are employed in mining. That's 0.75% of the labour force. If they doubled jobs in mining, that wouls 'soar' to 1.5% of the workforce. And obviously this is not going to happen if prices fall, and eventually they will.

    I really want to know what happened from the PF. Is the new cabinet taken into a smoke filled room, and told: "Here are 13 pieces of silver, and 13 bullets made of lead."

    I mean, who is really in charge of Zambia's domestic tax revenue policy? Anglo-American De Beers, and their Rothschild owners?

    Because this is a joke. It is pretend democracy. You can vote for anyone you want to, just as long as you don't expect policy to change in any relevant way.

    By the way, have you read Eustace Mullins' Secrets Of The Federal Reserve? The book is also available online here.

  4. Real smooth, Mr K ! ;-)

    PF leaders have no luck ;-)

    Here, bloggers have an excellent memory and ... proofs !

    Look at comments of Sichinga in 2011

    Foreign mining firms last year earned US$6 billion about K29 trillion in gross revenues from a record export of 822,676 metric tonnes of copper, the highest output in the country's history.

    While revenues by mining firms rose by 79.6 per cent largely due to an upswing in the average price of copper on the international market, the country's Treasury only got K1.7 trillion - the revenue which includes arrears from the disputed 2008 mining fiscal regime.

    Commenting on the revelations, Sichinga challenged finance minister Dr Situmbeko Musokotwane to disclose "where the variable tax is" as 2010 results revealed that mining taxes continued to contribute a paltry two per cent to the total tax revenue basket of the Zambia Revenue Authority (ZRA).

    Sichinga said there was "something wrong" with the current regime which only allowed the country to get a paltry K1.7 trillion from the total mineral export revenues of K29 trillion by foreign mining firms last year.

    "There is something wrong in the whole management of this important resource copper," said the Lusaka business consultant. "For as long as the mining companies continue to provide pecuniary partisan benefits to the MMD at the expense of the nation, those benefits will continue to sway the minds of the current fiscal managers."

    Sichinga said there was no need of keeping in power a regime that was sacrificing its people over investors.

    "I want to challenge political parties to make this a campaign issue," he said.

    "They should be able to go to the people and say 'if you vote for us, we shall get money from the mines than what the current government is doing.'"

    He said the current regime was abating the deprivation of the country's resources by foreign mining firms.
    Sichinga said the current contribution of the mining sector was not acceptable.
    He called for the reintroduction of the windfall tax on copper mining.

    "I want to challenge President Rupiah Banda and Mr Musokotwane - the economist - to show us where proceeds from the variable tax which they were talking about is," Sichinga said. "Since he Dr Musokotwane said the variable profit tax is better than the windfall tax, our question to him is 'let him breakdown the tax contributions of each tax and show us."


    and now read the lies of Veep

    VICE-President Dr Guy Scott says government has not backtracked on its campaign promises.

    And Dr Scott says it is only voters that can raise the quality of political debate in Zambia.

    During an interview with a United Kingdom-based online radio, Crossfire Blogspot, the interviewer indicated to Dr Scott that it appeared the PF was backtracking on some of its campaign promises with the recent description by finance minister Alexander Chikwanda of advocates of windfall tax as "lunatics".

    Sata removed Simuusa from mines ministry because he said “the country might bring back the windfall tax if copper prices hit $10,000” and because he wanted to to increase zambian stakes in mines from around 15% to 35%...

    $10,000 !!!!


    if Sata and Chikwanda carry on this way, it will be obvious that 2011 elections were an ELECTORAL SCAM !

  5. This comment has been removed by the author.

  6. MikeTe,

    And I haven't even touched upon who owns half al billion dollars worth of Glencore corporate bonds (Nat Rothschild, heir to Baron Jacob Rothschild). Mopani is now owned by Glencore AG, whose founder and now former CEO was convicted and pardoned by Bill Clinton.

    Also, guess where former BP CEO Tony Hayward landed after he compounded an oil spill with a chemical spill (Corexit) make the oil spill look much smaller, in order to minimize BP's corporate liability? He ended up with a billion dollar venture with Nat Rothschild, called Vallares. You should read: (Financial Times) Rothschild Links To Glencore, by Emiko Terazono.

    When people said 'the private sector' back in the 1990s, they were being disingenuous. The mining fraternity is not very large, and it should have been clear that we are talking about a very limited number of players - who have been around since before colonialism (like in the 1880s).


    I have a compromise that no one except tax evaders can object to.

    1) If you as a mining company pay all the taxes you owe under the present regime, you keep on paying those current taxes. However, if you are caught transfer pricing, violating OECD guidelines, not paying your dividends, or evade taxes in any other way, then...

    2) A 20% revenues tax kicks in. This will go at a higher rate until all the taxes owed have been collected. It will then revert to the 40% overall tax that corporations are supposed to pay right now.

    The only corporations who would object to this, are the ones who are determined to evade taxes, which is a crime for ordinary people.

    Right now, a big reason why corporations are not paying the taxes they are due to pay, is not because taxes are too high, it is because there is no consequence for violating the law.

    1. You are right

      I hope that the audit of the mining companies will be used for exposing those crooks and looters otherwise the PF will betray the Zambian People...

  7. Hi Cho,

    This is an extremely important addition to our understanding of tax evasion. Now we can see where our resources go to. There is a reason why a corporation like Glencore International PLC is headquartered in Switzerland. The Cayman Islands, Bermuda, Jersey and the likes are mere conduits that allow money to disappear into the 'other' economy. Feeding this alternative economy is what the Development Agreement are all about. This is why 'low taxes' will never develop any country. It merely facilitates theft.

    This is a transcript of an interview of tax expert (I think I can call him that) James Henry, on Amy Goodman's Democracy Now!

    (YOUTUBE) GlobalElite Hiding 32 Trillion in OffshoreAccts

    Clip from Amy Goodman's Democracy Now!, interviewing James Henry, author of "The Price Of Offshore Revealed".

    Amy Goodman: Let's talk about the continent of Africa, and what this means for various countries, and most importantly the majority of the population there.

    James Henry: Well for example Nigeria is supposedly a debtor country but when you look at all the unrecorded capital outflows that have flowed out of Nigeria, it turns out that Nigeria is actually like many other developing countries, a net creditor of the richest countries in the world. So if you add up and accumulate all the unrecorded capital flows that accrue to the Nigerian elite, political as well as private sector, the tiny share of that country's population owns vast amounts of offshore wealth.

    So the debt problem is not really a debt problem, it's a tax problem. Developing countries account for about 1/3, we estimate, of the $21 to $32 trillion in financial assets that are offshore.


    James Henry: We're not suggesting that there may not be problems on the spending side, but it is outrageous for the wealthiest people on the planet to pay zero taxes. What this does to developing countries in particular, because they can't tax income, because they can't tax wealth, they end up taxing low and middle income people, with VAT taxes and sales taxes that are regressive. So basically what you are seeing is that globalisation is driving a big hole through the nation state system that was designed to raise tax revenue.


    Also check out:

    Tax Justice Africa

    (TAX JUSTICE AFRICA) The Price of Offshore Revisited and Inequality Underestimated


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