Editor's note: This is a guest post by Kaela B Mulenga (PhD), a resident contributor to Zambian Economist. He is an economist and development consultant based in Canada. You can find him on Facebook and via email
Mineral taxing issues for Zambia have been exhaustively discussed in several of my previous articles. I normally make comments to complement the excellent tax debate found on Zambian Economist (ZE). But somehow the message I propound hasn't sank in with our taxing authorities. Let me elaborate.
I do realize that copper prices do sometimes rise and other times they fall. And that consumer preference does change. Indeed things do happen. With no investors and when customers turn away from buying copper, we lose revenue. I know that. Therefore I am quite concerned about the dependence on copper, which after all one day may no longer be in demand.
In this situation, the solution according to me – would be to diversify away from copper now, and develop a more balanced and integrated economy. But you cannot diversify if you do not have the financial resources. Therefore apart from user fees of all sorts – borrowing and taxing seem to be the main options available to governments for raising revenue.
I prefer that we go the taxing route rather than borrowing money from abroad. I totally agree with Zambian Economist's position [available on Zambian Economist site] – that the biggest drawback Zambia faces is the lack of a long-term tax strategy, which should transcend different Zambian administrations. Zambia is not the only country producing copper – so models on which we can base our taxing policies are already available else where.
In developed market economies, taxing issues are used to sway voters. Lower taxing doctrines are identified with countries where ideologies tend to be socially conservative or Republican. In these countries, household and corporate taxes are lower. On the other hand, liberal or social democratic governments tend to favour higher and progressive tax rates – for, they argue that – that is necessary to encourage national income redistribution.
In fact the two-party political system in USA and UK for example, is driven by tax regimes.
In developing countries like Zambia, where the economies are still weak, and that survival is in general based on raw materials and natural resources – mineral taxes and royalties together with commodity export taxes become important. Rather than selling policies to voters as they do in DCs [Developed Countries], LDCs [Less Developed Countries] politicians have to demonstrate to the investors, the fairness and attractiveness of their tax regimes. Otherwise nobody comes to invest.
In addition, although only a small portion of populations in poor countries have formal jobs, nevertheless, everybody is affected by the taxes levied. Surely even those who are unemployed reap some benefits from roads or flour milling plants once built. In short developed or not, the decisions government makes regarding taxes, therefore, become crucial. Government needs huge amounts of resources to get rid of poverty.
In Zambia we need a taxing policy which can remain in place regardless of which political party or leader is in power. This helps to remove confusion. So far every government which comes in thinks that it knows what is best and has all the solutions. In the meantime while this anomaly persists, foreign investors have a field day extracting all the profits they can get from the country. The differences over the inclusion of windfall tax in the government's revenue making tool box, is a typical example.
The government of Pres Patrick Levy Mwanawasa managed to introduce the windfall tax without any uproar from investors. But Pres Rupiah Banda's (RB) administration reversed it. And Pres Michael C. Sata's PF government, in spite of the fact that in 2011 they campaigned to support it - refused to re-introduce it. This sends a confused message to the investors.
An explanation why Zambia behaves this way is not clear, but there are some hints we can consider. First, I do not believe that Zambians are convinced that minerals – as non-renewable resources will one day get exhausted. Or maybe they fail to visualize that once these resources vanish, it is imprudent not to be ready for that fateful day. Indecision has contributed significantly to the prevailing instability.
Second, we seem not to be convinced that – even though our largest copper consumers would not dump us, China and India like everybody else are also subject to business cycles. This means that their economies too are vulnerable. Irrespective of commodity prices trend, they too will have to be dictated to by the booms and bursts pattern. As the prices rise or fall, they make adjustments in consumption, which means that at some point, their economies would also stop growing. As they reduce purchases of copper, we go down with them.
As sellers of the raw commodities, our goal then should always be to take advantage of boom times. Hence, during periods of good commodity prices, that should be the time when we can maximize revenue and in return economic development. A diversified, balanced and integrated economy should be the priority then.
Third, in spite of Zambia being in the mining business for over 100 years, we seem not to have all the necessary information and critical knowledge on which to base important (production or financial) decisions. Consequently each new investor who comes along continues to bully us because they know that we lack data or info to counteract their actions. The pomposity of Mr. Kishore Kumar of KCM demonstrates this. Although we're living in an information age, facilitated by the arrival of internet, unless one is aggressive, mining information – on mineral prices, costs, inventories, etc., remains a challenge.
Given accurate price and cost information, this could assist Zambia in designing clever tax policy/laws and/or working out effective compliance strategies.
When agreements are being entered into, investors irritatingly continue to manipulate cost information to get favourable terms from our authorities. This is in addition to the false promises they (investors) make concerning job creation argument to get operating licenses.
During negotiations, somehow, the investors' demands overshadows – their access to untapped resources, cheap labour, use of local infrastructure and the large profits they end up reaping during boom years. These people would raise anything they can get, pointing to issues like the cost of doing business in the country and others as a way to demonstrate that they're making sacrifices on our behalf when in fact not.
What I am trying to point out here is that – from the outset, investors' exploitation techniques never stops. Fearful of losing investments, which in turn admittedly is the source of jobs for the people – our governments soften up and give in. Licenses are granted and soft, instead of fair tax codes are imposed.
Thus to please investors, we keep on dancing to their tune. Avoiding windfall tax together with charging lowest corporate taxes, from our point of view, lowers government revenues and hence, brings in fewer resources for development projects.
As if that was not enough, foreign companies, through various means dodge paying taxes. Sometimes they cook books or use tax heavens or schemes to manipulate accounting reports to avoid taxes. In some cases they simply use advanced digital technologies when transferring funds abroad, which our unsophisticated officials fail to detect.
It is against this background I hope that our Finance Minister should reshape Zambia's taxing codes. Some of the things government must address should include: -
(a) A plan to raise sufficient tax revenues during the booms so that we can buffer the valleys of the business cycle. I hope it is not too late. Reliance on foreign borrowing, especially when we are approaching a valley, comes with a lot of disadvantages. One obvious one Zambia has experienced before is that – once the public debt gets too large, the little foreign exchange the country earns goes towards paying only interest rates. This leaves the principal as a burden on the future generations.
We also know that, although a small portion of what is borrowed might go towards infrastructure development, the bulk of it is consumed and not invested.
And by its very nature, foreign debt ties in a country's hands, making "sovereignty" difficult to manage. When we were fighting against colonial domination, I never knew that we would surrender control of the economy back to them in less than 50 years. The benefits of the 7% economic growth are accruing to expatriates and foreigners rather than the local Zambians.
(b) If Zambia is to make ends meet, fair rewards must be reaped from the natural resources we possess, at least when the commodity prices are good. This means putting in place fair tax codes (emphasis on fair) and plugging all tax loopholes so that everyone complies and pays what is due. Otherwise Zambia will never earn its fair share from its natural resources.
(c) We also need knowledgeable locals who can challenge investors when it comes to cost structures, commodity movements and trends, and international mineral and royalties' regimes. Some of these competencies are available around the globe – but it is now becoming doubtful if PF government has an interest in reaching out for them. A lot of brains in Diaspora are being wasted. The consequence of this is that – expatriate influence will continue to dominate policy direction.
(d) Otherwise if we continue on current policies, we'll never get rid off tax policy headaches, that is, allowing foreign investors to continue taking advantage of our weaknesses. Being resolved to attain fairness is noble. Failure to challenge investors where challenge is due, is weakness. And we should not forget that these foreign investors will always be backed by not only their powerful home governments, but also by the World Bank. For us, none other than ourselves will cover our backs. Let us put self- interest above being nice and civilized.
KAELA B MULENGA (PHD)
(Guest Author | Zambian Economist)