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Wednesday, 4 December 2013

Politics of Windfall Tax

MMD MPs led by Catherine Namugala are now crying for the windfall tax that they worked very hard to scrap against the wishes of all Zambians :
"We have time and again asked the government to introduce windfall tax, if you need to raise revenue, tax those that are creating massive wealth in this country...Tax the mines because we all know that when they create wealth, this wealth goes out of this country, we all know that when a poor person creates wealth in Zambia, they will use it to increase productive capacity of our economy." 
A bit of history might help us to put things in perspective. In January 2008 President Levy Patrick Mwanawasa (LPM) announced that Zambia was breaking the huge milestones hung around her neck by the Chiluba administration. Mining Development Agreements (DAs) were going to be abolished and replaced by a new fiscal regime. Under the LPM changes the corporate tax rate for mines was set at 30%, mining royalties on base metals at 3% of gross value (up from 0.6% in most DAs), and withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors in the mining sector were set at a rate of 15%.

While many of these measures, especially the increase of royalties had largely been anticipated, the introduction of a windfall tax on base metal revenues and the profit variable tax – took the mining companies by surprise. The windfall tax was to be triggered at different price levels for different base metals. For copper, a price between US$ 2.50 – US$ 3.00/lb attracted a windfall tax of 25%; between US$ 3.00 and 3.50, 50%, and 75% for prices above US$ 3.50/lb. At the time of the changes, copper prices were around the US$ 3.60 level, sufficient to trigger the maximum windfall penalty. The reaction of the mining companies was total uproar, threatening Zambia with legal action and other bullying tactics. LPM stood firm.

Fast forward to November 2008. LPM has died and Rupiah Banda (RB) is the country’s fourth president. His narrow ascendancy was greeted with cheers by the mining companies and their supporters, predicting gleefully: "It appears that the onerous tax rates enacted into legislation in Zambia earlier this year are likely to be significantly watered down”. It wasn't long before the global downturn was going to be used by RB to justify removing the windfall tax, “we must ensure that we do not kill the goose that lays the golden egg. There is little point in taking in a few million dollars in tax if thousands of jobs are lost as a result".

The ministerial chairs were shuffled accordingly to pave way for the changes – out went the Minister of Finance Ng'andu Magande and the Minister of Minerals Kalombo Mwansa was moved to Home Affairs. In January 2009, the Banda administration reversed the LPM changes following what the UK’s Financial Times described as ‘intense lobbying’ of the government by large, foreign owned copper mines. Windfall taxation which at the time was not binding due to low commodity prices was scrapped.

The government also allowed hedging income to be included as part of mining income for tax purposes. A serious setback to our people as it is relatively easy to demonstrate a loss on hedging (and move any profits offshore), allowing companies to further minimise their tax payments. Banda also went further and allowed companies to write off 100% of any investment against tax as depreciation in the year in which the expense occurs – well beyond the international norm.

These changes engineered by Banda and his cronies were a serious act of betrayal to the Zambian people. They removed a tax that was not binding at the time, but which mining companies knew soon would be a big boon for them when base metals prices resumed the expected upward trend. What was left is the standard corporate tax, a mineral royalty of 3 per cent of gross value, and a variable levy on profits. And shortly after the removal copper prices rose and even breached $10k per tonne.

In November 2010, it was announced that following the acrimony of the new fiscal arrangements with mining companies, the government has carved a new development agreement. Mining companies were offered a new fiscal stability period as part of the deal for them to pay legally mandated tax revenues owed to the Zambian government from previous windfall taxes. The then Finance Minister Dr Musokotwane was on hand to declare “it has been agreed that a fiscal stability for a period of ten (10 years) be given to companies that will accede to the new tax regime. The stability will apply to corporate income tax, capital tax allowance, mineral royal and profit variable tax”.

The action was against the spirit of the Mines and Minerals Development Act 2008 which calls for greater parliamentary say in such arrangements. It continued much secrecy regarding new DAs and the status of existing ones (e.g. Lumwana). To many Zambians, it is bad enough that new DAs were signed, what was even more shocking is that they remain secretive.

The PF in opposition along with many people supported the reintroduction of the windfall tax. Zambian Economist keeps a list of people who have supported the windfall tax. These include such names such Andrew Sardinis, Bob Sichinga, Mwenya Musenge, Clive Chirwa, Ngandu Magande, Charles Milupi, Oliver Saasa, Wylber Simuusa, Hakainde Hichilema, Edith Nawakwi and Maureen Mwanawasa among many others. On this list we can add think tanks such as JCTR, CSPR and other groups.

To everyone's shock immediately PF won and came to power, the new Finance Minister Alexander Chikwanda started calling people who wanted the windfall tax lunatics : "There is a misconception by external people who feel that we can get more money from the mines. Even internally, they have been many lunatics who think we should involve windfall tax…but the production costs in the mines are very high". I would hardly call this group one made up of lunatics or people who have no access to basic facts. Some people may say the current economic shambles at Finance and BOZ definitely shows where lunatics can be found!

Despite all these concerns, the PF administration continues to defend its intellectually bankrupt position through employing a range of incomplete and often incoherent arguments. Alexander Chikwanda in Dec 2011 said, “It would be unwise for the government to introduce a windfall tax when metal prices are unstable and are usually trending downwards" . A clearly foolish argument because the windfall tax is not binding at low prices!

The cautious joy many Zambians felt with the LPM fiscal regime has now given way to feeling of despair and anger, especially given the strong commodity prices. The strength of this anger stems from an acute recognition of the injustice of the status quo particularly in relation to all the revenue. Billions of dollars are being lost due to ineptitude and unwillingness to act decisively for the poor.

The MMD's new support in the struggle to end injustice in this area is welcome. But Zambians can no longer afford to rely on shifting politicians on this issue! Our history shows that we must cease the economic future on our own. As long as we rely on self appointed political messiahs no change will happen in this area.

AUTHOR
Chola Mukanga | Economist
Copyright © Zambian Economist 2013

5 comments:

  1. Our Finance Minister to be standing alone when it comes to windfall tax is unfortunate.
    I have consistently opposed MrK’s views – that we should run our economy as is done in the communist China. Let me now admit one thing though – that perhaps our neo-liberal policies have lost direction. Maybe we ought to learn a thing or two from the communists – and that is: to have a consensus on the economic plan. Our free enterprise thinking now at least as it concerns the mineral taxing policy is in disarray. Investors are now commanding us.
    Like in a commandistic economy, maybe we also need a national Indaba (conference) at which a national economic plan should be agreed upon. Thereafter, everyone should be made to comply with it. [Remember the UNIP days?] As it is, we are being dictated to by what a single person thinks is correct – regardless of whether the majority thinks that - that position is correct or not. So long as the president doesn’t oppose, the current policy on windfall tax will not change. So where is democratic principle here?

    Unfortunately EAZ, unlike the LAZ, also dilly dallies. EAZ as it should DOES NOT take a principled stand anytime confusion is thrown into the economic policy mix.

    Recently asked to comment on the saga between KCM and PF government, Isaac Ngoma, EAZ President said: “there is need to come up with an optimal mineral tax system desirable to both the government and investors”. True, but EAZ must go further by offering some options and then let government choose one. EAZ needs to be categorical instead of sounding like “politicians”. Is EAZ afraid to take a side?

    In short, someone with professional authority has to come in to challenge Alex Chikwanda’s position. LAZ is more forceful in this regard. We’ve to avoid a situation where cadres become the principal advisers of government.[Although Mr. Chikwanda is an educated cadre]. Neither should we let President Sata alone to be the arbiter or driver of our national vision. The destiny of a society should not be built on the sentiments or feelings of one or few individuals. It should be collective. If we are not careful we could easily slide back into dictatorship. That is how it comes.

    Moreover, well informed decisions are those based on knowledge and fact and not dreams. Presidents do wield political power but shouldn’t really control knowledge and thought. Unless of course, if as a nation, we’ve reduced ourselves to being blind followers again. I say so because although there are many voices in support of windfall tax nothing is happening. Institutions, through which these voices could be expressed, seem to be nowhere to be seen. Where are our representatives in Parliament? Zambians’ peace-loving is being confused with ignorance. I agree with MMD this windfall tax debate in Parliament is long overdue.

    Dec 4, 2013

    ReplyDelete
  2. Hi Kaela,

    Our Finance Minister to be standing alone when it comes to windfall tax is unfortunate. I have consistently opposed MrK’s views – that we should run our economy as is done in the communist China.

    First of all you are charactizing my opinions, even though they are there for all to read.

    Secondly, 'Communist China' is driving the world's economy right now - hardly something to scoff at.

    Thirdly, the so-called capitalist success of China is built on centrally planned economic projects like the Great Leap Forward, and such stalward communist programs like universal education, universal healthcare, building infrastructure (including in Zambia). What have the neoliberals ever built? They take what the 'communists' have built. Even the railway barons of the 1880s bought up municipal railroads. That's because major roads generally are not very lucrative in the short run, however they're very lucrative if you can speculate with them. Neoliberals don't build infrastructure beyond their immediate business plan. If you want to connect major population centers, the state has to do it, through taxes, or it won't get done.

    Fourthly, the whole neoliberal idea is a 'thought experiment', there is no historical record of a country that developed it's economy, let alone develop it for the benefit of it's own people, that did so by taking away protections for it's own manufacturers and farmers, and left the building of infrastructure up to private corporations without state guidance.

    Fifth, neoliberalism is the last stage of capitalism before the return to feudalism. One aristocratic class, and everyone else is a serf. That is what neoliberal economics leads to. Examples: the billionaire oligarchs of Russia, Carlos Slim in Mexico.

    Let me now admit one thing though – that perhaps our neo-liberal policies have lost direction. Maybe we ought to learn a thing or two from the communists – and that is: to have a consensus on the economic plan. Our free enterprise thinking now at least as it concerns the mineral taxing policy is in disarray. Investors are now commanding us.

    What economic plan? You mean, you believe in neoliberal economic planning? I thought the market would sort everything out? When "Investors are now commanding us", that's the whole point of neoliberalism. The free market rules. Investors decide to invest their money. And buy politicians the way they buy mines and telco companies.

    There are three excellent books on this, all from Cambridge economics professor Ha-Joon Chang:

    1) Bad Samaritans
    2) Reclaiming Development
    3) 23 Things They Don't Tell You About Capitalism

    Cho,

    The MMD's new support in the struggle to end injustice in this area is welcome. But Zambians can no longer afford to rely on shifting politicians on this issue! Our history shows that we must cease the economic future on our own. As long as we rely on self appointed political messiahs no change will happen in this area.

    I also find it galling that Catherine Namugala now is for the windfall tax, however while the MMD was in power, she was just another bribe taker, singing the praises of corporate ownership of Zambia's mines.

    On the privatisation of KCM:

    Anglo American plc Adherence to the OECD Guidelines for Multinational Enterprises in respect of its operations in Zambia Submission to the UK National Contact Point

    Introduction January 2002

    ReplyDelete
  3. Come, come Mr Mukanga:

    Kansanshi pays 48% tax right now? You said you understood Windfall Tax.....if you do then explain this:

    Copper is between $2.50 - $3.00 per lb then overall tax rate = 72%
    Copper is between $3.00 - $3.50 per lb then overall tax rate = 97%
    Copper is above $3.50 per lb then overall tax rate = 122%
    Think of that. Kansanshi makes $100 of profit, then they have to pay $122 of tax! Suspect you don't understand it as much you claim.

    You will not find any country charging taxes at those rates, anywhere.

    Windfall Tax isn’t the answer.

    Same 2 questions:
    How do we make all the mines pay the approriate tax under current tax laws?
    What does GRZ do with all this tax? (answer not to include the word 'landcruiser' or the phrase 'failed national airlines').

    Season's Greetings
    Fred Member

    ReplyDelete
  4. This talking point comes from one Adam Little of FQM:

    (LUSAKATIMES) RB opposed to the re-introducing windfall tax on miners
    Time Posted: December 12, 2013 7:51 am

    Mr Little explained in a statement that windfall tax would attract 122 percent if the price of copper was above $3.50 per lb, 97 percent if the price was between $3.00 – $3.50 and 72 percent if it was between $2.50 – $3.00.

    “Think of that. I make $100 of profit, I have to pay $122 of tax! The only thing I can do when that happens is stop production and shut the mine.

    “For the high cost mines that aren’t so profitable, the tax rates would even be higher,” he said.

    FQM’s Kansanshi Mine, co-owns with government (FQM – 80 percent and GRZ – 20 percent), pays a total of 42 percent in taxes under the current mining tax laws in Zambia.

    ___________________________________

    The problem is that the mines, including Adam Little, will never ever tell you, me, or the government how much profit FQM has made, in any year, and how much ore they smuggled out of the country, or what it contained.

    Mines are a strategic industry, like banking, and they should not be foreign owned.

    ReplyDelete
  5. The below figures should put to rest any of the protestations of the mining companies and their shills.

    When we are talking about profitability of the mines and the windfall tax, we are talking about the cash cost being lower than $2,50 per pound, which is where the taxation starts to kick in.

    According to The Post, the Windfall Tax is a progressive tax that consists of the following levels:

    " For copper, the windfall tax was pegged at 25 per cent at a price of US$2.50 per pound but below US$3.0 per pound, 50 per cent for the next 50 cents increase in price and 75 per cent above US $3.50 per pound. "

    http://www.postzambia.com/post-print_article.php?articleId=41811

    0,00 - 2,50 00% = $0,00
    2,50 - 3,00 25% = $0,125
    3,00 - 3,50 50% = $0,25
    3,50 - (4,50) 75% = $ 0,75
    (Total: $1,125)

    So if the copper price is $4,50 per pound, that taxes paid are $1,125 (=25% of turnover). Notice that at no time, taxes can be levied on the price below $2,50, which means that the cash cost is pretty much covered all the time.

    You can even argue that these taxes are too low, in that they leave a considerable part beyond cash costs untaxed.

    So far, I have not come across a mine that has a cash cost of $2,50.

    Therefore, the cries that the Windfall Tax is 'too expensive' and would force the mines to operate at a loss are lies or misguided.


    http://www.katangamining.com/media/news-releases/2011/2011-02-11.aspx

    C1 cash cost* for the year was $1.69 per pound of copper (C1 cash costs per pound of copper are cash costs including mining, processing, administration and refining, net of cobalt).


    http://www.reuters.com/article/2013/12/11/ozminerals-copper-idUSL3N0JQ04V20131211

    (REUTERS) UPDATE 1-Oz Minerals tumbles on concerns over growth in copper mining
    Tue Dec 10, 2013 8:55pm EST

    Oz is forecasting production for 2014 of 75,000-80,000 tonnes of copper and 130,000-140,000 ounces of gold at an improved cash cost of $1.15 to $1.25 a pound.


    http://www.boursorama.com/forum-equinox-minerals-ltd-zccm-ih-presentation--15-june-2011-409834023-1

    -> First Kansanshi evaluation
    KCM is Zambia's second-largest copper producer after Canada-based First Quantum. Note the First Quantum mine in Zambia is Kansanshi Copper Mine. Kansanshi has a cash cost of $0.90 per lb of Cu, and Konkola has a cash cost superior to $1 per lb of Cu. Kansanshi is bigger than Konkola, and the produce copper with and inferior cash cost. So, the Kansanshi value would probably be superior to the KCM value, or would have similar valuation...

    ReplyDelete

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