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.
Chola Mukanga | Economist
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