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Monday, 2 December 2013

Windfall Tax Debate Returns

Mbita Chitala has joined an increasing band of people that have resumed the call for the reintroduction of the windfall tax on minerals to capture large profits being made by mining companies. He is urging Zambians to continue demanding the reintroduction of windfall tax if we want the country to develop :
"For us to have money to do everything we want to do, windfall tax should be reintroduced, and that's the only way we can get money from our copper. We cannot tax them Pay As You Earn tax; they will always declare losses, so there is no tax on that. So the only way these resources are taxed is by windfall tax. Anywhere in the world, whether it is in Botswana or America or Norway, it is that turnover tax which is done, even in the oil industry...Minister of Finance Alexander Chikwanda called those calling for the reintroduction of windfall tax as lunatics, but he is wrong. All over the country, all the economists have said it should be done...Even the PF in their campaign they advocated the same thing." (The Post, November 2013)
Many people have called for the reintroduction of the windfall tax but nothing has been done [See the regularly updated post - List of Prominent Zambians for A Windfall Tax on Mining]. Earlier this year Finance Minister Alexander Chikwanda signalled that Government was considering introducing new "tax measures" in mining to boost revenues :
"We will introduce measures and relook at the tax system in the mining sector. Our mining sector has not contributed much compared to the rest of the region. So we want to engage local experts and ensure we have the statistics on mineral production and exports, and then we will find modalities to effect new tax measures to increase revenue collection..." (Times of Zambia, February 2013)
Dr Chitala is right that many people continue to call for reintroduction of the windfall tax nothing has been done, including leading PF ministers when they were in opposition. But nothing has been done. If anything what has happened is that mining companies have been in secret negotiations with Government to reduce burden of taxation. It was out of those secret negotiations that the mining companies seemed to have to have secured the removal of the 10% export levy introduced last year on unprocessed mineral exports. Only of course to be recently stopped by President Michael Sata who appeared to have been blind sided in the discussions. KCM has been one of the leading companies pressuring government helped by the Chamber of Mines, Economics Association of Zambia and Mines Minister Chris Yaluma.

Chris Yaluma has not stopped just with support them. He recently announced that plans to cede control of ZCCM-IH. “We are not looking back, but looking forward and getting the mining houses TOTALLY into private hands...We have gone past nationalisation and we are not going back.” (Bloomberg, October 2013). Government currently owns about 87.6% of ZCCM-IH which in turn owns minority shares in a number of mining houses, including KCM. Yaluma’s wants not merely a reduction to shares in ZCCM-IH below 50% as some have suggested, but potentially completely selling its shares and allow individuals (most of them likely to be foreigners) to purchase shares in ZCCM-IH. He wants KCM to run its mines without a government share! Mr Sata actions in recent days suggests that he does not share that view.

In short the government’s position on mining is very chaotic and contradictory. They do not know whether they are coming or going. The fundamental problem in Zambia as far as mining is concerned is a very simple problem which is always missed by everyone. The problem with our mining policies is that they are party political policies, not policies of the Zambian people. Everyone needs to remember that to have good mining policies, it is not just about changing taxes or laws, it is how they are changed. Policies forced by politicians without a Green or White Paper - and therefore without  public consultation - will do nothing to build a lasting environment for growth because it will have no full buy-in of all Zambians. Lack of consultation and unilateralism is hurting our country in many areas.

We talk about "one Zambia, one nation", but in my view right now there's nothing "one nation", as far as mining policy is concerned because successive governments have treated it as personal to order without the participation of the people. As long as that continues every government that comes along will constantly change its mining taxation policies because we are making policies in dark corners rather than with full consultation. Zambians are crying for a Zambian solution to our problems, not a PF or NAREP or MMD solution. PF and mining companies have to realise it is in everyone's long term interests to push for transparency within a publicly agreed framework. Anything else is not sustainable. The approach should be consultative and transparent. Only that will deliver stability in mining policies and facilitate long term investment. But they won't do this because they only think of today and their pockets!

So in as much as I am sympathetic to Dr Chitala on the need for the reintroduction of the windfall tax, I believe a better approach is to push PF to set out a comprehensive national policy on mining. And let them consult with the people for a good period of time. Let us all comment and debate on it - what mining policy do we wish to have? And then let it be implemented after parliamentary scrutiny - and let it stand the test of time. Mining is too important to be left to the care of few individuals no matter how smart or well intentioned our politicians may be. It is a national issue - and the way PF and previous governments have approached it is a complete disgrace.

Chola Mukanga | Economist
Copyright © Zambian Economist 2013


  1. I am a Zambian. I work in the mining sector. I am deeply concerned that we are crying out to strangle the golden goose here. The question is not "why aren't the mines paying more tax".

    Instead the two questions are "how can we make certain that the mines comply with the existing txation laws" and then "what on earth are GRZ doing with all the tax that is paid". The government has absolute total control over the answers to both these questions.

    I am tired of seeing the current Government and its moribund Civil Service squander our mineral wealth through the total misappropriation of the tax revenues they generate. A new Toyota Landcruiser anyone?

    Mines pay Mineral Royalty Tax at 6%, calculated on revenues. After deducting the MRT, they then pay a Profit Tax of 30% of profits (revenues minus the costs of producing the copper). Along with the Profit Tax, they then pay a Variable Profit Tax of up to 15%, also charged on profit.

    I don't work at Kansanshi but let's look at what it means for this mine as they quite famously DO pay their taxes:

    Kansanshi became profitable in 2005, and since then has paid more than $2bn in taxes in Zambia. This means to 12% of all taxes paid in Zambia between 2005 and 2012, and 2% of GDP in the same period, all from Kansanshi mine. Imagine what we (Zambia) could do if we can get KCM and Glencore to pay their taxes!

    So Mr Mukanga: get all the mines to pay the taxes that the current legislation demands - by calling for some purile windfall tax just demonstrates that you don't understand the current tax regime already in place. At the very least it shows how weak the governemnt is in enforcing its own laws. And it makes this country, our country, a very unattractive destination for the billions of dollars of foreign investment sloshing around the global markets.

    Leave the tax system as it is - just enforce it. Less stable tax regimes that change every 5 minutes scares foreign investors...

    Now please: can we just get on with deciding how to spend the billiojns of dollars we should be collecting, properly....and doesn't mean deciding which colour the next Landcrusier should be in!

  2. The only way Zambia will ever achieve greater milestone economically is when we change the way MPs vote in parliament by voting in a secret. My heart really sunk when I listen to parliament radio the other day, the opposition gave simple yet most comprehensive reasons why Hon. Chikwanda cannot have a 75% increased borrowing limit. Hon Mulusa even went further by submitting written proposals to Finance how we can get that money from our own resources and avoid borrowing but Hon. Chikwanda ridiculed that saying they needed to be conceptualized (he admits they have merit but has no time to the concept for earning from our own resources but has time to write a concept to deprive Zambians of a respectable future). Hon. Chikwanda knows this very well but politics for him are more critical than the people of Zambia. He is knowingly and willingly treating the people that he is supposed to protect worse than a colonizer would do. I almost want to believe that Hon. Chikwanda or should I just call him Mr. Chikwanda must be a real sad human being right now because at his age he should be the most generous, trusted, caring and full of wisdom. In the end he is so compromised that even the money that he is making cannot buy him a “peaceful conscience and soulful happiness he needs at his advanced age”.
    But then again, Zambians we are indeed very docile, we sit and talk talk, talk and allow this mediocrity to go on as we just complain; now our constitution is the latest casualty and we will get the constitution that we deserve because we allow it. The opposition is a major let down also, rather than having a cohesive force they are busy weakening each other. Until the opposition change in the way they dribble each other there is no reason for the electorate to trust that they will be any different from the current government.
    A youth is someone between the age of 18 to 35 years. You are already old enough to make major contributions to the economic growth of your land but selfish people want to make you believe that you are inadequate (stumping on your ABILITY). At 40 years, your future should well financially secure and you should be the "Financial Investor" the politicians are busy wasting tax payers' money trotting round the globe asking foreigners to come and create petty jobs. We have no problem working with foreign investors but we deserve to be treated better not just because this is our land but because we are QUALIFIED & ABLE

  3. Not so many years ago Gordon Brown levied a windfall tax on North Sea Oil companies. These were companies that paid their taxes before the windfall tax. If the Copper companies are cooking the books to avoid paying their current tax liabilities then the windfalltax seems the only alternative for the country to obtain its share.
    But the problem with windfall taxes are that they are a short term fix to address government financial problems. The long term fix is proper policy that will stand the test of time remembering always that no one owes anyone a living i.e. business will always go where they make the most profit. When Zambia is no longer profitable enough the miners will just leave and leave the government to put a windfall tax on nothing. Back to KK economics would then be the solution. Short term populism at the disadvantage of the future generation has always been popular with those who think of themselves not their children.

  4. I am pretty depressed about this. I have worked in the mining sector in Zambia for years.
    Let’s make no mistake here. We are in grave danger of strangling the very goose that lays the Golden Eggs. A re-introduction of the so-called windfall tax would be disastrous.
    Chola Mukanga and Mbita Chitala are asking the wrong questions.
    There are only 2 questions that need addressing and this does not include whether or not we should re-introduce the windfall tax. The 2 questions are:
    • How do we make the mining houses pay the taxes that they are required to do under the current Zambian tax legislation?
    • What on earth does the Zambian Government do with all the tax revenue that it does collect? Buy Landcruisers for ministers is the cynical answer.
    Let me show you what the mines should be paying. It is, as we all know only FQM’s Kansanshi Mine in Solwezi that actually pays any meaningful tax.
    • The mines must pay a Mineral Royalty Tax (MRT) at 6%, calculated on their revenues.
    • After deducting the MRT, they should then pay a Profit Tax (PT) at 30% of profits (revenues minus the costs of producing the copper).
    • Along with the Profit Tax, they must then pay a Variable Profit Tax (VPT) of up to 15%, also charged on profit. In Kansanshi’s case, just less than 14%.
    In Kansanshi’s case (I have done the research) the tax comes to 48%. This mine has paid more than $2bn in taxes since 2005. This amounts to 12% of all Zambian taxes (not just mining taxes) between 2005 and 2012, that’s 2% of GDP in the same period…...from one mine!
    Mukanga’s suggestion that a windfall tax will solve our problems is misguided. All this will do is frighten-off any further foreign investors from coming to Zambia. Taxes on mines across the world are high; righty so – ours are in fact no higher than anywhere else. The critical thing that foreign investors need is tax stability. Random changes in a tax regime, unless they are simplifications (which Zambia could do with), makes investors nervous.
    So come on: start making KCM and Mopani pay what they should be paying rather than introducing yet more complicated and arbitrary taxes. And then spend what we do collect on schools and hospitals, not Landcruisers.

  5. Well, you could start with electing politicians that do not sign investment protection treaties with tax havens. Because you cannot both sign these treaties and increase tax revenue from foreign investors. You could elect politicians that will scrap the tax holiday and tax free zone legislation.

    Fred Member is quite right that higher taxes from copper mines is not the way to prosperity for Zambia. You do already tax them more than most, which is good. Even if 100% of the gross copper value ended up in the government budget, Zambia would still be among the poor nations of the world. Reality is that quite a few of those mines under construction needs a copper price above 5000USD just to break even. Not much tax revenue to expect from them.

    Economic development for most people in Zambia will not come from copper. Copper is capital intensive, not labor intensive. People without work is your real problem, and copper cannot solve that problem. Investment in labor intensive businesses is the road to a better Zambia. As long as you keep your focus on the mines as the solution to your problems, you will not prosper.


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