Finance Minister Alexander Chikwanda last week delivered the Budget Statement 2015. As the Post newspaper already revealed, government is reducing its share in ZCCM-IH to 60%. Chikwanda also appeared to signal that the contentious VAT rule is here to stay. The big one of course is the redesign of the tax regime for mining operations by replacing the current two tier system with the following mining tax structure:
(a) 8 percent Mineral Royalty for underground mining operations as a final tax;
(b) 20 percent Mineral Royalty for open cast mining operations as a final tax.
(c) 30 percent Corporate IncomeTax rate on income earned from tolling; and
(d) 30 percent Corporate Income Tax rate on income earned from processing of purchased mineral ores, concentrates and any other semi-processed minerals, currently taxed as income from mining operations
Effectively what the measures do is increase underground mining royalties to 8 percent from 6 percent. It has also introduced a 30 percent corporate processing and smelting tax. Another 30 percent tax would be applied to income earned from “tolling”, industry-speak for an agreement to process another producers raw materials.
The measures are clearly intended to increase Government income from the mining sector. It is also aimed at increasing transparency in the sector and achieve a "more equitable distribution of the mineral wealth between the Government and the mining companies".
The expected additional revenues, in 2015, as a result of these new measures are estimated at K1.7 billion. Mineral royalty taxes will generate K5.9bn in 2015. So the new proposals roughly accounts for around 30 - 40% increase in mineral taxes.
The changes to the mining tax regime will however not apply to mining of industrial minerals. That is geological materials which are are not sources of metals. They are used as additives in a wide range of applications (e.g. limestone, granite, kaolin).
The new mining fiscal regime will need to be studied carefully - unfortunately there has been no consultation again. So what we have is a PF policy proposal rather than a Zambian one. We would question whether such an approach will bring stability to this area.
What Zambia needs is a cross party approach. Only through producing a Green Paper on mining and allow wider public consultation can we find a lasting solution to this thorny issue. We need a comprehensive debate and policy. Not least because there are wider issues in mining such as policy on ZCCM-IH, indigenisation and industrialisation that require much thorough debate.
In the mean time the PF proposals do raise issues that we need to think about. For example, Chikwanda has eleminated the "windfall" element that was partly built into the "profit variable tax", albeit unsuccessfully. So in the event that copper prices were to rise substantially, Zambia would now be even in a worse position to capture such super normal rents. The new measures will definitely not make the debate on restoring the windfall tax go away.
Another area which needs careful debate is the likely impact of the new regime on greenfield investments. Open cast mining operations would now be subjected to a 20 percent mineral royalty as a final tax. This seems to be based on the lower cost of open-pit mines relative to underground mines. But no information has been provided on how Chikwanda has settled on this figure, and what analysis he has done on the likely impact of the new measures on medium and long term investment. Are we sailing in the dark?
We will pick up on the ZCCM-IH proposal and the macroeconomic issues in due course, as well as one or two interesting sectoral issues flagged up in the Budget.
What are your thoughts on the new fiscal regime for mining companies? Is this likely to stand the test of time?