By Elias Chipimo
Let me start with a surprising statement: every finance minister since 1997 has been refunding mining companies for the VAT that they pay when they bring goods and equipment into this country. This includes Edith Nawakwi (under President Chiluba), Peter Magande (under President Mwanawasa) and Situmbeko Musokotwane (under President Banda).
It was therefore surprising to see the current finance minister, Mr. Alexander Chikwanda, being criticised in the media recently by some of his predecessors for advocating VAT refunds to mining companies - something they themselves did regularly over the past 17 years.
People are undergoing severe hardship at the moment. Jobs are scarce and finding money is proving unusually difficult with costs rising daily. Mealie-meal, electricity, transport, rentals and other expenses are higher now than under the Rupiah Banda administration, in spite of the PF promise of "more money in your pockets".
Under such circumstances, it is easy for we politicians to seek popularity by playing the blame game and identifying enemies that we can make to look bad so that we can seem caring. But before we cast any blame, we must examine the facts and identify the real source of our problems, for only then will we be able to consider and apply the correct solutions.
The danger in simply blaming the Minister or blaming exporters over the VAT refunds is that we may end up incurring debts as a country, that future generations will have to pay once these exporters sue to recover their refunds.
Already the PF administration has borrowed monies that future generations will have to settle without being fully accountable to the Zambian people for how those funds are being utilised. As a responsible Party that is concerned about the future of this country, NAREP feels compelled to set out the position on VAT Rule 18 so that the mistakes of the PF administration that will affect future generations can be avoided.
A leader must look at the long-term implications of his or her actions. We may think we are punishing the mining companies and other exporters by withholding refunds but what is actually happening is that we are preventing these companies from paying their suppliers and employees their proper dues.
We are simply creating a cycle of unsustainable debt and if you want to understand why businesses that depend on the mining sector and other exporters are struggling to find enough money to pay their suppliers, contractors and workers, look no further than the way the VAT laws are currently being implemented.
This is a highly technical subject but I will try and present it in a simple way so that every Zambian can understand what is at stake. Let us start by explaining the basic rules of VAT.
How VAT works
VAT stands for "Value Added Tax" and is what is referred to as a "consumption tax" meaning that it is supposed to be charged on goods and services that are used (i.e. consumed) in Zambia. If any goods produced in Zambia are sold for use (i.e. consumption) outside Zambia, no VAT is supposed to be charged on the sale of those goods.
Under the law, any VAT paid by the producer of such goods is entitled to be refunded. Companies that produce goods in Zambia that are to be consumed/used in another country are therefore "exempt" from paying VAT when they buy or import goods through a process that is known as zero-rating (explained below). Such businesses are classified as "exporters" and although they still have to register for VAT and issue a VAT invoice, they can only charge VAT at the rate of nil or zero - hence being deemed "zero-rated".
Any Zambia-based business earning more than a defined amount from its sales in a given year and whose business is not specifically excluded from the application of the VAT laws, is required to register as a VAT supplier. All registered VAT suppliers are required to charge VAT.
When a business charges VAT, it has to present a form to ZRA by the 21st day of the following month showing how much VAT was paid by the business for the goods and services it bought (this is known as "input VAT") as well as how much VAT was charged by the business for the goods and services it sold (this is known as "output VAT"). The business then has to pay ZRA the output VAT after deducting the input VAT.
In other words, the VAT collected by the business when it sells it's goods and which has to be paid to ZRA (output VAT) is reduced by the amount paid as input VAT so that the business pays ZRA the net amount.
Under the law, all exporters are indirectly exempt from paying VAT by being "zero-rated", meaning that although they have to register as suppliers of goods and services on which VAT is to be charged, when they sell their goods, they charge VAT at a rate of zero per cent.
This means that in terms of VAT, they owe ZRA nothing (since they have collected no output VAT) but can claim back all the "input VAT" for each month. They are therefore entitled to collect a refund of the VAT they paid on the goods and equipment that they imported and for goods and services supplied to them by local VAT registered suppliers. In a nutshell, in order to encourage exports, exporters are zero-rated for VAT.
Mining companies are exporters. They mine copper and send it to other countries that are major buyers of the metal. The copper they produce is not directly used in Zambia, even though it may come back in some form through finished products like electrical components.
Why was VAT Rule 18 introduced?
The Zambia Revenue Authority charges VAT on all the equipment and raw materials that are imported by mining companies and other exporters. Under the current law, the VAT is supposed to be refunded once the copper they produce is exported. In order to be sure that the exports have actually occurred, ZRA is required only to confirm that the goods have left the country. This process of verification is an administrative one and is carried out in accordance with rules issued by the Commissioner-General - hence the introduction of VAT Rule 18.
VAT Rule 18 draws it's legality from section 15 of the VAT Act which states that goods and services "described in the Second Schedule shall...be zero-rated." Item (1) of the Second Schedule zero-rates: "Exports of goods from Zambia by or on behalf of a taxable supplier, where such evidence of exportation is produced as the Commissioner-General may, by administrative rule require". It is clear from the above that to qualify for the benefits of zero-rating (such as the refund of input VAT) what is needed is "evidence of exportation".
However, since 1997, to be eligible for a refund, the Commissioner-General (under VAT Rule 18) has required an exporter to produce four things: (a) copies of export documents including a certificate of shipment issued by ZRA; (b) copies of import documents showing importation into the country of destination issued by the customs authority of that country; (c) proof of payment from the purchaser of the export goods; and (d) such other documentation as ZRA may reasonably require.
An amendment to VAT Rule 18 in 2013 added two additional requirements: (i) a tax invoice for the exported goods; and (ii) documentary evidence proving that payment for the exported goods had been made into the exporter's bank account in Zambia.
These amendments were introduced to tidy up the administration of the export verification process and to incorporate the requirements of Statutory Instrument No. 55 of 2013. This statutory instrument (which was repealed earlier this year) required exporters to notify its commercial bank of the receipt of all export proceeds in its foreign currency account in Zambia, within 120 days of such receipt.
It should be clear from the above that by requesting anything other than export documentation and possibly a tax invoice, the Rules issued by the Commissioner-General have gone beyond simply requiring the exporter to provide "proof of exportation". This calls into question whether the Commissioner-General has overstepped his authority and started to impose additional statutory requirements for zero-rating of exports than what parliament, as the nation's law-making body, intended.
How has VAT Rule 18 been enforced by ZRA through the years?
ZRA, acting through its Commissioner-General, has recently been publicly at odds with the Minister of Finance regarding unpaid claims for refunds by exporters - mainly the mining companies - that have backlog claims in excess of US$600 million.
It is important to point out that the differences do not centre on whether the refunds should be paid by ZRA to exporters like the mining companies. The differences centre on what proof is required to establish that a legitimate export has taken place.
As already demonstrated, ever since VAT Rule 18 was first introduced in 1997, there has been a requirement for exporters to provide copies of import documentation from the country into which the goods are being imported before claiming any refund from ZRA for "input VAT". This is the main contention under the current law. The challenge then - as now - was that such a requirement is difficult if not impossible to satisfy in practice.
We can illustrate this with an example. Many Zambians travel to South Africa and bring back goods for either sale or personal use. At the time that they are purchasing the goods in South Africa, they are (usually but not always) given a VAT receipt. When they present that receipt at the South African border, the customs officials are supposed to inspect the goods against the receipts and confirm that they match. The Zambian owner of the goods will then be paid back the VAT on those goods at the border - before they leave South Africa.
The South African Revenue Service does not require each person that they pay the VAT refund to provide proof from the Zambian customs authority that the goods have arrived in Zambia. Their main concern is that the goods have left the country (i.e. proof of exportation) and on that basis, they pay the refund.
ZRA has not previously demanded full compliance with VAT Rule 18 in so far as import documentation is concerned, largely because they are fully aware that there is no globally established practice of customs agencies providing confirmation of importation of goods into their countries. They also know when copper has been exported and would be the first to know if any of it was re-imported (which, given the low local demand for copper, is highly unlikely anyway).
While some people may feel uncomfortable about ZRA reimbursing exporters like mining companies their VAT - as required by the law, the solution lies in changing the law, not in condemning a minister for doing what all his predecessors have done for the last 17 years. Changing the law to remove zero-rating of exports, however, would contradict the very basis on which VAT - a consumption tax - is charged.
A final point to note is that when you look at the ZRA's VAT collection performance a very interesting picture emerges. In 2012, overall VAT performance was below target by K26.34 trillion (unrebased). In 2013, however, there was a surplus of K762 trillion (unrebased) as a direct result of the withholding of refunds due to exporters. From May to August 2013, ZRA fell below their collection targets by an average of nearly K140 trillion (unrebased) every month. From 1 September to 31 December 2013, however, after ZRA had started withholding refunds to exporters, they reported exceeding their collection targets by an average of over K220 trillion (unrebased) every month.
The non-payment of refunds to exporters by ZRA has meant that the monies that were due to be repaid have been used in normal government operations and created a debt to exporters that now stands at over US$600 million - close to the amount of money borrowed under the first Eurobond! The matter is now in court.
Tax principles require that VAT be charged only on goods that are consumed in Zambia. If those goods are exported, under the law, no VAT is payable on any production associated with those goods. VAT Rule 18 is only supposed to confirm "proof of exportation" of the goods on which exporters are seeking a VAT refund.
Although one of the requirements of the administrative rules is the production of proof from customs officials of the importing country, this rule has never been compiled with - even during the time that the current Commissioner-General first served as Commissioner-General from 2000-2007. The reason for this is that it is very difficult if not impossible to comply with. Further, when it comes to mining companies, every Minister of Finance since the law was first introduced in 1997 has paid the VAT refunds.
It should be remembered that when it comes to refunds, the main requirement of the VAT Act is that the goods are exported (i.e. that the goods have left the country). Who better than ZRA is able to objectively verify (through their own customs agents and procedures) that the copper on which VAT refunds are being claimed, has actually left the country and has not been re-imported into Zambia?
The ZRA Commissioner-General's Rules which go beyond this requirement may be deemed to go beyond administration and undermine Parliament's role as the law-making body of government.
The real issue with VAT Rule 18 is that the government has run out of money and has used funds required to repay exporters. They now need to find a reason to delay those payments and to put the blame on someone else. Not only that, these delays are most likely contributing to the poor performance of the economy by dampening investor confidence and depriving ordinary fathers, mothers and youth workers of their pay and employment. A company that employs over 300 people and that pays local suppliers has decided to close it's operations in Zambia because of these delayed refunds.
In fairness to him, Mr. Chikwanda has tried to do the honourable thing by acknowledging this truth. If any former finance minister is claiming that the current finance minister has benefitted from the mining companies and wants to return the favour by paying them their VAT refunds, perhaps they can share with us how they benefitted when they did the same thing while serving in that capacity.
Let us not blindly condemn everything that happens in Zambia. Let us instead examine and change the things that are really causing harm to our people.
Elias Chipimo Jr is the President of the Nationall Restoration Party (NAREP)