ZAM­BIA’S MIN­ING TAX REGIME

Half a loaf is bet­ter than none — or is it? Alexander Mu­tale looks at the im­pact of chang­ing min­ing tax regimes in Zam­bia

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Sta­bil­ity may have re­turned to Zam­bia’s cop­per min­ing in­dus­try af­ter a gov­ern­ment an­nounce­ment on April 20. Edgar Lungu’s new gov­ern­ment is to in­tro­duce a 9% min­eral roy­alty tax for both open pit and un­der­ground op­er­a­tions, and revert to the pre­vi­ously aban­doned two-tier sys­tem where min­ers are re­quired to pay cor­po­rate taxes in ad­di­tion to roy­al­ties.

This is a re­ver­sal of an ear­lier de­ci­sion un­der the pre­vi­ous pres­i­dent, the late Michael Sata, that min­ers would pay only one tax, namely roy­alty tax, and that this would be hiked to 20% for open pit min­ing and 8% for un­der­ground min­ing from Jan­uary 1. The pre­vi­ous rate was 6% for both types of min­ing.

The re­ver­sal comes af­ter con­sul­ta­tions with the in­dus­try and changes in the gov­ern­ment’s own fore­casts for the price of cop­per.

A Thom­son Reuters re­port projects that cop­per will trade at an av­er­age price of $5 975/t dur­ing 2015. It says prices won’t pick up un­til the sec­ond half of the year.

The roy­alty tax rates were pegged by the gov­ern­ment to a price of $6 780/t, which com­pares with an av­er­age price of $6 828/t

in 2014. In 2013, the av­er­age price was $7 346/t, the re­port shows.

Zam­bia pro­duced about 725 000 t of cop­per in 2014 and is the eighth largest pro­ducer in the world.

But the dra­matic fall in rev­enue may force Zam­bia to sus­pend in­fra­struc­ture projects for six months — un­til the 2016 fis­cal bud­get pe­riod be­gins — or bor­row from in­ter­na­tional debt cap­i­tal mar­kets.

Al­ready, sec­re­tary to the trea­sury Fred­son Yamba has said the gov­ern­ment is con­sid­er­ing re­fi­nanc­ing the Eurobonds of $750m is­sued in 2012 and $1bn is­sued in 2014.

Some planned road projects have al­ready stalled. So­cial pro­grammes have also been af­fected. Sports Min­is­ter Vin­cent Mwale said this month that sports bod­ies should find al­ter­na­tive sources of fi­nance be­cause gov­ern­ment cof­fers were shrink­ing.

The higher roy­alty tax would have helped Zam­bia to re­duce its bud­get deficit to 4,6% of eco­nomic out­put in 2015, from 5,5% in 2014. With­out the added in­come, the deficit may widen.

On the other hand, the de­ci­sion on the tax regime se­cures the 12 000 jobs in the min­ing sec­tor.

Min­ing com­pa­nies say the re­turn to the two-tier tax­a­tion sys­tem and the re­duc­tion in roy­alty taxes for open pit min­ing from 20% to 9% will lead to the re­sump­tion of stalled min­ing op­er­a­tions and projects and en­cour­age new cap­i­tal in­vest­ments.

Canadian-owned Bar­rick Gold Corp, which had threat­ened to put its Lumwana cop­per mine un­der care and main­te­nance if the higher roy­alty taxes were en­forced, has al­ready reversed plans to do so and is tar­get­ing higher cop­per pro­duc­tion this year, ac­cord­ing to the com­pany’s first-quar­ter re­port for 2015.

“The Lumwana mine will con­tinue op­er­at­ing fol­low­ing the an­nounce­ment of the new tax sys­tem by the gov­ern­ment of Zam­bia. Cop­per pro­duc­tion guid­ance for 2015 has been in­creased to be­tween 218 000 t and 236 000 t,” it says.

An­other Canadian miner, First Quan­tum Min­er­als (FQM), which is the lead­ing cop­per pro­ducer in Zam­bia, with an out­put in ex­cess of 250 000 t/year, is ramp­ing up its Kansan­shi cop­per smelter, which was com­mis­sioned in 2014.

FQM will also com­mis­sion a new $2bn Kalum­bila Cop­per Mine in 2015. With the new mine, its out­put will in­crease to more than 400 000 t and will cre­ate thou­sands of new jobs.

In the cor­po­rate tax tier of the sys­tem (as dis­tinct from the roy­alty tier), cor­po­rate in­come earned from min­ing op­er­a­tions will be taxed at 30% and cor­po­rate in­come from min­eral pro­cess­ing at 35%. Min­ers will also face a vari­able profit tax of 15% on earn­ings from min­ing op­er­a­tions when tax­able in­come ex­ceeds 8% of gross sales. The new regime is ef­fec­tive from July 1, fol­low­ing ap­proval from the coun­try’s par­lia­ment.

But new in­vest­ment will still be hard to come by as long as prices re­main low.

Steven Din, CEO of Konkola Cop­per Mines (KCM) — owned by In­dia’s Vedanta Re­sources — wel­comes the new tax regime but says the mine is still los­ing money. “KCM is in a loss-mak­ing sit­u­a­tion. Whether it was un­der the old regime be­fore De­cem­ber 31 or post-Jan­uary 1, we’re mak­ing losses,” Din told jour­nal­ists at a re­cent brief­ing.

Most min­ers, how­ever, are qui­etly get­ting on with it, happy to have avoided the al­ter­na­tive sys­tem.

Aban­don­ing the higher tax is not the gov­ern­ment’s only con­ces­sion. In Fe­bru­ary, the Zam­bia Rev­enue Author­ity lifted a VAT rule which re­quired com­pa­nies to pro­vide im­port cer­tifi­cates from the coun­tries that pur­chased their cop­per in or­der to qual­ify for zero-rated ex­ports. About $800m in with­held VAT re­funds will be re­leased to min­ing com­pa­nies, ac­cord­ing to the gov­ern­ment.

Min­ing com­pa­nies in­sisted that it was im­pos­si­ble to trace the fi­nal des­ti­na­tion of their cop­per be­cause they sold to traders and were not in touch with the fi­nal buyer. Un­der the rule, the gov­ern­ment au­to­mat­i­cally with­held VAT re­funds if it did not re­ceive im­port cer­tifi­cates. FQM an­nounced last June that with­held tax re­funds led it to de­lay or sus­pend more than $1bn in cap­i­tal projects.

The im­port cer­tifi­cate rule was in­tro­duced in Septem­ber 2013 to help the gov­ern­ment get more ac­cu­rate trade statis­tics, amid sus­pi­cions that min­ing com­pa­nies were un­der­stat­ing pro­duc­tion and ex­port fig­ures to dodge taxes.

The scrap­ping of the law has boosted in­vestors’ con­fi­dence in the gov­ern­ment's com­mit­ment to main­tain­ing an open dia­logue with the min­ing in­dus­try.

KCM an­nounced that the re­lease of the with­held VAT re­funds would al­low it to ex­pand op­er­a­tions at its Nchanga Smelter by 50%.

The many changes to leg­is­la­tion mean that Zam­bia will have two dif­fer­ent tax regimes im­ple­mented in a sin­gle year for the first time since 1964, when it

The gov­ern­ment’s de­ci­sion to re­duce taxes was more of a cor­rec­tional mea­sure than a be­trayal of peo­ple’s trust

The dra­matic fall in rev­enue may force Zam­bia to sus­pend in­fra­struc­ture projects for six months

gained in­de­pen­dence. The cham­ber of mines would not like to see that again, says its pres­i­dent, Jack­son Sikamo, who is also the GM of Chibu­luma Cop­per Mine.

“We have al­ways in­sisted that taxes be pre­dictable and sta­ble to en­able long-term plan­ning by the mine op­er­a­tors,” Sikamo told IM.

But the con­ces­sions put the gov­ern­ment back where it was. It adopted the roy­alty sys­tem of tax­a­tion be­cause it is sim­pler to en­force and leaves no loop­holes for min­ers to avoid pay­ing tax.

Sata’s gov­ern­ment be­lieved the old two-tier sys­tem al­lowed min­ing firms to adopt so­phis­ti­cated tax fil­ing strate­gies that sub­stan­tially light­ened their tax bur­den, to the detri­ment of the gov­ern­ment.

Its re­ver­sal has not gone down well with the public, who com­plain that Lungu’s gov­ern­ment has gone against its cam­paign prom­ise of up­hold­ing the new taxes. They feel the move sym­bol­ises weak­ness and a fail­ure to hold min­ers accountable and make them con­trib­ute to meet­ing to the coun­try’s so­cial needs.

But Frank Bwalya, who founded Al­liance for a Bet­ter Zam­bia — which has since joined the rul­ing party — says the gov­ern­ment’s de­ci­sion to re­duce taxes was more of a cor­rec­tional mea­sure than a be­trayal of trust.

“It’s a de­ter­mi­na­tion to cor­rect some mis­takes that were made by the pre­vi­ous lead­er­ship. We could not stick to mis­takes and see the in­dus­try go down. Steps such as we have seen needed to be taken to save the mines,” Bwalya told IM.

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

Pic­ture: THINKSTOCK

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