MINING TAX REGIME: FINDING THE BALANCE BETWEEN PROFIT AND BENEFIT
Two significant events have happened within a few days of each other recently that cannot pass without notice: first came the long-awaited unveiling of Mopani Copper Mines (MCM) joint venture with International Resources Holding RSC Ltd of Abu Dhabi and then, the announcement that the country had reached a deal with bond-holders to restructure its crippling debt of US$3.8 billion, brokered by the International Monitory Fund, raising hope of some respite in a tightening economy that was threatening to erode some gains made over the past two years, such as lower inflation and stable exchange rate.
The news about Mopani was greeted with a huge sigh of relief from various stakeholders, as the asset is one of the most significant in terms of current and future copper production, and definitely crucial if the country is to achieve the ambitious three million tons per annum target in the next decade. It also rest easier to the Copperbelt community that has yet to win itself from dependence on the Mining industry. Now the business communities can resume trading with the mines. This time round, we are looking forward to seeing birth of new and solid entrepreneurs on the Copperbelt, establishment of production lines to serve the industry and growth amongst the business communities, which to all, should be evidence of a clear benefit for Zambians from the Mines.
IRH announced that it plans to invest more than US$1 billion in Mopani mine, which needed about US$300 million to complete projects started by its former owners, Glencore and the Zambian Government.This will push annual production to 200,000 tons.
Although our estimation is that we need over US$18 billion in existing and greenfield mines for us to hit the three million tons per annum target by 2032, a first step or second step forward always inspires hope about future prospects.
Indeed, that our country has the mineral wealth is without doubt, but the big question has always been how to attract the right investments to locate the resource and extract it, an investment which would actually result in the development and operation of a mine adhering to Zambia’s stringent mining regulations, employ Zambians, develop communities in its catchment area, promote and support local businesses and pay taxes and thus create economic growth.
For a long time, one of the biggest impediments when it comes to investment in mining has been our unstable tax policy. The changes have always been insitigated by a desire to get more benefit from an industry perceived by many citizens as foreign owned and therefore not theirs, this despite that the Zambian Government, and hence Zambians hold shares in most of the operating large mines via ZCCM-IH.
Changes to the Fiscal Policy, prominent between years 20012019 following privatization of the Mining Industry include introduction of the Windfall tax, non-deductabilty of the Mineral Royal Tax (MRT). An attempt to introduce Sales Tax, which could have further constricted investment inflows thankfully failed.
The windfall tax was repealed after it was deemed to introduce inconsistencies. The non deductability of the MRT was discontinued out of leadership commom sense.
Whether we like or not, there is a correlation between mining policy and investment, and its resultant increased production.
This is why we have always advocated for the dismantling of excessive unfavourable mining tax policies that were previously introduced, leading to a slowdown in mining investment inflows.
This is a fact acknowledged by Minister of Finance Situmbeko Musokotwane in his 2023 national budget speech:
“The stagnation of copper mining in Zambia is a vivid example of what happens when partnership between industry and Government fails. Zambia has been left behind in this potential boom because of the unstable investment climate, especially the frequent arbitrary changes in taxation that reigned in the past decade.This demotivated potential investments.” The Minister gave an example of the Democratic Republic of Congo, whose output stood at 400,000 tons over a decade ago, but has now grown to 1.8 million tons, owing to its stability in tax regime which has attracted some remarkable investments in the recent past.
Government started making changes to the mine tax policies in the 2022 national budget, dealing with the most contentious issues; allowing the deductibility of MRT as an expense. Tax deductibility refers to claims made to reduce the company’s taxable income, arising from various investments and expenses incurred by a taxpayer. And so when the Minister of Finance announced the 2022 national budget, he introduced changes to the MRT, making it tax deductible, and made further adjustments to the MRT bands in 2023, in order to attract investment inflows in the industry.
We must remember that Zambia had some of the highest royalty rates in world, which ultimately proved harmful to the industry, and so the announcement was good for Zambia.
When this change happened for the first time in 2022, some economic watchers predicted heightened investment in our mining industry, and two years later, they surely have been proved right. Following that tax policy shift, First Quantum Minerals (FQM) announced plans to inject and actually injected the pledged US$1.25 billion in expansion projects at its Kansanshi Mine in North-Western Province and a further US$100 million in an enterprise nickel mine. Big investments announcements followed months lateri Barrick announced its investment to create a Super Pit in Lumwana and KoBold Metals announced that it will invest US$2 billion at Mingomba, where it where it is looking to develop a huge copper deposit.
No doubt, these huge investments are a response to the stable and predictable environment in the mining sector. Otherwise, no investor would want to pour billions of dollars in a bottomless pit, where their returns are not guaranteed, or indeed where their investments are not secure.
The other highlight in the sector of course was the launch of the 2022 National Mineral Resources Development Policy by the Government. The Policy seeks to address issues of mining taxation, value addition on minerals, corporate social responsibility, ownership and participation of Zambians in the mineral value chain, environmental management and large-scale exploration and mining and human resource development among others. It replaced the Mineral Resources Development Policy of 2013 which had some inadequacies in addressing emerging challenges in the sector. We hope that this new policy can further help to stabilize our tax policy and make things predictable in the sector.
Mineral Royalty Sharing Mechanism
To address the one frequently asked question by Zambians ‘what do we benefit from the mine?’,it is timely to repeat the suggestion, that Government considers reintroducing the Mineral Royalty Sharing Mechanism (MRSM) to ensure that communities housing these mining investments fully benefit from their God-given natural resource, through the distribution of mining revenue to mining and non-mining councils. This is the money Councils will use, for instance, to create legacy projects to address developmental needs in their communities. One would expect a hospital, a college or even a University build out of these funds.
The Mineral Royalty Sharing Mechanism, which guaranteed a 10 percent of the mineral royalties going to mining host communities through their local authorities, was enshrined in the repealed 2008 Mines and Minerals Act, but it was later removed in the revised Act of 2015.
Various stakeholders wants it back and civil society has made its position clear. In a joint statement published by the Jesuit Centre for Theological Reflection, the Strengthened Accountability Programme(SAP) implementing partners urged the government to reinstate the sharing mechanism.
“We demand for the reinstatement of the Mineral Revenue Sharing Mechanism, as we believe that it’s relevant in safeguarding
the livelihoods and mitigating impacts of environmental degradation in Mine Host Communities. It is worth noting that the Local Government Equalization Fund, does not take into parameters of loss of livelihood and environmental degradation in allocating resources to local authorities.”SAP statement said.
Our hope is that it shall soon be reinstated, so that our citizens can benefit from the mineral wealth.
Article 253(h) of the Constitution of Zambia (Amendment) [No. 2 of 2016 under the principles of land policy recognizes that and I quote “Investments in land to also benefit local communities and their economy.” It further calls for plans for land use to be done in a consultative and participatory manner. The ultimate aim, of course, is to find the balance and maintain it; it is not just about digging and selling the red metal, it is seeing to it that the mineral wealth benefits the citizens first and that it makes business sense to those involved in its extraction.
After all, any investor, local or foreign, raising and spending own dollars is seeking a profit on the invested cash, which in most cases is money borrowed from banks and capital markets.
And with a rush for energy metals to feed a fast-growing electric vehicle industry, the demand for copper can only grow, but we must remember that although we
“The stagnation of copper mining in Zambia is a vivid example of what happens when partnership between industry and Government fails. Zambia has been left behind in this potential boom because of the unstable investment climate, especially the frequent arbitrary changes in taxation that reigned in the past decade.This demotivated potential investments.”
Following that tax policy shift, First Quantum Minerals (FQM) announced plans to inject and actually injected the pledged US$1.25 billion in expansion projects at its Kansanshi Mine in North-Western Province and a further US$100 million in an enterprise nickel mine.
are the seventh-largest producers of copper in the world, we still have to remain competitive. Any sudden and unfavourable change can significantly distabilise the industry and prove costly not just to current and existing investments, but to future prospects too.
Mining tax policy has always been a huge topic during budget discussions, for the obvious reason: our country is still heavily dependent on mineral wealth for its economic survival. Copper still dominates Zambia’s export list, commands and heavily influences the exchange rate, and it will for decades to come.
In fact, typically Zambia’s budget revenue is discussed in the light of copper production and its price on the international market, hence the push to ramp up production, obviously now taking advantage of the rising demand and favourable price on the market.
But we must avoid the costly mistakes that we made in the past, such as introduction of taxes that were purely based on the market forces prevailing at the time, or on the mere assumption that mines are making super profits, and therefore must pay huge sums in taxes.
Such reactionary policies only tend to create instability in the industry.But we must always aim for a win-win situation; it is most imperative and desirable, and it is achievable.