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
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.