COPPER GETS TAX BOOST
Zambia has introduced a friendlier minerals tax regime as it hopes to ramp up copper production to take advantage of the commodity boom
Zambia is looking to position itself as Africa’s top copper producer in the next decade, reclaiming a ranking it lost to the Democratic Republic of Congo (DRC) in 2014.
President Hakainde Hichilema’s government, which came to power in August, hopes to ramp up annual copper production from 800,000t to 3Mt — against the DRC’s 1.2Mt — to ride the commodity boom and boost investment in a sector that accounts for 80% of Zambia’s foreign exchange earnings and 11% of GDP.
Copper prices at the London Metal Exchange hover at about $10,000/t, having climbed to a record $10,747.50 last year. And finance minister Situmbeko Musokotwane expects them to rise even further, given increased demand from industries such as the electric vehicle manufacturing sector.
“Copper is expected to be as lucrative as oil was in the mid-1970s,” Musokotwane said in his national budget address in October. “The ‘new dawn’ administration will facilitate the increase in copper output from the current 800,000t to over 3Mt … This means existing mines must produce more, while new mines must be opened.”
To boost investment in the sector, the government has introduced a friendlier minerals tax regime. Up until January, when the new system took effect, mining companies were effectively double taxed on their earnings.
Treasury secretary Felix Nkulukusa explains it as follows: imagine a company produces 1t of copper that it sells for $10,000. To produce that ton, it spends $3,000 on production costs and $2,000 on salaries. It then has to pay the Zambia Revenue Authority (ZRA) $2,000 in mineral royalty tax.
Under the old tax regime, it would pay 35% corporate tax on the remaining “profit” of $5,000.
“But the actual profit the company has made is $3,000, because it paid $2,000 as mineral royalty in addition to its own costs of $5,000,” says Nkulukusa.
“The government is now saying that if a mining company pays a mineral royalty to the ZRA, the ZRA should allow and recognise this payment [deductibility] in arriving at the profit to be taxed.”
In other words, the company in the example would pay tax on the $3,000 that remains after the mineral royalty is deducted, rather than the full $5,000.
The change will not be without cost to the country: the treasury expects a loss of about $800m to the fiscus. But Nkulukusa believes it’s a temporary sacrifice that will pay off, as the easing of taxes will attract investment that will ramp up production “and in turn increase our taxes from the mines from … under $1bn to between $4bn and $6bn, depending on the copper prices”.
Tax expert George Chitwa says: “The mining sector has been very clear about the impact of this double taxation. The minister has now changed [the tax regime], saying the mineral royalty is deductible. That’s a massive boost to the mining sector.”
As part of its drive to boost investment, the government has also extended the carryforward period from five to 10 years. Previously, in arriving at their profit, investors were limited to deducting 30% of interest from borrowed capital, while excess interest above 30% would be carried forward for five years.
The problem, says Chitwa, “is after five years you may not have earned a profit and you end up losing that interest expense”. The extension to 10 years is, he believes, “obviously good news for the mining fraternity”.
In a move likely to broaden the tax base, the government has also extended the terms of property transfer tax to include not just the extraction of minerals from the earth, but also the “transfers of mineral processing and other mine-related licences”.
On the whole, the Zambia Chamber of Mines is positive that as long as the government continues to create an environment conducive to investment, the sector will be able to meet the 3Mt target.
“Yes, it can be done,” says chamber president Godwin Beene. “There will be a lot of work to be done; a lot of goodwill must happen to continue to enable investors to come here.”
Economist and financial analyst Mutisunge Zulu believes the government’s changes may entice investors who have been “sitting on the fence”, unable to decide between sinking funds into Zambia or the DRC.
“Now it’s a question of should we set up a base in the DRC for a Zambia operation, or should we be in Zambia?” he says. “I think the pronouncements … come at the right time and Zambia is poised to meet the target.”