Zam­bia is tax­ing its way out of short-term pain and into long term in­jury

Zambian Business Times - - MIN­ING - Source: Min­ing in Zam­bia

The Zam­bia Cham­ber of Mines, after an emer­gency meet­ing of min­ing com­pa­nies on Wed­nes­day 3rd Oc­to­ber, de­clared that Zam­bia was now “un­in­vestable”. Given that the min­ing in­dus­try is in con­stant need of in­vest­ment, and Zam­bia’s econ­omy de­pends upon a thriv­ing min­ing in­dus­try, this should be a ma­jor con­cern for pol­icy mak­ers and ci­ti­zens alike.

Im­pli­ca­tions for the min­ing in­dus­try of a blan­ket in­crease in min­eral roy­alty taxes

At the mo­ment, the min­er­als roy­alty tax (MRT) op­er­ates on a slid­ing scale ac­cord­ing to the cop­per price. This sys­tem came into force in 2016 and has been sta­ble un­til now, a wel­come re­prieve in a tu­mul­tuous min­ing pol­icy en­vi­ron­ment that saw nine changes to the MRT regime in 15 years. When the cop­per price is be­low $4,500/tonne, the MRT is four per­cent. Be­tween $4,500 and $6,000/tonne, the rate slides up to five per­cent. Above $6,000 – a cur­rent thresh­old – the rate moves to six per­cent.

The govern­ment has now also pro­posed a fourth tier at a rate of 10 per­cent when cop­per prices move above $7,500/tonne. Prices will move to­wards that range in the next five to ten years as global mar­kets en­counter in­creas­ing deficits be­tween avail­able sup­ply and grow­ing de­mand.

An in­crease of 1.5 per­cent­age points on a 6 per­cent tax rate is ef­fec­tively a 25 per­cent in­crease in the rate. Not only is this sub­stan­tial in its own right, the govern­ment has fur­ther pro­posed that MRT be ‘non-de­ductible for in­come tax pur­poses.’ In other words, min­ing com­pa­nies will no longer pay in­come tax after MRT de­duc­tions; it will pay MRT ac­cord­ing to pro­duc­tion, and cor­po­rate in­come tax (CIT) on gross rev­enue re­gard­less of how much it con­trib­utes in MRT.

No other com­pe­tent min­ing ju­ris­dic­tion in the world ex­cludes MRT from be­ing tax-de­ductible. To the con­trary, lead­ing tax ex­perts like Deloitte have strongly pro­moted tax in­cen­tives in light of the in­creas­ing mo­bil­ity of min­ing in­vest­ments.

We recog­nise that there will be plenty of sup­port in Zam­bia for these ex­treme mea­sures. The govern­ment is in­deed wield­ing a big stick. So, why is this not a good out­come for Zam­bia?

The vast ma­jor­ity of Zam­bia’s mines operate at the up­per end of the global cost curve. For in­stance, Mopani’s op­er­a­tions are presently loss-mak­ing, and that’s be­fore the present changes are im­ple­mented. It’s dif­fi­cult to see how or why, in the cur­rent op­er­a­tional and leg­isla­tive en­vi­ron­ment, par­ent com­pany Glen­core would con­tinue to in­vest hun­dreds of mil­lions of dol­lars to con­tinue the turn­around, when they have so many op­tions else­where.

Over in North West­ern Prov­ince, Kan­shansi is presently in a more for­tu­nate po­si­tion. It pro­duces a siz­able por­tion of to­tal out­put and its pro­duc­tion costs are still rel­a­tively low, although min­ing does be­come more ex­pen­sive over time. How­ever, Kansan­shi’ s own­ers, First Quan­tum Min­er­als (FQM), have as a re­sult of the Bud­get an­nounce­ment an­nounced that the next phase of in­vest­ment – which would have ex­tended Kansan­shi’ s life span by an­other 15 years – will not now take place. The ef­fect of this will be that even Kansan­shi is likely to be be­come a mar­ginal op­er­a­tion within the next 3-5 years. A mar­ginal op­er­a­tion with de­clin­ing pro­duc­tion pays less roy­al­ties, and no profit taxes. This is plainly a dis­as­trous out­come for both FQM and Zam­bia.

With in­creas­ingly higher cost bur­dens, and huge ef­fec­tive tax rate hikes on the hori­zon, the min­ing in­dus­try in Zam­bia will be forced to scale back pro­duc­tion. In­vest­ment in ex­plo­ration – al­ready a minute frac­tion of what it was 10 years ago – and new pro­duc­tion ca­pac­ity, that would oth­er­wise have widened the tax base, will now be fore­gone.

The next phase of in­vest­ment – which would have ex­tended Kansan­shi’ s life span by an­other 15 years – will not now take place.

In sum­mary, the new pro­pos­als will have the di­rect ef­fect of shrink­ing the only sig­nif­i­cant eco­nomic sec­tor with its at­ten­dant mul­ti­plier ef­fects. The reper­cus­sions will un­der­mine Zam­bia’s abil­ity to raise in­vest­ment fi­nance more gen­er­ally to tackle its grow­ing debt prob­lem.

Broader im­pli­ca­tions

Min­ing is a po­ten­tial fly­wheel for di­ver­si­fy­ing the Zam­bian econ­omy, in ad­di­tion to hav­ing sig­nif­i­cant mul­ti­plier ef­fects (spin­ning off job op­por­tu­ni­ties in other con­nected sec­tors). Not only did the bud­get speech pro­pose un­vi­able mea­sures against the in­dus­try, it also pro­posed an im­port duty of five per­cent on cop­per and cobalt con­cen­trates. In­stead of in­cen­tivis­ing those im­ports to ex­pand man­u­fac­tur­ing that would grow the econ­omy beyond the life of fi­nite min­ing, the pro­posal sim­ply kills in­vest­ment po­ten­tial in man­u­fac­tur­ing op­por­tu­ni­ties con­nected to min­ing.

Beyond these con­cerns, the govern­ment has pro­posed a re­ver­sion to a non-re­fund­able sales tax and an abo­li­tion of VAT (cur­rently re­fund­able on cer­tain items). No spe­cific rates were of­fered, but this only gen­er­ates fur­ther pol­icy un­cer­tainty in a coun­try that can do with­out it. As it is, busi­nesses are fac­ing se­ri­ous cash flow prob­lems be­cause the rev­enue author­ity has been with­hold­ing VAT re­bates.

The wide road leads to de­struc­tion

While the bud­get speech be­gan on the right note, ac­knowl­edg­ing pri­vate sec­tor dy­namism as the an­swer to poverty al­le­vi­a­tion, the pro­pos­als on the ta­ble to raise rev­enue and tackle debt will shrink the tax base and ex­ac­er­bate the debt spi­ral.’

Robert Frost fa­mously wrote in ‘ The Road Not Taken’: ‘ Two roads di­verged in a wood, and I – I took the one less trav­elled by, And that has made all the dif­fer­ence.’

It’s an easy road to tax one’s way out of short-term fis­cal pain, but it is a well-trav­elled road that will lead to per­ma­nent in­jury.

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