Mines in US$500 million windfall?

Mines in US$500 million windfall?

Zambia, Africa’s leader in copper production may refund mining companies over US$500 disputed repayments in Value Added Tax (VAT) over a staggered period; the post reported citing finance minister Alexander Chikwanda.

Earlier reports by Bloomberg News say the Zambia Revenue Authority had last year stopped tax repayments to mines that allegedly don’t comply with a rule requiring them to provide an import receipt from the country of final destination of their commodities.

During the same period, the government decided to streamline administration of the VAT refunds for the mining sector which included introducing rules requiring provision of documents from importers of copper.

This was intended to authenticate the final destination of copper being exported out of Zambia and the export revenue needed to be paid directly to a Zambian bank, although some mining companies were paid through foreign accounts.

Unhappy at the unilateral decision, Konkola Copper Mines (KCM), a unit of Vedanta Resources disputed the ZRA argument. It resolved to petition the Lusaka High Court over a K3.2 billion tax bill relating to a retrospective 16 per cent VAT charge on exports from January 2011 to March 2013.

Some of the companies, including those in the mining sector, found to be complying with Rule Number 18 include KCM, Mopani Copper Mines and Zambezi Portland.

“The problem is that some mining companies and even other exporting companies allude that ‘they sell their products mostly to international traders who take ownership of the product either at the mine/factory gate or as soon as they are put in a ship at Dar es Salaam, Dubai or Durban,” Bloomberg said citing sources within the revenue agency.

“For purposes of VAT, a sale at the mine/factory gate is a local sale and should therefore be standard rated sale at 16 per cent of the sale and not zero-rated.”

However, sources say, the Government is now contemplating refunding the affected mining companies the disputed US$600 million (approximately K3.6 billion) in value-added tax repayments.

These differences have arisen after ZRA withheld over US$600 million in value-added tax repayments to mining companies that it claimed have failed to provide importer documentation required to qualify them for VAT reclaim on the zero-rated copper exports.

But the sources who are close to the dispute hinted about the Government’s desire to resolve the matter amicably, although there are some financial constraints. There are options that the refunds may have to be staggered.

“The minister [Chikwanda] says our current fiscal space is severely constrained for us to refund these mining companies of their VAT but that we can only clear the huge backlog by negotiating staggered repayments with the mining companies after we have instituted a more prompt VAT refunds regime,” the Post cites the sources as saying.

“The minister says the only way for the government to clear this backlog promptly is to allow Treasury access some funds from the recently-acquired US$1 billion which currently was ‘sitting’ at the Bank of Zambia,” the sources had hinted to the Post.

“Of that US$1billion Eurobond, only US$300 million has been disbursed so far and remaining the US$700 million is still with the Central Bank.”

It is argued further that Chikwanda was ‘uncomfortable’ with the VAT General Administration Rule Number 18, which requires ZRA to obtain information from importers outside Zambia’s jurisdiction, which had proved impractical and was blamed (Chikwanda) for delayed processing of VAT refunds for the mines.

Several rules have however been cited that justify the refunds and at the same time, empowers the Government through ZRA to collect funds but using accurate trade data.

Rule 18 under VAT entails that for any exporter to qualify for VAT zero rating of its exported goods, they must satisfy requirement which included copies of export documents for the goods.

These should bear a certificate of shipment provided by ZRA, copies of import documents for the goods bearing a certificate of importation into the country of destination provided by the customs authority of that country.

It also requires exporters to provide proof of payments by the customer for the goods, tax invoices for the goods exported, documentary evidence, proving that payment for the goods has been made by the customer into the exporter’s bank account in Zambia [as was introduced in January 2013], and such other documentary evidence that might reasonably be required by the authority.

However, sources hinted further that Chikwanda had proposed that ZRA amends Rule Number 18 to limit it to regulation and verification of exports and bank certification of receipt export proceed to clear the uncertainty and restore the confidence in the economy that was undermined by adjustment to Rule 18.

The Chamber of mines, a consortium of mining companies operating in Zambia is concerned with the development. It fears if the funds are withheld further, new projects might stall and affect the projected increase of copper output to 1.5 million tons per annum from the current 860,000 tons per annum by 2016.

Zambia is in competition with its neighbor, Democratic Republic of Congo to keep the top slot after holding it for over 26 years. This follows DR Congo’s improved copper production over Zambia last year. Copper is Zambia’s lifeblood and relies on the metal for about 70 percent of its export earnings in the absence of a diversified economy.

Mining Contribution

Mining contributes more than a quarter of total government revenue in Zambia, according to the London-based International Council on Mining and Metals (ICMM). The withholding of VAT repayments threatens to “wipe out profits” as exporters are forced to finance extra capital requirements, it said in its report launched on 10 April this year.

Other threats looming over the mining industry in Zambia include the 29 percent power tariff hike by the energy regulatory board (ERB) effected on April 2.

The chamber contends that unless the matter is resolved amicably, older and deeper mines, including as those operated by Vedanta and Glencore Xstrata, have fixed pumping and ventilation costs, and the price increase will have a “devastating effect,” said chamber of mines president Emmanuel Mutati.

The revised pump price by over nine percent recently has had devastating effects on the operations of mining companies in Zambia.

Many of them chiefly rely on diesel to drive their machines for copper production-Zambia’s lifeblood, Mutati, who is also a mining engineer and chairperson for Mopani, added.

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