Global professional service KPMG has condemned the constant reviewing of Zambia’s mining tax, as an economic barrier.
Michael Phiri, tax partner at KPMG said effects of perennial changing the tax regime are ‘massive’.
He said many mining project are being abandoned or deferred – representing a potential investment value of billions of dollars, as a result of the unstable tax regime.
“It’s a long-term thing,” said Phiri.
“Ten or twenty years down the line, you wake up and realise that your competitors have overtaken you – look at the Democratic Republic of the Congo,” he added.
Phiri said despite structural challenges facing DRC such as political instability, insufficient energy supply and lack of skills, the country overtook Zambia in 2013 to become Africa’s largest producer of copper, with output of 942 000 tonnes.
He highlighted that one of the DRC’s competitive advantages has been a very stable and attractive tax regime, with Mineral Royalty Rates of only 2%.
“When Zambia’s ill-fated 20% Mineral Royalty Tax (MRT) rate was announced in 2014, it had an immediate effect on the investment climate,” says Phiri. “It created a lack of trust and a lack of confidence on the part of investors. Potentially significant mining, expansion and exploration projects were deferred or abandoned. Some exploration companies pulled out of Zambia altogether.”
Phiri said the adverse reaction by investors came despite the very ‘real positives’ that Zambia has to offer as a mining destination.
“These include a peaceful political environment, a skilled and literate workforce,” Phiri said adding that Zambia has other mineral deposits besides copper, a relatively stable economy with no forex restrictions, proximity to major export markets in Asia. Phiri said the new spirit of dialogue and cooperation between government and the industry should heal sores that arose from the 20% MRT. The royalty brew a storm, as allegation s emerged that not all companies were paying.
KPMG believes the new finance minister Felix Mutati’ willingness to exchange ideas has potential to improve government, private sector relations in the mining sector
“The current government openness in discussing things with the mining sector is very positive, and there is also a greater commitment to transparency. You couldn’t ask for anything better.”
Last year, government introduced a sliding-scale MRT regime, reduction in the top rate for mining to 30%, among other developments.
However, Phiri says there are still issues that need addressing, such as greater allowances on accelerated depreciation, and the amounts mining companies are allowed to carry forward as losses.
He also cited that tax administration is not great, and needs to be made more efficient: ‘there are too many leakages, and VAT refunds are too slow’.
“Nevertheless, we will now hopefully have some stability in Zambia’s mining tax, so that companies can plan long-term,” says Phiri.
KPMG also paints an unflattering picture of Zambia’s mining competitors – South Africa, Mozambique and Tanzania, suggesting that there is much room for investment attractiveness and mining policies, improvement.
“From a regional competitiveness point of view, the uncomfortable truth is that other African countries are just as bad.”
Meanwhile Phiri is cautiously optimistic about the future of the mining industry from a tax perspective.
“We’re looking forward to better administration by the tax authorities, more consistency, and more consultation and transparency – both from government and the mining industry.”