Zambia’s Mineral Tax Regime

By: Kayombo Musumali. (Mining Engineer)

17th of February 2014, Zambia’s Extractive Industries Transparency Initiative (EITI) report was officially published indicating that Zambia’s mining revenue in 2011 rose 81% to US $1,360 million (ZMW 7.5 billion) compared to the 2010 figures ($750 million) representing an over 30% contribution to government revenue.

This increase in revenue from the extractive industries may be directly attributed to an increase in copper production (7%) between 2010 and 2011 and a rise in metal prices mainly driven by a rising demand for raw materials in Asia particularly China. Besides this, an end to the mineral tax breaks saw a 165% increase in revenue collected from corporate tax (US$395m).

New taxes introduced in 2008 were put to effect in 2011 meaning corporate tax increased from 25% to 30%, mineral royalty tax increased from 0.6% to 3% of which during the same period the government introduced a variable profit tax and windfall tax.

However, up until 2010, mining companies were paying taxes under the previous rate pending clarification on the changes to the fiscal regime. This was the case because development agreements that mining companies had signed before had stability clauses but in 2011, mining companies were required to pay all arrears arising from the 2008 changes. These arrears totalled ZMW 1,780,266,000 and were paid in the 2011 fiscal year.

In light of these achievements and making reference to a present day scenario; Konkola Copper Mines (KCM) Plc a subsidiary of Vedanta Resources Plc (LSE) and one of the largest copper producers in the country was recently in the spotlight again after a report was released by a Non-Governmental Organisation (NGO) claiming that the company contributed the lion’s share of the entire group’s (Vedanta) profits (12.9%). This scenario sparked controversy because a few months earlier the general sentiment was that the mining giant was struggling financially and low-profit making since 2004. Conversely, Kansanshi Mining owned and operated by First Quantum Minerals (FQM) Plc. – Zambia’s largest copper producer singularly contributed 55% of all the revenues from the sector representing 29.8% of all the copper produced in 2011 according to the recent EITI report.

Putting it mildly, these irregularities beg concern and indicate that the mineral tax regime in the country is porous and has a few leakages for revenue losses that need to be plugged. Mineral taxes apply impartially across the sector however some multinationals within the country clearly artificially manipulate their figures in order to evade paying tax. This scenario is brought to light by the inconsistencies that are particularly evident in the recent press releases.

In late 2007, Zambia introduced “Windfall tax” under protest by many mining companies operating within the country. The essence of this tax was to take advantage of the super profits being enjoyed at the time as a direct result of the copper prices sky rocketing to historic levels driven mainly by Asian economic activity. The mechanism behind this was that when the price of copper exceeded a threshold of US$2.50/lb., the country would be liable to receive revenue. At the time the price of copper was running at around US$4.00/lb. gaining the country valuable revenue when this tax was in effect, this tax threshold (US$2.50/lb.) was arrived at by looking at the general operating cost framework of different mining operators in relation to economic data obtaining in the country and around the world at the time.

Fast forward to today, the copper price is currently running between the US$3.00/lb.US$4.00/lb range, however, the operating cost structure changes drastically over time and differs significantly across different mines depending on several economic, geographical and logistical factors such as escalation of electricity and fuel prices, reserve size, mineral grades, location, depth of the reserve and the like. Advocating for the reinstatement of windfall tax at this time requires a much more thorough analysis of these variables before drawing any conclusions.

It is a fact that Zambia deserves to receive the most out of the exploitation of its rich mineral resources. The EIT’s reports that have been released over the years indicate that Zambia is on the right track to receiving its fair share of revenue from the extractive industries with projected increases year upon year and higher compliance rates. Nonetheless, using this benchmark there are still some loopholes in the system that make the country lose precious revenue. Pursuing this line of thought, emphasis will be made on identifying where some of these loopholes are most apparent.

The rhetoric in the country has always been on and off about copper, copper, copper. The significance lies in appreciating the fact that there are other minerals produced in the country alongside copper that are a product of the mineral processing chain. For example, cobalt, gold and other minerals under the precious mineral series like platinum and silver; these minerals usually leave the country in an amalgamate form (Anode Slimes) as a direct by-product of copper refining and are sold by the barrel. With the shutting down of the precious metals plant in Ndola, it is difficult to quantify these minerals for revenue collection purposes and as such the country loses valuable revenue.

Uranium reserves have been discovered in the Siavonga area with companies such as Denison mines in the vanguard seeking to begin mining operations. However proper legislation, procedures, regulations and general logistics surrounding the mining, processing and transportation of Uranium need to be properly articulated, emphasis needs to be made on whether it will be processed within the country or sold and transported in its raw form. This scenario leaves a lot of room for potential revenue losses in the short term while the country is in the process of drawing up an appropriate procedure. This situation also applies to other minerals found within the country because the majority of the legislation relates particularly to copper mining.

On a larger scale, revenue losses occur through a complex process called transfer pricing, in a nutshell this is a process where large multinationals transfer their profits from high tax countries where these profits and commodities are sourced such as Zambia to tax havens such as Switzerland where they won’t be taxed as much and in the process circumvent the local taxation system allowing these companies to make huge profits at the expense of the country’s revenue.

According to a documentary on ‘YouTube’ called “Stealing Africa” that documents the inequality that exists between the countries where these  large multinationals originate and developing countries where they have investments, the general perception that people have in Zambia  is that the largest buyer of copper in the country is China but in actual fact the largest buyer of our copper is Switzerland, ironically most of our copper is not transported from Zambia to Switzerland, the paper work is but the copper is transported all over the world.

The intent of the mineral tax regime in the country is sound but a little bit more understanding of the subtleties surrounding the entire process is required in order to fully leverage the revenue collection potential from the sector. The recent initiative by government to engage mining experts under the Zambia Revenue Authority (ZRA) to champion this cause warrants credit. The overall objective of this task force is to utilise their technical expertise and invaluable experience in the industry to ensure that the country doesn’t lose revenue through any flaws or loopholes in the current taxation system.

In conclusion, Zambia is currently enjoying lower middle income status; a mineral taxation regime that is properly articulated and has the potential to catapult the country to higher heights of affluence experienced by similar, largely mineral dependent economic power houses around the world.

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