Zambia’s reliance on its mining sector for economic growth has long been a double-edged sword. While the country boasts significant reserves of copper, cobalt, and manganese, maximizing the financial benefits from these resources has been a persistent challenge. Complexities surrounding cross-border transactions, transfer pricing, opaque mineral pricing, and the valuation of mining licenses have often led to revenue leakage, hindering the government’s ability to address pressing social needs and income inequality. However, a concerted effort by the Zambia Revenue Authority (ZRA), in partnership with international organizations, has begun to turn the tide, resulting in a substantial increase in mining revenue collection.
From 2019 to 2023, the ZRA collaborated with the African Tax Administration Forum (ATAF), the Intergovernmental Forum on Mining, Minerals, Metals and Sustainable Development (IGF), and the Organisation for Economic Cooperation and Development (OECD) on a deep-dive technical assistance program focused on mining taxation. This multi-year initiative provided crucial support to the ZRA, enabling it to effectively address the intricate tax issues prevalent in the mining sector.
The program’s primary objective was to bolster the ZRA’s capacity to audit international tax cases, particularly those involving transfer pricing risks within the mining industry. The initiative began by identifying high-risk transfer pricing cases among large mining firms, focusing intensive efforts on these key players. Specialized training was provided to the ZRA’s mining audit and international taxation units, equipping them with the expertise to analyze transfer pricing financial transaction risks and understand the complexities of copper and manganese pricing.
Beyond capacity building, the program also played a critical role in modernizing Zambia’s legal and policy framework. The ZRA and the Ministry of Finance and National Planning received assistance in revising transfer pricing rules for mineral sales. These revisions empowered the ZRA to access third-party sales agreements and utilize publicly quoted prices, effectively counteracting sophisticated tax avoidance schemes and ensuring fairer compensation for mineral extraction. Clear guidelines were also established for treating premiums and discounts, enabling accurate adjustments to quoted prices for tax purposes. This legal and policy update was crucial, as it gave the ZRA the teeth it needed to enforce fair taxation within the sector.
Furthermore, the program supported the ZRA in developing new methodologies for valuing mining licenses. This was a critical step, as previous valuation methods often resulted in significant underreporting, leading to substantial revenue losses. Internal guidance was also developed on how to apportion royalties for blended materials, further strengthening Zambia’s approach to taxing its mineral wealth.
The impact of this collaborative effort has been substantial. The ZRA, now equipped with enhanced skills and a modernized legal framework, has made significant strides in improving mining revenue collection. The capacity-building program directly enabled the ZRA to conduct transfer pricing audits within the copper mining sector. These audits, which are still ongoing, have uncovered potentially millions of dollars in mining taxes at risk. The collaborative partners continue to support the Zambian authorities in bringing these complex audits to a successful conclusion.
The updated legal frameworks and improved audit practices have already yielded tangible results. Between 2020 and 2022, the ZRA collected USD 6 million in property transfer tax and USD 58 million in mining corporate income tax revenue. The USD 58 million represents approximately 10% of the average annual mining corporate income tax collected in recent years, demonstrating the significant impact of these reforms.
The updated methodology for valuing mining licenses has also uncovered significant underreporting. In one instance, a mining license was found to be undervalued by nearly 55%, highlighting the massive potential for revenue loss under the previous system. The ZRA has now formally adopted this new methodology, ensuring more accurate assessments and safeguarding future revenue streams.
The revamped manganese valuation policy has also contributed significantly, generating USD 6 million in export tax revenue from manganese ore between 2019 and 2022. This success, coupled with the new guidelines for apportioning royalties on blended materials, has solidified Zambia’s approach to taxing its mineral resources, ensuring that the benefits of mining are more equitably shared.
In conclusion, Zambia’s journey towards maximizing its mining revenue is a testament to the power of international collaboration and targeted capacity building. Through sustained support and technical expertise, Zambia has made remarkable progress in strengthening its tax administration and ensuring a fairer share of the benefits derived from its abundant mineral resources. These efforts not only translate to increased government revenue but also lay a solid foundation for greater transparency and equity in the management of Zambia’s mineral wealth, paving the way for a more sustainable and prosperous future.