Zambia‘s US$500 million VAT refund plan to mining companies in new twist

A plan by finance minister Alexander Chikwanda to administratively seek President Michael Sata’s opinion over Government’s intentions to refund over US$500 million owed to mining companies operating in Zambia in Value Added Tax (VAT), has taken a new dimension with calls to establish how it leaked.

Finance minister Chikwanda has been in the news regarding a ‘leaked ‘ document which sought to consider refunding some mining companies over US$500 million in VAT and on how to administer it, with some proposals made by the Government that the repayments, if sanctioned, be staggered over a period.

The declassified and once secret letter was with regards to the administration of the Value Added Tax (VAT) General Administration Rule 18. Earlier reports quoted in the Post newspaper stated that Zambia was considering refunding mining companies over US$500 disputed repayments in Value Added Tax (VAT) over a staggered period.

Reports by Bloomberg News further cited Zambia Revenue Authority as having had last year stopped tax repayments to mines that allegedly ‘don’t comply’ with a rule. The regulation requires mining companies 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, according to reports, 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 quoted 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, citing sources, the new agency added, the Government was 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 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 were earlier quoted by the Post as saying.

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.

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, Chikwanda regrets the leakage and that some people were now using it to scandalize and blackmail him. He has since demanded that law enforcement agencies should establish how the document got in possession of unauthorized persons while awaiting President Sata on the way forward.

“I have sought the indulgence of the President to make public a letter addressed to him on 15th July, 2014, in which I asked for his guidance on VAT Tax General Administration Rule 18” he told reporters in Lusaka 27 August.

“The letter was a classified document, therefore, the law enforcement agencies, whose duty it is to protect government confidentiality and integrity, may wish to establish how it got into the possession of unauthorized persons.”

Chikwanda has reiterated that VAT Rule 18 affected all exporters and not only those in the mining sector and that mining companies were not being insulated from their tax obligations. In the letter to President Sata, Chikwanda explained that under Rule 18 of the VAT General Administration, the requirement to obtain information from importers outside Zambia’s jurisdiction had proved  impractical and had resulted in delayed processing of VAT refunds.

Accordingly, Chikwanda said he had told the President of some undeclared backlog in VAT refunds in excess of $600 million. Since the country’s fiscal space was severely constrained, government could only clear the backlog by negotiating staggered repayments with mining companies.

VAT General Administration Rule 18 was creating uncertainty and undermined confidence in the economy hence the need to ask the Zambia Revenue Authority (ZRA) to streamline Rule 18 so that it could be limited to regulation and verification of exports as well as bank certification of receipt of export proceeds, Chikwanda is said to have contended.

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