By Henry Kyambalesa
Of late, the taxation of mining companies operating in Zambia has become a highly topical issue. Currently, the mining companies are reportedly taxed as follows:
(a) 3% mineral royalty on income (that is, earnings) from copper sales;
(b) 30% corporate profit tax on profits declared after deducting costs and mineral royalties;
(c) 15% variable profit tax on all taxable income (that is, profits) earned that exceed 8% of copper sales;
(d) Deduction of 25% of expenditures on machinery and equipment from taxable income per year once a mining project starts operating;
(e) 15% income tax on foreign companies and expatriate consultants providing services to locally based mining companies; and
(f) Mining companies cannot deduct from taxable income on a profitable mining site its capital expenditure on another mining site.
There is dissatisfaction among some segments of Zambian society that this taxation regime does not provide for adequate contribution of tax revenue by mining companies to the country’s coffers, and that the government should not have shelved the idea of a “windfall tax,” which would have provided for a charge on the sales of copper for every US$0.50 increase in the price of copper per pound on international copper exchanges.
The government, however, wishes to maintain the existing taxation regime in order to foster the development of the mining industry.
Clearly, the two arguments are both reasonable. But since the 20-year development agreement signed between mining companies and the Zambian government is still valid, it may not be possible for Zambia to devise a new taxation regime for mining companies without losing its credibility in the eyes of potential foreign investors. Besides, there is a risk of legal action by mining companies against the government if it seeks to institute changes to the terms of the contract.
It is always a good idea to honor contractual obligations. We still have 17 or so years to think about negotiating a new contract with mining companies. We can start thinking about negotiating a contract which will increase the mineral loyalty from 3% to 5%, reduce variable profit tax from 15% to 13%, leave the other tax provisions at current rates, and without the contentious windfall tax.
We could also provide for a mining company to deduct from taxable income on a profitable mining site its capital expenditure on another mining site in order to induce the re-investment of profits by mining companies on Zambian soil.
There is, of course, no doubt that these suggestions are going to provoke unsavory comments from those who wish to extract more tax revenues from mining companies. But more government revenues from mining taxes or any other source will not likely culminate in meaningful improvements in our people’s lives if we cannot avoid wasteful spending on unnecessary expansion of ministerial and deputy ministerial positions, excessive number and staffing of our foreign missions, excessive and costly foreign trips by the Republican president, and on sinecures like the position of District Commissioner.
In fact, additional tax revenues will just be swallowed up by expenditures on the increase in the number of parliamentarians from 158 to 280 members that is recommended by the National Constitutional Conference, and on repayments of loans secured to buy the controversial mobile hospitals and the like!
We need to go through government expenditures line by line, program by program, agency by agency, department by department, and ministry by ministry in order to eliminate unnecessary application of public resources. The savings to be realized in the process could be invested in improving education and training, healthcare services, infrastructure, and agricultural production and food security, among other essential projects and programs.
In passing, we need to be mindful of the potential for foreign companies to engage in what is referred to as “transfer pricing” when devising a taxation regime for such companies—that is, a pricing strategy which a multinational company may employ to manipulate its intra-firm transfer prices by using its transnational network of affiliates in order to achieve a revenue-shifting effect and thereby cope with high corporate taxes, high import tariffs and/or restrictions on dividend repatriation in a host country as follows:
(a) Over-pricing finished, intermediate and capital goods transferred to subsidiaries in high-tax countries so that its profits in these countries are reduced or eliminated and shifted to subsidiaries in low-tax countries;
(b) Under-pricing finished, intermediate and capital goods transferred to subsidiaries in high-tariff countries (except in the case of specific tariffs) in order to reduce customs duties to be paid; and/or
(c) Over-pricing finished, intermediate and capital goods transferred to subsidiaries in countries where dividend repatriation is restricted so that its income is unscrupulously siphoned out of such countries in the process.
We need to change the perception that ONLY only foreign investment can run our mines. Sad development for Zambia.
” The government, however, wishes to maintain the existing taxation regime in order to foster the development of the mining industry. Clearly, the two arguments are both reasonable. ”
They clearly are not both reasonable arguments.
The ‘investors will leave’ argument is just cover for corruption. The MMD don’t want to collect, not only any taxes, but will not collect any dividends from the foreign mining companies.
The only rational explanation is that they are receiving about $200 million a year in bribes. This is why the first thing they discuss when ZCCM-IH received $18mn in dividends (they should receive $300mn) – how they were going to give it back to the mines and buy their otherwise worthless stock.
Privatisation, FDI are just opportunities for corruption.
” Besides, there is a risk of legal action by mining companies against the government if it seeks to institute changes to the terms of the contract. ”
In Cho’s excellent post “Quantum arrogance” (zambian-economist /com), First Quantum did not show much confidence that they could win any legal proceedings – they state:
” the Company recognizes that resolving this dispute through arbitration may not be in the best interest of either the Company or the GRZ ”
How considerate of them. The truth is that these Development Agreements were drawn up in secret, stamped ‘classified’, and I am sure both pressure and incentives were given to make them as beneficial to the mining companies as possible. If they bribed (foreign) public officials and they are US citizens, they can go to…
If they (foreign) public officials and they are US citizens, they can go to jail for that. There was no discussion in the press, in parliament, among civil society organisations on the contents of these secret agreements.
As such, the Zambian government will not lose much of whatever reputation it has among the business community if it walks back from them.
Mines will not flee because they have to pay taxes, they will pack up and leave when copper prices are back to $3,000 per tonne. So the money is to be made NOW.
just checking my calender, when is the next annual kafue river acid leak taking place? I want to stock up enough mineral water to sell to copperbelt towns.
I’m currently working on a business plan and hope to get funding from CEEC
#5 hahaha
but on a serious note this is not funny. one day pipo’s lives will be lost thru such carelessness
And these are mins that are largely left off the hook when they make so much money out of our own resources
# 1. What happened to ZCCM when we nationalized it?, the copper ore has always been with us. But we have no capital to fund such expensive ventures requiring millions of dollars or trillions of kwacha. We failed to re-capitalize the mining operations in Zambia. For now we can only think of employment in the mines and perharps let those very few zambians with the will and cash to invest or partner with prospective mine investors. History has shown that we cannot manage the mines that is why they were sold- painful reality.
Kelvin D Mulanga,
” we have no capital to fund such expensive ventures ”
If you have copper, you have money. That is an old excuse.
Because of privatisation, we are now losing $2.5 billion a year in untaxed profits and unshared dividends. That would all be ours without privatisation.
The money foreign mines used doesn’t come from their personal bank accounts. It comes from loans, and it comes from the fact that copper has been over $5,000 per tonne for years. Their cost per tonne is $2,000 to $3,000 max.
That is where the economic growth and increased turnover comes from.
When you have mines, you have capital.
Has anyone considered that the MMD wants to keep Zambians poor and keep Zambia’s mines in foreign hands, so they remain the only dog in town?
As long as this setup continues, the so-called political parties will keep competing for being the party that is allowed to take the $200 mn bribes, and keep everyone else poor so they won’t be competition to them.
History has shown that we cannot manage the mines that is why they were sold- painful reality.
If u are also living in history and dont want to embrace the real change among our ambitius pipo i africa and zambia particulrly dont foolishly conclude that history show that we cant manage our mines,who told you?is that the way you dont want to work hard and solve that problem coz u dont believe in the change of human abilities?repartriation of profits is life,what is more visible in Zambia are hole from where minerals are mined than development,then we can safely conclude that something is wrong in our country.THIS MUST CHANGE!starts with YOU!
” History has shown that we cannot manage the mines that is why they were sold- painful reality. ”
Your opinion, not reality or fact. Compare the copper price today and over the last few years, and when they were sold around 1999.
Back in the day the ZCCM had to make do with $1,500 per tonne copper prices. Today, the mines say that their breakeven price is $3,000 per tonne.
They can’t even touch the old parastatals. And there was no corporate capture of the government because foreign corporations were making billions a year from our copper.
Someone tell me, what would be the level of windfall tax if it were introduced? I have heard of figures of 6%.
I believe that people want the windfall tax and not the variable profit tax?
If we take the 15% for variable profit tax given by Kyambalesa, how does the revenue compare with 6% windfall tax?
Someone please do the numbers for us, we may be debating non-issues here, or as they say, splitting hairs. The politician who has instigated the non-ending windfall tax debate is the same one who publicly and strongly opposed it in 2006 in a desperate bid to win votes, and he has not offically withdrawn that silly position before taking another. Should we trust such a one? He has never even offered any numbers to debate at all and the rest of us are just parroting.
Hey People. Wake up. Running of mines in Zambia is not only confined to foreigners. The Government has gone out of its way to encourage Zambians in the diaspora to pool money together and buy and run the mines. ONLY foreigners have the inclination, ability and knowhow of how to run them. They are at least providing employment to a lot of people. Africans are good at shouting from the roof tops. They have never been able to produce any manufactured goods of any sort. Others produce, we consume. If you can the run the mines, well run the $£$$$$£ things. Every country, even European ones, are crying out for investors.
continued from #12, once we have the numbers consider the cost of the fallout if the mining companies reacted negatively as in Australia, or if those investors who wanted to come to Zambia shifted their investments to say Macedonia or Malaysia. Remember that investors are looking for profits and not copper per se.
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