Minister of Finance Alexander Chikwanda has told parliament that that only two mining companies were paying Company Income Tax under the previous tax regime as most of them claimed that they were not in tax-paying positions.
In a Ministerial Statement on the 2015 Mining Taxation Regime Presented to the National Assembly today, Mr Chikwanda said that before the introduction of the 2015 tax regime, the tax system was vulnerable to all forms of tax planning schemes such as transfer pricing, hedging and trading through “shell” companies which are not directly linked to the core business, adding that this had been a challenge for the revenue administration to detect and abate such practices.
Below is the full statement
Ministerial Statement on the 2015 Mining Taxation Regime Presented to the National Assembly by Hon. Alexander B. Chikwanda, MP – Minister of Finance
Mr Speaker, I wish to thank you for according me this opportunity to brief the House and the Nation at large on the 2015 Mining Taxation Regime which is a topical issue in our country.
Sir, despite Zambia being endowed with vast mineral resources, the country has not realised maximum benefits from the sector’s potential to support growth and enhanced socio economic development. This is against the backdrop that the sector has been experiencing high copper prices in the recent past. It is worth noting that the various changes in tax policies in the last 10 years with a view to optimise benefits from the mines have not yielded the desired results. The House may wish to note further that the contribution of the mining sector revenue as a percentage of GDP remains low at 4 percent. Similarly, the contribution of the mining sector to the national budget has remained minimal even after the Government doubled the mineral royalty rate from 3 to 6 percent.
Sir, the PF Government is cognisant that our mineral wealth is non-replenishable. It is therefore our responsibility as leaders of today to ensure that the exploited copper and other mineral resources contribute to development so as to ensure prosperity for future generations. Government is fully aware and does appreciate that the gestation period for mining companies to reap gains from investment is long. This notwithstanding, there is need to have tax policies that guarantee a win-win situation by tackling the inherent weakness that existed in the mining tax regime prior to 2015.
Mr. Speaker, before the introduction of the 2015 tax regime, the tax system was vulnerable to all forms of tax planning schemes such as transfer pricing, hedging and trading through “shell” companies which are not directly linked to the core business. Sir, it has been a challenge for the revenue administration to detect and abate such practices.
Further, provisions on capital allowances and carry forward of losses eliminated potential taxable profits. Mr Speaker, the tax structure was simply illusory as only two mining companies were paying Company Income Tax under the previous tax regime as most of them claimed that they were not in tax-paying positions.
Mr Speaker, it has therefore became imperative for the Government to restructure the mining tax regime by replacing the profit based tax system with a simple mineral royalty based regime that is final so that we insulate ourselves against tax planning schemes which are structured to wipe out taxable profits. In coming up with the 8 percent and 20 percent mineral royalty rates for underground and open cast operations respectively, the Government took into account the different cost structures for underground mining and open cast mining. Sir, I am eternally obliged to members of this august House for having overwhelmingly supported the Bill for us to proceed with the tax changes.
Mr. Speaker, we have however, received submissions from the Chamber of Mines and some of the mining companies that the new tax regime for the mining sector may pose sustainability challenges to the sector given the high cost of production for some of the mines. Sir, it is clear that the unfavourable course of events in the global economy, particularly the weak demand for copper from China coupled with the Eurozone debt crisis, have occasioned a slump in copper prices to their lowest in five years. In the event that this outlook persists our growth prospects will be dampened.
Mr Speaker, Government will pursue sector specific tax policies, and will not be persuaded to put in place tax laws to favour individual companies in order to avoid distortions. Sir, I wish to inform the nation that the Mines and Minerals Development Act contains mitigation measures which holders of the mining rights may wish to pursue on the perceived challenges the 2015 mining tax regime may present.
Sir, Government is committed to promoting investment and efficiency in the mining sector. The Government has planned to address policy matters while all operation matters will be dealt with by the specialised agency Zambia Revenue Authority which is responsible for tax administration.
Mr Speaker, regarding concerns over the application of the Value Added Tax (General) Administrative Rule Number 18 on proof of export requirements, I assured this House that it was Government’s desire to expeditiously and amicably resolve the concerns surrounding non-compliance with the requirements of Rule 18.
Sir, I am pleased to inform this august House that as a listening Government we have considered the submissions from the Chamber of Mines and we have proceeded to realign the provisions of Rule 18. This will ensure that mining companies and all exporters are not unduly encumbered by administrative rules and in the process affecting their cash flows and operations.
Mr Speaker, this is a clear demonstration of our unfettered commitment to ensuring that regulations are not onerous but supportive to investment and business development. In the same breath, we are confident that mining companies will remain resolute in complying with tax rules.
Mr Speaker, rationality and efficacy demand that our solutions are duly balanced. I therefore, would like to assure the nation through this august House that the Government is committed to ensuring that the tax system is not burdensome but conducive to tax compliance and beneficial to the country.
Mr Speaker, the Government remains open to dialogue and will welcome progressive ideas on matters relating to development of the country inclusive of those pertaining to taxation. This will be within the spirit of partnership between investors and the Government.
Mr Speaker, I thank you.