The mining industry is a sore topic for many Zambians; a source of pride and pain depending on where you seat on the fence. Copper is the nation’s main export and the mines are the largest formal employer after the civil service. Those employed in the mining sector are among the most well paid workers in the country. Mining activities have contributed to the growth of mining towns on the Copperbelt, Solwezi being the most recent development.
However, Zambia is still struggling to capture tangible benefits from this mineral wealth endowment for the wider population. Despite being the second largest copper producer in Africa, copper is still exported in its raw form, and the general feeling among the population is that most of the profits are expropriated. In september 2014, Zambia experienced a lot of turmoil in the mining sector, with both Glencore and Barrick Gold threatening to stop operations if differences between the companies and the government were not resolved by January 2015.The major cause of this standoff was a lack of transparency on revenues and profits from the mining companies and a lack of consistent and effective mining taxation policy from the government. This standoff is back, and taxation policy is still a key issue of contention.
Every change of government has seen an adjustment for better or worse, with the claim of serving the countries best interests.
To try and capture benefits for the local economy from copper, the Zambian government has had many changes the mining taxation policy. Every change of government has seen an adjustment for better or worse, with the claim of serving the countries best interests.
One of the best changes enacted to the tax regime was during Levy Mwanawasa’s government, which saw mineral royalties increase from 0.6% to 3%, corporate tax from 25% to 30% and a 5 cent windfall tax per pound on any copper sold above a designated market price.
However, the windfall tax was over turned by Rupiah Banda’s government due to pressure from mining companies to scrape the new reforms. They claimed that the tax was creating an ‘unattractive’ business environment for the country, despite favourable copper prices on the international market at the time. The mining companies succeeded by using contractual obligations and the financial crisis. On the other hand, the government conceded to this pressure arguing that Zambia was the only country in the region that had a windfall tax at the time. The government did not see this as an opportunity to be a leader in effecting a positive trend for regional mining taxation.
In 2012, Michael Sata’s government again made changes to the tax system with mineral royalties increased from 3% to 6%. However, the windfall tax was not reintroduced. While the Zambia Institute for Policy Analysis and Research (ZIPAR) admits that tax revenues in the country have increased considerably since Mwanawasa’s government, they have made it clear that it is hard to pin this growth on tax regime changes as copper prices and production have also increased consistently during the same period. Further, the Zambia Revenue Authorities (ZRA) has also improved its tax monitoring and administration capacity.
In September 2014, the impasse between mining companies and the government involved two main issues, both closely related to taxation. Firstly, the mining companies were claiming a $600m refund on VAT from the government, and secondly, the government had more than tripled the mineral royalty tax beginning January 2015 from 6% to 20%, a move that the companies found highly unacceptable.
According to VAT Rule 18, companies can claim VAT on inputs for exported goods produced in the country. However, companies find it very hard to claim these tax refunds due to the administrative requirements of the act. This led to the suspension of operations by Glencore at the beginning October 2014 based on unclaimed VAT refunds. Currently, Mopani is threatening to lay off 4 000 workers and is citing non VAT refunds as one of the key reasons for this.
ZRA requires that companies produce a number of documents in order to claim VAT refunds; a shipment certificate provided by the ZRA, a certificate provided by the customs authority in the importing country, invoices for the goods exported, proof of payment into the exporter’s bank account in Zambia and such other documentary evidence “as the authorized officer may reasonably require”.
While companies complain that the administrative requirements are too much, this is documentation that is readily available to them as they carry out their transactions. Therefore, the lack of transparency among mining companies has also contributed to delayed payments of VAT refunds from government.
Zambians are not very clear about how much revenues we should be earning from the mining sector
Currently Zambians are not very clear about how much revenues we should be earning from the mining sector. These documents required when claiming VAT refunds can provide this information, and help combat the high suspicions of tax evasion in the mining sector.
Mining companies must not be allowed to dictate policy terms for the country. On the other hand, government needs to develop a consistent, effective and sustainable taxation policy. While government cannot solely be blamed for the electricity deficit, the depreciating kwacha and the fall in commodity prices, they take full blame when it comes to inconsistencies in taxation policy. The lack of a long-term outlook when setting mining taxation negatively impacts on investor confidence in the sector, and reduces the value of the countries copper.
With regards VAT refunds, government needs to keep strict documentation requirements and not give the mining companies tax breaks that are too generous. On mineral royalties, government needs to be realistic about how much distortion they impose on production incentives. The highest mineral royalty tax imposed globally on copper mining is 15%. Of course Zambia can set its own tax rate, but there is a need to assess the performance of mining companies in the country to develop a mining policy that actually works and will be sustainable over the long term.