2018 Budget flawed as it does not address tax evasion and illicit financial flows by Mines and Multi-National Corporations (MNCs)
…. Leaving Zambians overtaxed while building a mountain of debt
By Kalima Nkonde
Zambia’s 2018 budget is flawed in its revenue generation strategy as it does not contain any measures and plans for legislation for curbing tax evasion and illicit financial flows by Mining houses and other multinationals thus leaving out a major source of domestic revenue mobilization.
The total budget of K71.6 billion or $7.4bn is financed as follows: K49.1($5.05bn) which is about 68.5 per cent is financed domestically, K20.1 billion or $2.06bn will be financed by borrowings and K2.4 billion or $247 million which is about 3.4 per cent financed by grants from donors.
There is no doubt that more could have been raised domestically and less borrowed if Mines and Multinational companies’ tax evasion, avoidance and illicit financial flows were stemmed and minimized given that the latest estimate of illicit outflows from Zambia in 2016 is $3billion which is 40% of total 2018 budget and 60% of domestic revenue projections in the 2018 budget.
In 2012,the then Deputy Minister of Finance, Miles Sampa reported that Zambia had lost $2billion dollars in tax evasion by Mining houses. Sampa said that only two mines claimed profits in that year and that “the other mines for one reason or another, some genuine, some not, are always making losses. Most of it is due to transfer pricing or tax avoidance.”
In their 2013 report on illicit financial flows (IFFs) from Africa, Global Financial Integrity and the African Development Bank said Zambia had lost approximately US$8.8 million in IFFs from 2001 to 2010.
In July, 2017, the Zambia Financial Intelligence Centre reported that multinational mining companies were robbing Zambia an estimated $3billion annually through tax evasion and illicit financial flows (IFF).
There is no doubt that government’ s loss of revenue due to tax evasion, avoidance and illicit financial outflows creates a hole in a nation’s budget, which places a major burden on citizens which they have to pay for directly through taxes, levies as well as through more debt contraction.
The expectation from government following the recent disclosures by the Financial Intelligence Centre report of the loss of $3 billion was that the Government would seize the opportunity to map out strategies for the 2018 budget going forward through the implementation and enforcement of measures meant to curtail these massive revenue leakages in order to raise domestic revenue. Unfortunately, Zambians still continue bearing the burden of financing the budget while foreign multinationals are smiling all the way to the bank.
The 2018 budget is too focused on raising revenue from the already overtaxed Zambians rather than the mines and multinationals. Zambians are already over burdened with direct, indirect taxes and levies and no effort is being made to ensure that the real “ Gold mine” for domestic revenue mobilization which is the Mines and Multinational corporations pay their fair share of revenue by stemming illicit outflows and sealing the tax evasion loop holes.
Zambians are bearing the blunt of government’s effort to raise funds for civil service salaries and to service loans especially. For example, in the 2018 budget, Zambians over the age of 18, once they obtain a national registration card are required to have ZRA tax PIN numbers. Also, in order for one to have a bank account, one needs a tax PIN. The recent financial burdens on citizens which include toll gates, the fuel and electricity prices increases are just overwhelming to Zambians but it appears nobody seems to care.
In general, all Zambians – farmers, informal sector workers, villagers, workers pay at least 16% tax through purchases of goods and services because of VAT as they cannot offset or pass it on. For some employees, if you add the pay as you earn (PAYE) top rate of about 35%, they end up paying 51% of their income as tax.
The question is: how much of their income are Mines and multinationals contributing to Zambia? In the last ten years, Mining houses have rejected four different tax proposals by government: Windfall tax, increase in Royalty tax, revision of VAT rule 18 and more recently the 7.5% copper concentrate tax and each time the government has curved in after threats of closure or retrenchment and no one has been brave enough like Sata and Mwanawasa did by calling their bluff.
One Mining house had audacity to refuse to pay increased electricity prices when Zambians had accepted a 75% increase! In Zambia it appears mines have more power than government and they can do whatever they like as they perceive our leaders as weak and highly compromised.
Does Zambia need a Magufuli-who has imposed $190 billion fine and back taxes for the gold miner, Acacia Mines for undervaluing exports thus evading taxes over the years – for Zambian mines and multinationals to see sense, be more sensitive, humane and responsible to the host country?
Why is that it is the Zambians who should bear the development burden when their resources are being exploited and there is nothing to show for it and yet the country is still building a mountain of foreign debt which is currently estimated to be over $17 billion as once disclosed in parliament by Minister of Finance, Felix Mutati; but later said it was “a slip of the tongue”, the actual foreign debt was $7 billion.
The Mines are not contributing to Zambia’s revenue sufficiently as the former Finance Minister, Alexander Chikwanda observed in his 2015 budget speech.
“Sir, despite Zambia being endowed with vast mineral resources, the country has not realized maximum benefits from the sector’s potential to support growth and enhanced social economic development. The House may wish to note further that the contribution of the mining sector revenue as percentage of GDP remains low at 4%. 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.”
The issue of the Mines and other Multinational corporation having been avoiding tax and involved in illicit financial outflows thus denying Zambia the much needed resources for development has been there for sometime and is not debatable and should be a no -partisan one, because different administrations have not sufficiently addressed it .The issue is that given the revenue and other challenges Zambia faces, the country should be bold enough and have the political will to put a stop this robbery for us to benefit from the resources and avoid borrowings thus emulate the clever Botswana who has benefited from their mineral resources- Diamonds.
During his 2017 address to the Annual General Assembly, the UN Secretary-General António Guterres, at the high-level event of financing the 2030 Agenda – the role of the United Nations, he lamented about the tax evasion and illicit flows from developing countries like Zambia
“Finance is pivotal for success. This includes tax reform by developing countries themselves – but also international efforts to fight tax evasion, money laundering and the illicit financial flows that have depleted domestic resource bases”, the UN Chief said .
“I am convinced that today there is more money leaving a continent like Africa due to money laundering and tax evasion and illicit financial flows than the money that goes in through official development aid, and this is a common responsibility of the international community,” Guterres added.
The former South African President, Thabo Mbeki chairs the African Union’s high level panel on illicit financial flows and it is estimated that Africa in last 50 years lost in excess of US$1trillion. In 2015, alone the estimate was an annual loss from Africa of $90 billion and Zambia is among the top nations in losses as nothing or very little is done about it to stem the losses.
In making a report to the AU in 2016, Mbeki observed, “Our heads of State and government are aware that that the problem of illicit financial flows is exacerbated by corrupt tendencies, lack of or weak African institutions both at national and continental levels in all sectors, ‘governance challenges, political instability and conflicts weak tax administration, and lack of capacity to monitor and curb such criminal activities among others…”
The amount of money mining houses make from Zambia which is not apparent to the Government and Zambians was further confirmed in a video three years ago by Vendeta’s majority shareholder Anil Agarwal speaking in March 2014 where he revealed how he bought KCM for just $25 million. Speaking to the Jain International Trade Organisation (6) in Bangalore, India, March 22 – 23 2014, he is quoted as having boasted about his investment in KCM:
“Its been 9 years [since we’ve owned the company], and since then every year it is giving us a minimum of 500 million dollar, plus 1 billion dollar, every year it has been continuously giving back.”
According to Stephen Yeboah a Research Consultant at the African Natural Resources Center of the African Development Bank (AfDB), between 1996 and 2014, there was under invoicing- understating exports so as to pay less royalty tax and create losses and pay no income tax – of $28.9 billion of copper exports to Switzerland, which was more than half of all Zambia’s copper exports then, which did not reflect in Switzerland’s import statistics.
Zambia should attempt to plug the holes of illicit financial flows as a matter of urgency and this should be a priority in the budgetary process by ensuring that sufficient resources are allocated to the effort as it is a major revenue generating activity. There are some immediate steps that government can take to address the issue of tax evasion and illicit financial outflows.
First, government should commission a major study by reputable international consultants teaming with Zambians to study how Zambia specifically is losing billions of dollars in tax evasion and illicit financial flows and provide practical recommendations to government which could form a basis of informed decision making unlike in past where knee jerk actions were taken without having an helicopter view of the matter at hand.
Secondly, funds say between $25m-$30m should be set aside to hire international lawyers, tax experts and accountants specialized and experienced in mining, tax evasion and illicit financial flows to address capacity issues that the country has and train Zambians for a period of three years on performance based contracts. These can help catch the international tax evaders and act as deterrent. These experts can be housed in a unit at Zambia Revenue Authority by converting the Mining Unit into Mining, transfer pricing and Illicit Financial Flows Unit (MIFFU).The government if it is serious, should make a project proposal for the purpose and engage donors such as World Bank, OECD, Africa Development Bank, European Union, Nordic Countries to finance such a project
Thirdly, Zambia should revisit the whole regime of tax incentives as some of them were unwise and have proved to be more costly than beneficial to the country and have been abused by multinationals that are perpetually making tax losses through financial engineering. There is need to do a detailed Cost/benefit analysis of the tax incentives by government given that some incentives to foreign investors have been there for the last 20 years. They may have just passed their “Sale by date”.
Fourthly, there is a very urgent need for legislation on the Extractive industry and Commercial Illicit financial outflows with should have severe penalties for those caught in the act. The legislation should be stand alone and be separate from the legislation which deal with illicit flows from proceeds of crime such as terrorism, drug trafficking. It should, however, include penalties for corruption as it forms an integral part of Illicit financial flows as corrupt officials both in public and private do act as enablers. There should provision of forfeiture of assets acquired through corrupt means regardless of where they are.
Granted, there are some ad hoc and uncoordinated measures in place meant to address some issues raised in this article like the EU sponsored Mineral Production Monitoring Support project at the Ministry of Mines and Mineral Development, the Mineral Value Chain Monitoring project at ZRA and the Ad hoc audits by ZRA of Mines. What Zambia needs, however, is a holistic approach where the issue of tax evasion and illicit financial outflows is housed in a specialized independent unit with professionals and it coordinates all issues and obtains information from other institutions. This should be supported by appropriate legislation.
The writer is a Chartered Accountant by profession and a financial management expert. He is a retired independent and non partisan commentator/analyst. He has lived in the diaspora in England, South Africa and Botswana for over 25 years.