2018 Budget flawed, does not address tax evasion and illicit financial flows by Mines

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Minister of Finance Felix Mutati
Minister of Finance Felix Mutati

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.

30 COMMENTS

  1. +9
    -9
    vote

    My Friend Kalima, as usual , great piece, great service to the nation and true patriot wanting to see the best for Zambia. I take my hat off to you.

    Now coming to the issue at hand and this has been vexing me for a while. In all honest Mines would break even at the price of $ 2000. The MMD infamous windafall tax was triggered when coper hit $4000. Today these mines claim recession and start laying off people when it hits 4000. Today the Price is $ 6000 per tone and some of these mines are claiming that they are still making loses. And on top of that we used to put subsidized electricity and they still claimed losses. Surely, why are they in this business then?

    • +3
      -1
      vote

      OK, you re-enforced Mr Kalima Nkonde’s sentiments on the current situation. He gave ideas on how to stem the vice. What is your view on that?

    • +10
      -1
      vote

      Excellent, excellent article – this is why Lusaka Times remains above par to their competition both online and print media in Zambia! Well written piece by Kalima Nkonde. This article highlights the key areas- the tax avoidance by the mines and big multinationals such as Lafarge is costing the country dearly, the State is now looking at the ordinary Zambian to compensate for these losses which is very wrong! The article rightly highlights the fact that the wage bill for civil servants is the major recipient- but is the State getting value for its money? The truth is it is not- a large portion of that wage bill is spent on the upper echelon of civil servants – the bwanas in other words. Allowances, gratuity, huge salaries, luxury SUVs etc etc – Millions can be saved by correcting this kind…

    • +11
      -3
      vote

      “Here are Lungu’s trips since 25th January 2015 to date 29th September 2017…Are we tightening our belts together?

      1. Ethiopia – AU Summit – 30/01/2015
      2. Zimbabwe – State visit – 06/02/2015
      3. Angola – State visit – 13-14/02/2015
      4. SA – State visit – 25/02/2015
      5. SA – Private visit – 10-13/03/2015
      6. Mozambique – State visit – 18-19/03/2015
      7. Namibia – Inauguration of Hage 21/03/2015
      8. China – State visit – 29/03 – 01/04/2015
      9. Zimbabwe – SADC – 29/04 – 01/05/2015
      10. Angola – Great Lakes Summit 18/05/2015
      11. Mozambique – Independence Celebration 26/06/2015
      12. Uganda – State visit the – 23-25/07/2015
      13. Malawi – Independence Celebration – 8-9/08/2015
      14. Botswana – SADC – 17-18/08/2015
      15. Namibia – Heroes Day – 25-27/08/2015
      16. US – United Nation -…

    • +5
      -6
      vote

      CONT’D..
      16. US – United Nation – 27/09-01/10/2015
      17. Tanzania – Magufuli Inauguration – 05/11/2015
      18. SA – China-Africa Summit – 4-5/12/2015
      19. Namibia – Committee of Ten – 15/01/2016
      20. Ethiopia – AU – 29-31/01/2016
      21. Italy – State visit – 4-6/02/2016
      22. Vatican city – State visit – 05/02/2016
      23. France – State visit – 7-11/02/2016
      24. Malawi – 5 hour bilateral talks – 25/04/2016
      25. Uganda – Mseveni Inauguration – 11-12/05/2016
      26. Saudi Arabia -State visit – 17/05/2016
      27. Uganda – Entebbe anniversary – 4/07/2016
      28. US – United Nation – 16-21/09/2016
      29. Madagascar – COMESA – 19-20/10/2015
      30. Angola – Great Lakes Summit – 26/10/2016
      31. Morocco – UN Climate change – 14-18/11/2016
      32. Equatorial Guinea – Africa-Arab Summit –
      22-25/11/2016.
      33. Tanzania -…

    • +4
      -4
      vote

      CONT’D..
      33. Tanzania – State visit – 27-29/11/2016
      34. SA – SA-Zam Business Forum – 7-9/12/2016
      35. Ghana – Addo Inauguration – 6-7/01/2017
      36. Ethiopia – AU – 27-31/01/2017
      37. Botswana – State visit – 6-7/02/2017
      38. Israel – State visit – 28/02- 5/03/2016
      39. Swaziland – SADC – 17-19/03/2017
      40. Equatorial Guinea. – AU c10 Summit – 17-18/05/2017
      41. Lesotho – Tom Thabae Inauguration – 15/06/2017
      42. Swaziland – State visit – 18-19/07/2017
      43. Rwanda – Kàgame Inauguration – 17/08/2017
      44. SA – SADC Summit – 19-20/08/2017
      45. SA – Security on Lesotho – 17/09/2017
      46. US – United Nation – 18-20/09/2017
      47. Angola – Presidential Inauguration – 25/09/2017
      48. Botswana – State visit – 29/09/2017

    • +2
      -1
      vote

      GOVERNMENT SHOULD STOP THE SCAM WHEREBY CEC SUPPLIES ELECTRICITY TO CEC WHICH IN TURN MERELY TWEAKS IT TO SUPPLY TO THE MINES. THE ARRANGEMENT ONLY BENEFITS TWO DIRECTORS AT CEC WHO SOLD CEC TO THEMSELVES WHEN THEY WERE MANAGERS AT CEC DURING THE PRIVATION OF CEC.
      GOVERNMENT SHOULD REPOSESS CEC AND HAVE IT UNDER ZESCO AND PASS ON THE BENEFITS IN REDUCED TARRIFS TO THE OVER-TAXED ZAMBIANS.

    • +5
      -1
      vote

      THE BUDGET AND ECL’S OBSESSION WITH THE GOVERNMENT JET – ISSUE Y’ALL SHOULD BE PROTESTING ABOUT.
      ==========================================
      @1.3 -5 Maloza
      Bravo, I have been wanting to know those trips data date by date. Good to know that you’ve been keeping track of this president’s unprecedented travel programme. It’s like LunguTripsGate kinda investigation. This president maybe winding up his presidency. I hated RB for his trips. The opposition should be questioning this president for his incessant trips abroad and overseas. I wonder what’s in that budget for his 2018 incessant trips. Kaleya mateyo’s kind’a trips. Better trip around Zambia and see how your people are suffering.

    • +5
      0
      vote

      If what you have listed above is anything to go by, then this president has taken on average 5 trips a month (5trips/month what a mileage!), from January, 1 to September, 30. Unprecedented! This is scary!
      Meanwhile, I am just analysing this PF/MMD budget.

    • vote

      GOVERNMENT SHOULD STOP THE SCAM WHEREBY ZESCO SUPPLIES ELECTRICITY TO CEC WHICH IN TURN MERELY TWEAKS IT TO SUPPLY TO THE MINES. THE ARRANGEMENT ONLY BENEFITS TWO DIRECTORS AT CEC WHO SOLD CEC TO THEMSELVES WHEN THEY WERE MANAGERS AT CEC DURING THE PRIVATION OF CEC.
      GOVERNMENT SHOULD REPOSESS CEC AND HAVE IT UNDER ZESCO AND PASS ON THE BENEFITS IN REDUCED TARRIFS TO THE OVER-TAXED ZAMBIANS.

  2. +3
    0
    vote

    What is surprising is that they claim to be making loses year in year out but they continue operations. Its a Big Lie!

  3. +7
    0
    vote

    Well articulated and factual piece of information , Its a sad story indeed that the poor and already over taxed Zambians continue to bear even more tax burden. But with the same tune i would also blame the likes of you Mr Nkonde. Budget consultations were announced many months before its presentation two days ago. If had made a detailed article like this one then, I promise you it could have made a difference. You knew before hand that this can be changed but because probably you are also a political antagonist you just wanted a right time to come and maliciously point an accusing finger on the people in gvt. You have the right mind of ideas help make Zambia a great nation. other wise great observations Kalima !
    .

    • vote

      Well said!
      The writer up is well articulated just wondering why it has come after the budget presentation. This is the drive we need from the opposition as well, the alternative to maximise revenue from the mines and other multinational companies. How i wish someone can implement your recommendations ASAP!

    • vote

      Spot on, spy mashra!It is so easy for anyone to come up with brilliant ideas/critique after the donkey work has been done by someone else…

  4. +1
    -7
    vote

    AS USUAL THE WISE COME FROM THE EAST….MR KALIMA IS ELDER BROTHER TO OUR BEST EVER FEMALE MINISTER VICTORIA KALIMA ..ONE POINT , DORA SILIYA BEST AGRIC MINISTER ..EASTERN POWER,, PF EASTERN WANTED MUTATI TO GO..EASTERN POWER.. ECL ..EASTERN POWER..FINALLY MUTATI MUST GO HE MEANS NOT GOOD TO ZAMBIA COS. OF HIS POLITICAL WILL TO BE PRESIDENT IN 2021

  5. +1
    -6
    vote

    The author has asked all the relevant questions. He has also largely answered tye questions or offered the solutions. One of the solutions is to carry put a study of the issues and carefully analyse the solutions. There is nothing worse than going into negotiations or worse still imposing solutions which are not based on solid indisputable fact and then do a u-turn as ignorant donkeys, you know my views on Donkeys..kikikikiki
    As far as I knoq tge givernment pledge to set up an expert team to look at mining and other multinationals taxes. What we must do as patriotic citizens is to unite and encourage and get our government to do those good things and set up proper taxation systems. Not as PF, or me I am UP.NDonkey and under5 is the best economist, or my trive is superior and terefore…

  6. +1
    -7
    vote

    ….Not as PF, or me I am UP.NDonkey and under5 is the best economist, or my tribe is superior and therefore I must rule this country, or its the turn of my tribe to rule, NO NO NO NO! please!! This is about OUR country and NOT, repeat NOT under5’s ambitions! The day when UP.NDonkeys begin to look at Zambia as OUR country, the day qhen UP.NDonkeys accept that elections take place every 60 months and everybody has a chance, half our problems are resolved without any work and unnecessary expenditure. But how could that happen when boys like under5 are flirting with the very imperialists ( whom you want to tax more -Maimane, DA, Anglo, Brenthurst etc)? Can you bring Anglo and impose all those taxes you talkibg about? Let’s be serious guys, we are dealing with Donkeys in our midst.

  7. +1
    -1
    vote

    LTerrible WTF are you on about again…… if government wants to stem this problem then employ INDEPENDENT consultants like PwC KPMG but have no govetnment involvement whatsoever and the full report of what monies go where….that will stop illegal and corrupt practices

    • +4
      0
      vote

      Exclude KPMG, please. They have (pooped) fuc!ked up completely in SA. It’s now a discredited, very unprofessional, dishonest and thug consultancy. Don’t you read papers? Unleashing them on Zambia where already the govt is under a kleptocracy, the outcomes would be more than catastrophic. What’s needed in Zambia is a brand new govt consisting of people who actually know what to do. And who are not thieves!

  8. +2
    -2
    vote

    Face the facts guys. Zambia is desperate for foreign investment. As a result, they have to be lenient, accommodating and encouraging to the mining companies. Should they shun Zambia, countries like:
    Indonesia
    Bolivia, and
    Papua New Guinea
    Will embrace them!

  9. +1
    0
    vote

    Zambia will be 53 years old and still following those she chased with a begging basket. On top of that Chagwa and team have found a loophole around IMF and they think they can go on borrowing forever from Bank of China without consequences? As for the mines, they have captured the state! It’s a high mind game which our poor leaders are too dull to understand! The best way to steal from Africans is to give them the Bible! Stop worshipping your politicians Zambians! Zambian politicians are liars and lies are smooth and more appealing than the truth! May the Zambian politicians continue depleting the masses maybe that is when they will wake up!

  10. vote

    Please build another toll gate kwa misisi, we need such developments. It government vision 2 have 50 tollgates by 2021.

  11. vote

    Rich article with great suggestions.. My take is the boma already knows what to do but are hesitant or rather scared given the backing of these mine owners.. The social design of things is to exploit the darker skinned human…World Bank etc will not support the approach that sees the balance of power shifted or indeed a semblance of the African taking a step to what looks like resource control.. The measures would require gunyus of steel which unfortunately we are at a serious lack of right now…

  12. +1
    0
    vote

    The issue of illicit financial flows (IFFs) from Africa will remain the greatest fiction of the century until the alleged culprits are brought to justice. It exposes the lack of capacity to follow through the logical arguments in politics and in law. It compares with the folktale of the legendary cat without bell around its neck in the kingdom of rats. If the African middle class were serious, then they would partner with certain liberals in the Western countries who have the means to solve the puzzle of IFFs. In short, political rhetoric per se is not the domain of scientific inquiry. It is blaming game with little or no interest for intellectual minds.

  13. vote

    Good and well thought out insightful. However, the writer can do with short, sizable and concise sentences. In this write up there is a paragraph that has one sentence but with 5 lines.

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