Proposed tax changes will make Zambia “un-investable’”
More tax regime instability, massive increases, and novel taxes not seen anywhere else in the world, will hurt the mining industry and all those who rely on its success, Zambia Chamber of Mines President Nathan Chishimba said after an emergency meeting of mining companies held on Wednesday.
“Having met as an industry, we are convinced that attracting investment is the only way to grow our economy, and growing our economy – and the base of taxpayers – is Zambia’s route to a prosperous future. To that end, we had a 10-point plan which we took to Government in July, in which we believed we could double the size of copper production, and add a billion dollars a year of fiscal revenue, over the next six years,” Mr Chishimba said.
“Unfortunately, our plan has been ignored. Instead, the raft of measures introduced will have exactly the opposite effect. A number of operations will be pushed into loss-making positions and will likely have to scale back.”
“Those already making losses will be pushed further into the red. And some of our members have had to immediately put on hold their expansion plans, which is the lifeblood of future production. Let us be clear, these higher tax rates will not result in more tax revenue. Quite the opposite. As industry production shrinks through the impact, there will be less jobs, less taxes and as a result there will be less in the government’s bank account for many years to come.”
Amongst the many changes, a few were singled out as being particularly harmful. These included:
Mineral Royalty rate increases
MRT rates have been increased by between 25% and 67% across the different price bands.
Zambia will now, once again, be an international outlier in the severity of its regime.
Non-deductibility of MRT
The Budget introduces a further feature to the MRT regime, which no other leading copper mining country applies. That is that MRT payments will no longer be deductible against Corporate Income Tax. This is in effect double taxation, and takes no account of the need for reinvestment in explorationand expansion.
The Budget introduces the notion of a non-refundable Sales Tax, in replacement of VAT, without providing any detail whatsoever. Quite apart from the non-refundable aspect which will severely impact cost of mining, the financial uncertainty is so great that banks are now unwilling to provide financing to all miners, big and small, without further clarity.
15% Export Duty
The export duties that are intended to be applied to gold and gemstones will hit emerging and established operations alike. In fact, they will have the effect of putting legitimate operators, many of whom are Zambians, out of business.
Import levy on copper and cobalt concentrates
The introduction of an import duty on concentrates, combined with sales tax, will render imports uneconomic, and partially shutdown the Copperbelt’s smelters and refineries. This initiative flies in the face of the government’s beneficiation drive, and in one strike, destroys the potential for Zambia to become a Southern African value-addition hub.
Restriction of tax credit for interest at 30% of EBITDA
This initiative has the effect of stringently penalising any company that has borrowed funds to invest in operations. Not only does this dramatically increase the cost of borrowing for any business, but it completely disincentivizes the entrepreneurial risk taking necessary to start new businesses.
“Some people will regard these increases as a great windfall for Zambia. But bear in mind that no operation will mine, explore or invest under those circumstances. The returns are simply not worth the risks inherent in mining. So, far from being a feast, this Budget will lead to famine,” said Mr Chishimba.
Mr Chishimba also highlighted the effect that these changes would have in the wider economy. “Many people do not fully appreciate the economic contribution the industry makes in Zambia. All large mines in Zambia have a multiplier effect of at least three – which means for every person working on the mines, there are at least three more jobs created in the wider economy just by the fact of the mines’ huge presence. We are talking about hundreds of thousands of household dependants. What will happen to these people? What will happen to our suppliers as they have to scale down? What will happen to those who supply us with power, for instance, if there is no longer demand?”
“We are on the precipice of a deadly spiral damaging our country, our reputation, our communities and our people that could take many, many long years to repair. We urge the government to open their door to us, to permit us to re-engage with them on these measures.”