By Webby Banda Senior Researcher (Extractives)
A Mining fiscal regime should obtain the right balance between raising revenue and providing fiscal space for mining companies to continue in operation. A mining fiscal regime should also inspire confidence that the country is collecting what it is owed.
In an endeavour to achieve this, the Zambian Government has structurally reformed the mining fiscal regime four times in the past five years. Although the current fiscal regime aims at capturing maximum revenue for the country, the Centre for Trade Policy and Development wishes to note the following deficiencies in its structure:
(i) Lack of capital gains tax
A capital gains tax (CGT) which is defined as a tax on the profit realised from the sale of a non-inventory asset is essential for Zambia to fully benefit from the sale of its mineral assets between multinational corporations. The most common capital gains are realised from the sale of real estate and property.
Therefore, the lack of an excess profit tax will continue to act as a weakest point of revenue loss. An example in history is the sale of Lumwana Mine by Equinox to Barrick Gold Corporation, where the country did not benefit from the transaction in form of capital gains.
(ii) Retention of administrative complex tax instruments
Maintaining administrative complex tax instruments like the current VAT system will continue to act as the weakest point of revenue loss. There is a need to match the complexity of the fiscal instruments in the current regime with the administrative capacity of the tax authority (Zambia Revenue Authority (ZRA). A country might have the best-designed tax system on paper, but if this is not matched with the administrative capacity of the tax authority, the tax system is bound to fail. The government needs to enhance the efficiency of the VAT system through structural reformation.
(iii) Lack of an excess profit tax instrument
The lack of an excess profit tax instrument in the current regime does not inspire confidence that the country will collect what is due or owed to it in high price cycles. A lack of an excess profit tax instrument will likely provide an incentive for the government to alter the regime in high price cycles. This is because it will feel it is not getting much of the desired revenue.
A robust fiscal regime should capture windfall gains in high price cycles but at the same time provide fiscal relief for mining companies to continue in operation in low price cycles.
Although the current mineral royalty might mimic the windfall tax, it is important to note that the former cannot serve the purpose of the latter. Mineral royalty acts as a rent paid to the government for the exploitation and exhaustion of mineral resources.
On the other hand, windfall tax is a fiscal instrument that aims at capturing windfall gains in high price cycles.
(iv) Overgenerous tax incentives
Overgenerous tax incentives in the current fiscal regime like the 10 years loss carryforward period continue to act as revenue leakages in the current fiscal regime. There is need to limit these overgenerous tax incentives given to large scale commercial mines.
However, energy needs to be redirected in crafting tax incentives that will grow the Artisanal and Small Mining (ASM) sector. This is because ASM is increasingly becoming an important sector of alleviating poverty levels in Zambia.