By Marko Sovi:-
Regarding windfall tax, it is important to understand why governments legislate to tax the profits as windfall. The concept of windfall tax on specific industries is not new. Most countries have had it in one industry or the other-China, Australia , Chile , Peru (still negotiation on copper profits).
However, the motive for many governments is the same which is to uplift the living standards of the people in disadvantaged areas, especially, those areas affected by the industry/(ies) in question.
In 2008, the UK government introduced a windfall tax levied on (state owned) companies that where sold at an under value in the early 1990 when privatisation hit the globe. The companies affected where, typically, utilities firms especially those providing energy and gas.
This, however, was a one-off tax base on the companies profits for the past four years multiplied by the index of 9 (to even out the profits).
The governments rationale was that these companies had enjoyed the profits which, in other words, they did not deserve because they were bought cheaply and most of them had the share price double or at least 50% higher than it was when sold just a few days after selling.
This meets the definition of windfall tax as defined by the financial times “a tax that must be paid by a company that has suddenly and unexpectedly earned a large amount of money, especially a large company that has recently been privatised (sold by the government)”.
Another source defines it as “taxes levied primarily on the companies in a targeted industry that have benefited the most from an economic windfall, most often commodity-based businesses such as big oil companies”. And windfall itself is defined as:
1. A sudden, unexpected piece of good fortune or personal gain.
2. Something, such as a ripened fruit, that has been blown down by the wind.
I honestly do not understand the mechanics of this tax in the Zambian context and how it is going to be implemented and administered? I also do not understand government’s projections regarding the revenue that will be collected from the windfall tax.
It’s very true that those mines were sold for peppercorn prices and that they have ridiculous incentives which are not the same across the industry- they are tailor made per company as per negotiations.
[pullquote]Now regarding the economics of windfall tax, it is true that it will have a knock on effect on investment if the mining companies will divert the profits to offset the taxes instead of investing the excess profits in equipment, machinery and human resource development.[/pullquote]
It is also true that in its desperation to sell the mines, government agreed to free those mines from the social responsibilities that they had shouldered when they were under ZCCM such as the provision of schools, hospitals and social amenities(sports grounds and equipment) etc.
These were errors that were made at the expense of the Zambians and as to whether they were honest or deliberate errors I stand on the left.
Now regarding the economics of windfall tax, it is true that it will have a knock on effect on investment if the mining companies will divert the profits to offset the taxes instead of investing the excess profits in equipment, machinery and human resource development.
It is also going to be a disincentive if the tax is going to increase their cost of borrowing as the case maybe (assuming they rely heavily and only on external finance). However, arguably, companies do not always finance their investments from profits-that would be pathetic financial management!
[pullquote]I personally do not believe that the tax would deter investment and that it would chase the investors away from Zambia ; that line of reasoning would be naïve and even, in my mind biased and corrupt! Investors invest because they know they are going to get a return.[/pullquote]
They however finance their investment, mostly through loans, bonds etc. If this is true then we are saying that the tax won’t affect their ability to invest as they can always borrow at their adjusted cost of borrowing.
I personally do not believe that the tax would deter investment and that it would chase the investors away from Zambia ; that line of reasoning would be naïve and even, in my mind biased and corrupt! Investors invest because they know they are going to get a return.
They are happy that their investment is safe and in a stable political environment. Some people may argue that investors like a predictable regime but I think introducing new policies does not amount to being an unpredictable.
Pertinently, as we all understand, government levies taxes on individuals and corporate bodies to enable it to provide essential services to its citizens. One major principle of taxation, regardless of the jurisdiction, is that it must be simple to administer i.e it must not be expensive for ZRA (in our case to execute). Another principle is that tax must not cause unnecessary hardships on the intended group, in other word must not be costly.
If we start off with the two, I think it would be fair to say that if the windfall tax is to be paid on excess profits, then the second requirement is met as it would not cause any hardships on the intended group-mining. Government has the responsibility to ensure that individuals and organisations pay fair taxes on their earning. It does so by enacting relevant legislation to guide with the calculations and requirements etc.
Government has no obligation to pass legislation that is tailored to favour individuals or corporations and in this case if government thinks that windfall tax should be introduced then it should simply go ahead but must do it cautiously keeping in mind that it shouldn’t impact negatively on the intended group.
[pullquote]One major problem I think is defining what would be considered as excess profits in this case. The legislation would have a hard time defining that one because it would have to take a lot of things into consideration and in my opinion that would make or create a lot of loophole and a huge burden on ZRA and the two factors would be a recipe for disaster.[/pullquote]
One major problem I think is defining what would be considered as excess profits in this case. The legislation would have a hard time defining that one because it would have to take a lot of things into consideration and in my opinion that would make or create a lot of loophole and a huge burden on ZRA and the two factors would be a recipe for disaster.
But if the intention is to collect these taxes as a one off, which is what it should be, then the time to do it, is now when the copper prices are high and leave the legislation in place that triggers windfall tax when copper prices rise by a certain %. I note that in 2008/2009 Zambia raised $77m in windfall taxes. This is a lot of money.
But the good question is how has it been used? If we are going to collect taxes and use the revenue otherwise than intended, then perhaps it’s not moral either. I find it hard, how a company could consistently declare loses and get away with it in a country where a public company is required, by law, to be audited by a qualified auditor.
ZRA has the powers to nominate its own auditors to ascertain that the financial statements of a company represent a true and fair view of the affairs of the company as at that time. We immediately run into one big problem and that is we have a lot of happy auditors who are ready to give a clean bill to the company dubiously. That’s the biggest problem plaguing the nation.
Now should we or should we not introduce windfall tax?
In my opinion perhaps we shouldn’t but instead:
- Increase the royalty fees to two figure percentages because companies would have to pay royalties whether or not they make a profit;
- Strip off the oppressive incentives that these companies enjoy. At the moment each company has its own incentives which it enjoys including long tax holidays of up to 10 years;
- Introduce a specific mining related tax or modify the current variable tax in force;
- Government can enact specific legislation which excludes mining companies from enjoying certain reliefs as to bring more profits into the tax web;
- Government should try to close down all the tax loopholes to enable more profits to be subjected to companies tax. In particular it should discourage the designer schemes whose main purpose the avoidance or even evasion of tax;
- Government should not entertain companies taking the country for a ride by being given silly conditions but is should be firm and introduce strong laws that penalise all companies that enjoyed designer conditions or schemes with exit charges should they wish to pull out within a certain period of time so as to recover the taxes that could have been paid had those conditions not existed;
- Windfall tax might also disadvantage the workers as the companies are likely to be reluctant to increase salaries and offer any bonuses to their employees as the money meant for that would be reserved for offsetting windfall tax;
- Arguably, it is also true that companies may withhold investment as the funds meant for investment have been diverted to paying off windfall tax. This is generally, explained earlier, reliance on borrowing will;
In my opinion, windfall tax will not guarantee a constant flow of revenue from the mines as it is a tax on excess profits only which means if the copper prices plummate to record lows, then the government is not going to get any extra revenue from the mines.
I hope I have reflected on the matter to the best of my abilities given the limited information that we have. We are all just commenting using abstract information with no solid figures. We don’t know how much the mines invest annually in equipment, machinery and human resources neither do we know how much profits they make.
It is all based all the fact that copper prices are rising and we feel windfall tax should be introduced. But having said that, I would like to believe that the government has the figures and their decisions are on solid information.
