By Henry Kyambalesa
Of late, the taxation of mining companies operating in Zambia has become a highly topical issue. Currently, the mining companies are reportedly taxed as follows:
(a) 3% mineral royalty on income (that is, earnings) from copper sales;
(b) 30% corporate profit tax on profits declared after deducting costs and mineral royalties;
(c) 15% variable profit tax on all taxable income (that is, profits) earned that exceed 8% of copper sales;
(d) Deduction of 25% of expenditures on machinery and equipment from taxable income per year once a mining project starts operating;
(e) 15% income tax on foreign companies and expatriate consultants providing services to locally based mining companies; and
(f) Mining companies cannot deduct from taxable income on a profitable mining site its capital expenditure on another mining site.
There is dissatisfaction among some segments of Zambian society that this taxation regime does not provide for adequate contribution of tax revenue by mining companies to the country’s coffers, and that the government should not have shelved the idea of a “windfall tax,” which would have provided for a charge on the sales of copper for every US$0.50 increase in the price of copper per pound on international copper exchanges.
The government, however, wishes to maintain the existing taxation regime in order to foster the development of the mining industry.
Clearly, the two arguments are both reasonable. But since the 20-year development agreement signed between mining companies and the Zambian government is still valid, it may not be possible for Zambia to devise a new taxation regime for mining companies without losing its credibility in the eyes of potential foreign investors. Besides, there is a risk of legal action by mining companies against the government if it seeks to institute changes to the terms of the contract.
It is always a good idea to honor contractual obligations. We still have 17 or so years to think about negotiating a new contract with mining companies. We can start thinking about negotiating a contract which will increase the mineral loyalty from 3% to 5%, reduce variable profit tax from 15% to 13%, leave the other tax provisions at current rates, and without the contentious windfall tax.
We could also provide for a mining company to deduct from taxable income on a profitable mining site its capital expenditure on another mining site in order to induce the re-investment of profits by mining companies on Zambian soil.
There is, of course, no doubt that these suggestions are going to provoke unsavory comments from those who wish to extract more tax revenues from mining companies. But more government revenues from mining taxes or any other source will not likely culminate in meaningful improvements in our people’s lives if we cannot avoid wasteful spending on unnecessary expansion of ministerial and deputy ministerial positions, excessive number and staffing of our foreign missions, excessive and costly foreign trips by the Republican president, and on sinecures like the position of District Commissioner.
In fact, additional tax revenues will just be swallowed up by expenditures on the increase in the number of parliamentarians from 158 to 280 members that is recommended by the National Constitutional Conference, and on repayments of loans secured to buy the controversial mobile hospitals and the like!
We need to go through government expenditures line by line, program by program, agency by agency, department by department, and ministry by ministry in order to eliminate unnecessary application of public resources. The savings to be realized in the process could be invested in improving education and training, healthcare services, infrastructure, and agricultural production and food security, among other essential projects and programs.
In passing, we need to be mindful of the potential for foreign companies to engage in what is referred to as “transfer pricing” when devising a taxation regime for such companies—that is, a pricing strategy which a multinational company may employ to manipulate its intra-firm transfer prices by using its transnational network of affiliates in order to achieve a revenue-shifting effect and thereby cope with high corporate taxes, high import tariffs and/or restrictions on dividend repatriation in a host country as follows:
(a) Over-pricing finished, intermediate and capital goods transferred to subsidiaries in high-tax countries so that its profits in these countries are reduced or eliminated and shifted to subsidiaries in low-tax countries;
(b) Under-pricing finished, intermediate and capital goods transferred to subsidiaries in high-tariff countries (except in the case of specific tariffs) in order to reduce customs duties to be paid; and/or
(c) Over-pricing finished, intermediate and capital goods transferred to subsidiaries in countries where dividend repatriation is restricted so that its income is unscrupulously siphoned out of such countries in the process.
