Editor's Comment

Mines should not hold the country hostage

AN open pit mine.

IT IS deeply saddening that over years, the mines, which are supposed to be the country’s cash cow, have become a monster that has held the country hostage.
Zambia is considered one of the world’s top copper and cobalt producers as well as Africa’s second-biggest copper producer.
Given such status, it is illogical for Zambia to be wallowing in poverty and still be considered among developing countries 54 years after independence.
Needless to say, the country, which is blessed with vast mineral resources, has all it needs to spur development.
The mining sector, which has been Zambia’s economic mainstay over decades, has vast potential to provide the much-needed foreign exchange to fund developed if only it is well harnessed.
However, the sad reality is that the mines are proving to be more of a curse than a blessing.
It is heart-rending that Zambia has struggled to get real value from its mineral resources.
A number of NGOs, media and academic reports in recent years have highlighted how mining companies, while producing large amounts of copper, have been paying fewer taxes to the Government.
On the other hand, international experience has demonstrated that a properly structured and administered mining industry has potential to generate substantial benefits to individual economies and regions.
In Zambia, allegations of tax evasion and avoidance by mines have become a proverbial song.
Some mines are said to over-report on costs while under-reporting production in a bid to avoid paying due taxes.
Given that the global mining industry is dominated by multinational companies trading between different operating units in different countries, some mines also abuse transfer pricing.
They do so by selling goods and services from an operating unit in a low tax jurisdiction at a relatively high price, transferring income away from a high tax jurisdiction thereby reducing their overall tax payments.
What is even more depressing is that mining companies are doing all this against Government’s overly generosity as witnessed by tax incentives and subsidies in fuel and electricity tariffs.
Government, having realised that it has been getting a raw deal from these mines, proposed a review of the mining tax regime in this year’s national budget.
Effective Tuesday, January 1, Government has proposed a 1.5 percentage points increase on the sliding scale for royalties of 4 to 6 percent and introduction of a new 10 percent tax when the price of copper exceeds US$7,500 per tonne.
And effective April 1, Government has proposed to replace the refundable value added tax with the non-refundable sales tax. This will enable Government to save on the VAT refunds.
Given that mines are in the hands of foreign investors, it is within their legal rights to externalise profits to their countries of origin.
This means the country can only benefit through taxes paid by mines, job creation and engagement of local contractors and suppliers.
Since mineral resources are diminishing in nature, it is vital to ensure that Government puts in place a tax regime that will give Zambians a befitting share of the mineral wealth.
Currently the mining sector only contributes about 12 percent to the country’s gross domestic product (GDP)
It is also estimated that Government loses about US$3 billion through tax dodging by multinationals.
This is evidence that the sector can actually contribute much more to the treasury.
We are, however, taken aback by the callous reaction by some mines to the new tax regime. They are threatening Government with job cuts and reduced production should the proposed taxes be implemented.
This seems to be an old-time trick that mines use every time they are faced with more taxes or any other challenges like plummeting copper prices.
This time the mines claim that implementation of mining royalties could lead to more than 21,000 job losses and operators cutting US$500 million in capital spending over the next three years.
So far, First Quantum Minerals Limited, Mopani Copper Mines and Kalumbila have made their intentions known to Government of the possible redundancies.
Sacrificing poor employees to avoid paying taxes is plain blackmail, to say the least.
Why are mines targeting Zambian employees who make up 90 percent of the staff at the mines, and not the expatriates that not only make up 10 percent of the workforce but also 60 percent of all remuneration as the situation indicates at FQML?
While it may be true that some mines say that they will also part company with expatriates, by comparison, this is a small proportional fraction of the local workers.
Despite running the mines for many years, all mines claim that they operate at a loss. Again, although it may be true that it takes years before investments in mines begin to bear fruit, this surely can’t be in perpetuity.
This is especially so considering that many analysts contend that major mining companies make billions in turnover.
However, it is recorded that KCM, which was bought for US$25 million against the asking price of over US$450 million, made a tidy profit of US$500 million during the first year of operation.
Mines cannot therefore be believed nor trusted with claims of making losses.
It is clear that they found a loophole in Zambia’s generosity and leniency to hold the country hostage.
Government should not succumb this time around. Let those who cannot cope with new taxes pack and go. Enough is enough.

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