Mining tax dispute: Chance to negotiate

PETER Sichinsambwe.

THE current mining tax dispute between Government and the mining companies is a chance to get back to the negotiating table and at the same time an opportunity to negotiate and formulate a mining tax policy framework that will allow the country to leverage its resource potential to the benefit of all citizens.
Zambia possesses an enviable share of the world’s reserves of minerals. These minerals, include the most traded commodities on the London Metal Exchange and other valuable minerals e.g. copper, gold, zinc, lead, manganese, cobalt, uranium and iron, gemstones, oil and natural gas that are spread right across the country.
The country is blessed with an abundance of mineral resources, yet it remains poor by most measures.
The mining companies have flourished and have been making millions of dollars in profits over the years and Government has failed to create a policy framework that should allow the country to leverage its resource potential to the benefit of all citizens in line with the nation’s developmental agenda adding value to the local context.
Due to the complexity of the Zambian tax laws and the impact thereof on the industry, it is necessary to have a thorough understanding of not only the tax legislation, but also the specific needs of the Zambian mining industry.
Historically, the performance of the Zambian economy has followed the fortunes of copper mining closely.
During the past five decades, the economy of Zambia has undergone major changes from the nationalisation era to the privatisation and liberalisation of the economy.
The vision for the economy since 1991 has been to have a stable, sound and market-based economic system that supports the efficient mobilisation and allocation of resources necessary to achieve economic diversification and sustainable growth.
Mining sector growth has been positive due to the stability in power supply to the mining companies and higher commodity prices.
Although the growth prospects remain good, the concerns raised by various mining players in the recent past with regard to anticipated changes to the mining tax regime have materialised, following the revisions announced in the 2019 budget by Minister of Finance Margaret Mwanakatwe.
Over the years the country has been making half-hearted attempts to amend mining deals and has been facing pressure of legal threats from foreign investors for breaching agreements.
Renegotiating deals can be problematic even if reasonable. Since the privatisation of Zambia’s mining industry in 1997 and 2000, four distinct tax regimes have applied as follows; (1). The Development Agreements (DAs) negotiated with individual mines at privatisation, (2). The “2008 regime” (the tax regime used between April 2008 and March 2009), (3). The “2009 regime” (the tax regime used between April 2009 to March 2012), (4). The “2012 regime” (the tax regime that has been in effect since April 2012).
Former President Rupiah Banda decided to review the existing contracts and the mining companies were upset by the unilateral revocation of the Development Agreements and some refused to pay the new taxes.
The announcement was followed shortly after by the onset of the global financial crisis.
Copper prices fell sharply and marginal mines started laying off workers.
The 2008 regime only lasted a year. To the disappointment of Zambians, in 2009, he removed a 25 percent windfall tax that had been introduced by his predecessor, Levy Mwanawasa, in 2008. Government reversed some of the 2008 tax measures in the 2009 budget; windfall tax was abolished, tax depreciation reverted to 100 percent, mines were again allowed to combine hedging and operating income for income tax purposes.
Following general elections in September 2011 and the change of government, further reforms were made to the mining tax regime in the 2012 budget.
The two main changes for the mining industry were: the mineral royalty rate for copper and cobalt was doubled from three percent to six percent; hedging and operating income were again to be treated separately for income tax purposes.
This had the effect of doubling the country’s mining receipts to US$1.36 billion in 2011 compared with 2010, although strong demand for copper from China and an uptick in prices also helped to have higher earnings.
Fiscal demands on developed and emerging countries have placed considerable pressure on governments to raise revenue and prevent the erosion of their tax bases.
Mrs Mwanakatwe proposed changes to the Mining Tax regime in the 2019 budget. Government plans to introduce new mining duties, replace value added tax with sales tax and increase royalties with an aim of increasing revenue mobilisation through taxes with the ultimate objective of reducing the fiscal deficit.
The proposed tax changes have been met with resistance. The mining companies have threatened to lay off workers and scale down operations, saying that such changes to the mining tax regime will negatively impact the growth prospects of the sector. The mine owners should engage Government and dialogue instead of trying to arm-twist the State whenever reforms in the mining tax regime are made. Some of the industry’s suffering is of its own doing. Mining companies have enjoyed generous tax concessions for many decades and have abused tax legislations and concessions, over the years through transfer pricing abuse, under-reporting of production values, debt payments abuse and hedging manipulation.
The blame for long-winded and unnecessary squabbling can equally be placed at the clay feet of political leaders who lack farsightedness.
The low tax-take lies in the development agreements signed at the time of privatisation giving away generous tax concessions and for this reason, Government should look into renegotiating certain terms of mining contracts without sending negative signals to investors and this is a delicate balancing act which requires political will and domestic mobilisation.
However, the mining tax policy shouldn’t be changed also without careful prior assessment, especially in an industry so intrinsically linked to global market unpredictability.
Since the privatisation of Zambia’s mining industry in 1997 and 2000, there has been enough time to learn from scientifically well-founded, tested and implemented ex-ante policies used by other countries or regions that have become an integral and systematic part of the political decision-making process.
Zambia can only benefit from minerals if they are extracted and their value is captured by Government and transformed into other productive assets.
The country must harness its mineral wealth to build human capital and industries that allow it to diversify away from commodity concentration.
What has surfaced out of years of conflict over mining policy and regulation is a valuable lesson.
The author is an economist.

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