UPND president Hakainde Hichilema says the 2019 mining fiscal regime needs to be revised because government will fail to raise their targeted revenues from a tax system that will prove burdensome on the sector.
And Hichilema says he will not be surprised to hear that the PF government has adjusted downwards the tax regime owing to challenges in its administration and compliance on the part of mining companies.
In the UPND’s weekly newsletter to News Diggers! Hichilema argued that the 2019 mining fiscal regime needed to be revised because government would fail to raise their targeted revenues from a tax system that was onerous on the mining sector.
The 2019 mining fiscal regime, which took effect last month, has seen an increase in mineral royalty rates by 1.5 percentage points at all levels of the sliding scale.
It also introduced import duties of five per cent on copper and cobalt, while also hiking export duty on precious stones and gemstones to a rate of 15 per cent, a situation that had previously prompted mining companies to threaten job cuts, while compelling Konkola Copper Mines (KCM) to downsize its Nchanga Smelter operations due to low availability of concentrates.
“The UPND wants more taxes to be paid by the mining companies. But we also believe that we need to feed the cow that gives us milk if we expect good yields. This is the only point of departure that we have from the current thinking in the government. Otherwise from the analysis above, it’s very clear that although our tax regime is more onerous, it is not yielding commensurate revenues, but rather it is discouraging investment and increased production, thereby, denying the Zambian people the much-needed revenues,” Hichilema stated.
In a detailed analysis outlining how government would fail to raise the desired mining tax revenues, Hichilema illustrated how punitive the 2019 fiscal regime was on mining companies because government had placed an increased tax burden on already squeezed earnings.
“Let us assume a company produces 10 tonnes of copper at a cost of US $7,500 and the copper price is US $10,000. It means the company’s gross value will be US $100,000 (i.e. 10 tonnes X US $10,000 per tonne). Let us also assume that the company has no any other expenses. Its total expenses will be US $75,000 (i.e. 10 tonnes X US $7,500 per tonne). The company will pay mineral royalty to government amounting to US $10,000 (i.e. 10 per cent of US $100,000 since price is above US $7,500). This means profit before tax is US $15,000, i.e. US $100,000 (gross sales) minus US $10,000 (MRT) minus US $75,000 (operational cost). Prior to the 2019 changes, the company would then go to ZRA (Zambia Revenue Authority) and pay 30 per cent company tax on the US $15,000 gross profit. It means the company will pay US $4,500 in taxes and profit after tax for the company will be US $10,500,” he explained.
“Now under the 2019 regime, ZRA will not allow the company to deduct the US $10,000, which the company paid, as mineral royalty to government through ZRA. Instead, ZRA will only recognise the US $75,000 operational expenditure and will not allow the US $10,000, meaning the company will be deemed to have profit before tax of US $25,000 and, therefore, ZRA will charge 30 per cent profit tax on US $25,000, which will be US $7,500. In short, the company will be asked to pay an additional 30 per cent tax on the $10,000 mineral royalty it already had paid to the government. Effectively, therefore, the company will pay 50 per cent tax on its profit as a result of double-taxation on the mineral royalty.”
He also pointed out that government’s frequent mining fiscal policy changes would jeopardize future investments and negatively affect revenue inflows.
“What is even worse now is that the 2019 tax regime will further affect mine development, which in-turn, will impact negatively on production and thus government revenues, in the short to medium-term,” Hichilema stated.
And he said he would not be surprised if the PF government adjusted downwards the tax regime owing to challenges in its administration.
“Our conclusion was that while we agree that the ultimate objective of a mining taxation regime is to maximize the benefits that a country receives from the mineral resources, the tax instruments, their established rates, and the institutional arrangements must not discourage the investment that is necessary to give commercial value to Zambia’s mineral resources and that mitigates the environmental, health, and social costs of mining activities. We will not be surprised to hear very soon that the PF government has adjusted downwards the tax regime and the rents will have been sought,” stated Hichilema.
“We hope these stand offs between the mining companies and the government are not a deliberate ploy to create some rent-seeking behaviour aimed at benefiting the privileged few.”