New mining taxes in Zambia

From IntFX

Overview

Zambia is a stable and vibrant country straddling central Africa and forming a natural hub for the sub-continents diverse activities, having common borders with Angola, Democratic Republic of Congo, Tanzania, Malawi, Mozambique, Zimbabwe, Botswana and Namibia.

Geologically the country is favored with an abundance of mineral resources. In the late Proterozoic Lufilian terrain of north-western Zambia, boasts one of the worlds most important and complex metallotects hosting enormous reserves of copper-cobalt ore, together with gold, uranium, nickel, lead-zinc, iron and manganese.

The Government of Zambia has taken significant steps to stabilize the economy and has created a positive investment climate which is particularly favorable to the exploration of these and the numerous other mineral and energy resources identified and still to be discovered throughout the country ^[1]

Zambia’s new mining tax regime

From April 2008, copper mining companies in Zambia will start paying more of their windfall profits in tax revenue to the Zambian government. This change will greatly increase the amount of money available for public spending on poverty reduction. The government will be able to improve education and health services, and make investments that will create more jobs and livelihoods for Zambian citizens.

This is how new taxes will bring more than USD400m a year into government coffers:

• The value of copper sales, which determines how royalties and taxes are calculated by Zambian companies, will no longer be determined by the price companies claim (often without providing evidence of these prices) they are being paid by their buyers overseas. Instead, it will be calculated based on the prices of copper on international commodity exchange markets. This will introduce much more transparency into companies’ profit calculations.

• The sales tax (or royalty) on the value of the copper ore produced will increase from 0.6 per cent to 3 per cent

• In our understanding, an additional royalty (called a windfall tax in the new tax regime) will be charged on the sales value of copper for every 50 cents increase in the price of copper per pound on international copper exchanges. This could push the ‘sales tax’ or royalty on copper up to over 5 per cent. A number of countries already charge royalties at this rate.

• Companies will pay corporate profit taxes of 30 per cent (up from 25 per cent) on the profits they declare after deducting costs and royalties (see above)

• In addition to the 30 per cent corporate profit tax, companies will also pay a ‘variable’ profit tax. This means that companies will in addition to the 30 per cent corporate tax pay an extra 15% tax on all profits they earn that exceed 8 per cent of their overall income. This is only likely to happen as a result of the boom in commodity prices. This tax transfers a fair share of the windfall value of copper to the Zambian government. In the UK, the Labour government implemented a similar tax on North Sea oil companies in the 1990s.

• Overseas consultants and companies providing services to Zambian copper companies will now be paying a 15 per cent tax on their income in Zambia, up from 0 per cent. The tax paid by such companies and individuals would now be split fairly between the country where they are resident and Zambia.

• Mining companies will no longer be able to deduct their losses from financial deals (for example hedging of future sales) from taxable income from mining.

• Under the current tax regime, mining companies are able to deduct 100 per cent of expenditure on equipment such as machinery from taxable income every year. From April they will only be able to deduct 25 per cent of such expenditure, and only once the project starts operating. Such a measure will reduce the incentive for mining companies to keep on buying equipment to reduce their tax bill in Zambia and it will bring forward their tax payments.

• In addition, mining companies can no longer deduct from the taxable income on a profitable mining site their capital expenditure on another mining site. While this will increase tax paid we are worried that this may discourage local reinvestment of profits. This is the only tax measure we recommend the Zambian government may want to revisit.

There is a very real possibility that some or all Zambian copper mining companies will take legal action against the government. According to the development agreement signed with Konkola Copper Mines, the Zambian government has to provide KCM with ‘full and fair’ compensation if it changes the tax provisions of the agreement in the 20-year period for which the contract is valid.

Should the Zambian government refuse to pay compensation for the additional taxes companies will have to pay under the new tax regime, the mining development agreement says that they can request an international tribunal to decide the amount to be awarded to them.

The tax analysis has been provided by Richard Murphy, a chartered accountant at the UK-based Tax Research LLP, and senior adviser to the International Tax Justice Network. ^[2]