Following on from our Experts’ Round-Up, in which we asked the country’s financial brains whether our economy is on the road to recovery, Mining For Zambia revisits the question on every Zambian’s mind: Can the mining sector be the driver of a post-COVID economic recovery? 

According to economists Noel Nkoma and Oliver Saasa, and tax partner at KPMG Zambia Michael Phiri, the answer is a resounding ‘Yes’. Yet all three agree: Harnessing the potential of this critical sector requires that Zambia urgently implement global best practices, without losing sight of what is best for the country.

When you last spoke to Mining For Zambia in September, you said that, unless our policy framework supports a growth-driven mining sector, it will be impossible to actualise the economic recovery that Zambia intends to achieve. This is why we need “a predictable, investor-friendly policy regime.” 

Mr. Nkoma: Yes. There needs to be proactive engagement with the mines, on the part of Government. As Professor Oliver Saasa recently said, we may have our suspicions in terms of some of the mines’ transparency, but we cannot paint them all black. Let us begin to individually engage and interrogate them, in order to understand them. 

We need to understand whether we really are losing a substantial amount of money through tax avoidance and, if so, how do we stem the tide? This requires that we improve our governance and regulatory capacity, so that we have full public transparency over mining revenues. Hardening mining policy and increasing the tax burden is not the solution to this perceived problem. 

To me, an unjust and inequitable tax regime basically rewards wrongdoing, and punishes those who would like to be compliant and transparent. [We need to have] an equitable, just, and fair fiscal and tax regime which is able to unlock that future pipeline to create more jobs for our people, get more taxes into the treasury, and once again get the mining sector to thrive. 

Block the leakages, don’t impose blanket penalties

Mr. Phiri: We understand the frustration from the Government, from the perspective that some mines have been posting losses for as long as they’ve been in existence, but that doesn’t justify punishing the whole industry by taxing them twice over [via Zambia’s policy of mineral royalty non-deductibility]. 

What this ends up doing is actually punishing the companies that are contributing by way of corporation tax — and [damaging] the incentive for reinvestment by the mines which do contribute — because the money they’ve set aside for expansions is almost all taken up by taxes.

Prof. Saasa: The really sad thing [about mining in Zambia] is that we are very suspicious of mining houses, which has reduced the room for meaningful engagement through well-structured dialogue. How reliable are the Government mechanisms for monitoring copper production? Is there room to improve capacity? For me, Government ought to own up to the fact that we’ve been unable to adequately monitor a very strategic sector which has been the mainstay of our economy for close to 60 years now, since Independence. 

Two of North-Western Province’s mines, FQM Kansanshi and Lubambe, have $1 billion expansion projects in the pipeline, but are holding off until they see the removal of the mineral royalty non-deductibility policy, which prevents mineral royalties from being deductible against corporate income tax. Can you explain why this particular provision is regarded by investors as such a problem?

Mr. Phiri: Royalties are levied as a percentage of a company’s sales each month, reducing the money left over to the business as profit. Treating royalty payments as a deductible cost when determining the profits of the business is therefore standard practice. By making these payments non-deductible, you are making companies pay a royalty on their sales — which is a huge expense because it’s [imposed on] the top line — and then taxing them as if they received the full amount from sales. This is why it’s regarded as double taxation. 

It also negatively affects the ability of companies — including greenfield operations — to see Zambia as a prospect for investment. We belong to the global economy. Every potential investor in Zambia’s economy wants to understand the tax regime and, when they consider that mineral royalties are non-deductible, their calculations show that it doesn’t give them a return that justifies their investment. 

We need to cure this, really for our own fate as a country. The mineral royalty non-deductibility is just one measure that is severely affecting investment. 

Prof. Saasa: Taking into account global best practices would serve Zambia’s interests well, in terms of maximising the country’s benefits from this strategic sector. [Kansanshi and Lubambe] have put their [$1 billion] investments on ice. This speaks to the urgency of reaching consensus through dialogue between the Government and mining companies so that a win-win solution is found urgently. 

Is this tax provision applied in other mining jurisdictions?

Mr. Phiri: No, none of the big mining jurisdictions have mineral royalty non-deductibility for copper mining — or, indeed, any other minerals. Zimbabwe tried it, Namibia tried it; both regretted it and have since changed back. It’s quite peculiar to Zambia and it’s a very unfortunate measure. 

We understand the frustration of the Government as well as the Zambian Revenue Authority — but that does not justify punishing compliant companies and disincentivizing businesses that want to invest in Zambia. 

These companies [Kansanshi and Lubambe] want to expand so they can produce more copper; when you produce more copper, you earn more dollars. You also create more employment, as well as linkages to suppliers. There are overall benefits in expansion projects like these. So, not to encourage them is really a shame. We are shooting ourselves in the foot.

“We understand the frustration of the Government as well as the Zambian Revenue Authority — but that does not justify punishing compliant companies and disincentivizing businesses that want to invest in Zambia.”

You’ve said that the number one impediment to a mining-led economic recovery is the mineral royalty non-deductibility provision. What other mining tax policy measures need to be implemented? 

Mr. Phiri: We also need to relook at the way that mineral royalty bands operate. At the moment, as the price of copper crosses a threshold, the royalty payable on each tonne substantially increases. Just imagine, if the price of copper changes by just a single US dollar — for example between $5 999 and $6 000 — crossing the threshold into a higher percentage band, that one extra dollar in revenue means paying a royalty of 6.5% as opposed to 5.5% [hundreds more in tax]. This is perverse, and has led to mines fearing price increases – whereas we should all be celebrating them!

The simple and fair solution would be to adopt the same incremental approach as we do for Pay-As-You-Earn tax bands. In other words, once a threshold is crossed, only the increase beyond that point should be taxed at the higher rate. So, let’s say the copper price was today $6 800, only the last $800 would be taxed at 6.5%. This would mean that both the State and investor benefit from the price rise, which is the balance we must inject into our mineral royalty tax regime. 

Supporting local production

A dump truck at Mopani’s Nkana Mindola Sub-Vertical Mine

Mr. Phiri: The 10% import duty on capital equipment is another negative measure that really has to be revisited. Are big construction projects – such as the Kansanshi and Lubambe extensions – prepared to pay 10% on capital equipment that they’re bringing into the country?

A good Customs Duty regime operates on the basis that the capital goods and equipment you need to produce goods — or raw materials used to produce goods locally — have a low import duty, or ideally, are duty-free. Semi-processed goods should attract a higher duty than capital equipment, and finished goods should attract the highest duties – because neither of these categories support local production. The major items of equipment used for sinking shafts and building plants for mining are not manufactured locally, but are essential to developing these mining projects. At the moment, the current duty regime is simply making it harder to develop projects like this that would stimulate production and economic activity which, again, is like shooting ourselves in the foot. 

Beyond tax

What do you imagine the impacts of removing the mineral royalty non-deductibility policy would be?

Prof. Saasa: We ought to understand the challenges with this policy in a more holistic manner. It is about the multiplier effect. Retaining non-deductibility by looking purely at what goes into the Treasury is missing the bigger picture. 

Mineral royalties are deductible the world over, and it is not surprising that mining expansion is continually recorded in those countries [where it is deductible] while Zambia’s copper output has declined. The more that we fail to see the bigger picture, the more we are forgoing opportunities to grow the [proverbial] pie. 

Mr. Phiri: Sometimes you’ve got to look beyond tax. Thousands of people are employed directly by the mining companies, and indirectly through the suppliers and contractors to the mining companies. You cannot guarantee the continued employment of those individuals if you have a dying industry. 

Playing the long game 

Prof. Saasa: We produced close to 100,000 tonnes less last year than the previous year because 2019 was when the objectionable fiscal regime was introduced. Reinvestment in the mining sector now would hedge us towards the benchmark [one million metric tonnes of copper per year] that we’ve been singing about for the last decade.

“Sometimes you’ve got to look beyond tax. You cannot guarantee continued employment if you have a dying industry.”

Mr. Phiri: If non-deductibility is removed, we would definitely see more production in the short term because existing companies will want to produce more and invest more. This would obviously be good for employment and suppliers. But the biggest impact – good or bad – is in the long-term, because mining projects take a very long time to come online. The thing is this: For a mine to be able to produce more copper in four years’ time, they need to invest now. 

If we wait until production has gone to the barest minimum — as was the case [in around 2000] — and then facilitate investment that year, we’re going to wait at least another four years before we can even get back to the level we are at now. But it’s not just about the long-term future; let’s not forget what happens during the construction period as well. Employment will be created, money will be spent, and other industries will benefit during this period. But the investment decision has to be made now. 

Mr. Nkoma: Zambia will probably post negative growth next year — and even the year after — because it will take time for this economy to rebound. Outside investment is key, because mining is a capital-intensive sector, and there is no capital in the domestic market. 

It doesn’t just require substantial investment in terms of capital, but also long-term capital because the sector takes time to mature and be able to pay dividends. Investing in the mines is not a short or medium haul — it’s a long haul.

See also: Experts’ round-up: Is Zambia’s economy on the road to recovery?

 

 

2 COMMENTS

  1. The mining industry is the strategic sector in our economy and hence it must be given a good care of it. I would like to agree with the people on the panel that the mining companies be looked individually. This is true in fact the companies have different operations costs and the production of ore ( I mean the mineral content ) differs from one mine to another. It is in this vain that I would like to add my voice to the debate that mining companies be looked at as individual companies rather than taking the all sector as a group and tax them equally, but in this regard we need to see the just and equitable tax regime.

    • not true think like a zambian we have been robbed if look at this mining companies of now days compare to zccm. I think we were better with zccm mmd betrayed zambians by sellering our mines on the cheaper price like salaula.now where their taking our minerals their making huge profit at unexpance of being careles and our former head of state chiluba their was a lodon judgement according to up

      zambian law’s if you buy a stolen thing you need to return it back because you will have a case to answer being in posetion of stolen property so we need to reposes the mines because people of Zambia were not consauted and theirs nothing that left their taking our copper day and night.and we are among very poor countries but rich in minerals the time is coming when our youth we will fight for their minirals I can see that’s coming no one will stop them their will flush so called investors not for Zambia but for their countries where their coming from leaving zambians in poverty

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