FQM BACKS CHAMBER OF MINES CALL FOR TAX RETHINK

As the Chamber warns that the cascading effects of Sales Tax will cause huge price increments
LUSAKA, ZAMBIA – Zambia’s largest miner and the country’s biggest taxpayer, First Quantum Minerals (FQM), has backed calls by the Zambia Chamber of Mines for the withdrawal of proposals for a sales tax to replace the current value-added tax (VAT) system.
The company has leant its weight to a hard-hitting report by the chamber that urges government to re-commit to the existing VAT system, in line with expert opinion that such a regime is better for business and economies in developing countries.
The report, A Tax Too Far: The Economic Impact of Zambia’s Proposed Sales Tax, urges government to withdraw the proposed ‘hybrid’ sales tax in its current form, which will make Zambia’s mining industry less competitive compared with the international mining industry.
“Implementing a sales tax leaves our mining industry at a point where it is uncompetitive. It costs significantly more to mine a tonne of ore or metal under a sales tax regime than it does under a VAT regime,” said Zambia Chamber of Mines president Goodwell Mateyo.
Speaking at an information sharing meeting on the findings of the report, Mr Mateyo explained that increasing taxes would not result in increased government revenue, adding that the under the 2018 mineral royalty and corporate income tax regime government collected US$525 million, compared to the projected US$445 million it would collect in 2019 under the current tax regime.
“The cascading effects of sales tax will result in huge price increments, and we have seen that in some typical examples, and those examples where drawn from actual potential transactions in a mining setup or in a mining value chain.
“What this will do is that long supplying chains will be worse off, and to mitigate against this impact industries such as mining and manufacturing will obviously reduce the value chains by cutting out local suppliers, local distributors and importing directly. The effect of this will be a reduction of jobs, and an incentivisation of direct importation at the expense of local intermediaries and local agents who create employment and pay taxes locally,” he added.
The aim of increasing overall tax receipts by introducing the proposed sales tax, as well as doing away with a system of VAT refunds that has proved difficult for the Zambia Revenue Authority to administer, would not materialise, said the chamber.
Instead, the tax burden on any given transaction will increase, but as prices go up, the number of transactions would go down as goods and services become unaffordable. This phenomenon of tax rate increases resulting in declining tax receipts and lower economic activity is well understood by economists based on the Laffer Curve model.
However, if the VAT system is retained, it will require addressing of the debilitating problem of the non-payment of VAT refunds that has wreaked havoc in recent years with the cashflow of Zambian businesses, great and small, said the chamber.
The chamber also called on government to bring the country’s mining tax regime into line with international best practice, where mineral royalty tax is deductible before computing corporate income tax.
“We have asked that the government consider reverting to the 2018 mining fiscal regime. In the event that they are not inclined to go back to that regime, we have asked for some changes in the current regime, for instance, the mineral royalty rates be capped at 7.5 percent,” said Mr Mateyo.
“Our ultimate conclusion following from the commissioning of this report and study, is that we need to remain with the VAT tax regime that we have in place and avoid effecting the sales tax altogether,” he added.
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