As the high cost profile of Zambian mining makes for a challenging place to do business, resulting in a depressed investment climate
LUSAKA, ZAMBIA – Zambia’s 2019 mining tax regime has significantly increased the tax burden on mining companies, making the sector unsustainable and uncompetitive, according to a report by two of the country’s leading economists.
Professor Oliver Saasa of Premier Consult and Shebo Nalishebo of The Zambia Institute for Policy Analysis and Research (ZIPAR) say Zambia has the highest tax burden, by a comfortable margin, of all comparable mining countries, and that under the new fiscal regime for the mining sector, the effective tax rate – the average rate at which pre-tax profits are taxed – would vary between 86.3 percent and 105 percent depending on the copper price.
The report, Assessment of Mining Fiscal Regime in Zambia: 2000- 2019, also notes that prior to the new tax regime, Zambia’s mines already faced some of the highest effective tax rates in the world, and that together with unstable tax environment, the high cost profile of the average Zambian mine makes for a challenging place to do business, resulting in an ever-diminishing investment climate.
“The 2019 tax regime’s key objective appears to be to increase the effective tax rate so as to raise tax revenue generation. Under the new regime, the effective tax rate for Zambian miners could be over 105 percent if the copper price surpasses $9,000 per tonne, said the report.
“At high copper prices, this would result in the extraordinary situation where a mine would be obliged to pay more in tax than the profit it had made. No business can continue to operate under those circumstances,” the experts added.
The explained that although the former Minister of Finance had argued that the tax changes in the 2019 budget would ensure that the sector was paying its fair share of taxes, there seemed to be no clear guarantee that the policy changes would actually result in enhanced revenue flow to the Treasury from the mining sector.
However, the Zamia Chamber of Mines has come out clearly to reiterate that Zambia needs a competitive and stable tax regime to attract investors and to secure sufficient revenue from the mining sector.
The organisation believes government and the private sector should seek to create a framework in which a modern, progressive, developing commodity-based economy can be built; a scenario where investors vie to invest in Zambia.
Professor Saasa’s analysis has further revealed that the mining sector is operating in an environment that requires urgent attention for mining players to meaningfully contribute to the Zambian economy through well-supported mining expansion programmes.
“Overtaxing the mines today has the potential of discouraging the development of existing and new mining projects, which would translate into low tax receipts tomorrow. It is clear that the 2019 fiscal regime, announced by the Government in September 2018, has introduced significant constraints to a thriving mining sector development,” the report added.
The report points out that the absence of a well-structured dialogue mechanism between the Government and mining sector players has contributed to the seemingly limited appreciation by the State of the mining intricacies that ought to be factored in when mining sector policies are crafted.
Mining sector taxes and royalties paid to the Government contribute significantly to the national economy. During the first half of 2019, the mining sector’s direct contribution was 13 percent of domestic revenues.
The mining houses’ indirect contributions amounted to 8 percent of domestic revenues. This brings the total contribution of the mining houses in Zambia to 21 percent of domestic revenues.
The top five mining companies (Kansanshi, Sentinel, KCM, Lumwana and Mopani) accounted for 96 percent of the copper production in 2018 and the first half of 2019. Production figures have declined in recent months. While production for the top 5 mines declined by 2 percent, production in the smaller mines declined by 45 percent in the first half of 2019 when compared to the first half of 2018.
“To secure unfettered growth of the mining industry, Zambia’s mining fiscal regime ought to be stable and predictable considering that the frequent policy changes that Zambia has witnessed over the years have generally discouraged long-term mining development.
“Mineral tax systems should ensure adequate payments to both the country and to the investor. An effective and efficient mineral tax regime that aims to attract FDI should, therefore, seek to adequately compensate the country while remaining internationally attractive and competitive,” said the report.