ctpd _fools paradise_ zambia mining tax regime briefing paper

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Transcript of ctpd _fools paradise_ zambia mining tax regime briefing paper

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    A fools paradise?

    Zambias mining tax regimeSavior MwambwaAaron Griffiths

    and Andreas Kahler

    Brieng paper

    December 2010

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    A FOOLS PARADISE?

    Zambias mining tax regime

    CTPD Policy Brieng Paper No. 1

    December 2010

    Savior Mwambwa, Aaron Griths and Andreas Kahler

    Centre for Trade Policy and Development in collaboraon with Caritas Zambiaand the Economics Associaon of Zambia

    Centre for Trade Policy and DevelopmentPlot 93

    Kudu Road, KabulongaLusaka, Zambia

    Tel: +260 211 264 409

    Fax: +260 211 261 600

    Email: info@ctpd.org.zm

    hp://www.ctpd.org.zm

    Centre for Trade Policy and Development 2010

    Permission is granted for reproducon and use of these materials for educa-onal purposes. Please acknowledge your source when using the materials andnofy the Centre for Trade Policy and Development.

    Cover photo: Dr Ian G. Smpson

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    1

    Contents

    Acknowledgements ................................................................................................................................ 2

    About CTPD ............................................................................................................................................ 2

    Acronyms................................................................................................................................................ 2

    Summary ................................................................................................................................................ 3

    Mining and taxaon ............................................................................................................................... 4

    A brief history ......................................................................................................................................... 5

    Reform and reversal ............................................................................................................................... 7

    Tax revenue and Zambias revenue needs .............................................................................................. 7

    How much tax is opmal? ...................................................................................................................... 8

    Towards a beer mining tax regime .......................................................................................................9

    Fairer distribuon of mining tax revenue ............................................................................................. 11

    Recommendaons................................................................................................................................12

    Further reading .................................................................................................................................... 13

    Appendices ........................................................................................................................................... 14

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    Acknowledgements

    This brieng paper is the culminaon of a series of public discussion seminars, analycal desk research, consultaonsand peer review exercises with tax and mining industry experts undertaken by the CTPD and its partner organizaons.

    Specically this brieng paper has been put together by the CTPD secretariat and collaborated by Caritas Zambiaand the Economics Associaon of Zambia (EAZ), both of which are member organizaons of the CTPD.

    This brieng paper represents the rst in a series of brieng papers tackling issues around taxaon, mining and theenvironment and other issues aecng Zambias extracve sector.

    Special thanks goes to the following partner organizaons for their nancial support toward the producon of thispaper as well as their input: Chrisan Aid (Zambia and UK), Diakonia Zambia and Acon Aid Zambia.

    All errors or omissions are the responsibility of the authors alone.

    About CTPD

    The Centre for Trade Policy and Development is a non-prot making, membership-based trade policy think tankwhich aims to promote equitable, pro-poor trade policies and pracces. CTPD provides analycal research, capacitybuilding and facilitaon services in trade and investment sectors to civil society, the local private sector, small-scaleproducer groups and government. CTPDs mandate is to inuence pro-poor trade reform at naonal, regional andmullateral levels as well as facilitate for the parcipaon of various stakeholders, including member organizaons,in ensuring that trade is used as tool for poverty eradicaon.

    AcronymsEITI Extracve Industries Transparency Iniave

    GDP Gross Domesc Product

    IMF Internaonal Monetary Fund

    OECD Organizaon for Economic Cooperaon and Development

    PAYE Pay As You Earn

    VAT Value Added Tax

    ZCCM Zambia Consolidated Copper Mines

    ZMK Zambian Kwacha

    ZRA Zambia Revenue Authority

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    Summary

    Zambias large mineral reserves are its richest naturalendowment. Copper mining is the main source of

    foreign exchange earnings and an essenal partof the countrys developmental plans. This paper,based on a series of public discussions held in 2010,highlights public concern over how much Zambiareally benets from its copper wealth, and calls forthe mining tax regime to be reformed to collect morerevenue.

    Zambias mining tax regime is strongly

    focused on aracng foreign investmentthrough low rates and an assortment ofincenves. But this needs to be balanced with

    the urgent need to raise more revenue frommining in order to invest in infrastructureand the countrys economic development.The opmal balance between these twoobjecves has not yet been struck. It is mefor the Government to devise a strategy forall Zambians to parcipate in the benetsfrom their countrys mineral reserves.

    The revenue-based windfall tax, repealedin 2009, is a simpler way to tax windfallsthan the exisng variable prot tax, which

    has not yet delivered any revenue. Had itremained in force, the windfall tax couldhave contributed many hundreds of billionsof kwacha to government coers. Given the

    limited capacity of the Zambian authoriesto assess mining companies claims on

    protability levels, the windfall tax shouldbe re-introduced, at least unl such a methat Zambia is able to administer a prots-based tax eecvely.

    Mining companies should not be allowed tooset hedging transacons against income.Fixing this loophole would be a simple andeecve measure to raise revenue andshould be one of Governments rst moves.

    It is crucial that those who bear the brunt of

    minings social and environmental impactssee a fairer distribuon of mineral royales.Mining operaons take a toll on the localinfrastructure and fuel rapid urbanizaon,so the local administraons need specicsupport to address these challenges.

    Public discontent is fuelled by the secrecyof government relaons with miningcompanies, dang back to the DevelopmentAgreements which have never beenpublicly disclosed. It is imperave that

    the Government and mining companiessubscribe to internaonal best pracce inextracve industry transparency.

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    Mining and taxation

    Taxaon has several important funcons, including:raising revenue for spending on agreed naonal

    and local development plans; inuencing the

    economic behaviour of companies and individuals;

    and encouraging tax-paying cizens to hold their

    governments accountable. Combined with economic

    growth, taxaon can help developing countries like

    Zambia deliver social and economic development

    and reduce aid dependency.

    Mining is an important source of tax revenue for

    countries with mineral wealth. In fact, tax revenue

    is the major benet mineral wealth brings becausemining is an enclave economic acvity, meaning it

    tends to have very few forward or backward linkages,

    creates relavely few jobs, and requires most of the

    equipment and services it needs to be imported.

    As several reports have shown, African countrieshave generally not beneed from rising mineralprices. Mining companies are granted too many taxconcessions and manage to avoid tax through theircomplicated corporate structures and accounngmechanisms. Coupled with inadequate instuonalcapacity to ensure tax compliance, these measuresdiminish the tax revenue due to African governments(OSISA et al, 2009).

    All these problems have been felt in Zambia, andpublic debates held in 2010 in Lusaka, Kitwe and

    Solwezi show that many Zambians are highlyconcerned about their current mining tax regime.Some in the mining communies are calling forZambias copper to be le in the ground if its wealthcannot be harnessed for Zambias development.Now, several years aer privazaon, with skywardcopper prices far exceeding producon costs, manyfeel it is me to raise more revenue from mining inorder to invest in economic development.

    How is mining taxed?

    There are many ways to tax mining, but these are some of the main ones:

    Royales payable as a percentage of the market value of minerals. These are the principalway governments extract an economic rent for allowing a mineral to be dug out of the groundand removed from