ctpd _fools paradise_ zambia mining tax regime briefing paper

8/7/2019 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: [email protected]

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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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 the country.

Income taxes employees in the mining sector, like other workers, pay a proporon of thesalary in tax through Pay As You Earn (PAYE). When applied to companies, income tax is usuallycalled company tax or corporate tax, and it takes a percentage of the taxable income (i.e. theprot) of the mining companies.

Other corporate cizenship taxes will also apply to mining companies in the course of their

work, such as customs duty on goods imported into the country, or VAT on goods boughtlocally. These are somemes the subject of remissions (exempons or deducons), as has beenthe case in Zambia. Companies are oen charged withholding taxes on interest, managementand consultancy fees, dividends, rent, commissions and payments to non-resident contractors,although these may be the subject of remissions.

Export taxes export taxes can be applied to exports of raw materials as an incenve forfurther in-country rening and processing

Supplementary taxes such as a windfall tax or a variable prot tax: a higher tax rate somemesapplied to the prots that ensue from a sudden windfall gain. In Zambia a windfall tax wasapplied to revenues rather than prots see below. Many countries have imposed variees of

windfall tax, most commonly to oil, but in some cases to mining.

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a stability period of 15-20 years. The agreementswere not made available to the public, but it emergedthat most set a royalty rate of 0.6%, rather than then2% in the 1995 Mining Act, while companies couldavoid paying a good deal of corporate tax by carryingforward losses to be subtracted from prots infollowing years. In 2002, legislaon eecvely wrotemany of these provisions into the tax regime itself,seng the royalty rate at 0.6% and corporate tax formining companies at 25%.

In the years aer privazaon, investment levels

began to grow, coinciding with a sustained increasein world copper prices between 2003 and 2006 (seeFigure 1). Total investment since privazaon nowtotals billions of dollars and new mines have opened,including Africas largest copper mine at Lumwana.Producon has increased to around 60,000 tonnes amonth (see Figure 2). Total producon for 2009 was698,000 tonnes and it is projected to reach nearly amillion tonnes by 2015.

A brief history

In the colonial era the industry was owned andmanaged by two private rms. The rst post-independence government naonalized them1970 and eventually brought together under theparastatal Zambia Consolidated Copper Mines(ZCCM). However, declining world copper prices andlong-term under-investment pushed the industryinto crisis. By the late 1990s producon had crashedto record lows.

The liberalizing MMD government passed a newMining Act in 1995 that paved the way for the

privazaon of the mines, a process that wasconducted rapidly between 1997 and 2000. ZCCMwas split into seven smaller companies and the stateremained a minority shareholder in the companiesthrough ZCCM-Investment Holdings. Developmentagreements were signed with the companies grantedlarge-scale mining licences that exempted them frommany of ZCCMs liabilies, including many taxes. Theprovisions were binding on the Zambian Republicnotwithstanding any subsequent legislaon during

Figure 1 Copper prices 2000-2010 Figure 2 Monthly copper producon levels, 2005-10

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Reform and reversal

Set against the upward trends in investment, prices

and producon, privazaon was accompaniedby many problems. In the mining regions, theseincluded casualizaon of the workforce, deepeningpensioner poverty and a failure to protect the socialinfrastructure (Fraser & Lungu, 2007). Moreover,at the naonal level the Government faced thecharge of being unable to regulate the miningcompanies acvies or obtain a share of the gains.This was parcularly the case in the early yearsaer privazaon. In 2004 the World Bank foundthe marginal eecve tax rate for the mining sectorwas 0%. As public concern about this situaon grew,

calls for the Government to extricate itself fromDevelopment Agreements were voiced, and theruling party did very poorly in the Copperbelt in the2006 elecons.

In 2008, having failed to renegoate the DevelopmentAgreements, the government chose the legislavepath and passed a new Mining Act that eecvelynullied (if not explicitly cancelled) the DevelopmentAgreements, introduced more transparency into thecalculaon of the price of sales, and increased the taxburden on mining. Royales were increased to 3%

and a windfall tax was introduced, triggering a tarion revenues when copper reached given prices. [Afull summary of the changes introduced is featuredin the appendices.]

The new regime met resistance from the miningcompanies, some of whom resisted paying thewindfall tax on the grounds that the governmenthad abrogated the Development Agreements. Themining companies also commissioned a study fromPricewaterhouseCoopers in 2008 that highlightedaws in its design that could have led to a marginaleecve tax rate of 80% or more.

In 2009, cing the eects of the global nancialcrisis which caused copper prices to fall sharply for

several months and led Zambian mines to warn

of major job losses, the Government announced

several concessions to the mining sector. It scrappedthe windfall tax and introduced several newmeasures favourable to the mining companies,including reversing the provision which preventedmining companies from oseng hedging lossesagainst mining income. Some have suggested theseconcessions represented a quid pro quo for thecompanies acceptance of the nullicaon of theDevelopment Agreements.

Many opposed these concessions and the debate hasrefused to go away as copper prices have recovered.

In February 2010 the government announced plans toreform the Mines and Minerals Act. In March the IMFopenly recommended Zambia increase tax colleconto create more scal space, specically calling formore tax revenue from the mining industry.

Tax revenue and Zambias revenueneeds

Aer a long period when it was at negligible levels,tax revenue from the mining sector has been risingin recent years. Unl 2004, individual workers PAYE

was the only signicant contributor to governmentcoers. Company tax began to make a contribuonfrom around 2005 as prots started to be made (seeFigure 3).

Figure 3 Mining sector revenues

Mineral royales became more signicant in 2008and 2009, exceeding government targets in bothyears. Company tax increased rapidly in 2006 and2007, although it tailed o somewhat the following

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Figure 5 Tax revenues in the 2010 Budget

In its 2010 country report, the IMF stressed theneed for enhanced revenue mobilizaon, especiallyfrom the mining sector. The IMF calculated thatZambias revenues and grants total 19.7% of grossdomesc product (GDP) in 2009 and its expenditure22.4%, leaving a gap of 2.7% of GDP to be bridgedby nancing. Mining taxes total 1% of GDP (thisis projected to rise to 2% by 2010, but the gap willsll stand at 1.6%). Furthermore, Zambias capitalspending is low compared to neighbouring countries,and this should rise.

The key macroeconomic policy challenge going forward is to increase growth furtherand create iscal space for spending thatwould enhance economic diversiication

and reduce Zambias dependence on copperexports, in support of its aspiration to become

a prosperous middle-income country by 2030.

IMF report, July 2010

How much tax is optimal?

It is clear that more revenue must be raised andthat the mining sector is a key area where this canbe achieved in a country where a narrow base ofindividual and household incomes already bear

much of the direct tax burden. Mining companiesoppose this and their representaves argue thatmining operaons can be credited with generang alot of personal taxes from its employees, includingthe biggest contribuon to PAYE from any sector.

The mining sector contributes to thenational economy in terms of tax revenues,which includes PAYE and VAT. It should notbe viewed from just the point of corporate

tax.

Mr F. Bantubonse, Chamber of Mines, Solwezi publicdiscussion, July 2010

two years. The fall in copper prices 2008 may havecontributed, but there may be other factors, includingthe reintroducon of the 100% capital allowance inthe 2009 budget which is deducble from company

tax.

Windfall tax was only collected in 2008. ZMK 126billion was raised, although this should have beenmuch higher except that some mining companiesresisted paying. Using copper price and producongures, our model esmates that more than ZMKone trillion should have been collected in the taxyear 2008/09, and ZMK 370 billion in the followingcrisis-hit nancial year. Had the tax been deducbleagainst corporate income tax, the net revenue impactfor the two years would have been ZMK 711 billion

and ZMK 259 billion respecvely.

Of the sum that was actually collected in 2008/09,ZMK 109.5bn was collected from Kansanshi MiningPlc, ZMK 7.7bn from Chibuluma Mines Plc and ZMK8.9bn NFC Africa Mining Plc. All the other miningcompanies paid nothing. No revenue from variableprot tax has yet been collected because the miningcompanies claim not to have hit the protabilitythreshold at which it comes applicable.

Export duty on unrened copper made a contribuon

of ZMK 178bn in 2008, but the primary aim was notgovernment revenue, but rather encouraging in-country processing. The sums have dwindled due towaivers granted as well as improvements to minesrening capacity (CTPD, 2010).

Set within the context of Zambias overall budget,these sums are relavely small. Figure 4 shows thatin the governments 2010 budget, tax revenues (ofall kinds) comprise 68% of the total revenue andnancing. Figure 5 shows the budgeted composionof this tax revenue. Mineral royales are expected to

contribute 2.15% of tax revenue in 2010, or 1.46%of total revenue and nancing. Company tax from allsectors (not just mining) is expected to contribute12% of tax revenue.

Figure 4 Total Revenue and Financing for 2010 Budget

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However, pung the onus on ordinary workers,whose salaries are eecvely a mining cost and nota prot, is misleading. Realiscally any increase inrevenues can only come from increasing corporate

tax or mineral royales. The debate over whetherthose prong from mining should pay more tax isreally about maximizing the gains to Zambia withoutharming the operaons of mines and investment inmining.

The aim of a mining tax regime must be to maximizethe present and future benets from mining.Benets include tax revenue, mining jobs, increasedtechnology, linkages to other industries, and higherforeign exchange reserves. Some take the viewthat that the non-tax benets of aracng foreign

investment outweigh the value of increased taxrevenues, and that a greater tax burden on miningtoday would discourage investment and underminebenets to be gained tomorrow.

However, in a country like Zambia, tax revenues areby far the largest benet from mining: employmentgeneraon is quite small; the manufacturing baseis not advanced enough to supply the mines withtheir inputs; the benets of increased technologyare limited by the low level of industrial acvity; andeven foreign exchange earnings are not as large as

they seem since the mines use about 40% of theseearnings to fund their own imports. Furthermore,tax revenue today is of more value than tax revenuetomorrow because it can be invested in its economicand social infrastructure, which will in me lead toincreased revenue in the future.

The specic level of taxaon that would deterinvestment is not at all clear. Where is the ppingpoint where investors will turn away from Zambia?The Government appears too reliant on the wordof mining companies on this: there is no evidence it

has ever tried to calculate the total value of all theincenves in the tax system or carefully assess theseagainst other countys regimes and the investmentbehaviour of mining companies. Furthermore, taxlevels are not the only factor in aracng investment:polical and scal stability, labour availability, socialissues, transport infrastructure, administraveeciency and corrupon, currency stability andexternal economic condions are also important.Several studies have suggested that taxaon levelsare far from the most important factor in investmentdecisions.

It is also important to remember that developingthe mining sector implies more than aracngforeign investment. The structural transformaonof the producon side of the economy, including

diversicaon, requires government investment,which requires revenue. In the long-term view,mining copper is not an end in itself, but a means tobecoming a more advanced economy.

We believe that serious and genuineinvestors cannot be scared by a tax onfuture proits that may be utilized to inance

key infrastructure of roads, railway lines,new hydropower and thermal stations,optic ibre communications infrastructure

for improved and faster internet services,healthy, educational, trade and tertiaryeducation institutions to mention but a few.This will in turn contribute greatly to thedevelopment of Zambia.

Mineworkers Union of Zambia representave, KitwePublic Discussion, June 2010

Towards a better mining tax regime

On the basis of its public discussions series and theinformaon and research available, CTPD calls forreform of the mining tax regime. Strong objeconsto further changes in the regime have been voicedon the grounds that all the changes in recent yearsis discouraging new investment. But it is clear thatmany Zambians do not have condence in thecurrent regime, and if people perceive the miningcompanies are not paying enough they are morelikely to support marginal populist policians whomay bring further instability. It is in the interests of

the government and mining companies that a stableposion in found as stability breeds investment.

The tax regime should be reformed, but in order tominimize any sense of instability and unpredictability,a clear path of reform should be set out for the nextfew years. Another possibility is that companies begiven a choice between the legislated system and atransparent package of higher taxes which would beguaranteed for a longer period, with crisis clauseswrien into them in which both sides can agree tobreak their agreement temporarily if there is another

economic crisis or similar.

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The major change should be to establish an eecveway of increasing revenue when prices are riding highby reintroducing for a xed term the revenue-basedwindfall tax that operated in 2008/09. Its detractors

have claimed that it is fairer to tax prots thanrevenues, parcularly as a revenue-based windfalltax aects high and low cost mines very dierentlyin that both are charged the same regardless oftheir costs. However the key argument in favour ofthe revenue-based windfall tax is that it is easierto administer than a variable prot tax because itdoes not rely on calculang prots, which is verydicult for governments to do when faced withthe sophiscated accounng pracces of miningcompanies.

The best opon may be to reintroduce the windfalltax unl a me when the ZRA is strong enough toadminister a prot-based tax eecvely. This couldinvolve announcing that for the next three-to-veyears the revenue-based windfall tax will be inoperaon, then aer that there will be a variableprot tax (possibly with the top threshold of windfalltax sll in place to capture very high price benets).There would need to be major changes from theoriginal version to make it less onerous, making itdeducble from corporate tax calculaons, reducingrates or increasing thresholds, and inaon-indexing

the thresholds to avoid future problems.

The Government should also review the wide arrayof exempons and incenves oered to miningcompanies; it should try to cost them and set clearcriteria for connuing with them.

Improving tax administraon means making theregime easier to administer and improving thecapacity of the revenue collecon authories.Parliaments Commiee on Esmates has repeatedlynoted that tax audits are made very dicult by

the complex nature of the mining tax regime,the sophiscated operaonal methods of themulnaonal mining companies (including hedgingtransacons or hiding costs through transfer pricing),and the limited monitoring capacity of the ZRA. TheCommiee openly wondered how the Governmentcan eecvely evaluate the genuineness of claims bythe mining companies to the eect that the minesare unprotable (Naonal Assembly of Zambia,2009). A rst step to simplifying the administraonof the regime and raising signicant amounts ofextra revenue would be to no longer allow hedging

transacons to be treated as part of income.

In terms of improving the ZRAs capacity, recentimprovements need to be sustained. The ZRAnow has more mining accountants than beforeand a dedicated Mining Tax Unit supported by the

Norwegians. Audits of some mining companies havetaken places for the rst me in 2010. The ZRA needsto receive connued support from the Governmentand donors, including earmarked funding to ensurethat strategic improvements are made in the mediumto long term. The Ministry of Mines also needssupport their engineering experse is vital if Zambiais to audit and control mining policy eecvely.There also needs to be a beer relaonship betweenthe instuons involved the ZRA and respecveministries for mines and nance so that policy andresources are managed coherently.

Ulmately, building public faith in the mining taxregime requires an end to the culture of secrecyaround mining taxaon and more communicaonwith civil society and mining companies. A moreeecve tax system requires more transparencyand informaon. Development Agreements areapparently a thing of the past, but comments inthe 2010 public discussion series revealed a lasnglegacy of distrust over the lack of transparency ofboth the government and the mining companies:

We ... want to know who is in charge ofsigning contracts or agreements with themining companies. Before signing anycontracts, the people must know howcopper will be taken out and how much ofit. All we are basically asking for is a fairshare and as Zambians we do not want tostart demonstrating.

Parcipant, Solwezi public discussion, July 2010

There should be honesty in the informationavailed by mining companies pertaining tothe operations and revenues of mines sothat the right decisions are made.

Professor Lungu, Kitwe public discussion, June 2010

Mining companies and government should both bemade more transparent. Internaonally-concertedacon should seek to make detailed country-levelrevenue and prot gures available. The ExtracveIndustries Transparency Iniave (EITI) processgoes some way towards this. It requires, amongother things, regular publicaon of all paymentsby companies to host governments to a wide

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audience in a publicly accessible, comprehensive andcomprehensible manner. Zambia is an EITI candidatecountry aer passing certain criteria and it must nowcomplete the agreed validaon process by May 2011.

The Publish What You Pay campaign goes further byaiming to get mining companies home governmentsto require them to publish what they pay whereverthey operate.

Fairer distribution of mining taxrevenue

As well as using increased tax revenue for capitalspending, more of it needs to be directed towardsthe communies of the mining regions who feelmost of the social and environmental impactof mining operaons. They have to deal withrapid urbanizaon and intense strain on localinfrastructure; consequently, discontent appears tobe growing. Parcipants in public discussions held in2010 reected this, with some people saying it wouldbe beer for them to leave the copper in the ground.None seem convinced with the mining companiescorporate social responsibility programmes.

It is better to leave the copper in the ground,if people want to steal it from our countryand our people. For Solwezi, there is verylittle that we can attribute as having beendeveloped as a result of the mining activities.The infrastructure is poor, heavy trucks aredamaging our roads which are not beingrepaired. When copper goes out, the pitswill become hazard to the environment.The wage difference between what is paidto Zambians and foreigners is huge. So ifinvestors come, let them get copper and in

return leave something for the local people.

Parcipant, Solwezi Public Discussion, July 2010

In Zambia the royalties dont trickle downto the grassroots and the only town thatseems to be developing is Lusaka, which isunfair to the general Zambian as priorityshould be given to the province where theminerals are coming from.

Mineworkers Union of Zambia representave, KitwePublic Discussion, June 2010

The 2008 Mining Act provided for a mineral royaltysharing mechanism to address revenue between thecentral government, local authories and the localmining communies. The provision was designed to

meet the expectaon of local communies to benetfrom the mineral royalty accruing to Governmentfrom their areas. However, no meframe was givenand as of late-2010 it is sll not in place.

Another mechanism that could be considered isan improved environmental fund. Mining can behazardous and old mines leave behind seriousenvironmental problems, leading some to suggestthat a poron of mining taxes should go directly intoan environmental fund:

South Africans have a very good system for protecting the environment which Zambiacan emulate. Ten percent of all revenuegoes into an environmental fund speciicallyfor cleaning up the environment in miningareas. It is important to ensure fairness for

generations to come.

Dr Mphande, Lusaka Public Discussion, June 2010

There is already an Environmental Protecon Fundoperated by the Ministry of Mines: the mines aremeant to contribute funds will be kept unl themines close as a guarantee that no public funds willbe used to cover the environmental liabilies of the

mining companies. However, this does not addresshow the communies being aected by ongoingmining operaons today are meant to be protectedand compensated.

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Recommendations

While aracng investment is important for developingthe mining sector, the Government must invest in amore diverse economy, build economic infrastructure,and prevent the social and environmental degradaonof the mining regions. This requires more eecve

taxaon of protable mining companies and moreeecve mechanisms for making sure the revenue isinvested in the right places.Other key stakeholders have responsibilies, duesand obligaons that they must full too, and thefollowing recommendaons are addressed todierent sets of key actors.

The Zambian Government should: Re-introduce a revised revenue-based windfall

tax at least unl such a me that the Governmentis in a posion to more eecvely administer

prot-based taxes, like the variable prot tax.

Not allow hedging transacons to be treated aspart of income.

Implement the mineral revenue sharingmechanism as spulated in the Mining andMinerals Act.

Be more transparent about how mining taxregime is formulated, including full transparencyand accountability on tax revenues and taxexpenditures.

Arculate a clear vision of what constutes

fair parcipaon by the state in the fruits ofthe mining enterprise. This should entail adetailed and publicly-available assessment ofthe full mining tax regime including a detailedcost-benet analysis of all tax exempons andincenves for mining companies.

Urgently resolve legacy issues related to theDevelopment Agreements and adherence to the

current tax regime.

Suspend or revoke mining licences of non-tax-compliant mining companies.

Connue to work towards becoming an EITICompliant Country.

Invest further in developing the ZRAs capacityto collect taxes and monitor and audit miningcompanies.

Support beer relaonships between keygovernmental actors such as the ZRA, Ministry of

Mines and Mineral Development and Ministry ofFinance and Naonal Planning.

Local and international civil societyshould:

Commit to researching the impact of current

tax regimes and campaigning for reforms atthe internaonal level to ensure that Africancountries tax regimes are not undermined byinternaonal tax pracces.

Make tax a campaigning issue and increaseeorts to hold the governments and miningcompanies accountable.

Conduct research and advocacy on the impact ofmining tax policies on Zambia.

Build public awareness about the links between

taxaon, poverty and governance.

The international community should:

[Aid donors] Connue support for improvementsto ZRA capacity, including earmarked funding.

[Aid donors] Assist in building the capacity ofcivil society to monitor the acvies of miningcompanies.

[The UN, IMF, World Bank and OECD] Include civil

society in all processes to challenge tax leakages. [G20] Involve African countries in internaonal

processes with regard to tax cooperaon.

[ Internaonal Accounng Standards Board]Adopt a country-by-country reporngmechanism of key nancial informaon for alllisted companies.

[G20 , UN and other internaonal instuons]Move towards a mullateral agreement for theautomac exchange of tax informaon between

jurisdicons, parcularly developing countries.

[African regional bodies] Iniate eecvemullateral programmes for exchanging taxinformaon to combat tax evasion.

CTPD signed up to a wider set of demands madein the Lusaka Declaraon on Mining Taxaon inSeptember 2010 by the Internaonal Alliance onNatural Resources in Africa (see appendices).

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Further reading

CTPD (2010a) Proceedings from the CTPD, EAZ &

Caritas 2010 Mining Tax Public Debates, Lusaka:

Centre for Trade Policy and Development.

CTPD (2010b) Export Taxes in Zambia: A Case Study

of Copper and Scrap Metals, Lusaka: Centre for Trade

Policy and Development.

Fraser, Alastair & John Lungu (2007) For Whom the

Windfalls? Winners and losers in the privasaon

of Zambias copper mines, Lusaka: CSTNZ & CCJDP.

Internaonal Monetary Fund (2010) Zambia, IMF

Country Report No. 10/208, Washington, DC.

Lungu, John (2009) The polics of reforming

Zambias mining tax regime, Resource Insight No. 8,

Johannesburg: South Africa Resource Watch.

Manley, David (forthcoming 2010) A Guide to Mining

Taxaon in Zambia, Working Paper, Lusaka.

OSISA et al. (2009) Breaking the Curse: How

transparent taxaon and fair taxes can turn

Africa`s mineral wealth into development, Open

Society Instute of Southern Africa, Third World

Network Africa, Tax Jusce Network Africa, Acon

Aid Internaonal, Chrisan Aid.

PricewaterhouseCoopers (2009) Comparison of

mining tax regime in Zambia with tax regimes of other

jurisdicons. Unpublished report for the Chamber ofMines, September 2009.

World Bank (2004) Zambia: Sectoral study of the

eecve tax burden, Foreign Investment and

Advisory Service (FIAS), a joint service of the World

Bank and IFC, December 2004.

Naonal Assembly of Zambia (2009) Report of the

Commiee on Esmates Appointed to Scrunise

the Income Tax (Amendment) Bill, Nab 1/2009,

the Customs and Excise (Amendment) Bill, Nab

2/2009, the Value Added Tax (Amendment) Bill, Nab3/2009, the Property Transfer Tax (Amendment) Bill,

Nab 4/2009 and the Zambia Development Agency

(Amendment) Bill, Nab 5/2009.

Useful informaon on the web:

Bank of Zambia:

Central Stascs Oce:

Mine Watch Zambia:

Naonal Assembly of Zambia:

Zambia Revenue Authority:

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Appendices

Mining tax regime recent changes

(Provisions listed for those holding a large-scale mining licence and carrying on the mining of base metals)

Mining legislaon

Mines and Minerals Act 1995 Mines and Minerals DevelopmentAct 2008

Royales on base met-als

2% (but 0.6% in the Development Agreements) 3%

Exempon from cus-toms and excise

Exempon from any dues levied under theCustoms and Excise Act in respect of all machin-ery and equipment required for any miningacvies1

As before

Income tax deducons Deducons allowed for prospecng expendi-ture, capital expenditure.

As before

Income tax legislaon

Chapter 323, Income TaxAct (as of 2002)

Income Tax (Amendment) Act 2008 Income Tax (Amendment)Act 2009

Corporate tax

(on losses)

(on hedging

income)

25%

Losses carried forward forup to 10 years2 (but Devel-opment Agreements hadstability periods of 15-20years)

30%

As before

Hedging income no longer to be part

of the mining income and subject tonormal income tax with losses arisingnot being deducble3

As before

As before

Hedging income allowed

to be part of mining in-come for tax purposes (2(a) iii)

Windfall tax - 25% when the copper price is be-tween $2500 to $3000 per tonne,50% when the price is between $3000and $3500 and 75 percent when theprice exceeds $3500

None

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Variable prottax

None 15% tax on prots when, aer corpo-rate tax, a companys prots are sllhigher than 8% of its overall income4

As before

Capital allow-ance

(deduconfrom income

tax)

100% deducon on capitalexpenditure

25% deducon on original expendi-ture

100% deducon on capitalexpenditure

Tax on divi-

dends

No restricons in respect

of the amount of prots,dividends, or royales thatmay be externalized.

Withholding tax of 0% ondividends or interest, roy-ales or management feesto paid to shareholders( as opposed to 15% fornon-mining companies)5

As before

Withholding tax of 15% levied inter-est, royales or management fees topaid to shareholders6

As before

As before

Customs and excise legislaon

Chapter 322, Customs and Excise Act (prior toamendments)

Customs and Excise (Amendment) Act2009

Export tax None Unrened copper: 15%

Customs duty Heavy fuel oils: 30%

Copper powder, akes and blisters: 15%

Rebate, refund or remission of the duty payable inrespect of plant, machinery, or equipment as pro-vided under secon 97 of the Mines and MineralsAct7

Heavy fuel oils: 15%

Copper powder, akes and blisters: 0%

As before

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Lusaka Declaration on Mining Tax

The Lusaka Declaraon on Mining Taxaon

Preamble

We, the representaves of civil society organisaons from eight

countries in Africa and the Netherlands; namely Angola, DRC,

Kenya, Malawi, RSA, Zambia, Zimbabwe, Mozambique having

met under the auspices ofThe Internaonal Alliance on Natural

Resources in Africa (IANRA)1 and Caritas Zambia, having shared

experiences and knowledge pertaining to the detrimental

eects of extant mining legislaon and pracce in our respecve

countries, hereby declare our uninching solidarity with our civil

society colleagues in Zambia in their demands for the review

of mining legislaon to mainstream cardinal values of social

jusce, environmental protecon, sustainable development and

equitable benets emanang there from for all Zambians.

1) Proclamaon

We hereby:

a) Recognise the detrimental commonalies prevailing in

mining operaons in our respecve countries impacng

adversely on sustainable economic development and

poverty eradicaon resulng from unacceptable domesc

and internaonal obstacles to eecve taxaon;

b) Arm that eecve and equitable taxaon is crical to the

overall economic growth of our countries and, specically

to the socio-economic and polical wellbeing of our

communies leading to the strengthening of channels of

polical representaon and government accountability;

c) Commit to work together for reforms in the areas of mining

and related taxaon, resulng in enhanced revenues

from natural resource extracon and processing for value

addion;

d) Having regard for the importance of tax compliance and

accountability for tax revenues and expenditures, we:

i. Call on the Government of Zambia and all African

governments to commit to full transparency and

accountability on tax revenues and tax expenditures;

ii. Demand the implementaon of a Windfall Tax

mechanism that would enable our naon to benetfrom inordinate prots generated by high prices for

our commodies, inclusive of previous accruals;

iii. Encourage the Government of Zambia to implement

already exisng revenue sharing mechanism of

proceeds from mining operaons;

iv. Call on the Government of Zambia and all African

governments to suspend or revoke mining licences of

non tax compliant mining companies;

v. Call on the Government of Zambia and all African

governments to remove all tax exempons for

mulnaonal corporaons;

vi. Urge revenue authories to simplify the tax code and

reduce the compliance burden;

vii. Demand that the Government of Zambia should

not allow companies to use hedging for tax planning

purposes;

viii. Commit to ongoing research and advocacy with

regard to the impacts of mining tax policies on men,

women and vulnerable groups.

2) Revenues from mines and minerals

a) Having regard for the importance of strong governance toensure African governments benet from natural resource

extracon we:

i) Note the power and informaon asymmetry between

African governments and mulnaonal companies in

negoang fair contracts and the lack of capacity and

polical will to determine appropriate prices;

ii) Queson the lack of transparency in mining

contracts across the connent which increase

potenal for bribery and corrupon and undermine

accountability;

iii) Call upon African governments to enact and/or implement fair and equitable revenue sharing

mechanisms of proceeds emanang from mining

operaons;

iv) Call on African governments to audit and publish

natural resource bases before signing mining

contracts;

v) Call on African governments to strengthen legal

provisions relang to contracts, such that all

mining contracts shall henceforth comply with a

predetermined naonal legislave format; including

measures to over-ride stability agreements that

prevent future governments from re-negoangcontract provisions, possibly including limits to

length of the contracts;

vi) Call on African regional bodies to explore regional

coordinaon and harmonisaon of scal regimes,

and informaon exchange to challenge harmful tax

compeon in the mining sector;

vii) Call on African regional bodies to commit to South-

South learning of successful tax pracces in relaon

to mining;

viii) Call on African governments to adopt and enforce

the Extracve Industry Transparency Iniave (EITI)

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regulaons in exisng mining legislaon and to rafy

the United Naons Convenon Against Corrupon;

ix) Call on aid donors to build the capacity of civil society

in monitoring the acvies of mining companies;

x) Arm that resources should be le in the ground

for exploitaon by future generaons if current

regulaons are deemed too onerous by potenal

investors;

xi) Urge our governments to establish mechanisms to

conserve adequate revenue gleaned from mining

operaons for future stability, growth and unforeseen

downturns.

Internaonal taxaon

a) Acknowledging the tax leakages which undermine the tax

base of African countries we:

i) Note that developing countries lose signicantly

more revenue than they receive in foreign aid as a

result of internaonal tax evasion and avoidance;

ii) Note the need for policy coherence among aid donors

to take steps at the naonal and internaonal level to

challenge internaonal tax dodging;

iii) Arm the need for internaonal and regional tax

cooperaon to challenge harmful tax compeon

and stop tax leakages;

iv) Challenge the widely held assumpon that low tax

rates aract FDI, leading to economic growth and

development;

v) Call on the United Naons, Internaonal Monetary

Fund, World Bank and the Organisaon for Economic

Cooperaon and Development (OECD) to include civil

society in all processes to challenge tax leakages;

vi) Call on the G20 to involve African countries

in internaonal processes with regard to tax

cooperaon;

vii) Having regard for the need for greater transparency

among mulnaonal companies, we call on the

Internaonal Accounng Standards Board (IASB)to adopt a country by country (CbyC) reporng

mechanism of key nancial informaon for all listed

companies;

viii) Having regard for the corrosive impact of nancial

secrecy in oshore nancial centres we call on the

G20 and the UN and other internaonal Instuons

to move towards a mullateral agreement for the

automac exchange of tax informaon between

jurisdicons, parcularly developing countries;

ix) Call on African regional and pan African bodies

to iniate eecve mullateral programmes for

exchanging tax informaon to combat tax evasion;

x) Call upon our governments to strengthen capacies

to monitor and audit mining companies;

xi) Call on African governments to introduce legislaon

to make tax evasion a predicate oense under

exisng an-money laundering provisions;

xii) Call on our governments to invest in strengthening

the capacity for revenue authories and to provide

technical experse in monitoring large taxpayers, in

parcular, transfer pricing issues;

xiii) Commit to research the impact of current tax regimes

and campaign for reforms at the internaonal level

to ensure that the taxing rights of African countries

are not undermined by abusive internaonal tax

pracces;

xiv) Call on African parliamentarians to take an acve rolein enhancing revenue transparency in the extracve

sectors and championing for good governance in the

management of natural resources of Africa.

xv) Call on Supreme Audit Instuons (SAIs) in Africa to

play an acve role in enhancing transparency on tax

revenues and tax expenditures as well as monitoring

and applying pressure for the implementaon of

audit recommendaons.

We hereby avow our commitment to above issues and pledge

our ongoing support on the same at the IANRA Solidarity

Meeng on Mining Taxaon and Development held in Lusaka

on 27th -29th September 2010.

For and on behalf of the Internaonal Alliance on Natural

Resources in Africa.

(Footnotes to Appendix 1)

1 See Secon 97, Paragraph 1

2 See secon 30, paragraph 2. Applies to any mining company

holding a large-scale, mining licence issued under secon

twenty-three of the Mines and Minerals Act and carrying

on the mining of base metals. For other companies the loss

shall not be carried forward beyond ve years.3 Under secon 2 (interpretaon), hedging is listed as one

of the items dened as business

4 See changes to Charging Schedule (f)

5 See Charging Schedule, Part 2, Paragraphs 6 and 7.

6. See deleon of Clause 4 of Paragraph 7 in Part 2 of the

Charging Schedule.

7. See Secon 89 The Customs and Excise (Rebates, Refunds

And Remissions)(General) Regulaons, Secon 25 (1)


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CTPD acknowledges nancial support for the producon of this paper from

Chrisan Aid (Zambia and UK), Diakonia Zambia and Acon Aid Zambia.

ctpd _fools paradise_ zambia mining tax regime briefing paper

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