MINING TAXATION AND ITS CHALLENGES IN ZAMBIA MINISTRY OF FINANCE MINING TAXATION AND ITS CHALLENGES IN ZAMBIA by Jimmy M. Sakala Ministry of Finance-Budget Office

Zambia Mining Sector The Mining sector remains a significant part of the Zambian economy. Zambia is a major producer of copper (7th largest producer in 2012), cobalt (9th largest producer in 2012) and produces a variety of other mineral products, primarily gold, nickel and gemstone Ministry of Finance-Budget Office

Zambia Export of Mineral Products (Million of US$) Copper 5,767.90 6,659 6,294.50 Cobalt 303.8 256 216.5 Gold - 81 94.3 Nickel - 44.9 – Gemstones 49.8 35.8 232.3 Cement and lime 15.6 19 26.6 Total 6,137.10 7,096.4 6,864.20 As % Total exports 83.70% 82.70% 73.30% Ministry of Finance-Budget Office

Ministry of Finance-Budget Office

Fiscal regime for the Mining Sector In the mid-1990s the Mining sector was privatised when copper prices were quite low The states owned mining company (ZCCM) was dismantled and negotiated for sale at low prices which at the time looked attractive by international market standards In order to guarantee fiscal stability, Development Agreements were negotiated with reference to the provisions of the law in force at the time Ministry of Finance-Budget Office

Role of Mining sector in the Economy Between 2006 and 2011 the contribution of the sector to GDP has averaged about 3.8% while mining tax revenue as a ratio to GDP was recorded at about 3 % in 2011 The sector is a significant contributor to employment and with new mines opening and increased investment, the sector will employ more people thereby contributing to tax revenue Development of other industries is dependent on the sector i.e suppliers to the mining sector Gains and resources from the mining sector contributed to diversification of the economy Ministry of Finance-Budget Office

Government’s Mining Policy Government policy is to make sure that gains from the mining sector benefits the people of Zambia and deliver appropriate returns for the investors with a win-win stance Maintaining a healthy business environment is essential for the long-term sustainability of the sector and the economy as a whole Ministry of Finance-Budget Office

Changes to Fiscal Regime for the Mining Sector Over the last 15 years, Zambia has implemented three (3) mining tax regimes summarized as follows: Development Agreements regime 2007 - 2008 Tax Regime Post 2009 Tax Regime/Current Tax Regime Ministry of Finance-Budget Office

Development Agreements Regime When former ZCCM Mines were privatized, mining companied Development Agreements were signed with investors One of the objectives was to promote reinvestment and greenfield developments at the time cooper prices were quite low The agreements provided for different fiscal terms for different mines Development Agreements were needed to ensure stability in the tax regime Ministry of Finance-Budget Office

Development Agreements The fiscal changes generally included the following : Mineral royalty reduced from 2% to 0.6% Corporate Income Tax reduced from 35% to 25% Period for carry forward of losses increased from 5 year to 10 years Exemption of payment of customs duty on consumable Exemption excise duty on electricity Withholding tax to associated parties reduced from 15% to 0% The above regime was later changed twice as explained in next slides Ministry of Finance-Budget Office

Challenges in the Mining Sector There was no mechanisms in place to monitor mineral production and contents, government is losing out as precious metals, e.g. silver, gold, palladium exported in anodes, slime & concentrates are not properly accounted for. Legislation has since been in acted to enhance valuation of weights and mineral content of all mineral exports Ministry of Finance-Budget Office

Challenges Most mining companies are still in loss positions, for tax purposes. Indications are that this trend will not change before 2016. Inadequate capacity at Mines department and Geological survey department with specialised skills such as engineers, metallurgist to monitor production levels mainly due employment and low retention rate. Ministry of Finance-Budget Office

Challenges Despite consistent and relatively high real GDP growth rates averaging more than 5% in recent years, the share of tax revenue from mining sector to GDP remain low at about 4%. Increasing the mining tax rate may not be feasible as, there may not be much space for such increase as the current rate is already high by international standards. Ministry of Finance-Budget Office

Challenges Lack of administrative capacity to capture Multinational corporation transactions for tax purposes. This challenge is currently been addressed through Technical capacity enhancement at ZRA with the assistance of cooperating partners. Ministry of Finance-Budget Office

Benefiting from natural resources Taxation Development agreements in the mining sector were cancelled and a new mining tax regime introduced in 2008, Company tax at 30% and Variable Profit Tax up to 15% Recent changes to mining tax regime under the PF Government includes increase of mineral royalty rate to 6% from 3% and subjecting export of mineral ores, concentrates and semi-processed metals to 10% export duty The above measures and increase in mineral production have contributed to increase in mining revenue to the Treasury Ministry of Finance-Budget Office

Main Features of Current Tax Regime Corporate income tax - 30 %; Variable profit tax – 0% to 15% on profits above 8 percent of gross revenues. Mineral royalty – 6% of norm or gross value Mineral Export Levy-10% on unprocessed copper Loss carry forward – 10 years for companies carrying on mining operations Property Transfer Tax -10% of the realized value of the mining right Ministry of Finance-Budget Office

Tax Regime Withholding tax -0% dividends, 15% interest, 20% management and consultant fees, 15% construction and haulage Capital depreciation allowance 100 % for prospecting and exploration, and smelters, refineries owned by mining companies 25% for other capital expenditure Hedging activity- Treated as separate business activity Ministry of Finance-Budget Office

Mining Sector Policy direction Enhanced transparency and broad participation in the management of revenues from mineral resources will deliver: Improved governance Increased equitable and pro-poor expenditure Reduced risk of potential of internal conflict or misunderstanding Improved domestic resource mobilization Ministry of Finance-Budget Office

Policy direction Efforts have to be made to ensure that an optimal level of taxation is achieved. Not only should the net present value of tax revenues be maximised but also social and economic benefits flowing from the mineral resources must be maximized over a long term basis For any investment to yield maximum returns, Zambia needs a conducive environment in which business can thrive It is critical to ensure that simplicity, equity and predictability in the tax system is achieved Ministry of Finance-Budget Office

Strengthening Revenue Administration and Compliance Legislation has since been enacted to enhance valuation of weights and mineral content of all mineral exports. S.I 97 of 2012. Tax audits of mining companies Technical capacity enhancement at ZRA with the setting up of a specialised unit Exchange of information (ZRA, MOF, BOZ, MMEWD) Ministry of Finance-Budget Office

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