Taxing the mining industry: the case of Zambia

The hot issue of the windfall tax In the wake of the ACP Ministerial on Natural Resources and the recent communication from the European Commission on establishing a strategy in this field, our report from Zambia and South Africa looks at the tricky task of taxing mining. Alfred Sayila reports.

Opposition from the Government and foreign mining companies on the one hand and the opposition and general public on the other concerning the deletion of windfall tax  started way back in 2008; this was when  several opposition parties, Non-Governmental Organisations (NGOs) and other interested parties accused the country's leadership of wanting to appease foreign mining investors at the expense of national development. They charged that the country was not benefiting from copper revenue, more especially at a time when the commodity had hit high prices on the international market.
                 
But then Government was unmoved on the issue contending that taxation based on the market price of copper and other minerals was not the best method of taxation and would not guarantee benefits to the country in the long term. It feared such a move would discourage foreign mining companies and scare away future investment in the mining sector.
                
Only recently Minister of Finance, Mr Situmbeko Musokotwane, described the windfall tax which many people were calling for as ‘an illusion that would not work anywhere in the world’. He said it was only in Zambia where a debate on the matter was still being sustained. ''There are many mining companies in the world, but none of them use the windfall tax,'' he stated.
                
According to the Zambian Minister of the Treasury the introduction of the windfall tax on the mining industry was an error which has since been corrected and his Government will not go back to it. He also claimed that he had consulted widely over the matter -  including with the International Monetary Fund (IMF) and the World Bank (WB) -  and all of them have seen no economic and monetary sense in this kind of tax regime.

Fair share

Musokotwane told The Courier in a short interview that those calling for the re-introduction of the windfall tax did not seem to be totally aware of changed world trends in the mining sector. ''We cannot be the exception to the way other countries tax the mining industry,'' he stated. The minister who prior to his appointment in 2008 was Treasury Secretary insisted that his Government had put in place measures for the country to get a fair share from the country's mineral resources.

According to Treasury Secretary Mr Likolo Ndalamei, mineral royalties taxed at three percent are meant to have 20% of the money thus collected used directly for community development and 20 % for local councils, with 60 % going to  central government. So far only one mine, Kansashi Copper Mines in the rural North-Western Province paid its arrears worth US$80 million while the rest of the foreign mining companies have promised to pay in the middle of this year.
                 
An outspoken Member of Parliament from the opposition, Mr. Chishimba Kambwili, whose party has vigorously campaigned for the re-introduction of the windfall tax asked the Government to reconsider its stand. ''Call it by any name, windfall tax is the only way the country can benefit from its mineral resources,'' he said.
                
Kambwili, a former Copperbelt miner, rebuked the Government for failing to apply the country's tax laws to some foreign mining companies who have deliberately evaded tax or have shown serious prosecutable tax contributions discrepancies. He singled out Mopani Copper Mines (MCM) as one of the glaring examples of tax evasion.  But the Parliamentarian is only one of many voices in the Central/Southern African country unhappy with the way Government handles the mining taxes issue.
               
Most of these critics claim that the foreign mining companies externalise all their profits, leaving paltry funds for payment of workers and suppliers. They also say most of the suppliers belong to foreign companies who transfer their incomes to their external accounts. The issue has divided foreign mining companies, some of whom have seen the need to plough back into the country the hefty profits made from the sale of minerals and who have, in the past, expressed willingness to comply with any type of tax regime which government can put in place. But then others have threatened to close their operations entirely contending that they contributed a lot to the country in terms of employment, social programmes and infrastructure development in mining areas.

The South African case

There is little that can pacify the majority of Zambians incensed with the recent high prices of copper on the international market at almost US$10,000 per metric tonne. Zambia is not alone in wanting to gain from its mineral resources as South Africa is now working to overhaul its mineral royalties so as to cash in on high commodity prices on the international metals market.
                
South Africa wants to use Australia's controversial high resources tax as an example to control its mining resources. This comes from sentiments expressed from the ranks of the ruling African National Congress (ANC) that the country was getting a raw deal from the mining companies. Last year South Africa pushed for a 40% minerals tax on the massive profits mining companies were making. This was later reduced to 30% after a corporate backlash.
                
The ANC is still going ahead with its desire to revise mineral tax upwards despite heavy lobbying from mining giants Billiton and Rio Tinto against high taxation. The two mining companies have openly lobbied for support from leading politicians for modifications to the tax system before hammering out an acceptable levy.
                 
Legal analysts in South Africa think the proposed modification will have to pass through a parliamentary process before having any chance of being introduced before 2012. South Africans want to share in the wealth of their country which some people see as an indirect way of calling for the blanket nationalisation of the mining industry.
                 
Both Zambia and South Africa could be posturing with their demand for higher taxes on foreign mining companies when in fact they potentially want to emulate neighbouring Zimbabwe which completely controls its mining industry, although at a cost to its tottering economy. Mining investment in that country has been quite low since 2002 because of its political policies. Whether windfall tax will be reintroduced in Zambia is hard to say and only time will tell.

Alfred Sayila