Tax Audits

The Zambia Revenue Authority (ZRA) have undertaken to audit the books of investors in the mining sector for the obvious reason that they want to be confident that the taxes being collected from the sector are reflective of the actual business activity.

ZRA expected to collect K7.6 trillion but instead only managed to collect K7 trillion even though the price of copper has risen substantially within the last 6 months.

The pre-emptive explanations that support the possible reasons for lower tax collection could be the poor performance of trade taxes, or the rapid depreciation of the Kwacha against major currencies, or indeed the general global economic slowdown. These explanations are probable but do not generally trigger an audit operation.

The norm is that when the ZRA suspect that a tax payer is not declaring the correct figures for trade and profit, then a tax audit is usually conducted. Mining is no exception and one can simply consider the sector for possible areas where the figures may not inspire confidence in the ZRA and therefore persuade them to launch an audit.

The ZRA acknowledge that after the removal of Windfall taxes a Variable Profit tax was introduced which by definition, requires that mining operations be audited to verify their tax obligations to Government.

If the comments by Caritas Zambia at their recent conference on ‘Exploiting our Natural Resources’ are anything to go by, then the issues of secret agreements between the Government and selected mining investors must be a thing of the past and all agreements must be put in the public domain for all to see and evaluate. Additionally, the stated short fall in revenue collection from the mining sector of 75 percent on Windfall taxes and 92 percent on Company taxes begs that the books be re-looked at, to either arrive at a more realistic figure for budget planning, or to be more accurate on the figures for tax collection.

The realization that mining operations damages the environment and eventually negatively affects the residents in the mining communities, should be enough motivation to ensure that taxes from this sector are correctly collected and used to develop the nation and invest in the future economies of these mining areas.

On the drawing table are new investments in mining from Brazil with collaboration from South Africa, coming to the Konkola North Project which will develop and open pit mine with an expected production capacity of 44,000 tonnes of copper concentrates per year. Already on the ground are the new mining investors in Luanshya Copper Mines and at the Munali Nickel mines in Mazabuka. North Western province is experiencing a mining boom with several new investments in copper mining activities.

Siavonga is also opening up to mining of uranium at Mutanga and Dibwe thereby establishing yet another sub sector of the mining industry. The target in this sub sector is to export uranium oxide to the developed world where it is expected to fetch very good prices.

The picture in mining is quite clear. There is going to be a proliferation of mining activity across the country within the next five years and yet the tax regime governing this sector is not clearly up to speed.

In the name of liberalization and free market economics, Zambia has allowed the mining sector to literally decide what taxes they want to pay because they are not compelled to account for all export earnings through export receipts via Zambian commercial banks. All countries around the world insist on these export earnings to be initially recorded in home based banks, before the money can be employed in any other business activity.

The recorded revenues from mining exports gives the ZRA a basic idea of the turnover of the company and some simple assessment criteria can be employed to arrive at an acceptable figure for tax payments to Government. The option is always open for the tax payer to argue any special mitigating and convincing circumstances that would result in lower taxes being paid than that calculated by the tax office.

The reality is that for too long, has the mining regime been one of handheld investors being allowed to walk on the red carpet for investment, while all the normal procedures and benchmarks are set aside to allow the investment to settle very comfortably. Well, the salad days are over, mining like any other investment is open to all and sundry.

Investments in the mining sector must pay their taxes like any other business. Accountability and transparency must prevail for tax purposes. If ZRA does not get a meaningful tax return from the mining companies, then the legacy that Zambia will inherit from all the mining activity around the country will be gigantic potholes, polluted rivers, and desolate waste lands.

We may actually fulfill the prophecy that the meek will inherit the wasted earth while the powerful inherit the minerals and useful resources.

Published 10 November 2009