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

Mining - Pill or Poison?

Recently, the Chamber of Mines noted that the mining sector wanted stable and long term policies that would reduce unnecessary risks to their investments. This was stated as a benchmark for sustained private investment in the mining sector.

The chamber called for consistency so that any changes to mining policies should not result in a fundamental shift in the direction of the industry.

Examples were cited of the 2008 introduction of a 15 percent profit variable tax and a 25 percent mineral windfall tax which upset foreign mining firms.

This year the mining industry is set to achieve the targeted production of 600,000 tonnes of copper and the Chamber of Mines notes that the country can achieve the target provided that all other factors such as reliable supply of power and other logistical arrangements are met.

There are planned expansions and upgrades at Mopani Copper Mine (MCM), and the resumption of operations at LCM and Chambishi Metals Plc later this year. Konkola Copper Mines (KCM), is in the process of developing a major copper mine.

In an effort to support the mining sector, Copperbelt Energy Corporation (CEC) states that it will raise supply by about 25% in the next two years to match rising demand from new mining projects

CEC acknowledged that power demand from the mines would increase to around 700 MW and 800 MW from the current 430 MW.

CEC is planning to embark on the development of smaller power stations around the country to supplement the power generation primarily carried out by ZESCO.

There is a necessity for ZESCO to also strategize how to generate and supply the higher demand for power that the mining industry will need over the next ten years. This consideration will not only put ZESCO into considerable debt, but is also likely to put the country into long term debt as it backs up ZESCO.

Mining commentators from the private sector and academia highlight that mining taxes only account for two per cent of government’s total annual revenue.

There are calls for the immediate restoration of the 2008 mining fiscal regime abandoned this year following pressure from the mining companies. This is in view of the rising prices of copper from a low of US$2, 900 per tonne to a current high of about US $6,146 per tonne on the London Metal Exchange.

These calls are based on attempts to reach a win-win situation for both Government and the investors in the mining sector.

The opportunities that arise from high copper prices and more taxes from the sector include additional income to finance the diversification of the economy, and a meaningful move from our mono-dependence on copper.

Zambia is said to be a country with one of the lowest earnings from the mining sector, while developed countries like the United States earn mining taxes as high as 17 per cent of the country’s total revenue earnings.

Many Zambians argue that the mining sector is consuming the bulk of electricity, uses the bulk of all transport infrastructures, and enjoys the lowest cost for all logistics, and yet it is only contributing to two per cent to the Government treasury.

Multi National Companies (MNCs) which have subsidiaries in the country’s mining industry are perceived to be buying minerals such as copper at the gate price which is lower than that of the London Metal Exchange (LME). Government is therefore urged to put in place a policy where companies which are subsidiaries of multinational companies should be discouraged from doing “insider trading” where they sell to the parent company at a gate price which is lower than the LME price.

On the ground in the mining towns, residents experience rapid degradation of their roads because of damage caused by trucks carrying mining equipment, exports, and ore. The environment is impacted by effluents from mining activities that affect people’s health and agriculture production. These effluents include smoke, slag dumps, and chemicals pumped into local rivers and streams. In some areas noise pollution is experienced by residents in close proximity to mining activities.

It must be acknowledged that mining is an activity that damages the environment and leaves behind holes, tunnels, and cavities that could leave vast lands unusable for many years to come.

One can therefore understand why the public is so concerned with the operations of the mining industry, and look to ensure that the mining sector helps to develop the economy in such a strategic way that even when the mining activities come to an end, there will have been sufficient investment into diversification to stomach the legacy of derelict buildings and barren lands that mining often leaves behind.

To this end, there are some immediate practical steps that the Government can take to reel in the taxes that the mining sector should be paying.

The notion that Zambia has a liberalized economy whereby open trade should take place without public monitoring, is wrong.

The role of Government is not to impede economic development, but Government does have a responsibility to monitor and evaluate all economic activity in the country such that the correct taxes can be collected, and that the activities being conducted are in the best interests of the country.

This basic management of the economy requires that all mining exports must be accounted for through shipping documents processed by the Zambia Revenue Authority, and that all proceeds for the exports are accounted for by remittances to Zambia through the several commercial banks. This basic form of accountability ensures that Zambia gets her fair share of taxes.

This does not stop the mining companies from spending their money as they see fit, but ensures that solid and reliable figures are recorded for the purposes of calculating the taxes due to Government.

Furthermore, even if the export earrings are kept in Zambian banks even for only two days, the availability of foreign currency to the banking sector will be much greater and subsequently provide for a healthy liquidity of foreign exchange to support local businesses thereby instrumentally financing the national economic diversification program.

Mining is now bringing in more profits and the trend appears to be that of rising copper prices for at least the next few years.

It is high time that we took advantage of this windfall by converting the earnings into greater revenues for the national treasury, and investment capital for the other sectors including Agriculture, Manufacturing, Tourism, and Services.

Published 1 September 2009

Copper Mining in 2009

Copper mining is making the headlines again as it has done in the past when copper prices begin to rise.

For many Zambians, the current copper prices that have risen from a low of USD3,000 per tone and now stand at about USD4,000 per tonne is good news and there is hope that the prices will continue to improve.

All eyes are on China, the world’s largest buyer of copper, to see how the manufacturing economy is doing out there. Any increase in China’s manufacturing sector in areas using electrical and electronic products, will result in more copper being purchased and logically, the price of copper should increase due to the increased demand.

On the home front, ZCCM IH is looking to invest in African Copper (ACU) to the tune of USD22.5 million in a bid to pull ACU out of its present financial crisis and take advantage of a stake in a copper mining operation in view of the rising copper prices.

In Luanshya, there is growing excitement about the prospects of new investors in the mining operation there. Front runners for the Luanshya mines are a Chinese investor and several other un-named options.

As investors are poised to take over mining operations in the country, the Mine Workers Union of Zambia (MUZ) have voiced their concerns about allowing old investors that had previously operated mines in Zambia, and later pulled out due to the low copper prices, to come back now when the going seems to be getting better. This position has also been echoed by the State President Rupiah Banda who was not happy with former investors that abandoned the country and their employees when business got tough, and were now rushing in to pick up where they left off.

In the wings, we note that Lumwana Mining Company has experienced differences with Mopani Copper Mines and Glencore International in respect to the specifications of copper concentrates for processing at the Mufulira Smelter. An alternate arrangement has now been made with the Chambishi Copper Smelter for Lumwana concentrates to be processed, but Zambia is likely to eventually pay the price of building another Smelter plant as a consequence of these differences.

There is a great opportunity for the copper mining industry to collaborate where it makes sense, and to compete in areas of productivity and technologies. The duplication of Smelting plants that have capacity to process concentrates for several mining companies, is not only a waste of money for the mining companies themselves, but a waste of resources for Zambia as a whole.
Copper prices may be on the increase, but the world is increasingly competitive, and efficient, cost effective production will go a long way towards sustainable business. To this end, collaboration and cost sharing in the mining industry will benefit all investors in the long run.

Government and the Zambia Development Agency can also play a significant role in promoting, facilitating, and supporting value addition to copper within the country. The Chambishi economic zone can be targeted as the primary vehicle for developing the value chain in the copper industry. Zambia needs to see more investments such as ZAMEFA on the Copperbelt. Opportunities are there to manufacture copper cables of all sizes and description in the Chambishi economic zone and elsewhere on the Copperbelt. Many other copper based products are possible with guided investment incentives offered by ZDA.

The copper slump will go, and no doubt return after a few years. Zambia must make some decisive choices about how to tackle the rising and falling prices of copper on the world market. We can choose to go with the flow and be subject to the price variations out there, or we can decide that we will consciously invest in the value addition components of the industry, so that the changes in metal prices have as little impact as possible on our own domestic economy.

The impact of value addition in the copper industry has implications far beyond the copper industry. Copper metal fabrication and processing has the effect of creating capacity to add value to other metals such as zinc, aluminium, etc. This metal processing sector can quickly become the basis for many different forms of manufacturing across the country.

This phenomenon is evident as we currently experience the development of a steel industry in Zambia. There are several steel processing plants in operation, and several more being developed by the private sector. The impact is already being felt in the manufacturing sector as new companies are being set up to manufacture steel based products such as door frames, window frames, steel re-enforcement building products, trailers, machinery, and farming implements that were previously imported.

Reports indicate that China is stock piling copper to support its industry which is the backbone of the expected 8.3 percent growth of the economy in 2009. Although the USA, Japan, and Europe are reducing their imports of copper and other metals, China is taking up the overspill and using the opportunity to boost its own economy.

On the home front, European companies are now offering franchises to Zambian companies to procure equipment and machinery for metal processing, in an effort to market their technologies in Zambia. The net effect of these initiatives is that Zambia can become more industrialized, Zambians can gain better skills with new technologies, and Zambia can transform her economy from a primary raw material producer, to a sustainable manufacturer of semi processed and processed metal products.

Published on 5 May, 2009