Mining companies face taxing problem

The Zambian government’s attempt to increase earnings from its rich copper deposits by raising mineral taxes to global norms is meeting with resistance from mining companies, which signed legally binding development agreements based on a 0,6% royalty tax.

Finance Minister Ng’andu Magande announced in his national budget last month that government had revised the tax regime for the mining industry, raising mineral royalty taxes to 3%, pegging corporate taxes at 30% and slapping mining companies with a windfall tax, which will be triggered by higher prices for copper.

“The new fiscal regime for the mining sector will be effective from April 1 and, for copper, the windfall tax will be 25% at the copper price of $2,50 per pound, but below $3 per pound,” Magande said. “Fifty percent will be charged at the price of the next 50c increase in the price and 75% for the price above $3,50 per pound.”

The Zambian government hopes to raise more than $400-million in revenue from the mining industry this year alone.

In the past Zambia offered generous conditions to foreign investors, which, critics say, prevented one of the world’s poorest countries from benefiting from the global commodities boom, recognised as the biggest base-metal bull market in 50 years.

On the back of strong demand from China and India, copper prices on the world market have leapt to record highs of nearly $8 000 per metric ton, from an average of $1 200 per metric ton six years ago.

But mining companies doing business in Zambia still pay only a paltry 0,6% in royalty tax, while the global norm is close to 3%. While companies also pay a compulsory 25% corporate tax, they are exempt from customs duties on imports of machinery and equipment, as well as raw materials, in some cases for up to 20 years.
There are also no restrictions on the amount of profits and dividends that can be externalised.

“The new fiscal regime … [for the mines] will bring about an equitable distribution of the mineral wealth between the government and mining companies,” Magande said.

However, mining companies reacted vehemently to the news, threatening to opt for litigation if government tampers with existing development agreements.

CP Baid, the director of operations for Konkola Copper Mines, Zambia’s largest mining company, which is owned by the London-listed Vedanta Mineral Resources, said the new tax regime could destabilise long-term expansion and recapitalisation plans in the sector.

“The new tax regime is detrimental and jeopardises the ability to generate surpluses and raise funds for infusion towards growth and extension of our mine’s life. It is contrary to … the fundamental requirement for sustainable development and growth of the copper mining industry, which had passed through a decline phase and is now in the phase of recovery,” Baid said.

Zambia is one of the world’s five largest producers of copper. Production peaked at about 750 000 tons per year in the Eighties, before dropping to 200 000 tons in the Nineties.

In 2002 Anglo-American’s pull-out plunged the Zambian mining sector into crisis. Government subsequently negotiated the existing development agreements, offering generous investment conditions to foreign companies.

“When these development agreements were introduced, government was under pressure to ensure continuous production of the mines and copper prices were very low on the world market. Therefore, government negotiated from a very disadvantaged position,” Mathias Mpande, head of the mining engineering department at the University of Zambia, told the Mail & Guardian.

“We must appreciate the fact that every negotiation is based on current mineral prices and costs. Unfortunately, though, these are very dynamic and hence we can’t have a permanent mining development agreement because prices and costs can fluctuate any time. They [agreements] should be open to renegotiation,” Mpande said.

In October last year the Zambian government called on mining companies to renegotiate existing development agreements, but, said Mines and Mineral Development Minister Kalombo Mwansa, “none of the mines were willing to renegotiate because they never responded to our correspondence, which is why the government decided to go ahead with the new tax regime and put in place a new regulatory framework”.

Government has since announced that a specific mining Bill incorporating the changes in the tax regime will soon be introduced in Parliament for ratification. It is likely to go through because revision of the mineral tax recently became a popular issue with Zambian politicians, the labour movements and businesses.

Analysts, however, said that if the government executes such a move unilaterally it could negatively affect the development agreements with international firms and eventually throw the copper-rich country into turmoil at a time when it should be reaping the booming benefits in commodity prices.

Frederick Bantubonse, general manager of the Zambia Chamber of Mines, told the M&G: “The proposed tax is too severe and it might trigger economic recession, with obvious consequences being unemployment and poverty … following the budget address, the [mining] tax consultants worked out an example and found out that the effective tax rate came to 79%; this might impact badly on the country’s investment perception abroad.”

Zambia’s Attorney General, Mumba Malila, maintained that government is ready to defend its position in the courts should litigation become the option. “The development agreements can’t stop the government from making a law. There is no need for the mines to panic because all the good things in these development agreements will be captured in the new law.”

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