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ZAMBIA: Debate Over Windfall Tax

Kelvin Kachingwe

LUSAKA, Nov 10 2010 (IPS) - The Zambian government has been accused of embracing poverty as the debate over a windfall tax on the mining industry heats up.

Mining truck at the Nchanga mine. Credit: Blue Salo/Wikicommons

Mining truck at the Nchanga mine. Credit: Blue Salo/Wikicommons

In February 2008, at the height of a worldwide boom in commodity prices which began in 2003, government introduced a windfall tax. Copper was then fetching around $7,000 per tonne on the London Metal Exchange (LME).

“These measures are competitive, reasonable and balanced,” said Ng’andu Magande, finance minister at the time.

“With this [new tax], the government will be able to improve education and health services and make investments that will create more jobs in other sectors of the economy and improve livelihoods of Zambian citizens.”

Then the global economic recession hit, and the price of copper tumbled along with falling demand.

According to the Bank of Zambia, the country’s revenue earnings from copper sales in 2009 fell to $2.9 billion from $3.6 billion the previous year despite increased output. The decline in earnings was a direct result of lower prices for the metal, which plumbed a low of $3,000 per tonne in the first quarter of 2009.

Mines such as the Luanshya Copper Mines (LCM) closed down, putting thousands out of work. Mopani Copper Mines (MCM) threatened to put their Nkana and Mufulira mines in the Copperbelt province on care and maintenance.

Government scrapped the windfall tax just a year after its introduction.

But since then, copper prices have rebounded, fetching as much as $8,000 per tonne on the LME. Copper production in the country is this year expected to exceed 720,000 metric tonnes, a level of production that was last seen in 1973. This places the country within reach of the medium-term target of one million metric tonnes per annum.

But despite rebounding prices, government has opted for a different formula.

“On the call for the re-introduction of windfall tax, the government position is that this will not be done as the variable profit is already in place. The variable profit tax is an extra or windfall tax on mining profits,” Finance and National Planning Minister Situmbeko Musokotwane says.

Variable tax is calculated as an extra 15 percent that companies pay on profits that exceed eight percent of their overall income. This is in addition to the standard 30 percent corporate tax.

Frederick Bantubonse, general manager of the Chamber of Mines in Zambia (CMZ), says if the windfall tax on the mines is brought back, it would make Zambia an expensive destination for mining activities in the region.

But Nsama Chikwankwa, a Lusaka-based development analyst, says refusing to collect windfall tax is embracing poverty.

“Government’s position on windfall tax shows its lack of seriousness about mobilising resources which can help improve schools, build roads, improve mother to child health, and even provide the money to help meet the challenge of the so-called bumper maize harvest.”

Presenting the 2011 national budget to Parliament on Oct. 8, Minister Situmbeko did not disclose actual figures, but said he was pleased to report that tax collections from mining companies had improved this year.

“With the current high copper prices and production, I expect even higher tax payments from mining companies.”

But Matthias Mpande, who lectures at the School of Mines at the University of Zambia is critical of the variable tax.

“The mines are making huge profits, but disguise the revenue in the consolidated financial results, and it is difficult for the Zambia Revenue Authority (ZRA) to calculate the actual taxes,” said Mpande, who served as the Minister of Mines in former president Frederick Chiluba’s administration.

“We’re pressing for the re-introduction of windfall taxes because they are easier to collect – based on international minerals prices – than the variable profit taxes.”

He says the mining sector’s contribution towards the treasury in Zambia is still very low as there is no voluntary tax compliance by the mines.

Member of Parliament Chishimba Kambwili, whose Roan constituency on the Copperbelt province hosts the Chinese-owned Non-Ferrous Metals Mining Company (NFCA), says government should be able to collect more than $400 million annually through windfall taxes if introduced.

A report released last year by some non-governmental organisations with an interest in an equitable trade system that enables development, was critical of the existing legislation in most African countries that favour low royalty taxes which combines with mining contracts, called development agreements in Zambia.

In a report titled “Breaking the Curse: How Transparent Taxation and Fair Taxes can Turn Africa’s Mineral Wealth into Development,” by the Tax Justice Network for Africa (TJN-A), ActionAid, Southern Africa Resource Watch, Third World Network Africa and Christian Aid, they say questionable accounting practices by multinational companies that conceal the true value of their operations and a mixture of secrecy and flawed laws passed by parliaments in Africa deprive resource-rich countries of revenue.

The Zambia Chamber of Commerce and Industry (ZACCI) also supports a windfall tax for the mining industry, but says the tax should be based on profits and not revenue.

Hanson Sindowe, the ZACCI president, says costs can be manipulated to reflect low profits whereas revenues cannot be similarly manipulated.

“ZACCI therefore supports the windfall tax to ensure that the country benefits adequately from its natural resources, government needs a sizeable level of revenue to run and also invest in the social sectors of the country,” he says.

Sindowe says a review of revenue streams in the national budget indicates that currently, income tax by way of Pay As You Earn (PAYE) and company tax is the highest contributor to Government revenue, placing a heavy burden on a small working class and a few companies.

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