STATE OF THE INDUSTRY

Zambia 2014 | EXECUTIVE GUIDE | REVIEW: MINING ENVIRONMENT

Benson Mubanga, the Senior Tax Manager at KPMG Zambia Limited, describes his analysis of the state of the mining sector in Zambia.

The state of the Zambian mining industry is good, with strong prospects over the next 5 to 10 years. There are three factors that lead me to this conclusion: resource availability, investment in mining, and demand for copper.

RESOURCE AVAILABILITY

According to the World Bank, Zambia has the largest known reserves of copper in Africa, 6% of the global resource. Current exploration activities in the Northwestern province are likely to add to that. Zambia is also quite rich in other minerals and precious stones. For example, 20% of the world's output of high-grade emeralds are produced in Zambia, at Kagem Mine, which is operated by Gemfields.

INVESTMENT

Copper production peaked in the 1970s at 700,000 tons and then gradually declined to 255,000 tons by 1998 as a result of depressed prices and under investment in the then state-owned industry. Rising commodity prices and an estimated $8 billion in investment between 2002 and 2012 re-ignited the industry and in 2013 production is projected to reach 808,000 tons.

The Economist Intelligence Unit (EIU) has forecast economic growth of 8.1% between 2014 and 2016, “as copper production soars on the back of the completion of major projects at the Kansanshi, Lumwana, and Konkola mines and the new Trident mine, operated by Canada's First Quantum Minerals."

DEMAND

The outlook for copper is greatly focused on China. China's electricity generation and distribution industry accounts for 45% of copper consumption. China currently consumes half of Hong Kong's power and a fifth of the US value. As a result of that, China's demand for power and copper are expected to continue to grow in the medium to long term.

LEGISLATION

MINING LICENSES

The issuance of mining licenses is administered under The Mines and Minerals Development Act (2008) by the Ministry of Mines and Minerals Development. The major mining licenses issued are for prospecting (2 years renewable), retention, large-scale mining (25 years), and gemstone mining (10 years).

TRANSFER OF MINING RIGHTS

Any transfer of a mining right or interest is now subject to property transfer tax of 10% of the transfer value beginning January 2013. The Property Transfer Tax Act is administered by the Zambia Revenue Authority.

ENVIRONMENTAL REGULATION

To ensure environmental sustainability, The Zambia Environmental Management Agency (ZEMA) manages the sustainable use of natural resources under the Environmental Management Act of 2011. Before any mining activity can be undertaken, ZEMA carries out an Environmental Impact Assessment (EIA) study. A number of pieces of legislation are taken into account in an EIA study and these include: The Mines and Minerals Development Act (2008), Zambia Wildlife Act (1998), Forests Act (1999), Water Resources Management Act (2011), and the Petroleum (Exploration and Production) Act (2008).

MINING TAX REGIME

The main taxing Acts that affect mining in Zambia are:

· The Income Tax Act

· The Value Added Tax Act

· The Customs & Excise Act

· The Mines & Minerals Development Act

KEY HIGHLIGHTS OF THE TAX LEGISLATION ARE AS FOLLOWS:

It is proposed to abolish corporate income tax on income from mining starting from January 2015. Instead, it is proposed that mineral royalty tax be the final tax at 8% for underground mining and 20% for open cast mining. Mining of industrial metals such as gravel, sand and clay not included in the proposed changes. A 0% withholding tax on dividends payouts and 20% on management fees paid to non-residents. Thin capitalization threshold of 3:1. Input VAT claims according to VAT Rule 18. Mineral exports are zero-rated. Proof of export required. Duty rebates on imports of selected mining equipment but no VAT deferment. A 10% export duty on unprocessed copper and cobalt concentrates. A 6% Mineral Royalty tax on industrial minerals.

FUTURE OUTLOOK

On September 1, 2014, Rule 18 of the VAT General Rules (1997) required exporters to provide proof of export from the importing country and proof that the export proceeds were deposited into the exporter's account in Zambia was amended to remove these two requirements. The amendment was, however, reinstated and is still in effect. Exports are zero-rated, meaning exporters can claim input VAT. The government has withheld $600 million in input VAT refunds for mining companies because they have not met the requirements of rule 18.

PROPOSED MAJOR SHIFT IN MINING TAX REGIME - 2015

The Minister of Finance and National Planning announced a proposed major shift in the mining tax regime to abolish corporate income tax for income from mining operations. The proposal is to charge mineral royalty tax at 8% for underground mining and 20% for open cast mining and make it a final tax.