THE GOING RATE

Zambia 2015 | MINING & ENERGY | FOCUS: MINING ROYALTIES

One of its most valuable industries, the mining sector, has recently been engaged in a tax tug of war with the Zambian government.

Zambia's mining industry has been essential to economic development. Figures from the finance ministry show that it currently maintains a 12% share of GDP. The country is Africa's second largest copper producer, and globally, they sit at a respectable eighth place. This is in large part due to vast resources and an inflow of both government and private investment in the sector, and has lead to sustained growth that the country was in dire need of before the industry's boom in the 1990s.

Recently, however, the industry has been rocked with an aggressive taxing scheme that was introduced by the government. In October 2014, the government announced a major overhaul of the industry's taxing structure. The new tax regime mandated that open-pit mines pay upwards of 20% in royalties, an increase from 6%, and underground mines paying 8%, up from 6%. The industry immediately opposed the proposal, claiming it would be detrimental to mining operations; the government responded in kind, pointing to an fall in state revenues as the driving force behind introducing such a mechanism, as a decline in copper prices and a weakening global economy has hampered state revenues.

After months of discussion between the Chamber of Mines and government officials, new taxation levels were introduced in an effort to curb industry resistance without completely abandoning the initial goal of generating additional revenues for the state in its bid to narrow the budget deficit. In April, the government countered by cutting royalties to 9% for both open-pit and underground operations.

In an interview with TBY, Gen. Kingsley Chinkuli, Country Manager of First Quantum Minerals, explained how vital a fixed income regime is to the industry. “We look for a competitive and stable tax regime in every jurisdiction in which we operate. We understand the politics of Zambia and applaud the president's courage in stepping back, but Zambia remains the highest base metal tax jurisdiction in the world, so we would like to see further movement in this area and we are engaging the government constantly through the Chamber of Mines to try and make Zambia a more competitive tax jurisdiction for investors."

In June, the government once again cut mineral royalties for underground mines, reducing the rate to 6%, while the rate for open-pit mines remained at 9%. In addition to these rates, a 30% profit tax was also stipulated for both operations. The new tax regime took effect on July 1st.

The chamber maintains that these are problematic for several reasons that the government has failed to take in to account. The industry says having different royalty rates based on mining methods neglect to consider the inherent challenges that each type of operation faces on a regular basis. Additionally, many in the industry believed that the new law had too many loopholes that the government could take advantage of in order to apply new and more stringent regulations on mining firms. Explains Chinkuli: “To split open-pit and underground mines as if open-pit were low cost and underground high does not accurately describe challenges within the sector."

The discussion surrounding the two-tiered tax system continues, and many industry leaders speculate that the complicated regime will deter investors. The World Bank has also expressed concern over the system, as the group believes it will be extremely difficult to administer; instead, it proposes that a single royalty rate based solely on profitability could be more advantageous for the industry as a whole.

Chinkuli agrees: “We are confident that Zambia will flourish again once it becomes a truly competitive investment jurisdiction through further policy adjustments, not least in the area of the mining tax regime. We will then we will see a return to the level of inflows of foreign direct investment we saw previously in Zambia."