There has been a lot of debate surrounding the windfall tax both based on an informed position and uninformed position. Several countries have introduced certain tax systems meant to capture the “wind as it fell” during the course of operations when their industries were enjoying rising prices with Tanzania being the most recent after introducing a supper tax on Extractive Industries meant to raise revenue to support the newly institutionalised US$ US$ 27.4 development strategy. The application has varied from the taxes being a deductible expense for calculating the profits subject to income tax or a levy on excess profits, the payment of which does not form part of the tax deductible for income tax purposes.
Whatever approach and method to be used, they all have one thing in common; to share the proceeds of industrial activities between the industrialists and the government. The type of tax to levy in order to capture the “wind” generally depends on the capacity of the levying country to administer it and the structure of the tax itself.
It is agreed that whatever method is applied, it should be able to self adjust and leave no injury to either party to the tax but at the end of the day, ensure that government collects an optimum amount of revenue. Further, it is worth highlighting that it is not a single line of tax that ensures a country benefit from its industries but the whole tax system and framework for that particular industry.
It is not the re-introduction of a windfall tax that will not or will ensure Zambia benefits from its mineral wealth but a re-engineering of the whole mining tax system and its administration in order for the country to yield optimum tax revenues from its natural resources. However, cognisant of the fact that having an overhaul of the tax system in Zambia might be a long term measure, it is important that the country still institute key measures that will ensure that there are no revenue leakages and that the revenue collected is optimum or moves towards optimality.
- A run down would review that currently the mining companies are subject to the following taxes among other levies.
- 3% mineral royalty on income (that is, earnings) from copper sales;
- 30% corporate profit tax on profits declared after deducting costs and mineral royalties;
- 15% variable profit tax on all taxable income (that is, profits) earned that exceed 8% of copper sales;
- Deduction of 25% of expenditures on machinery and equipment from taxable income per year once a mining project starts operating;
- 15% income tax on foreign companies and expatriate consultants providing services to locally based mining companies; and
- Mining companies cannot deduct from taxable income on a profitable mining site its capital expenditure on another mining site.
Royalties are typically agreed upon as a percentage of gross or net revenues derived from the use of an asset. In Zambia, the Mineral Royalty is calculated based on the gross value of the minerals produced. At 3%, the mineral royalty tax falls short of international and even the SADC average of 6% and yet Zambia is comfortable at 3%, a figure that was previously adjusted from 0.6%. If the windfall tax is still not appetising, then government should and must adjust the mineral royalty tax towards international and SADC averages. Unless government takes steps to align this levy towards norm, the country will continue to lose revenue that it could otherwise had collected had the royalty tax been brought in line with the international or SADC standards.
Companies and mining firms are not expected to complain because in other countries were they are present and operating, they are subject to such kind of rates. Therefore, it should be recommended that government either re-introduces the windfall tax or consider increasing the mineral loyalty from 3% to close to 6% which would almost have the same effect with the scraped windfall tax.
Currently Zambia is projected to produce over 900,000 metric tons of copper; with an estimate copper price of U$9,000 per metric tonne at the moment, that would mean a gross of U$8,100,000,000 from which the government would then collect U$243,000,000 while the application of the international average on the other hand would yield U$486,000,000 or ZMK 2,332,800,000,000 which is about 11 percent of the 2011 budget. This will certainly be a relief to the hard taxed Zambian.
For long, the Zambians have been complaining of being over taxed. On average, Pay As You Earn has been contributing almost twice what the mines are contributing to the countries revenues. This is on the backdrop of a 15% income tax charged on foreign companies and expatriate consultants providing services to locally based mining companies. A lot of mining firms have expatriates on their gates because it is cheaper to tax an expatriate than a local who on average pays up to 25% tax on income and still gets to be casualised. Therefore, government should re-align this tax line and adjust the figure from 15% to around 25%+ for the expatriates. Additionally, the labour laws have to be implemented to the full spirit of their intentions. When and only when Zambians start earning decent salaries in these mines will Zambia start to benefit more from their PAYE which would still be an indirect contribution from the mines.
The Zambia Revenue Authority (ZRA) is on record admitting that it does not have the capacity to properly tax the mines nor monitor their activities. The recent mine audits have reviewed glaring tax evasion and avoidance efforts by the mining companies. This is just a tip of the iceberg and one wonders how much has been siphoned out of this country in one way or the other. Tax evasion is a problem world over and investors do not come for charity but to make money and hence will use any means (ethical or otherwise) to get more out of their investments. Inflated invoices, inflated costs of operations, financing or part of owners capital that takes the form of loans on the balance sheets e.t.c. These are just but subtle ways in which ZRA has lost revenue from our extractive industries.
Lastly, Zambia seems to lack a strategy on how the mining revenues are going to develop this country now and benefit future generations. It has been a “hand to mouth” and calls to use the mining revenues to develop other sectors of the economy seem to have fallen on deaf ears. Libya, Botswana and many other countries and now Zimbabwe are just but an example of how countries with mineral wealth intend to develop their country and provide future generation with a stream of revenues way after the exhaustive resources have been depleted. Their mineral wealth has found way into infrastructure development and the creations of Sovereign Wealth Fund with Libya being a classical example. Zamtel of today is owned by Libya Africa Portfolio (LAP Green) a fund created in 2006 with U$5 billion and now boasts of over U$70 billion in assets. These are funds from oil that have been wisely invested and future Libyans are assured of benefiting from the proceeds of their oil through such vehicles. To ask what has Zambia done, the possible answer could be, it has further let go its little holdings it had on the mines and wished Zimbabwe and South Africa “good luck” on their bid to increase their holdings to their mines.