By BRIAN HATYOKA
SINCE Zambia’s independence in 1964, mining has been a major economic sector in the country. Mining makes a significant contribution to Government revenue mainly through mining royalties and Value Added Tax (VAT). The sector has provided a traditional base for foreign exchange earnings and continues to be the major contributor to export receipts.
Despite Zambia’s long mining history and large mineral resource endowment, the country still faces a number of challenges in the sector. These include low levels of local participation and ownership, lack of transparency and accountability as well as inconsistent fiscal policy. Players in the mining sector have lately been complaining of an unfavourable tax regime.
The numerous changes to the mining tax regime in recent years also impacted negatively on investor confidence. Such a status quo, if not tackled, might prompt mining investors to look at alternative investments in other jurisdictions.
Currently, all eyes are on President Hakainde Hichilema and the New Dawn administration to provide better ways of sustaining and attracting investments in the mining sector.
PRESIDENT Hichilema said his Government will increase the annual copper production from about 800,000 tonnes currently to about 2 million tonnes in the next few years.
President Hichilema has a strong background from the corporate world and so the private sector, particularly mining, is positive that President Hichilema’s administration will revive the mining sector.
Specifically, the long awaited first-ever 2022 national Budget under President Hichilema and the United Party for National Development (UPND) administration is expected to address vexing issues in the mining sector.
President Hichilema recently said his Government would create a better operating environment for mining.
In his maiden address to the National Assembly, President Hichilema said his administration would review the mining tax policy framework to ensure predictable and sustained investment in the mining sector.
The Head of State indicated that the action would be done in consultation with stakeholders.
“We will ensure that our people receive their fair share from our mineral wealth. Further, to enhance operations in the sector, Government will review the existing institutional framework. With these measures in place and increased participation of our people, the mining sector is poised to contribute more towards restoring economic growth and improving the livelihoods for our people,” President Hichilema said.
He said his administration is determined to ensure increased local participation and ownership in the sector, more jobs being created, as well as increased investments in the mining sector.
The New Dawn Government promised to offer appropriate incentives in the sector and position Zambia to be a leading manufacturer of mineral value-added products such as electrical cables and copper-based accessories to meet the growing demand of such products.
During his historic phone-in radio interview on Radio Phoenix last week, President Hichilema assured the nation that mining policies and taxes would be attractive to both local and foreign investors.
He said his administration would increase the annual production of copper from about 800,000 tonnes currently to about 2 million tonnes.
It is generally agreed that the Zambian mining industry needs an improved, and thereafter a stabilised mining tax regime to take advantage of strong mineral demand and to attract serious investment into new and existing mines.
The Zambia Chamber of Mines, an association for mining and allied companies, both large and small, has come up with 2022 national Budget proposals for the mining sector.
The proposals also include recommendations from the April 29-30, 2021 National Mining Indaba to the ministries of Finance and Mines as well as the Zambia Revenue Authority (ZRA).
The chamber’s top priority request and key recommendation is the full removal of the non- deductibility of mineral royalty taxes.
This proposal would put Zambia back on the list, and signal to investors that Zambia is open for business.
It has been argued that when comparing the Zambian mining tax regime to that of other copper mining
jurisdictions, one element of the regime that stands out is the Mineral Royalty Tax (MRT) regime.
While many other comparable jurisdictions do have royalty regimes, the submission is that there are two elements of the Zambian mineral royalty tax regime which are particularly unfavourable and, therefore, uncompetitive.
The two are non- deductibility of the mineral royalty tax and the stepped scale which applies each time a rate threshold is crossed.
‘To put it simply, non- deductibility amounts to double taxation and is a policy unique to Zambia. No other jurisdictions which have a mineral royalty tax treat this as non-deductible for corporation tax purposes. This one measure alone dramatically increases the effective tax rate of mining companies and is a deterrent to investment,’ the chamber said in a statement.
If the concern is that few mining companies in Zambia are profitable, then the chamber is questioning why Government had to introduce a provision that specifically penalises the profitable.
It submitted that the recent increase in the copper price does not alter the detrimental impact of the non-deductibility of mineral royalty taxes on the industry.
‘As the copper price increases, so too does the royalty rate. This allows the Government to benefit from increased prices in the form of increased royalty revenue, and in addition further company income tax revenues are collected on any increased profitability,’ the chamber said.
There is also a further or double tax on the increased mineral royalty amount due to the non-deductible element.
An increase in both the rate of mineral royalties and the non- deductibility costs leads to a disproportionate increase in the effective tax rate due to the double taxation element.
This is a further deterrent to investors, which is the opposite of what should be happening when copper prices are increasing.
‘It has been suggested that something short of full deductibility could be a compromise position. We would respectfully disagree. The practice of double taxation violates the principle of fairness; lessening the degree of hardship does not make right something that is inherently wrong,’ the Chamber submitted.
Further, the Chamber recommended that the mineral royalty price thresholds should be structured as a progressive tax system or sliding scale – similar to Pay As You Earn (PAYE), where only the additional price above the threshold is taxed at the level applicable to the threshold.
‘This allows Government to benefit from increased rates when prices increase, however increases are more gradual and therefore don’t disproportionally penalise mines at prices just above the rate thresholds,’ the chamber said.
In addition to the main proposal, being the recommended changes to the mineral royalty taxes regime, the chamber has proposed that Government should allow taxpayers to determine the timing of wear and tear allowance claims.
Other proposals are to increase loss carry forward from 10 years to 20 years and to remove the interest limitation in the first five years of a new investment.
If implemented, the said proposals could alleviate this hardship on mining companies and increase competitiveness.
On import duties, the chamber recommended that mining rebates or import duties should revert to the 2018 rules which were pre-removal of rebates and increase in 0/5 per cent rates to 10 per cent.
This would encourage spending on sustaining capital and equipment for new investments or expansions.
On export duties, the chamber recommended that the export duty on gemstones should be repealed rather than being waived through a Statutory Instrument (SI).
In addition, it was also recommended that the export duty on precious metals should similarly be removed to safeguard the growth of small-scale miners and guard against illegal trade.
The chamber also noted that the six per cent mineral royalty greatly disadvantages Zambian gemstones on the global market with higher quality stones from Columbia and Brazil becoming that much cheaper and ensuring that buyers prefer to participate in auctions there.
‘It is recommended that this rate is reduced to three per cent to increase competitiveness,’ the chamber said. It further made recommendations for the improvement of the small- scale mining regime.
These include the creation of a department for small scale miners with its own director and a stand-alone mining policy to enable small scale miners to access funding, equipment and capitalisation.
This will enable small scale miners to produce and pay tax. Other proposals are that mineral royalties should be reduced from six per cent to three per cent for small scale miners while mineral royalties for limestones and industrial minerals should be based on tonnage produced.
‘These proposed changes must be implemented without delay, if Zambia is to capitalise on the favourable outlook for copper and other minerals,” the chamber said.
It is only hoped that the New Dawn Government will consider the various proposals as it crafts the 2022 national Budget.