Zambia needs a more competitive mining tax regime to entice new and existing investors to invest billions of dollars in the mining industry and boost flagging production, says Zambia Chamber of Mines (ZCM) president Nathan Chishimba.
“Zambia Finance Minister Felix Mutati’s Budget Speech, last month, aimed to restore financial stability to the Zambian economy and lay the foundations for long-term economic growth, which depends on investment,” he emphasises.
In a press statement publicising the release of a new report by the chamber, entitled ‘Taxation and Mining Investment in Zambia’, Chishimba says, despite recent welcome changes to the Mineral Royalty Tax (MRT), Zambia’s overall effective mining tax rate remains among the highest in the world.
“How is it that we have ceded our long-held position as Africa’s leading copper producer to the Democratic Republic of Congo (DRC). A key part of the answer has to be investment incentives and policy stability. The DRC’s tax regime is not only more investor friendly than Zambia’s, but has also been much more stable. This has encouraged long-term investment, which has boosted production,” he contends.
Further, Chishimba comments that the importance of new investment in Zambia is all the more timely, as the World Bank has projected that growth in copper production will start to slow from 2019 onwards.
He remarks that, along with a decline in production, there will be a decline in government revenue, mining industry jobs and foreign exchange. “However, production levels can increase if there is a new wave of investment,” Chishimba points out.
The ZCM’s report quotes research showing that mining investment in Zambia benefits not just the mining industry but also the wider economy, through what is known as the ‘multiplier effect’. Chishimba explains that this means mines procure supplies from local businesses, and employees spend their wages in the economy, stimulating more business creation and more employment.
Moreover, he points out that a recent World Bank study on Canadian base metals producer First Quantum Minerals’ Kansanshi mine, in the north-western province town of Solwezi found that for every direct employment opportunity created at the mine, a further five were created in the wider economy.
The report also shows how levels of mining investment and national economic growth are “inextricably linked”. From 1997, investors in the newly reprivatised Zambian mining industry collectively invested more than $12-billion in modernisation, expansion and new greenfield ventures.
Additionally, the report highlights that copper production and national economic growth recovered in 2000 and accelerated in the years thereafter. “Importantly, this growth started before the copper price began to recover in 2004, proving it was the surge in investment which turned around the economic fortunes of the country,” Chishimba notes.
The report goes on to cover the challenges of designing a mining tax regime which encourages continued investment, or at least does not discourage it. The report considers the various phases that a typical mine goes through, from exploration and development to production and closure and the incentives necessary to encourage the development of resources through the various stages.
For example, during the exploration phase, when there is no income, the tax regime should ideally allow mines to defer losses to later years and write them off against future profitability. This incentivises mines to continue beyond exploration to actual mine construction.
“When taking business decisions, mines will respond to the nature of the tax treatment in place,” the report says.
A range of industry observers have welcomed the release of the ZCM report. It is free to the public and is available in hard copy, booklet form from the Lusaka office of the ZCM. It can also be accessed in electronic form on the chamber’s educational website: www.miningforzambia.com.
The observers describe it as a “good initiative” which will help to raise awareness of a subject that is of critical importance to the Zambian economy.
Professional services firm KPMG tax partner Mike Phiri says the report should help lead to a better understanding of the link between taxation and mining investment, not just at government and policy level, but also among various stakeholders.
Zambia Private Sector Development Association chairperson Yusuf Dodia remarks that it is a good document which was well constructed and kept short enough for readers to embrace the key messages. He also believes that it is a good mechanism to initiate dialogue on the issue of taxation and the development of the mining sector in Zambia.
On World Bank projections cited in the booklet showing that growth in Zambia’s copper production will start to slow from 2019 onwards, Dodia says that this may be a key departure point, which should compel the government to consider mechanisms for diversification away from copper mining towards other sectors, such as tourism, agriculture, manufacturing and services.
Extractive Industries Transparency Initiative Zambia CE Siforiano Banda comments that there is not enough knowledge among industry players. “There is a need for government and industry stakeholders to always dialogue on matters of policy. If possible, the Ministry of Mines should be giving weekly appraisals to fellow Cabinet Ministers on developments in the sector, so that they are kept abreast and can assist in redirecting the future of the country,” he states.
Mineworkers Union of Zambia general secretary Joseph Chewe states that the ZCM has come up with “another great publication” on taxation and mining investment in Zambia.
“The first one, on the MRT, was simple and easy to understand. It was good of the chamber to release such informative and educative booklets, as they help to close knowledge gaps and inform the Zambian public,” he enthuses.
Chewe adds that there is a need for such information-sharing mechanisms to continue so that government and policymakers arrive at policymaking and tax regimes from a “well-informed” background.
Msoni Mtwalo, who is deputy national coordinator for Publish What You Pay, an international body that promotes transparency in the extractive sector, says that the booklet is “quite useful” as it gives an overview of the mining sector from the industry’s perspective.
However, he remarks that it will likely prove less useful to people outside the sector, as it does not break down the implication of the various mining taxes and does not state the basis on which the royalties cited are calculated.
Nonetheless, on the question of whether there was sufficient understanding of the topic at government and policy level, Mtwalo says there “definitely is not”, as he points out that, if there were, Zambia would not have had six different tax regimes over the past eight years!