Presentation to Economic Association of Zambia Forum on Mining tax in Zambia
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Presentation to Economic Association of Zambia Forum on Mining tax in Zambia 2 December 2009 By Frederick Bantubonse General Manager PowerPoint PPT Presentation


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Presentation to Economic Association of Zambia Forum on Mining tax in Zambia 2 December 2009 By Frederick Bantubonse General Manager. Agenda/Content. Brief history of mining sector investment in Zambia The Life Cycle Assessment Total Tax Contribution Non measurable benefits .

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Presentation to Economic Association of Zambia Forum on Mining tax in Zambia 2 December 2009 By Frederick Bantubonse General Manager

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Presentation to economic association of zambia forum on mining tax in zambia 2 december 2009 by frederick bantubonse gen

Presentation to Economic Association of Zambia Forum on Mining tax in Zambia

2 December 2009

By

Frederick Bantubonse

General Manager


Agenda content

Agenda/Content

  • Brief history of mining sector investment in Zambia

  • The Life Cycle Assessment

  • Total Tax Contribution

  • Non measurable benefits


Brief history

Brief History

  • Phase 1 – 1960s and 1970s

    • High international commodity prices

    • Newly independent governments

    • Nationalisation of mines

    • Surplus revenues from copper


Phase 2 zambia 1972 1990s

Phase 2 – Zambia 1972-1990s

Nationalised Mine Assets

  • Little or no investment in mining sector

  • Existing mines run down requiring significant investment

  • Insufficient national reserves for investment


Phase 3 post privatisation 2000 to 2008

Phase 3 –Post Privatisation 2000 to 2008

Privatisation

  • Attracted FDI now over US$ 4 billion by 2008

  • Plant rehabilitation & new processing facilities and mines.

  • Production up from 257,000mt in 2000 to over 500,000mt in 2008.

    Investment

  • International metal prices start to increase - rose by 269% on average at its peak

  • Increased demand from China and India

  • All new investments in Zambia by “junior” mines

  • “Junior” mines perceived to be more risky by institutional investors – therefore expect higher returns

  • Financing for junior mines more difficult to obtain


Zambia fdi 1994 2007

Zambia FDI- 1994- 2007

FDI inflows to Zambia exhibited a fluctuating but general increase and favourable tread over more than a decade. FDI, which stood at less than USD100m in 1994, reached a significant USD 800 million in 2007


Presentation to economic association of zambia forum on mining tax in zambia 2 december 2009 by frederick bantubonse gen

2008

  • 2008 GRZ introduces new tax regime and mining law.

    • Exploration declined

    • Projects put on hold

    • Metal price on international market collapses to below US$ 3000/tn


2008 continued

2008- continued

  • Copper prices slump in September 2008 from a all time high of US $8,800 to below US $3,000

  • Risk of financial support being withdrawn

  • All mining companies face uncertain future

  • Particularly difficult times for mining companies committed to significant capital expenditure

  • High cost mines went into care and maintenance


Current position

Current position

  • Copper prices rebound

  • However long term outlook still uncertain:

    • Insufficient investor confidence

    • Insufficient liquidity in capital market

    • Financial houses risk averse

    • Borrowing still difficult and expensive

    • Uncertain political outlook


Life cycle assessment

Life cycle assessment

  • On average it takes between 15 to 25 years for a mine to establish itself and realise regular returns

  • For e.g. Lumwana Mining, Ore body discovered around 1962

  • Took 8 years to develop the mine

    • Define ore body, produce bankable feasibility, financing, construction and finally operations

    • All this time the company was incurring costs with no revenue


Life cycle assessment1

Life cycle assessment

  • Early years predominantly characterised by exploration activities

  • Significant investment which may or may not be realised

  • This is followed by bankable feasibility study

  • Organising and raising finance

  • Significant upfront investment – to build new mines

  • Modernisation and rehabilitation

  • Depletion and closure (few years to 100 years)


Presentation to economic association of zambia forum on mining tax in zambia 2 december 2009 by frederick bantubonse gen

The mine Cycle

Production

1

Mine Exploration - 7-10 years

Mine Development- 5-10 years

2

Mine Operation 2-20 years

3

Mine Closure 2-10 years

4

Time

7-10yrs

5yrs -10yrs

2yrs -20yrs

2yrs -10yrs

1

2

3

4


Life cycle assessment development phase

Life cycle assessment –development phase

  • Significant capital expenditure required not just on mining operations but on:

    • Infrastructure development

    • Support to local industry

    • Employment and training

    • Community development projects

      All this with significant challenges:

    • High cost of doing business

    • Poor transport & telecommunications network


Long term approach essential

LONG TERM APPROACH ESSENTIAL

  • It takes time before a country can realise tax revenues from mining investment

  • Empirical studies show that on average it will take at least 15 years after commencement of operations before a country will reap reasonable tax revenues

  • The major benefits accrue from investment and only a small amount is realised from tax revenues


Total tax contribution

Total Tax Contribution

When considering the taxes received by a State there is need to take account of all contributions

This should include:

  • Obvious and easily identifiable and measurable taxes;

  • Expenses of business that are not allowed relief (hidden taxes);

  • Expenditure incurred on infrastructure and social and community welfare projects for the mining community


Tax statistics

Tax statistics

  • Current focus in Zambia when assessing mining contributions is on:

    - Corporate tax;

    - Variable profits tax;

    - Mineral royalties;

    - Export levy.


However in reality need to take a c of

However in reality need to take a/c of:

- PAYE

- VAT

- Customs duties

- Fuel levy

- Duty on diesel

- Property taxes


Paye 2004 2006

PAYE 2004-2006

Source: Zambia Development Agency


Paye 2004 20061

PAYE 2004-2006

  • The mining sector clearly has the greatest impact, in value terms. This is not surprising, given both the magnitude of investment and salaries and employment levels in the sector.

Source: Zambia Development Agency


Vat 2004 2006

VAT 2004-2006

Source: Zambia Development Agency

%age of VAT contribution decreases temporarily because of significant capital investment


Vat 2004 20061

VAT 2004-2006

VAT contribution by sector

Source: Zambia Development Agency


Corporate and variable profits tax

Corporate and variable profits tax

  • Given that most mining companies have had significant investment costs there will be little contribution to corporate and variable taxes despite the increase in prices because:

    - of accelerated capital expenditure;

    - increased operational costs in earlier years;

    - increased finance costs in earlier years;

    - significant carry forward tax losses (2000 to 2004)

  • The above coupled with boom bust cycle since the 1960s means that there has been insufficient time for mining companies to establish and realise significant AND consistent returns


Total tax contribution1

Total tax contribution

Investment in non mining operations:

  • Infrastructure

  • Mine hospitals

  • Schools

  • Health care programmes – e.g. malaria control, HIV, etc

  • Training academy

  • Community development projects

  • Township development


Major benefits of attracting mining investments

Major benefits of attracting mining investments

  • Attracts more FDI in terms of suppliers and subcontractors

  • Increased FDI brings about – increase in employment, skills base, increased capital investment, increased technology

  • Money into the economy

  • Increase in foreign exchange reserves

  • Strengthens Kwacha – reduces import costs

  • Corporate social responsibility programmes


Strategy and policy important

Strategy and policy important

  • The benefits of FDI can multiply and accelerate growth and development providing appropriate environment and framework is created by government


Presentation to economic association of zambia forum on mining tax in zambia 2 december 2009 by frederick bantubonse gen

Exports-2004 to 2006

Source: Zambia Development Agency


Presentation to economic association of zambia forum on mining tax in zambia 2 december 2009 by frederick bantubonse gen

Exports- 2004 to 2006

Source: Zambia Development Agency


Employment generation new jobs

Employment Generation (new jobs)

Source: Zambia Development Agency


Employment generation new jobs1

Employment Generation (new jobs)

Source: Zambia Development Agency


Thank you

Thank You


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