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MINISTRY OF FINANCE . MINING TAXATION AND ITS CHALLENGES IN ZAMBIA. by Jimmy M. Sakala. Zambia Mining Sector. The Mining sector remains a significant part of the Zambian economy.

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mining taxation and its challenges in zambia

MINISTRY OF FINANCE

MINING TAXATION AND ITS CHALLENGES IN ZAMBIA

by Jimmy M. Sakala

Ministry of Finance-Budget Office

zambia mining sector
Zambia Mining Sector
  • The Mining sector remains a significant part of the Zambian economy.
  • Zambia is a major producer of copper (7th largest producer in 2012), cobalt (9thlargest producer in 2012) and produces a variety of other mineral products, primarily gold, nickel and gemstone

Ministry of Finance-Budget Office

zambia export of mineral products million of us
Zambia Export of Mineral Products(Million of US$)

Mineral Products 2010 2011 2012

  • Copper 5,767.90 6,659 6,294.50
  • Cobalt 303.8 256 216.5
  • Gold - 81 94.3
  • Nickel - 44.9 –
  • Gemstones 49.8 35.8 232.3
  • Cement and lime 15.6 19 26.6
  • Total 6,137.10 7,096.4 6,864.20

As % Total exports 83.70% 82.70% 73.30%

Ministry of Finance-Budget Office

fiscal regime for the mining sector
Fiscal regime for the Mining Sector
  • In the mid-1990s the Mining sector was privatised when copper prices were quite low
  • The states owned mining company (ZCCM) was dismantled and negotiated for sale at low prices which at the time looked attractive by international market standards
  • In order to guarantee fiscal stability, Development Agreements were negotiated with reference to the provisions of the law in force at the time

Ministry of Finance-Budget Office

role of mining sector in the economy
Role of Mining sector in the Economy
  • Between 2006 and 2011 the contribution of the sector to GDP has averaged about 3.8% while mining tax revenue as a ratio to GDP was recorded at about 3 % in 2011
  • The sector is a significant contributor to employment and with new mines opening and increased investment, the sector will employ more people thereby contributing to tax revenue
  • Development of other industries is dependent on the sector i.e suppliers to the mining sector
  • Gains and resources from the mining sector contributed to diversification of the economy

Ministry of Finance-Budget Office

government s mining policy
Government’s Mining Policy
  • Government policy is to make sure that gains from the mining sector benefits the people of Zambia and deliver appropriate returns for the investors with a win-win stance
  • Maintaining a healthy business environment is essential for the long-term sustainability of the sector and the economy as a whole

Ministry of Finance-Budget Office

changes to fiscal regime for the mining sector
Changes to Fiscal Regime for the Mining Sector

Over the last 15 years, Zambia has implemented three (3) mining tax regimes summarized as follows:

  • Development Agreements regime
  • 2007 - 2008 Tax Regime
  • Post 2009 Tax Regime/Current Tax Regime

Ministry of Finance-Budget Office

development agreements regime
Development Agreements Regime
  • When former ZCCM Mines were privatized, mining companied Development Agreements were signed with investors
  • One of the objectives was to promote reinvestment and greenfield developments at the time cooper prices were quite low
  • The agreements provided for different fiscal terms for different mines
  • Development Agreements were needed to ensure stability in the tax regime

Ministry of Finance-Budget Office

development agreements
Development Agreements

The fiscal changes generally included the following :

  • Mineral royalty reduced from 2% to 0.6%
  • Corporate Income Tax reduced from 35% to 25%
  • Period for carry forward of losses increased from 5 year to 10 years
  • Exemption of payment of customs duty on consumable
  • Exemption excise duty on electricity
  • Withholding tax to associated parties reduced from 15% to 0%
  • The above regime was later changed twice as explained in next slides

Ministry of Finance-Budget Office

challenges in the mining sector
Challenges in the Mining Sector
  • There was no mechanisms in place to monitor mineral production and contents, government is losing out as precious metals, e.g. silver, gold, palladium exported in anodes, slime & concentrates are not properly accounted for.
  • Legislation has since been in acted to enhance valuation of weights and mineral content of all mineral exports

Ministry of Finance-Budget Office

challenges
Challenges
  • Most mining companies are still in loss positions, for tax purposes. Indications are that this trend will not change before 2016.
  • Inadequate capacity at Mines department and Geological survey department with specialised skills such as engineers, metallurgist to monitor production levels mainly due employment and low retention rate.

Ministry of Finance-Budget Office

challenges1
Challenges
  • Despite consistent and relatively high real GDP growth rates averaging more than 5% in recent years, the share of tax revenue from mining sector to GDP remain low at about 4%.
  • Increasing the mining tax rate may not be feasible as, there may not be much space for such increase as the current rate is already high by international standards.

Ministry of Finance-Budget Office

challenges2
Challenges
  • Lack of administrative capacity to capture Multinational corporation transactions for tax purposes.
  • This challenge is currently been addressed through Technical capacity enhancement at ZRA with the assistance of cooperating partners.

Ministry of Finance-Budget Office

benefiting from natural resources t axation
Benefiting from natural resources Taxation
  • Development agreements in the mining sector were cancelled and a new mining tax regime introduced in 2008, Company tax at 30% and Variable Profit Tax up to 15%
  • Recent changes to mining tax regime under the PF Government includes increase of mineral royalty rate to 6% from 3% and subjecting export of mineral ores, concentrates and semi-processed metals to 10% export duty
  • The above measures and increase in mineral production have contributed to increase in mining revenue to the Treasury

Ministry of Finance-Budget Office

main features of current tax regime
Main Features of Current Tax Regime
  • Corporate income tax - 30 %;
  • Variable profit tax – 0% to 15% on profits above 8 percent of gross revenues.
  • Mineral royalty – 6% of norm or gross value
  • Mineral Export Levy-10% on unprocessed copper
  • Loss carry forward – 10 years for companies carrying on mining operations
  • Property Transfer Tax -10% of the realized value of the mining right

Ministry of Finance-Budget Office

tax regime
Tax Regime
  • Withholding tax -0% dividends, 15% interest, 20% management and consultant fees, 15% construction and haulage
  • Capital depreciation allowance
  • 100 % for prospecting and exploration, and smelters, refineries owned by mining companies
  • 25% for other capital expenditure
  • Hedging activity- Treated as separate business activity

Ministry of Finance-Budget Office

mining sector policy direction
Mining Sector Policy direction

Enhanced transparency and broad participation in the management of revenues from mineral resources will deliver:

  • Improved governance
  • Increased equitable and pro-poor expenditure
  • Reduced risk of potential of internal conflict or misunderstanding
  • Improved domestic resource mobilization

Ministry of Finance-Budget Office

policy direction
Policy direction
  • Efforts have to be made to ensure that an optimal level of taxation is achieved.
  • Not only should the net present value of tax revenues be maximised but also social and economic benefits flowing from the mineral resources must be maximized over a long term basis
  • For any investment to yield maximum returns, Zambia needs a conducive environment in which business can thrive
  • It is critical to ensure that simplicity, equity and predictability in the tax system is achieved

Ministry of Finance-Budget Office

strengthening revenue administration and compliance
Strengthening Revenue Administration and Compliance
  • Legislation has since been enacted to enhance valuation of weights and mineral content of all mineral exports. S.I 97 of 2012.
  • Tax audits of mining companies
  • Technical capacity enhancement at ZRA with the setting up of a specialised unit
  • Exchange of information (ZRA, MOF, BOZ, MMEWD)

Ministry of Finance-Budget Office

the end
The End
  • Thank you for listening

Ministry of Finance-Budget Office