Company backlash against tax renegotiation

**Nb – Links to articles in The Post are only available to online subscribers – apologies to those without access. I will quote extensively and try to stay the right side of copyright law**

The Post reports today that the Chamber of Mines of Zambia (CMZ) is leading a backlash against widely discussed Government plans to re-negotiate mining companies’ Development Agreements. CMZ is an umbrella for most of the major mining companies, and is a body they chose to use when senior executives and shareholders prefer not to be identified with sensitive comments. The Post reports that, “The Chamber of Mines of Zambia (CMZ) warned that the renegotiation of mining development agreements would erode investor confidence in Zambia.”

The Post quotes CMZ general manager Fred Bantubonse speaking at a tax review workshop last Friday. “If authorities come up with a harsh fiscal regime, the impact may come later than now when investors decide not to invest.” As discussed in ‘For Whom the Windfalls?’, CMZ member companies have previously been in different places on this issue, with some recognising the inevitability of renegotiation, and others threatening legal action to prevent it. In an interview with the report researchers, Bantubonse himself recognised that renegotiation was inevitable and discussed a potential role for the Chamber in easing the process. The Chamber may now be adopting a more hostile position (or it might be journalists trying to whip up a storm).

The intention of the Zambian government to renegotiate the Development Agreements, specifically to claw back a greater tax take from mining companies, has long been trailed. As reported in a previous blog entry, in his recent budget, Finance Minister Magande raised mineral royalties from 0.6% to 3%, company income tax from 25% to 30%, and introduced a 3% import duty and a 15% withholding tax on dividends, interest, royalties and other mining sector transactions. However, these tax changes would only affect future investors, not those already holding contracts. Nonetheless, Magande said that the government would now seek negotiations with those companies “so that there is mutual consent by contracting parties to revise the tax regime to the new rates.” It is unclear to minewatchzambia whether this statement should be taken to imply that existing investors might face new taxes across the broad range of taxes above. It has previously been widely assumed the renegotiation would only cover mineral royalties.

Bantubonse claimed that the current agreements were fairly entered into, and that, “There is no tax holiday in Zambia. What we have is a capital allowance and a carry over losses, where the company cannot pay tax either during the period they are investing and expanding or when they are making losses.” He claimed that by 2005, mining companies had made a cumulative loss of US $85 million against investments of US $1.4 billion, and that this was the reason carry-over losses and capital allowances could be offset against tax. He recognized however, that “the huge profits they are making now are accelerating the liquidation of capital allowances and carry-over taxes so that they start paying taxes earlier than they were supposed to.”

The Post reports that CMZ anticipates that mining firms will contribute US $ 650 million in all taxes this year, US $850 million in 2008 and US $950 million by 2009.

The editorial in the business section of The Post challenges the CMZ argument that the current contracts are fair since they were negotiated when ZambiaWhile recognizing that ambia negotiated from a position of weakness, the Post notes, was in a desperate situation: “Now things have changed. Copper prices have skyrocketed and it is only plausible that we similarly enjoy the benefits. If the similar principle of a win-win situation is allowed to prevail, as it did during the negotiations, then mining firms have a moral obligation to allow for the renegotiation of the development agreements….We know that there is nothing that will compel them to yield to the government’s intentions because the development agreements are legally binding documents anyway. But we are now questioning why all these development agreements can be supreme to the Laws of Zambia. How can this be allowed to happen?…Our sources are now telling us that Article 9 of the development agreements, which makes the fiscal provisions of the mining contracts more superior to the lands Act, is being reviewed so that every fiscal policy in the development agreements is made subordinate to the overall national statutes. This should bring some sanity around.”

This editorial treads a similar line to a previous editorial in The Post business section.