Companies cheating on tax, EAZ lobbies to withdraw windfall tax

A masively significant report in The Post on Tuesday - reproduced in full below. I would suggest reading this alongside the presentations from Profs Saasa and Lungu and Dr Miles Larmer for the MineWatchZambia conference. One comment from me for the moment. It is hard to accept the argument, which I think I detect below, that because the companies are not complying with the law, the law should be changed. I will try to get and paste a copy of the EAZ's original evidence.

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GOVERNMENT will only collect US$200 million of the projected US$415 million from mineral taxes owing to low compliance levels among mining companies, the Economics Association of Zambia (EAZ) has predicted.

And EAZ has proposed a replacement of windfall tax for mining companies with either the variable profits tax or revenue-based tax regime.

According to a presentation made to the parliamentary committee on estimates last week, EAZ stated that the government would only collect about US $200 million from mine taxes this year, claiming that only Kansanshi Mines Plc had paid windfall taxes.

“ZRA reports that it has collected about K325 billion (about US$95 million) so far this year. This would be about half the rate anticipated in the budget – that is, government would collect about US$200 million, instead of the targeted US$415 million,” EAZ predicted. “The main reason appears to be non-payment of windfall tax, with only one company, Kansanshi, having paid windfall tax so far. The non-payment appears to be due to complaints by the companies about the new tax regime.”

EAZ however, emphasised that the government should ensure mining companies pay the revised taxes promptly and in full.

Secretary to the Treasury Evans Chibiliti last week told a parliamentary committee on estimates that only two out of the 13 mining companies in the country had paid windfall taxes. Chibiliti disclosed that the two companies who had paid windfall taxes amounting to K109.5 billion, did so under protest, meaning they (companies) could seek legal redress that could result in restoration of their privileged rights enshrined under the defunct Mining Development Agreements.

Most mining companies are said to have had cash flow problems emanating from high production costs. There is however a 100 per cent compliance from all mining companies in payment of other taxes relating to mineral royalties (charged at three per cent) and company tax (30 per cent).

During the second quarter of 2008, a total of K255.6 billion was paid in mining taxes of which windfall taxes stood at K109.5 billion, company tax at K105.1 billion and mineral royalties’ contribution stood at K41 billion.

And EAZ has proposed the replacement of the windfall tax introduced last April with a variable profits tax which would consider the cost structures of companies or the revenue-based tax regime.

“It is reasonably clear that the windfall tax, as presented in the 2008 budget, is likely to result in much higher tax rates than those intended and will deter new investment,” according to EAZ. “Government should seek to replace it as soon as possible by either the variable profits tax which would consider the cost structures of companies or structure the revenue based tax regime in such a way that the windfall tax will only apply from a price level which takes into consideration the cost structures of companies.

“The windfall tax should also be a flat rate. Thus the government should in the meantime re-examine the issues of tax deductibility, as well as the price thresholds and tax bands in the current legislation. In return, the mining companies should pay the revised taxes promptly and in full.”

EAZ stated that there was need to strengthen and accelerate the capacity of Zambia Revenue Authority (ZRA) to review the profitability of mining companies in the country.

It however, emphasised the need for the government to expedite its plans to join Extractive Industries Transparency Initiative (EITI), which commits mineral-rich countries to disclose earnings from natural resources.

“Much of the difficulty and, indeed, suspicion surrounding mining company representations reflects concerns that they are exaggerating their costs and thereby reducing the potential tax take if taxes are based largely on profits.” stated EAZ. “We understand that ZRA is in the process of building up its capacity to review mining company tax returns critically, and would strongly encourage that this be accelerated.

In addition, we believe that Government should seek independent audits where necessary. “The EITI, as an internationally supported mechanism, appears to have started to help countries such as Nigeria to address issues of transfer pricing in their extractive industries. The initiative is at an early stage in Zambia, and should be pursued with vigour.”

EAZ also urged the government to re-evaluate the impact of new mining tax on further investments, arguing that the association of local economists was also concerned that the new mining fiscal regime does not provide the stability and predictability needed to sustain investments in the sector.

“While we support the intention of the new tax regime, we are concerned that it does not yet provide the stability and predictability needed to sustain investment in the mining sector,” it stated.

“Therefore, the government should review the impact of the new regime on new investment, especially on greenfield investments, like Lumwana, but also on those being carried out by existing mines.”