I will write a more detailed blog on last weekend's MineWatchZambia conference in due course. The conference is already making waves in Zambia.
The Post reports a debate between Professor John Lungu of Copperbelt University and Finance Minister N'gandu Magande. Lungu claimed in a paper prepared for the conference and posted on this site, that the decision on the exact shape of the mines tax regime and whether to completely cancel the development agreements (DAs) would only be reviewed after next month’s presidential elections.
Magande responded that the government had not deferred the collection of taxes, claiming that government was "still collecting the 25 per cent windfall tax from the mining companies in line with the new mining fiscal regime." In defiance of media reports reviewed in this blog over the last week he is reported as saying, “Deferring the tax…what do you mean? We are still collecting. It is not correct to report that the government had deferred the collection of the windfall tax.”
That position would be defensible 1) if it were true that they were still collecting (I don't have evidence beyond what's in this blog but that seems unlikely) and perhaps more importantly 2) if it weren't that the legislation put through Parliament mandated quite different rates to those being applied. 25% is clearly a concession made to the companies, initially in a letter to First Quantum, previously reported in this blog, and possibly now extended to all companies. Unless the LME price for copper has been averaging below $6,614/tonne (it hasn't - see below), this rate is simply not in line with the new legislation.
The Post also notes that Magande is directly contradicting claims by Secretary to the Treasury Evans Chibiliti a couple of weeks ago that only two out of the eleven mining companies had paid windfall taxes. Chibliti added that those who had paid had done so unwillingly, as they insist on further negotiations on the new tax regime with the government. Similarly the Economics Association of Zambia (EAZ) recently predicted that the government may only collect around US $200 million from the mines owing to the low compliance levels exhibited by the non-payment of windfall taxes.
Clearly there are negotiations ongoing over a retreat from the originally-announced regime. In the legislation passed by Zambia's sovereign parliament there are three reference prices for the rate at which the windfall tax will apply mandating rates of 25%, 50% and 75%. These are a monthly average price on the London Metal Exchange of:
5512 US dollars per metric tonne results in windfall taxation of 25% on income above the trigger price.
6614 US dollars per metric tonne results in windfall taxation of 50% of income above the second trigger price.
7716 US dollars per metric tonne results in windfall taxation of 75% of income above the third trigger price.
(The original legislation is here). Copper is currently trading at around the 7000 $/tonne mark. This is as low as it has been since the legislation was in place. Prices here and here suggest that the rates applied should have varied through this period between 75% and 50%.
So where are we at? Lungu argues in his paper, “Having taken a unilateral decision, it was expected that the mining companies would take legal action. This has not happened yet. The mining companies are only waiting for the time when the government will invite them for negotiations... While some companies have paid the taxes, others are still waiting to see if the government can open up to negotiate. This time, however, the government has an upper hand. They have demonstrated to the mining companies that they are able to take decisions. This however does not seem to be the ending. The situation will become clearer after October 30th 2008, when a new government comes into power whether headed by Mr Rupiah Banda or Mr Sata (Michael). At that point, we shall know whether either of them will honour their promises.”
Well, the negotiations have already started. According to who? The companies themselves.
The Post reports a debate between Professor John Lungu of Copperbelt University and Finance Minister N'gandu Magande. Lungu claimed in a paper prepared for the conference and posted on this site, that the decision on the exact shape of the mines tax regime and whether to completely cancel the development agreements (DAs) would only be reviewed after next month’s presidential elections.
Magande responded that the government had not deferred the collection of taxes, claiming that government was "still collecting the 25 per cent windfall tax from the mining companies in line with the new mining fiscal regime." In defiance of media reports reviewed in this blog over the last week he is reported as saying, “Deferring the tax…what do you mean? We are still collecting. It is not correct to report that the government had deferred the collection of the windfall tax.”
That position would be defensible 1) if it were true that they were still collecting (I don't have evidence beyond what's in this blog but that seems unlikely) and perhaps more importantly 2) if it weren't that the legislation put through Parliament mandated quite different rates to those being applied. 25% is clearly a concession made to the companies, initially in a letter to First Quantum, previously reported in this blog, and possibly now extended to all companies. Unless the LME price for copper has been averaging below $6,614/tonne (it hasn't - see below), this rate is simply not in line with the new legislation.
The Post also notes that Magande is directly contradicting claims by Secretary to the Treasury Evans Chibiliti a couple of weeks ago that only two out of the eleven mining companies had paid windfall taxes. Chibliti added that those who had paid had done so unwillingly, as they insist on further negotiations on the new tax regime with the government. Similarly the Economics Association of Zambia (EAZ) recently predicted that the government may only collect around US $200 million from the mines owing to the low compliance levels exhibited by the non-payment of windfall taxes.
Clearly there are negotiations ongoing over a retreat from the originally-announced regime. In the legislation passed by Zambia's sovereign parliament there are three reference prices for the rate at which the windfall tax will apply mandating rates of 25%, 50% and 75%. These are a monthly average price on the London Metal Exchange of:
5512 US dollars per metric tonne results in windfall taxation of 25% on income above the trigger price.
6614 US dollars per metric tonne results in windfall taxation of 50% of income above the second trigger price.
7716 US dollars per metric tonne results in windfall taxation of 75% of income above the third trigger price.
(The original legislation is here). Copper is currently trading at around the 7000 $/tonne mark. This is as low as it has been since the legislation was in place. Prices here and here suggest that the rates applied should have varied through this period between 75% and 50%.
So where are we at? Lungu argues in his paper, “Having taken a unilateral decision, it was expected that the mining companies would take legal action. This has not happened yet. The mining companies are only waiting for the time when the government will invite them for negotiations... While some companies have paid the taxes, others are still waiting to see if the government can open up to negotiate. This time, however, the government has an upper hand. They have demonstrated to the mining companies that they are able to take decisions. This however does not seem to be the ending. The situation will become clearer after October 30th 2008, when a new government comes into power whether headed by Mr Rupiah Banda or Mr Sata (Michael). At that point, we shall know whether either of them will honour their promises.”
Well, the negotiations have already started. According to who? The companies themselves.
World Mining Exploration News reports that First Quantum Minerals expects Zambia will agree to a compromise on its new mining tax regime in coming months. “We expect to reach a result that everybody is quite happy with,” President Clive Newall told a mining conference sponsored by RBC Capital Markets. Newall is reported as saying that the recent death of Zambia’s president is expected to delay slightly a new tax agreement. In deirect contradiction of Magande, the paper reports, "In the meantime, the Zambian tax authorities have suspended collecting the new higher taxes."
The Miningbeat blog reports a potential explanation - the Zambian government might be prepared to reconsider the new levels of mining tax that it’s imposing, if the government’s own 87 per cent owned Zambian Consolidated Copper Mines (ZCCM) started to receive meaningful dividends from its Copperbelt joint ventures. I will post much more on this fascinating and very detailed blog in my next message. All we can know for now is that a lot more transparency about any talks would be very welcome.
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