Multinational mining companies in Zambia are being forced to face up to the weakeness of their position in attempts to resist a new mining tax regime. In spite of legal threats from the companies, the Zambian state is forging ahead, introducing to Parliament legislation that will establish higher taxes on companies that have had everything their way for almost a decade of privatisation, low taxes and minimal regulation.
Last week the companies thought their threats of legal action and an international media campaign were bearing fruit when President Levy Mwanawasa proposed that they bring their complaints to the Finance and Mining Ministers. In the last few days, these hopes have been dashed as the President clarified that the companies were only being invited to justify their hyperbolic claims made to a Parliamentary committee, rather than to negotiate on the new rules. The companies' hostile response to reform proposals may also have backfired more profoundly. Not only have they brought numerous international and Zambian political, intellectual and civil society big-hitters out to condemn them, the companies will also have been rocked by an announcement from the Finance Minister that they should prepare their accounts for inspection from the moment they began operations in Zambia. The companies have long been suspected of having abused loopholes in the existing regulations - for example on VAT reclaims and on rolled-over losses. This new announcement may thus be designed to make a point to the companies: behave, or the state could make your lives very difficult. It also raises an issue I've wondered out loud about on minewatchzambia before. Have the companies ever made the quarterly submissions they are required by their Development Agreements to do? If they had, the state should already have this information.
The Times of Zambia reports today that Finance Minister Magande yesterday presented three bills for amendments, including the Income Tax Bill which seeks to introduce a variable profit tax for the mining sector, a graduated windfall tax for the mining of base metals and precious metals and also introduce a reference price for determining the values for the windfall tax. The mining sector would also have a reduction in capital expenditure deductions from 100 per cent to 25 per cent per year. The three bills passed first reading.
Meanwhile the Daily Mail reports on the demand from Magande that the companies prepare income and expenditure accounts since their establishment to help resolve the misunderstandings on the new mining tax regime. Mr Magande said the firms must state their profits from the time mining incentives were given and show how they would incur losses once the new tax regime is effected on April 1, 2008. In an illustration of the degree to which the Zambian state enjoys massive popular as well as civil society support on the issues, the Mail also reports that last week, hundreds of people on the Copperbelt demonstrated in favour of the new taxes. When did you last hear of a protest in favour of higher taxes!
The companies attempted to read the comments last week from the Zambian President that the companies should explain their recent claims in Parliament as an invitation to renegotiate. For example, The Times of Zambia reported that First Quantum Minerals and Konkola Copper Mines (KCM) welcomed President Mwanawasa's call for dialogue over the new tax regime for the mining industry. First Quantum representative Mr Puta-Chekwe said the mines wanted to renegotiate the Development Agreements (DAs) in good faith. However, the Government have repeatedly been clear that the point of any such meeting would not be to renegotiate the Development Agreements.
If any doubt remained, today's Times of Zambia should settle the matter. It reports a statement released in Lusaka by chief analyst for public relations and Press, David Kombe. Kombe said the point President Mwanawasa made was that the Government was ready to listen to the complaints by mining companies who had alleged that the rate of taxation had been pegged at 76 per cent or 95 per cent, which would scare away potential investors to Zambia. "The point the President made was that the Government will listen to their complaint on this alleged error," the statement said. The statement stated that the President said that rather than engage in uncoordinated arguments with the investors' representatives, they should send in advance their submissions in which they identified how this "error" arose, and if there was no such error, they would be wasting everybody's time requesting for the meeting. "He (Dr Mwanawasa) made it clear that the Government was merely getting for the people of Zambia a fair share from the value of their mineral resources." At 47 per cent tax it was leaving a substantial return on the investment of the investors. This level of taxes was now neither the highest nor the lowest in the world. To that extent, therefore, this level of taxation was not negotiable," Mr Kombe said. "The President notes that recently the investors' representatives actually appeared before a Parliamentary Committee to put their case forward and throughout they did not show any such error for the Government's assessment of the rate of mining taxation."
First Quantum Minerals and Vedanta Resources have taken their campaign into the international media, with Reuters, South Africa's Mail and Guardian, and The International Herald Tribune all running stories on the issue. The IHT reported on 15 February that First Quantum executives make clear that decisions about legal cases in the mining sector will not be made by local managers but by shareholders in the major mining companies. Chisanga Puta-Chekwe, country manager for the Canadian company siad that if the tax hikes go through, his company would be under heavy pressure from shareholders to take the government to court. "We're not eager to go to arbitration, but at the same time I think it's inevitable if the development agreements are breached," he said. Puta-Chekwe said, however, that Mwanawasa's offer of a meeting "We do understand the political reasons for this," he said, adding that his company was "open to negotiations" with the Zambian government.
The Mail and Guardian on 18 Feb quoted CP Baid, director of operations for Vedanta's Konkola Copper Mines saying that the new tax regime could destabilise long-term expansion and recapitalisation plans in the sector. “The new tax regime is detrimental and jeopardises the ability to generate surpluses and raise funds for infusion towards growth and extension of our mine’s life. It is contrary to … the fundamental requirement for sustainable development and growth of the copper mining industry, which had passed through a decline phase and is now in the phase of recovery,” Baid said.
Nonetheless, the campaign appear to be having little impact with either international opinion or the Zambian Government. The same Mail and Guardian report noted Government frustrattion with the companies, including a claim that in October last year the Zambian government called on mining companies to renegotiate existing development agreements, but, said Mines and Mineral Development Minister Kalombo Mwansa, “none of the mines were willing to renegotiate because they never responded to our correspondence, which is why the government decided to go ahead with the new tax regime and put in place a new regulatory framework”.
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