It looks like crunch time (again!) in the drawn out battle over mine taxes, but contradictory reports are emerging. The Post reports that Zambia Revenue Authority (ZRA) has collected about K255.6 billion in mine taxes on account of all mining companies in the country complying with the new fiscal regime. This is roughly what was expected. Sources have been telling me that even KCM, which made a big political show of accepting the new tax regime, are trying to renegotiate in the background. Nonetheless, no company has thus far been willing to launch legal action or to refuse to pay. The political opposition Patriotic Front promised mass action against any company that took such steps. After initial grumbles it looked like the companies were going to slowly adjust to political realities, accepting that even with the new regime they remained massively profitable, and take the new taxes on the chin.
Nonetheless, First Quantum, which has been the most truculent company in terms of threatening legal action, hiring lawyers and claiming to hold legal advice on the enforceability of their Development Agreements is now making claims that they hold a letter from ZRA suggesting the state may be offering a compromise, capping windfall tax rates that apply to the company at 25% as an interim measure while negotiations continue. A 25% rate would be much lower than what the companies, including First Quantum, have already started paying as a result of legislation passed by Zambia's sovereign parliament. This sets windfall taxes at 50% or 75% depending on the price of copper. First Quantum claims the letter instructs that the Company "will with immediate effect be required to pay windfall tax on a provisional basis at a flat rate of 25% at any price above the first trigger price for both copper and cobalt". The Company's accounts for the period ended June 30, 2008 reflect tax liabilities consistent with the legislation passed by parliament, although a payment of windfall tax made on July 14, 2008 in respect of the June quarter was calculated using a capped 25% windfall tax rate.
What authority ZRA has to offer individuated short-term exemptions to the law is not clear to me. The company reports, "Currently, the Company, along with other mining companies operating in Zambia with similar agreements, is engaged in discussions with the GRZ to find an alternative solution to arbitration or litigation. The timing and outcome of these discussions is uncertain." The company put out a detailed notice yesterday which is available on the First Quantum website. A webcast of the related press conference is here.
First Quantum's negotiating strategy has long been to threaten but not launch international arbitration or legal action over Zambia's new mining legislation, which overrides the 'stability clauses' in the companies' Development Agreement. These promised investors long-term tax exemptions. Just yesterday, key state negotiators of the corrupt privatisation process were jailed with hard labour for their part in the sales which are widely regrarded to have been profoundly unfair to Zambia's interests. Most of the companies have not pushed too hard on this issue as a) the corrupt process of the original negotiations is widely known, b) most companies have failed to live up to even the incredibly lenient terms of these original contracts.
Nonetheless, First Quantum's press release ups the ante in its claims on the enforceability of its Development Agreement. “The Company has, following the recent tax changes, obtained legal advice on its rights under the Development Agreements. This advice has confirmed that the Company has rights of recovery for any taxes which are levied in excess of those permitted under the Development Agreements... In the light of the detailed advice received, the Company has assessed there to be a high probability of recovery from the GRZ (Government of the Republic of Zambia) of certain payments made in respect of these taxes.” The company estimates it has thus 'overpaid' and is owed $67m as at end-June.
First Quantum posted a healthy increase in interim profit despite the new tax regime. Net profit for the interim period nearly doubled to $390m from $201m a year before. Its tax expense ballooned to $233bn from $77m over the same period, admittedly off a higher production base.
Mining MX claim 'the market' sees the letter from ZRA and the legal advice the company has received as positive developments. This may help us to understand what is going on. Is the companies' constant ebullience about its chances of avoiding the tax regime designed to artificially inflate a controversial and troubled companies' share price? As reported in previous blogs, First Quantum has a record of extremely optimistic, maybe naive, interpretations of what is going on politically in Zambia.
The Post gives a sense of the degree to which the new regime is already bringing new revenues into state coffers. ZRA commissioner general Chriticles Mwansa told journalists yesterday during the end of second quarter media press briefing that the biggest contribution from mining taxes came in from windfall tax which stood at K109.5 billion. Mwansa explained that the mineral royalty in the review period stood at K70.54 billion of which, K6.39 billion, K29.67 billion and K34.48 billion were collected in April, May and June respectively. He said the mineral royalty paid so far in the last two months under the new mining fiscal regime had averaged K25.75 billion per month compared to an average of K5.2 billion per month that the mines used to contribute to the treasury in 2007.
"However, other tax returns such as provisional company income tax returns, windfall tax return were due on 30 June 2008," Mwansa said. "To this effect, in July 2008, a total of K255.6 billion was paid in mining taxes of which windfall tax stood at K109.5 billion, company income tax was K105.1 billion and mineral royalty contribution was K41.0 billion."
Asked whether there were some mining companies that were still resisting the new mining fiscal regime, Mwansa said: "The mine have, by and large, complied with the new regime. They have met with us; they have met with government to indicate the effect of that regime. We intend to continue meeting them to make further clarification should there be failure on their part mines to understand other details involved, but I must say that mine is to implement the law. If the law demands that the mines pay, then I go and effect."
How seriously we should take that final statement depends on First Quantum's ability to demonstrate that the state is already compromising. Some of the media houses carrying the story claim to have seen the letter from ZRA. I have not and it is not on the companies' website. If anyone has a copy, do forward it and I'll post on the site. Reading the whole thing, not just First Quantum's favourite quotes, could be very interesting.
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