MINING TAXATION IN AFRICA: LESSONS FROM THE ZAMBIAN CASE Prof. John C. Anyanwu Lead Research Economist Development Research Department African Development Bank 3 rd West & Central Africa Mining Summit, 1-2 November 2010, Golden Tulip Hotel, Accra Ghana. * The views expressed here are those of the author and in no way reflect those of the Bank and its Executive Directors.
OUTLINE INTRODUCTION MINERAL TAXATION: FORMS AND RATIONALE ZAMBIA S MINING TAXATION AND INCENTIVES MINING TAX REVENUE PERFORMANCE IN ZAMBIA LESSONS FROM THE ZAMBIAN EXPERIENCE WAYS FORWARD: RECOMMENDATIONS CONCLUSION
I. INTRODUCTION
I. INTRODUCTION >1 resource holding in top 10 globally 1 Resource holding in top 10 globally Eleven African countries are among the top ten global resource countries in at least one major mineral Morocco Mauritania Niger Guinea Ghana Democratic Republic of Congo Namibia Zambia Botswana Zimbabwe South Africa Adapted from Bardouille, Hamblin,. and Pley (2010)
I. INTRODUCTION Major Minerals in Africa Gold and silver Chrome, platinum, and nickel Copper, lead and zinc Iron and manganese Tin Uranium Source : http://www.aeon.uct.ac.za/content/pdf/join%20us/p5053.viewpoint42.pdf
I. INTRODUCTION Zambia: Output of M ajor M inerals, 1960-2009 800.00 8,000.00 700.00 PRIVATE SECTOR POST-PRIVATIZATION 7,000.00 Copper Cathodes Output ('000 tonnes) 600.00 500.00 400.00 300.00 200.00 100.00 STATE CONTROL 6,000.00 5,000.00 4,000.00 3,000.00 2,000.00 1,000.00 Cobalt Output (Metric tonnes) - 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 1985 1987 1988 1989 1986 Year 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 - Copper Production Cobalt Production Source: Author, using data from BOZ.
I. INTRODUCTION Mineral taxation is an integral part of national economic and social policy Linkage between Mineral Taxation and Key National Economic and Social Policy Tax Policy Industrial & Social Policy (Corporate taxes) Mineral Taxes Mineral & Resources Policy Mineral Products Taxes Environmental Policy Community Policy Regional Development Policy Source: Adapted from Andrews-Speed (2000)
I. INTRODUCTION Recently, over 100 countries have introduced new mining laws, most involving reforms to their fiscal systems, including taxation. Since the 2003 commodity price boom, many African governments have been reviewing their mining contracts and tax laws: To put in place more transparent and beneficial mining tax systems; To encourage greater mining investment and concerns about the public private shares of mining revenues; Tax revenues derived from mining activities represent an important public policy issue; A response to the fact that neither the nationalization nor the subsequent liberalization of mining activity in mineral-rich African countries has brought lasting transformation to their economies and societies; Mineral wealth has fuelled and prolonged violent conflict in some countries such as Angola, the DRC and Sierra Leone, and stalled economic diversification in countries such as Botswana and Zambia; and Mineral wealth has failed to contribute to the development of communities and economies of mineral-rich nations.
II. MINERAL TAXATION: FORMS AND RATIONALE (A) Profits-based taxes Corporate income tax Profit tax on dividends Royalty based on profit/income measure Withholding tax on remitted dividends Resource rent tax MAJOR MINING TAXES (B) Production-based taxes Royalty; unit-based and value-based Sales and excise tax Payroll tax Export duty Import duty Value Added Tax (VAT) Application/issuing/registration fees and stamp duty Land rents Withholding tax on loan interests and services Property tax Source: Adapted from Commonwealth Secretariat and ICMM (2009)
II. MINERAL TAXATION: FORMS AND RATIONALE MAJOR MINING ROYALTIES Unit-based royalties Value-based royalties Unit-based royalties are assessed either on volume or on weight and measured at a specified point, for example the mine mouth. For value-based royalties, the value of the product assessed can be specified in many different ways and at different stages of the production process - the most commonly used form of royalty tax. Profits-based or income-based royalties Profits-based or income-based royalties, like income tax, bear some relation to the concept of economic rent, and thus the profitability of a project. Source: Adapted from Commonwealth Secretariat and ICMM (2009)
II. MINERAL TAXATION: FORMS AND RATIONALE SPECIAL TREATMENT OF MINING FOR TAXING PURPOSES peculiar characteristics of the sector: The exploration phases precede start-up and production are lengthy and costly, without any revenues during these phases. The development of a mine is very capital-intensive and requires the import of specialist equipment and skills. The capital invested in a mine is immobile and hence captive. The investors are often transnational corporations/foreign. A mining project typically has a long life and hence may be subjected to changes in the political regime or domestic circumstances. International circumstances keep changing and commodity prices take larger cyclical swings than most other economic sectors. The scale of operations can be very large, but also very small within the same country (i.e. small and artisanal miners) Mining activities get costlier as a project matures. Mine closure and reclamation incur large costs after revenues have ceased.
II. MINERAL TAXATION: FORMS AND RATIONALE MINERAL TAX INCENTIVES Mineral Tax Incentive Accelerated capital cost allowances Resource depletion allowances and general and reinvestment tax credits Tax holidays Interest deduction rules Loss carry forward Loss carry back provisions Description Allows accelerated payback, allows firms a higher kevel of real discounted profits after tax, shifts risks to governments, could be trade off with higher tax rate. Based on annual extraction rates, tax revenues are reduced by production rather than increased; may be based on cost or volume; sometimes used when exploration allowances are not deductible from revenues in defining the income tax base. Tax credits sometimes used to encourage local reinvestments of earnings. Moratorium on income tax and other payments for a set number of years; a sort of negative royalty. Considers debt service as operating expenses and thus accommodates debt servicing in the early years of production, reducing the income tax base. Reallocates risks to governments and shifts tax incidents, same effect as accelerated write-offs but at a later date, important instrument of flexibility. Difficult to administer, not found in many developing countries. Source: Adapted from Commonwealth Secretariat and ICMM (2009)
II. MINERAL TAXATION: FORMS AND RATIONALE Tax Uncertainty Political Risks SOME MINERAL TAX DISINCENTIVES Unfavorable treatment of cross-border transactions (e.g. withholding taxes on dividends & interest) Inability of local tax incentives to flow through to the parent mining company group s tax charge Source: Adapted from Commonwealth Secretariat and ICMM (2009)
II. MINERAL TAXATION: FORMS AND RATIONALE RATIONALE FOR MINING TAXATION- Mining taxation, in particular, is essential for both the government and mining companies. For governments, mining taxation is: a source of revenue to finance its expenditures; an instrument of social and economic policy; instrument for the promotion of certain industries; instrument for the control of sector development; instrument for attracting foreign investment; enhancing the developmental impact of mining; to influence the behavior of mining companies, e.g. in environmental and procurement policies; a key factor in contributing to state-building and better governance; and to promote social welfare.
II. MINERAL TAXATION: FORMS AND RATIONALE RATIONALE FOR MINING TAXATION- Mining taxation, in particular, is essential for both the government and mining companies. For companies, mining taxation affects: their profits; the country they choose to invest in; and what sort of projects they undertake and how they implement them.
III. ZAMBIA S MINING TAXATION AND INCENTIVES Privatization to February 2008 The Zambian government privatized the copper industry in 1997, an exercise completed in 2000. Following privatization, the government legislated changes in the mining tax regime by entering into Development Agreements (DAs) (very generous royalty and tax arrangements), which were secret in nature but revealed by CSOs in 2007. The DAs generally led to a special mining tax regime for the mine owners as follows: effective mineral royalty rate of 0.6%; company income tax rate of 25% (compared to 35% for on-mining sector); withholding tax rate of 0% (Interest costs and repatriated dividend income were fully deductible); carry forward losses of 10 years/20 years; 100% deduction of capital expenditure (Table below shows the details of DAs entered into with one of the main mining companies); a stability period of between 15 and 20 years during which the agreed terms and conditions were guaranteed.
III. ZAMBIA S MINING TAXATION AND INCENTIVES Privatization to February 2008 Mine owners that were not under the DAs had the following tax regime: increased corporate income tax rate from 25% to 30%; increased mineral royalty rate from 0.6% to 3%. New mining companies relieved from assuming financial liabilities and environmental legacies originally incurred by ZCCM, which were transferred to ZCCM-Investment Holdings Ltd
III. ZAMBIA S MINING TAXATION AND INCENTIVES Preferential Treatment under DAs The Case of Mopani Copper Mines Plc 15 years stability period starting March 31, 2000, life of mine, unknown; Mineral royalty tax 0.6% of gross revenue, exempt for the first 5 years of operation; Royalty payment income tax deductible during the stability period; Royalty payment subject to deferment if cash operating margin is less than zero; VAT 17.5%; Losses to be carried forward for 10 years; Withholding tax 0% during stability period and 10% there after; Duty free importation and tax free exportation for household and personal effects within six months of arrival and departure, respectively of non-zambia citizen workers and their dependents; No customs duty and excise duties on consumables up to US$250 million for 5 years; 100% deduction on capital expenditure; 100% deduction on payment with respect price participation payments ; 100% deduction on royalty payable during the stability period. Deferment of royalty payment if cash operating margin isles than nil. Import duty on capital goods 0%; Import duty on other goods and materials not to exceed 15% No excise duty on electricity for 15 years; No tax on property transfer associated with acquisition of assets. Source: Adapted from Kangamungazi (2009)
III. ZAMBIA S MINING TAXATION AND INCENTIVES March 2008 - March 2009 In March 2008, under pressure from CSOs and opposition politicians, the Zambian government unilaterally cancelled the pre-existing DAs and established a new fiscal regime for the mining sector The new tax code consisted of three key elements: Shift of the tax code in favor of generating a larger revenue flow to government, mainly through an adjustment to the royalty rate. The introduction of a degree of progressivity into the tax code through two channels: A variable profit tax rate under which the marginal tax rate would rise from 30% to 45% when taxable profits exceed 8% of gross revenue. A graduated windfall (royalty) tax levied at a rate of 25% on gross proceeds when the copper price exceeds US$2.50/pound (US$5,600 per ton); at a rate of 50% when the copper price exceeds US$3.00/pound (US$6,720 per ton); and 75% in excess of $3.50/pound (US$7,840 per ton). An export levy (of 15% on value) was introduced on the export of copper concentrates, as an incentive to produce finished copper products (bars, ingots, cathodes).
III. ZAMBIA S MINING TAXATION AND INCENTIVES March 2008 - March 2009 The principal elements of the March 2008 tax regime were: An increase in the corporate income tax rate to 30% from 25% previously applied. (At the same time the corporate tax rate in the non-mining sector was reduced from 35% to 30%). An increase in the mineral royalty rate on base metals from 0.6% to 3 % of gross revenue. (The royalty rate for other precious metals was raised from 2% to 3%). The re-introduction of withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors for all mining companies at a standard rate of 15%. Reduction of capital allowances from 100% expensing to a conventional 25% per annum straight-line allowance (and deductible only in the year production commences rather than in the year the expense is incurred).
III. ZAMBIA S MINING TAXATION AND INCENTIVES From April 2009 Given the importance of the mining sector to Zambia s economic progress, in the 2009 budget, the government announced new changes to the fiscal regime designed to stabilize the sector: The most notable decision was to scrap the 25% windfall tax, a measure that had only been in place for one year and had attracted considerable opposition from the mining companies. The variable profit tax was retained, which the government hopes will still capture any windfall gains that may arise in the sector; Hedging income to be a part of mining income for tax purposes; Capital allowance was increased to 100% as an investment incentive; Customs duty on heavy fuel oil will be reduced from 30% to 15%, and the customs duty on copper powder, copper flakes and copper blisters were removed; Copper and cobalt concentrates were included in the import deferment scheme for value-added tax (VAT) purposes. These measures were designed to reduce the operating costs of mining companies, but they entail a revenue loss, which the government projected at ZK19.3bn (US$3.6m).
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA Trend in M ining Tax Revenues in Zambia, 1995-2009 1800.0 1600.0 1400.0 1200.0 Billion Kwacha 1000.0 800.0 600.0 400.0 200.0 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Years Total Mining Revenues Source: Author, using data from ZRA.
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA Trend in the Components of M ining Tax Revenues in Zambia, 1995-2009 700.0 600.0 500.0 Billion Kwacha 400.0 300.0 200.0 100.0 0.0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Years Company Tax Withholding Tax/Dividends Mineral Royalty Export Duty Windfall PAYE Source: Author, using data from ZRA.
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA Zambia: M ining Tax Revenue Growth, 1 9 9 6-2 0 0 9 140.0 120.0 100.0 80.0 60.0 Percent 40.0 20.0 0.0-20.0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009-40.0-60.0-80.0 Years Source: Author, using data from ZRA.
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA While mining tax revenues were 12% of total tax revenues in 2009, it was a mere 2% of GDP (down from 3% in 2008) the same year. M ining Tax as a Percentage of Total Tax Revenues 18.0 17.0 16.0 14.0 12.0 13.5 12.8 Percent 10.0 8.0 8.0 6.0 4.0 2.0 1.7 1.7 2.1 3.6 3.7 4.9 5.2 0.0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Years Source: Author, using data from ZRA.
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA Export Revenues from Copper and Cobalt ( US$million), 1994-2009 4500 4000 3500 3000 US$million 2500 2000 1500 1000 500 0 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Years Copper export Revenues Cobalt export Revenues Export Revenues from Copper & Cobalt Source: Author, using data from BOZ.
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA Zambia - Ores and M etal Exports ( % of Total Exports), 1993-2007 90 89 87 80 78 77 81 78 70 60 70 63 65 62 62 62 63 Percent (%) 50 40 47 30 20 10 0 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Years Source: Author, using data MoFNP, Zambia.
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA Mining tax revenue was 12% of total tax revenues in 2009 (down from 17% in 2008 its maximum in recent years). Mining tax revenue as a percentage of total domestic revenue was roughly the same at 16% in 2008 and 13% in 2007. Mining tax revenue was a mere 2% of GDP in 2009 (down from 3% in 2008 its peak since privatization). Estimates put the total revenue loss from the various deductions from profits in the mining sector as a result of the DAs and generous tax concessions to ZK528 billion (US$110.52 million) in 2004. It has also been estimated that the loss in royalties in 2007 alone when mining firms were paying an effective rate of only 0.6% in royalties amounted to US$50 million. Analyses have shown that government obtained less than 30% of incremental profits under the DAs. The Zambian Revenue Authority (ZRA) lacks the capacity (institutional, manpower/skill, and facilities) to enforce mining tax compliance. ZRA s lack of capacity has given room to tax avoidance (even evasion), especially though transfer mispricing. In the Behere Dolbear 2010 Rankings of 25 Countries hosting the major exploration or mineral development efforts and/or mining operations, Zambia ranked poorly at 19th, with the tax regime scoring only 3 out of 10.
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA Effects of Tax Regimes on M ining Investment in Selected African Countries, 2010 The Zambian tax regime is generally perceived as deterring investment in that country but not strongly Zimbabw e ZAMBIA Tanzania South African Namibia Ghana Democratic Republic of Congo (DRC) Botsw ana 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Encourages investment Not a deterrent to investment Mild deterrent Strong deterrent Would not pursue investment due to this factor Source: Author, using data from McMahon and Cervantes (2010).
IV. MINING TAX REVENUE PERFORMANCE IN ZAMBIA Uncertainty Over M ining Taxation in Selected African Countries, 2010 The Zambian tax regime is generally perceived as uncertain hence deterring investment in that country - but not strongly Zimbabw e ZAMBIA Tanzania South African Namibia Ghana Democratic Republic of Congo (DRC) Botsw ana 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Encourages investment Not a deterrent to investment Mild deterrent Strong deterrent Would not pursue investment due to this factor Source: Author, using data from McMahon and Cervantes (2010).
V. LESSONS FROM THE ZAMBIAN EXPERIENCE Mining taxation has become a heated issue in many mineral-rich countries and often lies at the heart of resurgent resource nationalism (witness the current debate in South Africa, for example). Without an effective mining tax regime, mining cannot promote sustainable development since the sector is an enclave economy with large costs. National capacity to effectively tax large mineral extraction and utilize the revenues is a key element in building a legitimate state. The mining tax regime in Zambia from 2001 to 2008, introduced fiscal terms designed as emergency measures to avoid mining sector collapse, which was largely achieved; There was limited control of the areas of production, exports and tax revenue, combined with large investments and loss carry forward, lead to minimal government take.
V. LESSONS FROM THE ZAMBIAN EXPERIENCE The new mining tax regime has led to substantial increase in average effective tax rate, from 25-30% to 45-50%. The new mining tax regime has led to greater viability of mining businesses in Zambia but the government take is still as low as 15% of export value. Zambia s experience shows that the main sources of government revenue generated from mining activity are PAYE and company income tax, with mining royalties being an insignificant proportion until April 2008. The Zambian case illustrates the fact that many African mineral-rich nations are foregoing millions of dollars in revenue through mining tax subsidies/concessions and company tax avoidance strategies. The opposition by mining companies in Zambia shows that mining companies are generally against windfall taxes since they see windfall profits as a compensation for the financial risks of their operations.
VI. WAYS FORWARD: RECOMMENDATIONS Where African countries have, for whatever reason, agreed to tax terms that do not respond adequately to changing economic circumstances, renegotiations are necessary. African governments should sit down with mining companies and work in a collaborative manner to modify tax terms on the basis of nondiscrimination, transparency and due process. The African Development Bank will support such renegotiations efforts by providing African mineral-producing countries assistance in their EITI participation and implementation. Regular planning and operations as well as development partner assistance needed to close the disproportional ability (knowledge and finance) between international mining companies and government so as to protect interests. The mining tax system should have flexibility to accommodate a wide range of economic outcomes rather than tailoring regimes to fit each deposit on a case by case basis.
VI. WAYS FORWARD: RECOMMENDATIONS African mineral-rich countries should stop the practice of entering into bilateral development agreements with mining companies for generous concessions in mining contracts. Consequently, all mining tax rates and terms should be legislated in the substantive law and implemented as such. Robust transparency and reporting are essential to facilitate information sharing and enable agencies and mining tax payers to be held to accountable. African countries company and financial laws should be reformed to require all mining companies to use the EITI template in their annual financial reports by law. It is our belief that fair, efficient and accountable taxation is a cornerstone of good mineral sector governance, together with the wise management and effective use of revenues to induce sustainable development and poverty reduction. The EITI/EITI++ approach offers a framework under which the African Development Bank and its partners can work with mineral rich countries in Africa like Zambia to achieve this desired outcome.
VI. WAYS FORWARD: RECOMMENDATIONS African countries should formulate tax systems that provide the government with minimum revenue streams throughout mineral production but generate additional revenues linked to achieved profits. The share of profits should be sufficient to reduce temptation for future governments to change terms while preserving returns that compensate the mining companies adequately for capital employed and associated risks. The ZRA, like many revenue agencies in Africa, lacks the knowhow, access to information and resources necessary to measure and value mineral production, classify and verify costs and safeguard against transfer pricing on a reliable basis. At the same time, its audit capabilities are limited. Adequate resourcing and training in all mineral tax assessment and audit functions is imperative through broader-based capacity building programs for tax administrations and specific assistance to dedicated Mining Tax Unit and ZRA as a whole, for example. Development partners like the African Development Bank should scale up their financial assistance to African governments to improve their capacity to monitor and audit the accounts of mining companies, and to review their mining tax regimes. For effectiveness and procurement of best available services, African governments should be free to use this finance to purchase legal and other technical assistance from any service provider of their choice.
VII. CONCLUSION Mining is the life-blood of the Zambian economy as it is for a good number of mineral-dependent African economies like Guinea, Mauritania, Niger, Mozambique, Central African Republic, and Zimbabwe, among others; Low taxation regime dominated the Zambian mining industry until April 2008 as in many African countries thus denying these countries adequate mining revenues for socio-economic development; A strong and capable state and its fiscal institutions are paramount in negotiating, formulating, and administering durable, simple, fair, stable, predictable, transparent, economic cycle-sensitive, and longterm revenue-maximizing mining development agreements and tax regimes; Investors are concerned more than taxes and royalties but also conducive operating environment, political stability, policy stability, and overall good governance; When considering mining taxes, African countries need to take account of all contributions, including identifiable and measurable taxes; expenses of business that are not allowed relief ( hidden taxes ); expenditure on infrastructure and social and community welfare projects and programs for the mineralbearing community; environmental impact; and distribution of benefits.