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Mines must do their part

MINERS processing copper at one of the mines on the Copperbelt.

AS was expected, the Chamber of Mines has welcomed Government’s decision to retain the current Value Added Tax (VAT) regime. In the 2019 budget, Government had proposed to abolish VAT and replace it with sales tax.
But from the onset, the mines had argued that the introduction of sales tax would negatively impact the revenue of mining companies, resulting in a net decrease in tax revenues.
However, that was not the only bone of contention from the mines. They had in fact argued that the overall effect of the 2009 mining tax regime has been to raise the tax burden on mining companies to wholly unsustainable levels. In the lead-up to the 2020 budget presentation by Minister of Finance Bwalya Ng’andu, the Chamber of Mines had gone to town decrying how the mining tax regime in Zambia makes mining in the country uncompetitive.
Most of their arguments are in the report ‘Assessment of mining fiscal regime in Zambia: 2000-2019’.
But before this report, there have been others which have indicated that some mining companies inflate their production costs in order to avoid paying taxes. This is so despite enjoying a lot of privileges and tax advantages.
For instance, in 2009, the Zambia Revenue Authority (ZRA) commissioned international accounting group Grant Thornton and Norwegian consulting and engineering group ECON Poyry to do a pilot audit of the operational costs, revenues, transfer pricing, employee expenses and overheads of one of the mining companies in the country.
The findings were chilling.
The investigating team came to the conclusion that the reported numbers relating to all the above items were actually in doubt.
The team highlighted that at least US$50 million of the reported labour costs for 2007 was unexplained; fuel costs had doubled between the period 2005 and 2007, even after the increase in production had been accounted for; and mining costs had increased extravagantly and the difference was outside the boundaries of the cost analysis. The same applied to the insurance, security and safety, administration costs and spares.
It also noted that residual costs had increased by US$205 million from 2005 to 2007, which was attributed to the increase of scrap metal accounting to US$266 million. The audit team also reported that it was unable to match the general ledger data with the trial balance data and offered the hypothesis of high variance costs the cause of which was not easily discernible.
It is not the only report available which shows that despite the privileges and tax advantages they have enjoyed, some mining companies may have siphoned huge sums out of Zambia using a variety of methods.
Africa Progress Panel, which at the time was headed by former United Nations Secretary-General Kofi Annan, reported that the total tax (PAYE – employees’ income tax) paid by the Zambian mineworkers is higher than the tax paid by the companies they work for to Government.
Annan told the Financial Times of May 10, 2013 that “we firmly believe that Africa could dramatically improve the lives of its people if they can ensure that they get a fair share of the revenues generated by the extractive industries and use the revenues to invest in its people, in health, in education, in infrastructure and other things.”
And we agree with him.
For several years, some mining companies never paid any income tax apart from mineral royalties. When they boasted of paying so much money to Government in terms of taxes, they did not give a breakdown. But it is unlikely that the payments they were talking about constituted company tax. Instead, the money paid to Government or other national bodies include PAYE (which Africa Progress Panel reported was higher than the tax paid by the companies they work for); import duties, VAT, licence fees, vehicle registration fees and property rates paid to municipalities. None of these payments comes under the category of company tax.
Simply put, since the privatisation of the mines, Zambia has not had a fair share of the revenues from the mines despite the huge tax concessions given to the new owners.
Despite that, however, Government has been able to listen to the concerns raised by the mines, including the latest one on sales tax.
In the spirit of having a win-win situation, we hope that the mining companies will reciprocate this goodwill by doing their fair bit. We are talking about maintaining jobs in the mines, doing a lot more in the communities where they operate and not use transfer pricing [the transactions made by multinational companies and their subsidiaries] to avoid paying some of the taxes.
Transfer pricing is a big monster.
The Financial Times of May 10, 2013 noted that “transfer pricing costs Africa billions of dollars annually”.


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