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Zambia: Zambia considers simpler tax for miners as VAT row simmers

Tuesday, 07 October 2014   (0 Comments)
Posted by: Author: Reuters
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Author: Reuters

Zambia could simplify its fiscal regime for mining companies by scrapping corporate tax for the sector next year, a government source said on Friday, a move that comes against the background of a simmering dispute over value-added tax (VAT).

Instead of corporate tax, regarded as hard to administer, companies would face a higher mineral royalty rate in Africa's second-largest copper producer, the source said, without detailing the size of the rise. The rate is currently 6%.

"This is under very serious consideration and may be announced by the finance minister," said the source, who asked not to be named. Zambia's 2015 national budget is set to be presented to parliament next week.

Like many producer countries, Zambia would like to see a bigger slice of mine revenue remain at home, and it has periodically been at loggerheads with mining companies, claiming in the past that it was owed hundreds of millions of dollars in unpaid taxes.

Now the industry says $600-million of VAT refunds are being withheld by the government under a previously unenforced 1997 rule, prompting threats to cut back investment.

Glencore, the mining group and commodity trader, has halted its zinc operations in the southern African country. Its Mopani copper unit has suspended some of its planned $800 million investment in Zambian projects.

Konkola Copper Mines (KCM), owned by Vedanta Resources, said the issue of its VAT being withheld was hindering its investments and could have a "long-term negative impact".

The roots of the VAT row lie in Zambia's efforts to get to grips with the destination of its copper exports.

The regulation in question requires mining companies and other exporters to produce import certificates from destination countries to qualify for tax refunds.

This was aimed at determining whether or not Zambia was getting fair value and revenue for its mineral resource.

For example, a 2010 study by Christian Aid showed that as Zambia's copper production soared in the 2000s, Switzerland came to account for more than half of the southern African country's exports of the commodity. But the price of Swiss re-exports of the copper was far higher than that received in Zambia.

In 2008, the study estimated, Zambia's GDP would have been 80% higher if the copper leaving its borders in that year alone had received the same price as Switzerland.

"The international trade data suggest that Zambia may be suffering losses in the billions of dollars by failing to receive the real value of its exports," said Alex Cobham of the Centre for Global Development, a trade and aid think tank.


The industry for its part says that it is almost impossible to get produce such documentation because it sells to multi-national trading houses.

"Products once received by the traders can be split, can change hands several times and may even be changed into different products before reaching the final point," Zambia's chamber of mines said in a recent statement.

"It is impossible for the seller/exporter to track the products and obtain documentation from the receiving customs jurisdiction to confirm that the products did reach that destination or destinations," it said.

Critics say the difficulty in tracking metal raises questions over the transparency of the commodities market, but Zambia's changing tax focus has also raised concerns.

In 2012, its mines minister at the time said the industry owed the fiscus up to $1-billion in unpaid taxes. Now, it is enforcing an old rule that enables it to retain more cash.

"The Zambian government’s tendency to intervene directly in the pursuit of its objectives has shed a poor light on the country’s investment climate in recent months," said Irmgard Erasmus, an analyst at NKC Independent Economists.

"The current time is not optimal for the government to be throwing its weight around, especially against a backdrop of a softening in copper prices."

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