Zambia’s new tax regime has significantly increased the tax burden on mining companies, making the sector unsustainable and uncompetitive, states a report coauthored by Premier Consult’s Professor Oliver Saasa and the Zambia Institute for Policy Analysis and Research’s Shebo Nalishebo.

According to the authors, Zambia has the highest tax burden of all comparable mining countries, and, under the new fiscal regime for the mining sector, the effective tax rate would vary between 86.3% and 105%, depending on the copper price.

The report, titled ‘Assessment of Mining Fiscal Regime in Zambia: 2000–2019’, also notes that prior to the implementation of the new tax regime, Zambia’s mines already faced some of the highest effective tax rates in the world and that, together with an unstable tax environment, the high cost profile of the average Zambian mine makes for a challenging place to do business, resulting in an ever-diminishing investment climate.

The authors state that the new tax regime’s key objective appears to be to increase the effective tax rate so as to raise tax revenue generation, adding that, under the new regime, the effective tax rate for Zambian miners could be above 105% if the copper price surpasses $9 000/t.

“At high copper prices, this will result in the extraordinary situation where a mine will be obliged to pay more in tax than the profit it has made,” the authors say, noting that “no business can continue to operate under those circumstances”.

They explain that, although the country’s former Finance Minister had argued that the tax changes in the 2019 Budget would ensure the sector was paying its fair share of taxes, there seemed to be “no clear guarantee” that the policy changes would actually result in enhanced revenue flow to the Treasury from the mining sector.

However, the Zambia Chamber of Mines has reiterated that Zambia needs a competitive and stable tax regime to attract investors and to secure sufficient revenue from the mining sector.

The organisation believes government and the private sector should seek to create a framework in which a modern, progressive and developing commodity-based economy can be built – a scenario where investors vie to invest in Zambia.

Saasa’s analysis, meanwhile, further reveals that the mining sector is operating in an environment that requires urgent attention for mining players to meaningfully contribute to the Zambian economy through well-supported mining expansion programmes.

“Overtaxing the mines today has the potential of discouraging the development of existing and new mining projects, which would translate into low tax receipts tomorrow,” he explains.

“It is clear that the 2019 fiscal regime, announced by the [Zambian] government in September 2018, has introduced significant constraints to thriving mining sector development,” the report adds.

The report also points out that the absence of a well-structured dialogue mechanism between the government and mining-sector players has contributed to the seemingly limited appreciation by the State of the mining intricacies that ought to be factored in when mining-sector policies are crafted.

Mining-sector taxes and royalties paid to government contribute significantly to the national economy and, during the first half of this year, the mining sector’s direct contribution was 13% of domestic revenues, according to the report.

The mining houses’ indirect contributions amounted to 85% of domestic revenues, bringing the total contribution of mining houses in Zambia to 21% of domestic revenues.
“To secure the unfettered growth of the mining industry, Zambia’s mining fiscal regime ought to be stable and predictable, considering that the frequent policy changes that Zambia has witnessed over the years have generally discouraged long-term mining development,” the report points out.

Mineral tax systems should ensure adequate payments to both the country and the investor, it adds, noting that an effective and efficient mineral tax regime that aims to attract foreign direct investment should, therefore, seek to adequately compensate the country, while remaining internationally attractive and competitive.