MAC: Mines and Communities

Mining companies reject windfall tax

Published by MAC on 2010-01-31
Source: Post Zambia

Mining companies reject windfall tax

By Chiwoyu Sinyangwe, Post Zambia

27 January 2010

MINING companies have vehemently opposed the reintroduction of windfall mining tax despite the current boom in international copper prices, warning that raising taxation could plant uncertainty in future investments in the sector.

And the government has disclosed that it plans a meeting over mining companies' continued opposition to the abolishment of incentives tied to the Development Agreements (DAs).

The Bank of Zambia (BoZ) last week disclosed that in 2009, the country got US$77.7 million in tax revenues from copper sales revenue earnings of US $2.9 billion.

BoZ stated that Zambia's revenue earnings from copper sales last year tumbled to US $2.9 billion from US $3.6 billion recorded the previous year despite output increasing by 20 per cent over the same period.

During the same period, the country's revenue earning from the vast mining sector through taxes dropped from US $77.7 million in 2009 compared to US $128.4 million.

The rising of international copper prices from just below US $3,000 a tonne at the height of the global financial crisis in the last quarter of 2008 to the current levels of around US $7,500 has heightened calls from key sectors for the reintroduction of the windfall tax abolished last year.

The pressure is mainly as a result of the government's apparent failure to include revenue projections from the mines in this year's budget, which also replaced windfall taxes with the profit variable tax regime.

The windfall mining tax introduced in 2008 at the height of the copper boom which started in 2003 was abolished last year by the government as incentives to help the mining sector overcome operational difficulties emanating from the plummeted international copper price then.

Despite recent mounting pressures for the government to increase tax revenue earnings from the copper mining sector, the country's lifeblood, finance minister Dr Situmbeko Musokotwane opposed the calls, saying reintroducing windfall taxes would result in closure of mines thus causing unemployment.

Dr Musokotwane contented that although copper prices had improved on the international market, it was not possible to reintroduce windfall taxes because not all mining companies were making profits.

Recent indications from the ministry of finance states that only First Quantum Minerals owned Kansanshi Copper Mines was paying "full taxes" as it had reached full development levels.

In what would be seen by most analysts as its first ever official response to the growing pressure on the government to reintroduce the higher taxes on the sector in view of the current boom in commodity prices, Chamber of Mines of Zambia (CMZ) said by reintroducing higher taxes on the sector, the country risked discouraging future investment as investors always felt and preferred to invest in environments that had predictable regimes.

However, CMZ president Nathan Chishimba said if any alteration to the mining fiscal regime was to be done, it needed to be a product of consensus between the Zambian people and the mine owners.

CMZ is an association of foreign mining firms operating in the country.

"With regard to windfall tax, the industry respects the right of speculators, spectators and observers to voice their opinion on national issues," Chishimba told Business Post in an interview. "What is important is to bear in mind that mature mining jurisdictions maintain objectivity and consistency in framing mining policy, and that in such regimes, when changes are effected, they are well consulted and researched.

It is also important that debate on tax issues is informed and factual. We are concerned that in the case of windfall tax most observers have missed the wood for the trees by not familiarising themselves with the architecture of the regime as it stood, or the issues that caused concern in the industry with the particular format that was proposed.

By so doing, and demonising mining investors in a broad brush manner, they risk planting uncertainty in the international investment fraternity about the kind of investment environment Zambia represents, which uncertainty may cascade to other important non-traditional sectors we may be seeking to promote as a country."

Chishimba welcomed the recent recovery in international copper prices over the last few months, saying the development would give much needed relief to the Zambian copper mining industry battered by low metal prices in the last quarter of 2008 and the first half of 2009.

"However, we are concerned that very few analysts in Zambia examine the entire suite of factors that influence copper pricing, investment and operation of production assets," he said. "There is a certain fixation in some quarters that investment and operation costs in mining remain constant, and only the price shifts, therefore if the price moves upwards, then the entire quantum of upward change in price constitutes profits."

He said while the mining companies were benefiting from the current high metal prices on the international market, they had been hurt by production costs which had surged in tandem with the price recovery.

"In point of fact, just as the prices are cyclical, production costs are also cyclical, depending on which aspect of a boom or bust cycle the industry is in," Chishimba said. "Additionally, as you may have seen from recent upward adjustments in petroleum prices, commodity price booms are a double edged sword, being beneficial for exporters of one commodity and adverse for importers of that commodity. In the case of Zambia, we are currently highly dependent on one commodity, copper. Therefore, while a high copper price may be perceived as being highly beneficial in a narrow sense, it is important to factor in the full implications of the countervailing adverse impact of the higher cost of inputs and materials that will accrue as a result of upward movements in prices of other commodities."

Globally in mining and other extractive industries, a rise in international prices trigger a demand for higher wages from workers who anticipate to share from the high prices "while the spoils last."

Local mine workers have already sent the warning shots, threatening to down tools if mining companies fail to improve their working conditions in tandem with increasing copper prices on the international market.

This year, unless we get meaningful remuneration packages, we may not take the situation kindly because we have been taken for the ride for too long," Mine Workers Union of Zambia (MUZ) president Rayfold Mbulu warned last week , adding that "The problem in the mining sector is that the relationship that exists between the workers and employers in the mining sector is similar to that of the horse and the rider where the mine owners want to ride on the backs of the miners and make huge profits... and this as MUZ, we shall not allow the miners workers not to get reward for their sweat."

But Chishimba said: "We have confidence in the sobriety and maturity of the representatives of mining workers. It is our understanding that negotiations are currently underway within a number of mining operations, and it would therefore be irresponsible for us to prejudice those discussions by speculating on their outcome."

Chishimba also played down recent projections by the International Monetary Fund (IMF) that international copper prices and all commodities were expected to maintain bullish run in the short to medium term, rallying on the current recovering global economy which was sustaining demand for metals and other commodities.

He cautioned that the country needed to treat cautiously the IMF optimistic projections, saying it was too early to firmly state whether the global economy had fully recovered.

"The projections by the IMF can only be taken for what they are, projections. We also understand that the IMF normally undertakes research in the context of fiscal matters, therefore we would understand if they were a little more optimistic about the performance of the copper price," he said. "Indications are that currently, there are stirrings of recovery in the major economies, and possibilities of growth in emerging and developing countries, which should be good for commodities like copper. However, we must temper this optimism with the reality that the growth we see being projected is still fragile."

Chishimba said although the recent recovery in international metal prices had positively impacted on the operations of existing mining units, future investments still looked uncertain as most key sources of investment funds into the mining sector remained averse.

"This means that risk awareness among providers of investment funds that we critically need in new mining projects, infrastructure and other supporting sectors is very heightened," said Chishimba. "We therefore must maintain momentum in ensuring that investment risk is managed and mitigated to the greatest extent possible.

In general, the copper price is the result of a complex interplay of issues over which mining companies have very little control. We would certainly hope prices hold at good levels to enable the much needed investment to flow into Zambia."

And Secretary to the Cabinet Likolo Ndalamei disclosed last week that the government would soon engage eligible mining companies that had raised concerns about recent changes to mining legislation and the impact that the new legislation and the resultant tax measures have had on incentives that were tied to mine development agreements.

Since the reintroduction of the mining fiscal regime of 2008, the new Act nullified the Development Agreements between the government and mining companies, resulting in what foreign mining firms complained as "causing loss of incentives for the mines." As a result of the new mine fiscal regime, the government increased Company Income Tax rate from 25 per cent to 30 per cent, increased mineral royalty rate from 0.6 per cent to three per cent and introduced both windfall tax and variable profit tax.

The new mining regime also resulted in separation of hedging income from mining income for tax purposes and also reduction of capital allowance depreciation rate from 100 per cent to 25 per cent.

The changes to the mining regime had not gone down well with the mining firms who continue to contest that the government should restore the DAs which were skewed in favour of mining companies.

"Following the changes to the mining fiscal regime, mining companies raised concerns about the impact that the current laws and the resultant tax measures have had on the incentives that had been tied to the Development Agreements," stated Ndalamei. "In the spirit of dialogue and especially because of the need to attract investors in Zambia's quest for development, the government has appreciated the necessity for extensive talks."

Ndalamei stated that the new fiscal and regulatory was in line with the directive by President Rupiah Banda during the official opening of Parliament in September 2009 for government to hold consultative talks with the mining companies in order to arrive at a mutually beneficial resolution, acceptable to both the people of Zambia and the mine investors.

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