Change in Mineral Royalty Tax is not a risk to Zambia’s sovereign sustainability

By Brenda Zulu

The Zambia Chamber of Mines dispel assertions in the Post newspapers of Monday, April 25,2016 by Moodys, lead Sovereign analyst for Zambia, Zuzana Brixiova that the proposed changes to the Mineral Royalty Tax(MRT) in the Mines and Minerals Development amendment Bill, before the Zambian Parliament, are a risk to sovereign sustainability.

According to a Press Release made available to the Africa Interactive Media (AIM), the announcement of changes to the mining fiscal regime in the 2015 national budget, the Chamber of Mines and its membership have been engaging government and other relevant stakeholders through a constructive dialogue process.

It must be noted that the disastrous consequences of the MRT regime as it stood, would have resulted in virtual death of the mining sector, something which would certainly have not boded well for the country. The industry together with government was looking for a longterm solution that would take the industry through the next 20 to 30 years. Increased production is fundamental to increasing government revenue.

It must be realized that having high nominal tax rate does not necessarily result in positive revenue. A realistic revaluation of tax rates that sustains the taxed sector is more progressive than an unsustainably high rate one that ultimately only serves to destroy the target sector.

What is an ideal mineral tax regime? It is one that delivers the maximum benefit for a country’s citizens from its mineral resources. Maximum benefit to the citizenry might not necessarily be the same as maximum benefit to the Government, in terms of tax receipts.

For example, a healthy mining industry has significant multiplier effects within the wider economy that far outweigh its contribution to the national coffers.

Studies by the International Mining and Minerals Council (ICMM) have shown that for every $1 generated by mining, at least an additional $3 are generated elsewhere in the host economy. In addition, for every one direct mining employee, employment is generated for further 3-5 employees elsewhere in the economy.

The broad aims of Government minerals taxation policy must therefore be to generate immediate and lasting revenue in a manner which:

• Has no adverse impact on the health of the Industry.
• Encourages (or, at least does not discourage) the investment needed for future development, which is the pipeline of future tax receipts.

Royalties are a blunt instrument; they are not sensitive to the distinctive circumstances of each mine. As MRT is based on production, it has no regard for costs – which will always vary between different mines. So, two mines with completely different cost structures and profit levels might end up paying the same royalty tax.

In fact, a mine can be making a loss and still have to pay the royalty – that is precisely what is happening across the Industry at the moment. Some loss making mines might even have to borrow money in order to make the payments.

A country report (No. 15/153, June 2015) by the International Monetary Fund (IMF) suggests Zambia’s MRT rates are too high.

“A comparison of prevailing royalty rates in 2014 shows that, at 6%, Zambia’s royalty rate was among the highest fixed rate among copper-producing countries.

A World Bank report (Making Mining Work for Zambia, June 2015), also suggests the country’s MRT levels are too high. “Zambia’s mineral royalty rates have in recent years tended to exceed the global norm, even before the rate jumped temporarily to 20 percent on open-pit mines in 2015. Most major mineral producers charge less than six Percent.”

According to the table below based on trends in Taxation by KPMG Global Mining Institute

Comparison with other national mining taxation regimes

COUNTRY ROYALTY CORPORATE INCOME TAX 

Australia 2.5%-5 % 30%
Brazil 2 per % 25%
China 0.5%-4 % 25%
Ghana 5% 25%
Indonesia 4% 25%
South Africa 0.5%-7% 28%

DRC 2% 30%

Zambia 30% 6%-9%
We in the mining industry have been restructuring our operations, lowering our costs and contemplating investments which improve our efficiency and try to keep people in work. But what are the right measures when we’re dealing at the level of an entire country.

This basic truth is tremendously encouraging for us in Zambia, for it tells us that despite the serious situation we currently find ourselves in, there is a way out. This explains why we, as an industry, are calling for a national strategic consensus among all stakeholders to promote the growth not just of the mining industry, but of the economy in general.

The long-term objective is a diversified high-growth economy in which the mining industry is no longer the sole contributor, but simply one of many industries selling products and services, creating jobs, and generating wealth for Zambia’s people and tax revenue for Government services.

Recent public pronouncements by His Excellency, President Edgar Lungu on the absolute necessity for a growing, diversified economy are encouraging, and show the government is alive to the need for such a transformation. As an industry, we stand ready to work with government, and all other stakeholders, to help make this a reality.