Zambia to hike minerals royalty tax

The government wants to review upwards the mineral royalty tax slapped on the copper and other base metals sold on the international metal market and whose benefits should benefit the local people.

Other players are concerned that revising the mineral royalty tax on the basis of the robust copper prices would affect their operations, scare away investors and trigger inflation.

The government seeks to review the royalty tax to 10 percent from 0.6 percent slapped on exports, far lower than world averages of 2,5 percent, according to sources close to the project.

Finance minister Ngandu Magande recently said it was the government’s desire to benefit from the high copper revenues on the international market arising from increased demand from China and the Far East.

Magande declined to divulge more details on the matter apart from saying the matter was actively being considered.

But sources close to the project explained that the government felt the foreign mining firms are not adequately sharing their “profits” earned from the all time high metal prices.

Some foreign investors in Zambian mining industry have urged the government to be cautious as it seeks to review the mining royalties and taxations after the surge in copper pricing on international market.

Vedata Resources Plc and Canada’s First Quantum mining firms said they supported the government’s plan to review taxations on condition that it did not affect their operations and profitability.

Vedata Resources, a 51 per cent equity partner in Zambia’s Konkola Copper Mines (KCM), hopes the planned review of mineral royalty tax would be done cautiously so as not to affect its operations and the agreement entered with the government.

Chairperson, Navin Agarwal, explained that any review upwards would obviously increase the cost of production and affect the company’s profitability.

“1t should not make any material difference in our operations of projects,” Agarwal told journalists on June 24 during his visit to Zambia.

He explained that Vedanta Resources’ agreement with the Zambian government was protected under the ‘shareholders agreement’, which should be honoured.

Agarwal expressed reservations about the actual pricing of copper on the international market claiming that the ‘real price’ of copper averaged between US$1.2-US$1.6 per pound as opposed to the current US$3 to US$3.7 per pound.

First Quantum, a Toronto-listed base metal firm said the proposed revision of the royalties payable by investors were uneconomical and a threat to the development of the sector.

Commercial manager, Andrew Hickman, urged the government to be considerate before revising the royalties as it was a threat to the existing investors and prospective investors; most of whom he said already have obligations to repay loans to creditors.

Most foreign firms paid a maximum of 1-2 per cent worldwide and 10 per cent, if implemented would be exploitative in an economy that needed to be buoyed.

Hickman said recently that despite First Quantum expanding four-fold since 1997, when it opened operations at Bwana Mkubwa, about 380kms from the Zambian capital Lusaka, it was struggling to bring the development agreement to the signing stage to guarantee stability under the existing tax legislation.

Economic commentators contend that revising the mineral royalty tax would affect the success of the industry.

David Punabantu, an economic analyst said initially the low mineral royalty tax for large scale mining companies was meant to increase production for the mining sector, an objective, which has been attained.

He said the decision would affect the government’s revenue collected from the sector which it seeks to pump into the economy through various projects and ultimately trigger inflation.

Punabantu cited 1970 when copper prices were high and the government opted to increase its expenditure due to the high revenues coming in from the royalty tax resulting in high inflation.

“The government had then bought all cement produced by Chilanga Cement (a local firm) forcing the public to buy from the black market at hiked prices. The trend had spread to other commodities and in the end we encouraged inflation to go up because of such factors,” said Punabantu.

He noted that the increase would make operations of some mines unprofitable as their production output levels were different.

Additionally, the quality of copper was not the same at all mines and increasing royalty tax would disadvantage those producing low grade copper or low quantities as there would be no exemptions in relation to the quantities or quality.

He urged the government to instead put up a new foreign exchange management policy to ensure that Zambian copper was bought in local currency (Kwacha).

The decision would allow the sales to be brought back into the country through local banks and enable the Zambians, especially the private sector to have access to such funds for developmental projects.

Chambers of Commerce and Mines general manager Frederick Bantubonse urged the government not to change regulations because of the ‘temporal’ high copper prices.

“Government sits on these boards and they have information so there is no need to change the laws just because there is cash at the bank and since prices may rise or fall; nobody expected it to be at US$8,000 per pound,” he said.

“These mines initially incurred losses of US$85 million after investing US$1.4 billion leading to some foreign mining firms to pull out.”

Under the Mines and Minerals Act and the local taxation laws, local and foreign mining companies carrying out copper and cobalt extraction operations are taxed at 25 per cent.

Foreign mining firms are exempted from paying dividends realised from copper produced and sold, but do not pay interest earned on finished copper sold. Investors are obliged to pay 0.6 per cent royalty tax but are exempted from paying management fees while in Zambia.

Foreign firms, other than mining are also allowed 100 percent deduction of capital expenditure in the year incurred, according to the current tax laws.

July 2006
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