Copper War: Zambia puts Kongola on the spot for tax evasion

 

Windhoek – Africa's biggest copper producer, Zambia, is at war with Konkola Copper Mines (KCM), a unit of London-listed Vedanta Resources Plc, which is also one of the country's largest miners, over allegations of transfer pricing.

 

Vedanta Resources officials were in Zambia this past week, in what appeared to be an attempt to calm rising tensions, as Lusaka stokes up the heat on the multinational, accusing it of dodging tax in the country.

Relations between KCM, which produces around 300 000 tonnes of copper a year, and Zambia soured late last year when the government revoked the work permit of KCM chief executive, Kishore Kumar, after he announced plans to slash 1 529 jobs arguing that the miner is mechanising and wants to cut overheads.

An infuriated Zambian government hit back at the Vedanta unit, with President Michael Sata threatening to cancel the company's mining licenses.

A report released in January by a London-based non-governmental organisation, Foil Vedanta, titled ‘Vedanta KCM and the copper loot of Zambia’ accused the company of “widespread use of transfer mis-pricing”, a mechanism in which a corporate entity exploits legal loopholes to under-declare profits to reduce tax payments.

Globally, there is consensus that multi-national corporations have milked Africa over the past decades through transfer pricing, which is made easy by use of tax havens such as the British Virgin Islands and the Bahamas only to mention a few.

In the case of KCM, the report alleges that the miner has seen “very little profit”, one of the justification for the botched attempt to lay off 1 500 workers, when it notched a US$362 million profit in 2013 alone.

Zambia's Vice President, Guy Scott, ratcheted up the pressure against KCM when he publicly claimed that the company wants to siphon billions of dollars from the country.

“We are keeping a careful eye on KCM. It seems a lot of money was taken out and the firm now has a lot of liabilities, which are in excess of US$1 billion. They have not paid loans to banks, and they owe a lot of money to companies. So, there are a lot of all these strange things happening,” VP Scott said in Parliament last week.

“This is a matter of national importance. It is a matter concerned with billions and billions of dollars, tens of billions (Zambian) Kwacha, that we stand to lose if we don't stand together and show that we won't be taken for a ride,” VP Scott said.

“It seems as if they don't mind heading to a situation where bankruptcy is entailed. 

They would like their liabilities that they have deliberately built up to be taken on by the government,” he added.

KCM is currently engaged in a legal battle with Zambia Revenue Authority over a 3.2 billion kwacha tax bill relating to retrospective 16 percent value added tax (VAT) charge on exports from 2011 to March 2013.

Zambia has previously said that it loses up to US$2 billion yearly to tax avoidance and mining companies are the biggest culprits.

In January, reports said that the government was withholding US$500 million in value added tax repayments from mining companies failing to provide importer documentation.

The maze characterising the global commodities trade system means that Zambia has no clue as to what happens to copper when it leaves the country's shores. The government has previously admitted as much and is trying to come up with measures to plug the losses.

“The fact is that most metal is traded on the high seas ‑ a colonial tradition which is almost totally de-regulated, and unaccountable,” says the report by Foil Vedanta.

“Vedanta claim their Zambian assets at KCM comprise 13.6 million tonnes of copper, which, at current prices would be worth US$99 billion. Is this resource benefitting the people of Zambia under Vedanta's management? If not, how can the Zambian people radically re-examine the worth and potential of this enormous national asset,” the report says.

The report has found succour in a government whose mistrust of mining companies' operations has been rising over the past years.

Zambia's former minister of mines, Dr Kalombo Mwansa told the Zambian Post, copper prices, which have stayed at above US$7 000 a tonne during the past years, support the viability and profitability of mining operations in the country.

“There is no mining company which can claim to be making losses. It is not just true because the prices are good and the labour costs are always low, especially in Zambia. The wages are relatively low compared to other countries, so there is no way any company can claim to be making losses at this stage,” Mwansa said.

“They must be made to account, they must disclose what it is they are giving the government,” Mwansa added. Zambia Mines Minister, Christopher Yaluma, could not be reached for comment at the time of going to print.

Latest statistics from the Bank of Zambia show that the country produced 916 000 tonnes of the red metal between January and November 2013.

The problems Zambia is experiencing with mining companies mirrors the situation in the Democratic Republic of Congo (DRC), the continent's second largest producer of copper. Reuters reported in January that an audit report estimates that the government is owed US$3.7 billion in unpaid customs duties and fines by companies operating in Katanga, the copper heartlands.

According to the news agency, the report, which came after a government probe into the operations of mining companies, reveals that mining companies are under-declaring the value of imports and exports, and sometimes avoiding tax altogether and they sometimes do this with collusion of customs officials.

February 2014
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