Sunday, September 14, 2008

New tax regimes spearheaded by Zambian Chamber

The Zambian Chamber of Commerce and Industry (ZACCI) advocated the revision of the Zambian mining tax royalty (MTR), in order to augment government revenue and invest in socioeconomic improvement initiatives in Zambia, ZACCI secretariat policy officer Clive Saili tells Mining Weekly.

Zambia has had one of the world’s lowest MTRs at 0,3%, when compared with a world average of about 3%. 

The government of the Republic of Zambia (GRZ) increased the MTR from 0,3% to 3% in April this year, which also marked the increase in corporate tax from 25%, to 30%, and the introduction of a 15% variable profit tax. 

Saili concedes that the new tax legislations will, ultimately, have a bearing on the profits of mining operations in Zambia, and in all probability affect inter- national investor relations with the local mining sector. 

“Understandably, a number of mining companies have had to re-evaluate their capital projects over the next years on account of the new tax regime, with a few suggesting that they may relocate future capital projects elsewhere,” reports Saili. 

He says, however, that the ZACCI is confident that min- ing companies will not cease their mining operations in Zambia. 

“It is our view that the investment climate in the country still remains favourable enough to continue attracting new investments,” states Saili. 

He mentions that all the large-scale mining companies have not only agreed to the tax increases, but have also begun to pay taxes under the new mining tax regime. 

The proposed tax increases by the GRZ and the ZACCI were introduced on a negotiation basis with mining companies, which would result in a voluntary agreement on the revision of the MTR that was mutually agreeable, reports Saili. 

In the ZACCI’s 2007 national budget submission, the Cham-ber acknowledged the need to offer tax incentives at the time of drawing up the develop- mental agreements between the mining companies and the GRZ, in the medium to long term. 

However, the ZACCI advised that the mining sector should become a major contributor to government revenue, states Saili. 

Commodities Boom 
The ZACCI reports that the unexpected boom in the price of copper driven by high demand in the Asian market, resulted in the price of copper crossing the $8 000/t level from below $1 000/t in previous years. 

“The future still remains bright in the mining sector, especially with current forecasts done across the world suggesting that the demand for commodities, such as copper demand in Asia, most especially, is not likely to falter in the coming years,” says Saili. 

As such, a number of mining companies in Zambia have continued to invest heavily in future projects, such as the Lumwana mine to be commissioned this year. 

Further, there are new nickel-, uranium-, gemstone- and cobalt-mining projects as well explorations for gold not only on the Copperbelt but also in other parts of the country. 

He says that the current performance and positive outlook for commodities provided a need for an upward adjustment of Zambia’s old tax regime, with the aim of bolstering government revenue, and helping to address the social challenges that Zambia faces. 

“At the same time, government was under severe pressure from civil society, which felt that there was a need for a trickledown effect in the benefits from the copper boom, and the general price of commodities on the international market,” reports Saili. 

As a result, government introduced the MTR and a windfall tax, in addition to other taxes for the mining community. 

The new windfall tax insti- tuted by the GRZ, promises to bolster the coffers of the Zambian government, with companies such as Canada-based mining and metals company First Quantum, which dropped a $30-million windfall tax offering in April, marking the first major payment by a major foreign mining firm. 

Development Agreements 
First Quantum, through its Zambian subsidiaries, is party to development agreements (DAs) with the GRZ for its existing opera- tions. 

The DAs provide an express right to full and fair compensation for any loss, damages or costs incurred by First Quantum by reason of the GRZ’s failure to comply with the tax stability guarantees as set out in the DAs. 

The company reports that it obtai- ned legal advice on its rights under the DAs, following the new tax regime insti- tuted by the GRZ. 

First Quantum, subsequently, sought legal advice, which confirmed that the company has rights of recovery for any taxes, which are levied in excess of those permitted under the DAs. 

In the light of the detailed advice received, the company has assessed there to be a high-probability of recovery from the GRZ of certain payments made in respect of these taxes. 

Accordingly, the company has recognised a receivable from the GRZ for an amount in respect of the expected ulti- mate repayment of taxes in excess of the taxes permitted under the DA. 

As required by the financial instruments standards, this receivable has initially been recorded at fair value based on management’s best estimate of the timing of receipts and amounts owing to the company. 

At June 30, 2008, this receivable amounted to $67,3-million, reports First Quantum. 

The company is currently engaged in discussions with the GRZ, along with other mining companies operating in Zambia with similar agreements, to find an alternative solution to arbitration or litigation.