SHOULD ZAMBIA RE-INTRODUCE WINDFALL PROFIT TAX

INTRODUCTION
The lamentation of Dr. Mathias Mpande in his article “Explaining Windfall Tax” which appeared in the October Issue of the Zambian Economist is a clever explanation as to why Zambia must address the issue of mining taxation. The fact that the mining industry which provides over 80% of Zambia’s export earnings but contributes less than 2% to government revenue, is a clear misnomer and according to Dr. Mpande, “this is what is paralyzing our state, causing corruption, extreme poverty and suffering of 99% of our Zambians”. While agreeing with the main thrust of Dr. Mpande’s argument, this article attempts to put the issue of windfall tax into a historical context and argues that Mwanawasa’s bold attempt at resolving a historical injustice against Zambia has been betrayed by the recent revisionism as espoused by the new Minister of Finance Musokotwane who not long ago was Mwanawasa’s economic adviser.

ZAMBIA’SCOPPER/COBALT PRODUCTION AND SALES
Zambia has continued to be one of the global leaders in both Copper and Cobalt production /sales. After the privatization of ZCCM, production and sales figures for both copper and cobalt have varied. Observers have noted that definitive production/sales figures are not available as the Ministry of Mines has not been capable of auditing the industry effectively. The IMF have estimated the following production figures and value of the metals from information allegedly supplied by the Ministry of Mines. In 2002, copper productio was 337.7 MT and sales were US$ 510 million while cobalt production was 3.9 MT and sales was US$ 50 million. In 2006, copper production was 498.3 MT and sales of US$ 2,938 million while for cobalt, production was 4.7 MT and reported sales of US$ 146 million. From 2007 to date, there has been no cooper and cobalt production figures reported. However the IMF estimated that Zambia's projected earnings from copper alone would be US$ 3,407 million in 2007, US$ 3,785 million in 2008 and US$ 3,658 million in 2009.


It is obvious that during this period of copper boom, Zambia does not know or has been prevented to know with exactitude the quantity of metals it produces and sales. The privatization process has made this fact worse as mining companies now are at liberty to export unrefined copper/cobalt metals and in this way circumvent honest statistical reporting. Zambia now un acceptably loses a lot of Gold, Silver and other minerals in this way. It is in this environment that the Late President Mwanawasa and his government attempted to institute fiscal policy reform to enable Zambia to benefit from the God given mineral resources which will waste away within twenty years of our life time living the next generation with hazardous gaping holes with nothing to show for. In the current debate on this, two viewpoints can be discerned, namely, the Mwanawasa Doctrine and the post Mwanawasa Revisionism.

THE MWANAWASA MINING TAX DOCTRINE
After being hesitant for almost six years, Mwanawasa was finely convinced that Zambia was getting a raw deal from its minerals. On 1st April, 2008, his Government finally gave effect to the Mines and Minerals developed Act 2008 and also passed the Income tax (amendment) Act 2008. Hitherto, Company Tax rate for Mining was charged at 25% of Company profits In reality however, the Copper Mining Companies since they were privatized have hardly declared any profits as they claimed that they were still carrying forward their losses and claiming depreciation on large capital investment. The Zambian Government had, under duress, agreed not to alter the 25% Tax rate on profits for a stability period of 20 years. Because of this, Zambia hardly received anything from the Mining Company who for instance in 2001 only paid a paltry K 4 Million as Company Tax. Mwanawasa wanted to change this historical injustice and the starting position was by way of addressing the mining tax regime of Zambia. Among other changes, the MMD government addressed the following:

Firstly, Section 2 of the Mining Minerals Development Act introduced the definitions of energy minerals industrial Minerals Mineral royalty and Mining operations. This was to avoid deliberate misinterpretation of the intention of the changes.

Secondly, Section 133 amended the Mineral Royalty rates and introduced the definition of norm value and gross value. The norm value was defined as the average LME or Metal Bulleting or any approved money exchange market cash price per metric tonne multiplied by the quantity of the metal sold or produced. The gross value was defined as the realized price for a sale free – on – board at the point of export from Zambia or point of delivery within Zambia.

The Mineral Royalty rates were increased from 0.6 % to 3% of norm value of base metals produced or recoverable under the license; 3% of gross value of Industrial and Energy Minerals; and 5% of norm value of the precious stones and 5% of the gross value of the gemstones produced under the license.

Furthermore, to ensure that Tax was collected, the ZRA Commissioner General was empowered, if he felt the realized value had been under declared, to charge royalties in accordance with the mechanism of section 97A to 97 D of the income TAX.

To ensure compliance of the law, section 142 of the Act also prohibited the disposal of Minerals and provided penalties for contravention.

To stop the continued pillage of Zambia’s resources, Section 160 provided that existing development agreements would henceforth cease to be binding on the Republic of Zambia and also removed the proviso on paragraph 3(1) (e) of the charging schedule which made all Mining Companies including those with Development Agreements unfairly or crookedly signed with the Government to start paying Income Tax at the rate of 30% instead of 25%.
Many Patriotic Zambians heralded the Mines and Mineral Development Act 2008 as the best of the Mwanawasa heritage, which had the potential of making Zambia benefit from its Minerals fairly. Previously, Zambia had been a victim of transfer pricing where Mining Companies directly or indirectly sold Zambia’s metals to associated parties at under valued cash prices. For Tax purposes, the Commissioners general was now empowered to use the reference prices to determine Tax obligations.

INCOME TAX AMENDMENTS
Further more, the Manawasa Government effected changes in the Income Tax Law by passing the Income Tax (Amendment) Act, 2008 and amended the Tenth schedule on windfall Tax. The amendment introduced a schedule for the Computation of Windfall Tax. This applied to any person carrying on Mining operations of base metals or precious stores its computation started at two times the average cost of the Mineral. In other words, a breakeven point was first established and the trigger point was at a double cost to this. Although this was unfair for Zambia, it was still a progressive beginning.

For Copper, the First Trigger Price (FTP) was US$ 5,512 meaning that the agreed break even point cost was US$ 2,756. And yet in the mining circles, the real breakeven point for copper production in Zambia is between US$1,000 and US$!,500 per tonne. The Second Trigger Price (STP) was US$ 6, 614 and Third Trigger Price (TTP) was US$ 7,716. Windfall Tax was then paid as follows: If the monthly average price (MAP) (i.e weighted average LME price for the month) did not exceed the FTP, Windfall Tax would not be paid . If MAP was between FTP and STP the Windfall Tax to be introduced was 25% or US$ 2.50 per pound . If MAP was between STP and TTP, the Wind fall rate for this would be 50% or US$ 3.00 per pound and if it exceeded TTP Windfall profit would be 75% or US$3.50 per pound. The measure was intended that whenever prices of the metals increased beyond 2 times the cost of production, Zambia would also gain.

For cobalt, the First Trigger Price (FTP) was US$55,116, the Second Trigger Price (STP) was US$77,162 and the Third Trigger Price (TTP) was US$88,185. As with the copper costing, the provision for windfall taxation were 25%, 50% and 75%.
VARIABLE TAX
The Mwanawasa tax regime also provided for Variable Tax which was charged where assessable income from mining activities exceeded 8% of the total sales. As is normal in many countries, all companies including mining companies pay a normal company tax. In Zambia, it has been 30% of the profits. However for Zambia, there was an additional proviso that the assessable income from the mining operations did not exceed 8% of the total sales value of the year. Where assessable income exceeded 8%, variable tax rates became applicable. This was 15% for profits above 8%. In other words, income tax on profits up to 8% was 30% while any profits above 8% would be charged at 45%. Variable Tax is a net-profit based tax that was specifically to work under all price and cost scenarios. And this is the tax that shortly after the demise of President Mwanawasa, the new government of President Banda opted to adopt and caused Parliament to abolish the windfall profit tax regime in 2009.

THE CONTROVERSY
Two positions have emerged, namely, to sustain the current tax regime or revert to the windfall tax regime. The Minister of Finance and National Planning Situmbeko Musokotwane who earlier had been Mwanawasa’s principle economic adviser and who had been nominated by the new President to be Minister, has been the greatest proponent of the new tax regime of the mines. In his 2009 National Budget Address, Musokotwane defended the abolishment of windfall taxes. “Mr. Speaker, the current mining tax regime was introduced last year aimed at providing a stable and robust tax system that works during periods of both high and low prices and cost. This regime was intended to ensure that the nation received a fair return from its resources, while mainting a globally competitive mining industry.” Having said this clearly progressive statement, Musokotwane then contradicted himself and said “Sir, having consulted with the industry and other stakeholders, and in light of the impact of the global crisis on the mining sector, I propose the following refinements:…(a) remove the windfall tax and retain the variable profit tax, which will still capture any windfall gains that may arise in the sector…”

Many observers have defined this position as a very unpatriotic apology. Musokotwane completely discounted the view that the two tax systems were not applied concurrently nor did he reflect on the loss of income to Zambia. In 2008, it was estimated that Zambia would earn not less than US$415 million from windfall taxes. With the new variable tax, the country is unable to even estimate what Zambia would get. What is factual is that Zambia is the loser. Silvia Masebo, the Chongwe MMD Member of Parliament pleaded with her own MMD government to re introduce windfall tax in a passionate speech in Parliament quoted in the Sunday Post, October 25,2009 at page 3 as follows: ”We continuously sound apologetic to those wanting to invest in the mining sector. We have been complaining about little resources, but it is in the mines where the money we need is. We have heard our colleagues on the left (opposition) say they objected the removal of windfall tax. I want to make it clear that even those of us on the right (Ruling Party MMD) are for the re-introduction of windfall tax because that is where money for development is.” Masebo continued her speech by recalling the bravery MMD exhibited when they introduced the regime. “II recall how we suffered as MMD last year to introduce this tax. Our late President Mwanawasa had to take a break and drink water when he was opening the National Assembly because he had to make an important announcement. We introduced the windfall tax, and it is sad that a few months later, we have shifted. May I appeal that this government re-introduces the windfall tax on mining…”

FUTURE PERSPECTIVES
It is apparent that the abolishment of windfall tax was not well thought out. The irony that Musokotwane continues to defend the revisionism even as he was the principal adviser to its introduction in 2008, begs the question. The Mwanawasa government fiscal regime introduced on April,1,2008 aimed at making Zambia receive fair shre of mining profits and rents through the introduction of windfall profit tax, variable tax and increased mineral royalties. In implementing, the windfall tax and the variable tax did not apply at the same time. In 2008 when this was implemented, Zambia found itself with a surplus budget and in a letter of Intent to the IMF dated 7th May,2008, the then Minister of Finance Peter Magande committed government to save K722 billion in a separate Mining Resource Account (MRA) at the Bank of Zambia (BOZ) to be used a stabilization fund to smoothen expenditures over time. It was estimated that the country would earn more than US$415 million that year. The windfall tax regime was supported by all donors notably the Bretton Woods Institutions, the Scandinavian countries, the EU, and DFID. Other organizations such as Oxyfam heralded this as a new beginning to mineral rich countries. The Musokotwane revisionism has worked against the new resource nationalism being practiced by all progressive countries that want to eradicate poverty and underdevelopment in their countries. The choice is whether Zambia should benefit fairly now by way of fair taxation or leave a situation where in twenty years time, our generation will leave a heritage for our children, hazardous gaping holes with nothing to show for.
Dr. Mbita CHITALA