Zambia to raise mining taxes

Vancouver — A significantly increased effective tax rate is bad news for companies interested in mining in Zambia, but it seems proposed hikes in the country’s mining taxes will not affect those majors already doing business there.

In his speech to open the second session of the tenth national assembly on Jan. 11, Zambian President Levy Mwanawasa said his government will introduce a new fiscal and regulatory mining regime with the aim of achieving a “more equitable” distribution of mineral wealth between the government and mining companies.

The new regime, which Parliament must still debate and approve, would include a windfall tax and a variable profits tax, which the president said has been designed to work in times of both high and low metal prices and for both high and low-cost mines. Company taxes would also increase. In all, the changes would bring Zambia’s effective tax rate for mineral resources to 47%, up from 31.7%.

The change is no great shock. Under the current system, Zambia earns far less from mining than any other comparable country. The 31.7% effective rate is 8% lower than the rate in Peru, which has the next lowest mining taxes. At such a low rate, mining companies in Zambia paid only US$142 million in company taxes and mineral royalties from total earnings of US$4.7 billion in the 2005-06 fiscal year.

Mwanawasa said that under the new regime, mining taxes would bring in $400 million in the 2008-09 fiscal year. The proposed system also includes new measures to ensure transparency and more effective regulation.

However, many questions about the proposed changes remain, primarily because of the mining tax system that has developed in Zambia since its mining industry was privatized.

Until the early 1990s, mining in the country was dominated by the massive, state-owned Zambian Consolidated Copper Mines (ZCCM). By 2000, under the supervision of the World Bank and the International Monetary Fund (IMF), ZCCM had been divided into several smaller companies and sold to private investors, in one of the most comprehensive and rapid privatization processes ever seen.

Privatization has no doubt brought more money into mining in Zambia. By the time of its demise, ZCCM was struggling, faced with low copper prices and substantial social program costs. With privatization, pits threatened with closure have stayed open, new mines have been developed, and production and profits have grown.

The problem is that during the privatization process, Zambia’s focus on securing investors led to development agreements — binding legal documents outlining taxes and regulations for mining companies — that left the government bereft of significant mining profits and unable to perform its role as an effective regulator. In addition, in negotiating development agreements, companies made sure to exempt themselves from cover- ing most of ZCCM’s liabilities, including pensions for its employees and care of its reclaimed mine sites.

As a result, the social crisis that started during the ZCCM’s decline has since worsened. The quality of employment in the Copperbelt has collapsed, with some 45% of mine workers now unable to access permanent, pensionable jobs and instead working on rolling contracts. The ZCCM provided not just jobs, but hospitals, schools, housing, and a wide range of social services — roles that private companies have not taken on. And many of the expected benefits for the local economy that privatization was meant to have provided have not materialized.

In addition to strikes and protests, the situation led to a democratic rebellion in the Copperbelt. In the 2006 presidential election, Copperbelt voters roundly rejected current mining policies, electing to every urban seat in the region MPs representing the Patriotic Front — a party that ran on a platform of deporting foreign investors, increasing corporate taxes, and limiting foreign ownership of mines. Although the ruling Movement for Multiparty Democracy party won the election nationally, in his first speech Mwanawasa recognized that the Copperbelt workers had demanded change.

That brings us to the present. Mwanawasa’s announcement was cheered in the Copperbelt but, since the debate has not yet gone to Parliament, ambiguities remain concerning just who the new tax will impact.

The development agreements include stability periods, ranging from 10 to 20 years, during which time the contracts cannot be modified without mutual consent. And since the agreements were created as part of a privatization process overseen by the World Bank and the IMF, they hold international legal status, meaning the Zambian government cannot modify the agreements, even through legislation. Development agreements are also secret, not available for public viewing or scrutiny.

So despite what are likely higher aspirations, it seems certain that Mwanawasa and his government cannot force companies already working in Zambia to conform to his new tax regime. Clive Newall, president of the largest Canadian firm active in Zambia, First Quantum Minerals (FM-T, FQVLF-O), was unwilling to comment on the president’s speech because the ramifications are as yet unclear.

Equinox Minerals (EQN-T, EQXMF-O) is developing the Lumwana copper mine in Zambia. The company’s vice-president, Kevin van Niekerk, is confident that all development agreements will be honoured.

“We will not see unilateral cancellation of existing development agreements,” he says. “They are protected in law as binding international agreements. For new projects, however, it’s a different story.”

Equinox signed a 10-year development agreement with the Zambian government in December 2005. As such, van Niekerk is not concerned about the impact a new tax regime would have on that project, at least for now. However, the company is also looking to develop a uranium project in the country, and van Niekerk understands that venture will be subject to the new laws.

“One needs to remember that what the government is asking for is not unrealistic, according to current mining tax standards,” he says. “With the current copper price, the companies currently mining in Zambia are benefiting quite greatly, and the government of Zambia has been making it quite clear that they’re keen to tweak the system.”