Windfall Tax
Recently we wrote an article explaining why we
thought Windfall tax is not the solution in taxing the mines. We have had the
great pleasure of receiving some feedback from the Former Finance Minister
Ngandu Magande who is a proponent of windfall tax.
Filled with valuable insight, below is his line of
argument which we have deemed as a very much worthy a counter balance to our
approach. The choice now lies in the public not to take sides but pick
information from both sides to make a better tax framework.
Windfall Tax by N'gandu Magande
2008 Budget Speech Introducing the New Mining Tax Regime
1.
Mr. Speaker, I beg to move
that the House do now resolve into Committee of Supply on the Estimates of
Revenue and Expenditure for the year 1st January 2008 to 31st
December 2008, presented to the National Assembly in January 2008.
2.
Sir, I am the bearer of a
message from His Excellency the President recommending favourable consideration
of the motion I now lay on the Table.
3.
Mr. Speaker, over the past
five years, the nation has achieved macroeconomic stability characterised by
growth in the real Gross Domestic Product (GDP) in excess of 5 percent per annum,
the reduction of inflation to single digit, a stable exchange rate, declining
interest rates, a stable financial system, the removal of the external debt
burden, and a substantial build-up in foreign exchange reserves. These
achievements have resulted in notable successes in the creation of jobs and
wealth, and the reduction in poverty levels.
4.
Sir, our cherished and
chosen vision is to be a prosperous middle income country by 2030. This will be
achieved by creating a nation of dynamic, self confident and vibrant
entrepreneurs. Our foremost challenge, this year and in the medium-term, is to
create the fiscal space that will allow us to marshal both human and financial
resources. This will enable us to accelerate the implementation of the Fifth
National Development Plan.
5.
Mr. Speaker, to realise this vision, the theme of this
year’s budget is “Unlocking Resources for Economic Empowerment and Wealth Creation.”
6.
Mr. Speaker, the preparation
of this Budget has benefited from broad-based consultations with various stakeholders. This is in line with this Government’s policy
of openness and transparency. I, therefore, wish to express my utmost gratitude
for the valuable contributions made by various organisations and individuals.
Changes to the Mining Fiscal and Regulatory Regime
144.Mr. Speaker, in my 2007 Budget
Address to this august House, I proposed new tax measures for the mining
sector. I also informed the nation that the Government would engage mining
companies, with whom we had signed Development Agreements, as part of the
process of introducing the new tax regime for the mining sector.
145.Sir, given the complexity of the
mining sector, a team of experts was appointed to study this matter in great
detail. The findings of the study show that:
(a)
the Development Agreements in their current form are
lopsided; and
(b)
even if mining companies were to move to the 2007 tax
regime, the country would still not get a fair share from its mineral
resources.
146.Sir, the Government has, therefore,
decided to introduce a new fiscal and regulatory regime in order to bring about
an equitable distribution of the mineral wealth between the Government and the
mining companies.
147.Mr. Speaker, effective 1st April
2008, the new fiscal regime for the mining sector will include the following:
(a)
The corporate tax rate will be 30 percent;
(b)
Mineral royalty rate on base metals will be 3 percent
of gross value;
(c)
Withholding tax on interest, royalties, management
fees and payments to affiliates or subcontractors in the mining sector will be
at the rate of 15 percent;
(d)
Withholding tax on dividend will be at zero percent;
(e)
A variable profit tax of up to 15 percent on taxable
income, which is above 8 percent of the gross income, will be introduced;
(f)
A windfall tax will be introduced to be triggered at
different price levels for different base metals. For copper, the windfall tax
shall be 25 percent at the copper price of US $2.50 per pound but below US
$3.00 per pound, 50 percent at price for
the next 50 cents increase in price and 75 percent for price above US
$3.50 per pound;
(g)
Hedging as a risk management mechanism shall be
treated as a separate activity from mining;
(h)
Capital allowance, that is a depreciation of capital
equipment, shall be reduced from 100 percent to 25 percent per year;
(i)
A reference price, which shall be the deemed arms
length price, shall be introduced for the purposes of assessing mineral
royalties and any transaction for the sale of base metals, gemstones or
precious metals between related or associated parties. The reference price
shall be the price tenable at the London Metal Exchange, metal Bulletin or any
other commodity exchange market recognised by the Commissioner General; and
(j)
Capital expenditures on new projects shall be ring
fenced and only become deductible when the projects start production.
148.Mr. Speaker, the new mining
regulatory framework will be provided for in the Mines and Minerals Act. The
framework will also have a modern licensing system based on transparent
procedures.
149.Sir, these measures are competitive,
reasonable and balanced. The expected additional revenues, in 2008, as a result
of these new measures are estimated at US $415 million.
Line of Reasoning
In the 2008 Budget Speech I delivered under which
the windfall tax was introduced in the Zambian tax regime. I and officials took
time to discuss with individual mining companies on these proposals between
February and May 2008. They agreed to the tax with observations that it will
take away some of their income.
The price of copper then had risen from US $2,000 in
2002 to US $7,500 in 2007 per tonne, ie less than US $1 per pound to US $3.4
per pound. Somewhere in 2008, the price rocketed to just below US $10,000 per
tonne or US $4.2 per pound. Most of the mining houses had invested in the early
2000's on the basis of a projected best price of US $2.5/lb and a breakeven
price of less than US$2.00/lb. These statistics were presented by both parties
and discussed in our meetings in 2008. Just enquire with Chibuluma Mines
whether they had a meeting with me and officials at 0930 on 6th March and at
1100 hours on 18th March 2008. The government team and mining company officials
agreed that prices of over US $3/lb were a windfall to be shared by the
owner/introducer of the new technology and the owner/guardian of the historical
God-given copper deposits. we all realized that many mines would recover their
CAPEX and other initial costs in a short time than had been projected at the
beginning of the century.
Our meetings with the individual mining companies in 2007
and 2008, opened by inviting them to present their investment plans which
contained estimated costs of production and anticipated income. From these
numbers, both sides were aware of the break-even numbers. Each mining company
had its unique set of figures. All of them were above the 18 % margin, which is
the world average rate for mining operations
Variable tax was on taxable income below $2.5 per pound
(lb). The windfall tax was for any additional taxable income above this
threshold. They were and could not be applied on the same income. All this
was explained to the companies on individual basis. On 30th June 2008, the
Deputy Commissioner General of ZRA had a meeting in Chingola with Finance
Directors of all mining companies. he explained the new tax and a new variation
to collecting the windfall tax. They all agreed that they understood the
procedure, which was given later in writing. The following is the text:
"The Commissioner General of ZRA to collect the
windfall tax as a provisional tax at the lowest rate of 25 percent only, so
that the mining companies are not adversely affected during the year. The full
effective tax rate will be calculated at the end of the operating year and the
windfall tax will then be adjusted accordingly to a maximum of 47 percent. We
project that in spite of these adjustments in the collection of the windfall
tax, we will still achieve a collection of around US $400 million by the end of
the year."
Example Calculation of Windfall Tax
TAXES FOR A MINE PRODUCING
50,000 TONNES OF COPPER IN ZAMBIA
PARAMETERS
- TOTAL
PRODUCTION: 50,000
TONNES
- PRICE
PER TONNE: US
$7,000 LME
- GROSS
INCOME: US
$350,000,000
- COST
OF PRODUCTION (30 %); US
$105,000,000
- TAXABLE
INCOME: US
$245,000,000
- CORPORATE
TAX (30 %); US
$73,500,000
- MINERAL
TAX (6% OF GROSS VALUE): US
$21,000,000
- WINDFALL
TAX: 25% between US $2.5 but
below 3.00/lb (6,000 to 7,000)
25% x 50,000 x 7,000 = US
$87,500,000
50% for every 50 cents increase
above 3.00 (7,000 to 8,000)
50% x 100,000 x (7,000 minus 7,000) = US $0
75% for every 50 cents increase
above 3.5 (above 8,000)
75% x 100,000 x (7,000 minus
7,000) = US$0
I.
TOTAL
TAXES: F + G + H +
I = 73.5 + 21 + 87.5 = US $182,000,000 =52% of Gross Income
N.B: Variable tax was on taxable income below $2.5 per pound (lb). The
windfall tax was for any additional taxable income above this threshold. They
were and could not be applied on the same income
The formula is mathematical and the numbers could be changed, but the rationale of sharing the
WINDFALL INCOME should be maintained. The farmer must enjoy the golden eggs
while looking after the Goose as it is getting old and will soon die!
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