CHIKWANDANOMICS, THE BUDGET AND THE MINES

THE economics of Zambia’s Finance Minister, Alexander Chikwanda, fondly referred to as chikwandanomics by the Zambian online community can be confusing.  In his 2015 national budget address under the theme, Celebrating our Golden Jubilee as One Zambia One Nation by Making Economic Independence a Reality for All, he proposes to spend K46.7 billion representing an overall increase in expenditure of 9.3%. This increase in expenditure comes against a backdrop of a widening overall fiscal deficit and increasing inflation.

Overall the budget carries a theme of continuity without major variations from the 2014 allocations across all sectors. The social sectors continue to receive lower funding as the government continues with its infrastructure development drive.

Zambia currently spends half of her national budget on the public sector wage bill owing to a huge salary increment government gave some civil servants which has proved unsustainable and government had to borrow a billion dollars by issuing a high interest Euro bond in 2014 to finance a significant portion of the 2014 budget. 2014 was a turbulent year for the Zambian economy with the kwacha having deteriorated to its lowest position in history and economic stability further threatened by an impasse with exporters over VAT refunds that government is yet to pay amounting to over USD 600 million mostly to the mining sector. The mining sector itself has responded to this by cutting jobs and scaling back investments in their millions of dollars.

 Mr Chikwanda has decided to overhaul the entire mining industry in his 2015 budget by simplifying the mining tax regime. In the 2015 national budget, Government intends to redesign the mining fiscal regime by replacing the current two tier system with what Chikwnda describes as a simplified one.
The new system will make underground mining operations to pay eight percent mineral royalty while open cast mining will pay 20 percent mineral royalty, resulting in a revenue generation of about K1.7 billion.
The new system will also see mines pay 30 percent corporate income tax on revenue earned from processing of purchased mineral ores, concentrates and other semi -processed minerals, currently taxed as income from mining operations. This proposed new system has received some mixed reactions with industry leaders raising caution on the likelihood that the new regime may make Zambia an unattractive destination for mining investments. Zambia Revenue Authority (ZRA) Commissioner General Berlin Msiska also says the  changes  to  the  mining  tax  regime  will  only  apply  to  mining of  industrial  minerals.

In their budget bulletin commentary Price Waterhouse Coopers observes that these measures are aimed at increasing revenue obtained from themining sector to “achieve a more equitable distribution of mineral wealth”.

The 8%/20% royalty tax applies to the value of the minerals. In most cases it is calculated on the “norm value” determined according to the price on the London Metal Exchange.

In providing for different mineral royalty rates, the Government has sought to take account of the fact that underground mining and open cast mining have different cost structures.   Operating a single tier mining tax in the form of mineral royalty will arguably be straightforward to calculate compared to corporate income tax. The Minister also considers that this reduces scope for tax avoidance.

However, the 20% rate of mineral royalty on open cast mines is high by global standards.

With the abolition of corporate income tax, there will be no form of tax relief for the running costs or capital expenditure of a mine. This means that irrespective of whether or not a company makes any profits it will still be liable to tax.

Further, the mineral royalty applies equally to mines regardless of the cost of extraction. As this will be the final tax there will be no deduction for mineral royalties. Previously mining companies were able to claim the mineral royalty as a deduction for corporate income tax purposes.

The changes proposed are a major deviation from normal taxation principles whereby enterprises are provided relief for business expenditure incurred, particularly where there is a significant capital expenditure requirement as in the mining industry.

The application of a turnover-based tax with no relief for operating costs and capital expenditure will be a major cause for concern and is likely to be a key disincentive for mining companies to continue operations, particularly if they are already operating at loss.

This measure could in the longer term render investment in the Zambian mining sector unattractive.

The reduction of the corporate income tax rate to 30% on the processing of mineral ores and tolling activities is intended to incentivise value addition and consequently contribute to job creation. It is not clear whether the reduction below the normal 35% CIT rate will be sufficient to achieve this aim. Chikwanda insists he is being misunderstood by his critics. Speaking at an FNB organized post budget discussion he appealed to stakeholders to clearly explain the new changes in the mining tax administration to the public instead of attacking Government on the new policy.

Chikwanda desires to run a budget that will not exceed 4.6 percent of the Gross Domestic Product (GDP).