A tax war is brewing

Mines at War over New Taxes

Jan 7, 2019

One thing we know about crises is that they have a habit of getting worse, a lot worse, before they get better. The new tax regime for the mines and the rest of taxpayers is heading in the habitual direction of a crisis.

Here is the sequence of events so far:

In October, the Minister of Finance announced a huge tax rise in her budget for 2019 to pay for mounting debt and ongoing relentless spending. Hon Minister increased mineral royalty taxes as well as import duties from January 1st. A radical replacement of 16% VAT by a non-refundable sales tax is to be introduced from April rumoured to be set at 20%.

The mines through the Zambia Chamber of Mines have been complaining that the new tax policies would lead to 21,000 job losses and a significant cut of $500m in investment basing their argument on a comparison of resource-rich countries. ZCM stated that it would make mining in Zambia unprofitable at current prices. No figures on impact on profits were forthcoming.

What we do know is that the latest figures from the Extractive Industries Transparency Initiative (EITI) -- a global coalition of governments, companies and civil society groups -- reveal the mining sector accounted for more than a quarter of the Zambia government’s income, contributing K10.72 billion-over US$1 billion-in 2016.

The chamber of mines warned that the proposed changes would make Zambia "un-investable", with the government responding by saying it was willing to amicably discuss the transition.

On 21st December, First Quantum Minerals announced 2,500 lay-offs at its Trident and Kansanshi mines in Northwestern Province. Last week, Vedanta Resources announced closure of its smelter and Nchanga Mine in the Copperbelt due to higher import duties.

The government retaliated by saying that it would not tolerate arm-twisting by the mines over taxes. It asked the industry to justify layoffs and demonstrate the impact on profitability by close of play Friday last week. None responded to its request.

On the same day Zambia Revenue Authority announced that there would be no refund of $550-600 million in VAT owed to the mines because it said the mines owed more in royalty and back taxes. ZRA did not disclose the net position.

Today, its the turn of a mine union, which predictably threw its support behind the government. The Mine Workers Union of Zambia says "mining companies that do not want to pay the new taxes must go to countries where they will not pay taxes".

And the Association of Mine Suppliers and Contractors says "the mines’ agenda to undermine the will of Zambians on its resources is unjustifiable and will not be tolerated".

The two were speaking at a joint media briefing in Kitwe this morning.

A "technical team" from the Mine, Energy and Water Ministry was dispatched to Solwezi, Northwestern Province, today in an attempt to fact find in the country's largest open pit mines. 

Inevitably, truth is the first victim of this tax war with neither side volunteering information. Habitually, it will get worse before it gets better. Everyone will end up worse off - reputationally, economically, socially and politically. 

Global headwinds

Set this local skirmish against the larger global trade issue and China's slowing economy and we have a potential deadly cocktail, which can easily push the economy into another 2016 trough that no amount of supply-side government spending can avoid.