ZICA proposes higher tax rate for mines

ZICA proposes higher tax rate for mines
By Joan Chirwa
Tuesday October 07, 2008 [04:01]

THE Zambia Institute of Chartered Accounts (ZICA) has proposed a higher tax rate for the mines, although emphasising that the adjustment should not ‘kill’ the country’s largest foreign exchange earner.

And local businessman and former chairperson of the Zambia Association of Manufacturers Mark O’Donnell said the government had a huge challenge to solve the tax problems considering that tax revenues were not commensurate with the country’s gross domestic product (GDP).

In a submission made to the Ministry of Finance and National Planning towards the formulation of next year’s national budget, ZICA feels mining companies were still not contributing enough revenue to the government treasury, even at three per cent mineral royalty tax and the just implemented windfall tax on copper. It however proposed that government replace the windfall tax with a progressive tax system based on profit.

“What we are proposing is that government should sit with the mining companies and come up with a written agreement over the tax system. On the windfall tax, we think in form, it is not fair and equitable and will kill the mining industry because the unit cost of production has not been taken into account as first trigger price is lower than the least cost of production.

We therefore propose that as a country, we do away with windfall tax and instead apply progressive tax system basbed on profit,” said ZICA’s chief executive officer Christopher Siakakole in an interview. “We are not saying mining companies should pay excessive taxes; the mines should instead pay moderate taxes, but should obviously be slightly higher than the current ones.”

The government this year implemented a new tax regime for the mines, forecasting to earn around US $415 million (approximately K1.5 trillion) in additional revenue to the treasury in 2008. The estimate in terms of the expected additional revenue from new mining taxes is significantly higher compared to what the government has been collecting from the mines through taxes.

However, indications are that government may earn less money than the projected US $415 million since some mining companies were not willing to pay windfall taxes. The mines have however complied in paying the three per cent mineral royalty tax which has been raised from the previous 0.6 per cent negotiated at the time of privatisation.

A windfall tax has been introduced at different price levels for different base metals. For copper, the windfall tax will be 25 per cent at the copper price of US $2.50 per pound but below US $3.00 per pound, 50 per cent at a price for the next 50 cents increase in price and 75 per cent for a price above US $3.50 per pound.

And Siakakole has said government should come up with a system for reviewing the mining tax regime on an annual basis.

“The country needs to benefit from the mining industry now that metal prices are high on the international market,” Siakakole said. “And we also propose that mining companies pay their taxes in dollar. Currently, the mines pay taxes in kwacha although their sales are in dollar, but in order to mitigate the effects of the appreciation of the kwacha, they should be allowed to pay taxes in dollar.”

ZICA also feels government should give a corporation tax discount of five per cent for Zambian controlled companies currently listed on the Lusaka Stock Exchange (LuSE).

“In order to encourage Zambian-controlled companies to list on the LuSE and develop capital markets, we propose that all Zambian-controlled companies listed on the stock market and have more than 25 per cent local shareholding be given a corporation tax discount of five per cent and this should only be given in the year of listing but on a continuous basis,” ZICA stated.

“We further propose that the costs for listing should be tax allowable in order to mitigate the cost that listed companies incur. We are aware that LuSE has created an Alternative Investment Market (AIM) to cover the SMEs. We therefore propose that all the SMEs that will be listed on the AIM should be given a five per cent discount on their corporation tax.”

ZICA further proposed that government should zero-rate value added tax (VAT) on commercial airline operations as recent hikes in fuel prices have put a lot of pressure on the country’s aviation industry.

“We propose an amendment to part one of the First Schedule of the VAT Act so as to make transportation of persons by air can be a zero rated service and not an exempt service thereby encouraging the growth of the aviation and the tourism sectors,” ZICA stated. “The recent fuel price hikes and the general complexity in operating an airline require government support through appropriate legislation. Currently, commercial passenger airlines operators are not allowed to claim input VAT because their services are exempt.

ZICA also stated that government should raise incomes exempted from tax from the current K600,000 in line with rising trends in the cost of living around the country.

“The K600,000 exempt income per month given the government last year is no longer enough to cushion the impact of the rising cost of living, arising from the fuel increases, global food price increases, leading to an increase in the inflation rate,” stated ZICA. “Secondly, as a result of the rise in the cost of living, the food basket is currently estimated by the Jesuit Centre for Theological Reflection (JCTR) at about K1.8 million for a family of six.”

Finance minister Ng’andu Magande early last week however said Zambians should brace for higher pay as you earn (PAYE) in the next budget.

But Siakakole said increasing PAYE on the workers would send a lot of poverty into poverty.

“I’m very sure he (Magande) will not go ahead with the decision to increase PAYE when he receives proposals for the next budget because already people are spending a lot on basic commodities when their incomes are very low,” said Siakakole.

And O’Donnell said government was unable to collect sufficient revenue from taxes to carry out programmes, noting that the burden of paying tax falls on a few individuals who are employed in the formal sector.

“There is a big problem with taxes and the government has a huge challenge to solve the tax problem. Frankly the government is not collecting enough tax revenue as a proportion of GDP and hence is not able to collect sufficient to carry out all the programmes they want to,” O’Donnell said. “On the other hand, the burden of paying tax falls on the few who are lucky enough to have a job in the formal sector. This means that those in the formal sector are paying tax on behalf of those that are not working and contributing themselves. Because we only have about 600,000 formal sector jobs, this means that those who are paying end up paying very high amounts in proportion to what they earn.

“The same applies to businesses. Those businesses in the formal sector feel they are paying tax at rates in excess of what would be reasonable, simply because there are so few formal sector companies in comparison to the size of the country and the population.

“The way forward is quite simple. We need the economy to expand and grow in order for all those who do not have formal sector jobs, to be given an opportunity and for them to be included in the formal sector.”

O’Donnell advised that the 2009 national budget should focus on a number of areas that could contribute to increased economic growth.

“It is my view that whatever the Minister of Finance does in the budget, the budget has to focus very specifically on a number of areas. These are rapid economic growth at a rate of at least 10 per cent per year, creation of jobs in the formal sector.

A target needs to be set and we need to monitor that target so as to ensure policy in this area is giving the desired results,” O’Donnell said. “And if we are going to achieve rapid economic expansion, we have to ensure that skills are there to do it. Policy must encourage skills training to take place within the public sector and by the private sector.

“Rapid economic expansion is very possible, and if it achieved on a sustainable basis over a reasonable period of time, levels of poverty will begin to subside in a very noticeable way. The creation of jobs requires excellent investment policies along with consistency and predictability. We need to attract and retain as much investment as it possible, both local and foreign. There are many things that could be done to enhance the economic climate and to make it far more attractive for investment to take place.

“Although things have got better in recent years the investment climate is still quite harsh. There is too much petty bureaucracy, costs of doing business are too high, availability of skills is not what it should be and there are many more areas which if attended to, could make Zambia a much more attractive place to invest.

“We want to see the Minister collect more revenue out of economic growth and not simply by increasing the tax burden on the few that pay. We want to see policy improve in areas which affect the economy and we want to see policy in place to ensure more formal sector jobs are created out of new investment.”