Thursday, March 27, 2014

Govt should revise double taxation treaties - Chigunta

By Kabanda Chulu
Wed 18 Dec. 2013, 14:00 CAT

THE government should go beyond renegotiating mining development agreements to revise double taxation treaties that are used by some foreign investors to avoid tax payments, advises Dr Francis Chigunta.

Chigunta, a Development Studies lecturer at the University of Zambia and former special advisor to Rupiah Banda, said Zambians needed to maximise gains from the country's natural resources. He said many companies were using the double taxation treaties to evade taxes in Zambia.

"Government should also look at the whole agreements which were negotiated under duress, there was much pressure from the IMF and World Bank and price of copper was very low that we had no option and no one knew that prices will suddenly rise. This is why we ended up accepting whatever was given because we had no choice, we were beggars, but now that we are in a strong position, it is time we renegotiated these agreements but we should go beyond and revise double taxation treaties, for example with Ireland and Switzerland," Dr Chigunta said.

"Under these agreements, citizens of either country choose where to declare their profits, you will find companies like Zambia Sugar preferring to declare profits in Ireland where tax is zero rated. This is why Zambia Sugar has legally not been paying a lot to the Zambian Treasury since they can take advantage of that tax loophole and if you look at copper exports or trade, statistics indicate that copper goes to Switzerland because profits are zero rated but copper actually goes to China. These are the agreements we need to do away with, especially that some were signed before independence. But why are we still keeping them; whose existence is to the detriment of the Zambian economy?"

He also advised on the calls for the implementation of windfall tax, saying the reality on the ground was that the country should not implement the tax.

"Indeed Zambians must maximise gains from the country's natural resources, particularly copper which is a national asset, but at the same time, we have to be very careful in the manner that we handle the issue of windfall tax. My view is that we need to be careful in the sense that we should not kill the goose that lay the golden egg," Dr Chigunta said.

"Right now, the mines are going through a period of difficulty, copper prices have been sluggish... They (the mines) have found themselves in this situation of not making a loss or profit and some of these mines are very old, about 80 years and there are those like deep mining at KCM which are facing high operational costs. Therefore, to survive, they resort to borrowing to meet these costs and even if the prices of copper were to rise suddenly, it will still be not possible to make that kind of payment because they have borrowed massively to sustain operations in the hope that prices of copper will rise. So, imposing windfall taxes will create further problems."

When reminded that windfall tax would be triggered at certain price threshold and the mines would not be affected until the price reached the trigger point, Dr Chigunta insisted that the mines would still have to meet obligations from their financiers.

"US$ 7,000 per tonne is currently the price the mines are break-even and they are still borrowing from banks to sustain operations. Even if the price reaches US$ 8,000 or more, they still have to meet those obligations from their financiers so they might need to use that money to pay off debts they have incurred due to a sluggish price of copper. Definitely it will not help, otherwise we might end up squeezing a dead horse which will not be good for the country," he said.

"We have to take into account the Chinese growth model, which is undergoing serious structural changes. China is moving up the value chain and the result is that demand for copper will not be as strong as it has been in the past years. So, we don't see the possibility of copper prices rising to that level, and what makes it worse is that even with other BRICS countries like Brazil, there is sluggish growth as well, so, demand for copper globally will not rise that much."

Dr Chigunta advised that the government should improve tax administration and management by strengthening ZRA to curb loopholes.

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