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MINERAL TAXATION IN ZAMBIA -MAIN CHALLENGESFOR THE

ZAMBIA REVENUE AUTHORITY

Berlin MsiskaCommissioner General - Zambia Revenue Authority

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INTRODUCTIONINTRODUCTION

TWO PHASED TAX ADMINISTRATION REFORMSTWO PHASED TAX ADMINISTRATION REFORMS

MINING SECTOR CHALLENGESMINING SECTOR CHALLENGES

RECENT POLICY CHANGES TO THE MINING TAX RECENT POLICY CHANGES TO THE MINING TAX REGIMEREGIME

ENHANCED ADMINISTRATIVE RESPONSES TO MINING ENHANCED ADMINISTRATIVE RESPONSES TO MINING SECTOR CHALLENGESSECTOR CHALLENGES

FUTURE OUTLOOKFUTURE OUTLOOK

Zambia is a rich mining country. Mining dates back to the early 20th Centaury

pioneered by the British South African company.

Until nationalisation of the mines between 1968 and 1972 the two dominating multi-national enterprises were Anglo America and Roan Antelope.

Prior to nationalisation mining was quite dominant: 30-50% of GDP, 30-50% of total tax revenues, above 90% of exports

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Nationalisation period (1973-1990) was beset by low investment or re-investment and very low metal prices on the international market.

In 1991, the process of privatisation was initiated which saw the mines go back into private hands (mostly foreign multi-nationals)

Origins of current mine owners include: China, India, Australia and Canada.

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Along with wider economic reforms, Zambia embarked on two phases of tax administration reforms:

1. Prior to 1994 the Ministry of Finance had two separate departments that administered the country’s tax regime: Customs and Excise Department and the Income Taxes Department.

2. 1994 saw the creation of a semi autonomous corporate entity Zambia Revenue Authority through the merger of the Customs and Excise Division and the Direct Taxes Department. Alongside the creation of a division responsible for administering the newly introduced Value Added Tax. The Authority was a tax type focused administration.

3. 2006 Tax reforms placed emphasis on integrating and segmenting tax payers to create a taxpayer focused administration.

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The outcome of the creation of ZRA and the Tax Policy changes in 1994 were as follows:

There was a marked increase in tax effort from about 13 Percent of GDP prior to 1992 to 17-18 percent.

Simplified Personal Income Taxation Structure.

Tax Base was broadened and Tax System was simplified.

Successfully introduced VAT.

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Merger of VAT and Direct Taxes Divisions - Dec 2006. Establishment of Design & Monitoring - Jan 2009.

Launch of service standards. Design of policies & procedures.

Establishment of Large Taxpayer Office - Jan 2009. Establishment of the specialized mining tax unit. Medium and Small Taxpayers in the mining sector are

administered under the Mining Unit. Establishment of Small and Medium Taxpayer Office-April 2010.

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Improved revenue Performance.

More equitable distribution of tax burden across the country.

Reduced compliance cost for taxpayers.

Greater control over tax evasion and tax fraud.

Improved services to taxpayers. Greater support from government and stakeholders.

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2012 Figure are Budget Figures 2011 Figures include Mining Tax Arrears of 1.87 of GDP

• Possible under valuation of minerals that are not internationally Possible under valuation of minerals that are not internationally traded such as gemstones.traded such as gemstones.

• Possible under declaration of mineral content in mineral ores.Possible under declaration of mineral content in mineral ores.• Possible non-disclosure of recoverable precious metals from mineral Possible non-disclosure of recoverable precious metals from mineral

ores and concentrates.ores and concentrates.• Mining versus contract mining – An increase in contract mining Mining versus contract mining – An increase in contract mining

leading to companies trying to use the tax regime applicable to leading to companies trying to use the tax regime applicable to mining companies.mining companies.

• Transfer Pricing – setting prices, conditions and terms on Transfer Pricing – setting prices, conditions and terms on transactions with related parties on cross border transactions in such transactions with related parties on cross border transactions in such a way that profits arise in a country determined by the multinational a way that profits arise in a country determined by the multinational companies determines.companies determines.

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• Thin Capitalisation – Exploiting tax deductible interest flows.Thin Capitalisation – Exploiting tax deductible interest flows.

• Hedging Transactions – Structuring complex commodity hedging Hedging Transactions – Structuring complex commodity hedging transactions in such way that losses are reported in a country transactions in such way that losses are reported in a country determined by the multinational enterprises.determined by the multinational enterprises.

• Intragroup services - Pricing of management fees and technical Intragroup services - Pricing of management fees and technical services among others at non arms length basis and also whether services among others at non arms length basis and also whether these services have in fact been provided.these services have in fact been provided.

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The Mining Audit Unit was created in July 2008 to specifically

administer and handle all domestic taxes of the mining sector.

The unit: • Is housed under the Large Taxpayer Office.• Handles clients of all sizes (small, medium and large).• Deals with companies involved in:

- Mining

- Mining services (large enterprises)

- Mineral trading (small and large enterprises)

- Prospecting and exploration

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Tax Rate

Company tax 30% to 45 % Note: Where Taxable Income to gross sales ratio exceeds 8 % the rate varies from above 30% to a maximum of 45%.

Mineral Royalty 6 % on all Minerals

Note 1: 6% of the norm value of base and precious metals. The norm value is;

a. The monthly average London Metal Exchange cash price per metric ton multiplied by the quantity of the metal or recoverable metal sold;

b. The monthly average Metal bulletin cash price per metric ton multiplied by the quantity of the metal or recoverable metal sold to the extent that the metal price is not quoted on the London Metal Exchange; and

c. Monthly average of any other exchange market approved by the Commissioner General Cash price per metric ton multiplied by the quantity of the metal or recoverable metal sold to the extent that the metal price is not quoted on the London Metal Exchange or Metal Bulletin.

Note 2: 6% of the gross value of gemstones, industrial and energy minerals; Gross value’ is defined as “the realizable price for sale Free on Board at the point of export in Zambia or point of delivery within Zambia”

Withholding tax (rent, interest, commissions, management and consultancy fees and payments to non-resident contractors )

15% Note: Dividends are at 0%

Medical levy on Interest 1%

Property transfer tax 5% Capital Allowances 100% on Buildings, Machinery and Equipment

The Revenue Authority has been using a number of methods aimed The Revenue Authority has been using a number of methods aimed

at addressing the challenges and risks posed by the Mining Sector :at addressing the challenges and risks posed by the Mining Sector :• Legislation - The tax law has provisions for limiting transfer pricing Legislation - The tax law has provisions for limiting transfer pricing

and thin capitalization.and thin capitalization.• Capacity building of staff:Capacity building of staff: through training and workshops in specialized courses offered by through training and workshops in specialized courses offered by

CATA, ATAF, OECD among others.CATA, ATAF, OECD among others. Cooperation with other tax jurisdictions aimed at strengthening Cooperation with other tax jurisdictions aimed at strengthening

specialized large taxpayer revenue administration.specialized large taxpayer revenue administration.

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Transfer Pricing Practice note for staff to refer to during the course Transfer Pricing Practice note for staff to refer to during the course of their work.of their work.

• Enhanced Integrated audits.Enhanced Integrated audits.• Fostering enhanced relationships with taxpayers aimed at sensitizing Fostering enhanced relationships with taxpayers aimed at sensitizing

them on various tax concerns.them on various tax concerns.• Fostering linkages with key stakeholders such as the Ministry of Fostering linkages with key stakeholders such as the Ministry of

Mines.Mines.• Increased risk profiling of taxpayers .Increased risk profiling of taxpayers .

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The Mining Audit Unit has since scored the following successes:The Mining Audit Unit has since scored the following successes:

•Enhanced client relationships with corporate clients based on mutual Enhanced client relationships with corporate clients based on mutual trust and respect.trust and respect.•Increased level of voluntary disclosures by taxpayers on tax Increased level of voluntary disclosures by taxpayers on tax underpayments.underpayments.•Increased Mineral royalty registrations and payments.Increased Mineral royalty registrations and payments.

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Tax revenue expected to increase◦ Most of the companies have almost exhausted

their capital allowances and therefore expected to start paying taxes

Copper production is also expected to increase due huge investments in the last few years

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