A Look at Windfall Tax

8/3/2019 A Look at Windfall Tax

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A look at Windfall Tax, perhaps Zambia

should not introduce it

TIME PUBLISHED - Friday, October 21, 2011, 5:01 am

40 Comments 2864 views Email1 mail Print

By Marko Sovi:-Regarding windfall tax, it is important to understand why governments legislate to tax the profitsas windfall. The concept of windfall tax on specific industries is not new. Most countries havehad it in one industry or the other-China, Australia , Chile , Peru (still negotiation on copperprofits).

However, the motive for many governments is the same which is to uplift the living standards ofthe people in disadvantaged areas, especially, those areas affected by the industry/(ies) inquestion.

In 2008, the UK government introduced a windfall tax levied on (state owned) companies thatwhere sold at an under value in the early 1990 when privatisation hit the globe. The companiesaffected where, typically, utilities firms especially those providing energy and gas.

This, however, was a one-off tax base on the companies profits for the past four years multipliedby the index of 9 (to even out the profits).

The governments rationale was that these companies had enjoyed the profits which, in otherwords, they did not deserve because they were bought cheaply and most of them had the shareprice double or at least 50% higher than it was when sold just a few days after selling.
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This meets the definition of windfall tax as defined by the financial times a tax that must be

paid by a company that has suddenly and unexpectedly earned a large amount of money,especially a large company that has recently been privatised (sold by the government).

Another source defines it as taxes levied primarily on the companies in a targeted industry that

have benefited the most from an economic windfall, most often commodity-based businessessuch as big oil companies. And windfall itself is defined as:

1. A sudden, unexpected piece of good fortune or personal gain.2. Something, such as a ripened fruit, that has been blown down by the wind.

I honestly do not understand the mechanics of this tax in the Zambian context and how it is goingto be implemented and administered? I also do not understand governments projections

regarding the revenue that will be collected from the windfall tax.

Its very true that those mines were sold for peppercorn prices and that they have ridiculous

incentives which are not the same across the industry- they are tailor made per company as pernegotiations.

Now regarding the economics of windfall tax, it is true that it will have a knock on effect on

investment if the mining companies will divert the profits to offset the taxes instead of

investing the excess profits in equipment, machinery and human resource development.

It is also true that in its desperation to sell the mines, government agreed to free those minesfrom the social responsibilities that they had shouldered when they were under ZCCM such asthe provision of schools, hospitals and social amenities(sports grounds and equipment) etc.

These were errors that were made at the expense of the Zambians and as to whether they werehonest or deliberate errors I stand on the left.

Now regarding the economics of windfall tax, it is true that it will have a knock on effect oninvestment if the mining companies will divert the profits to offset the taxes instead of investingthe excess profits in equipment, machinery and human resource development.

It is also going to be a disincentive if the tax is going to increase their cost of borrowing as thecase maybe (assuming they rely heavily and only on external finance). However, arguably,companies do not always finance their investments from profits-that would be pathetic financialmanagement!

I personally do not believe that the tax would deter investment and that it would chase the

investors away from Zambia ; that line of reasoning would be nave and even, in my mind

biased and corrupt! Investors invest because they know they are going to get a return.

They however finance their investment, mostly through loans, bonds etc. If this is true then weare saying that the tax wont affect their ability to invest as they can always borrow at theiradjusted cost of borrowing.


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I personally do not believe that the tax would deter investment and that it would chase theinvestors away from Zambia ; that line of reasoning would be nave and even, in my mind biasedand corrupt! Investors invest because they know they are going to get a return.

They are happy that their investment is safe and in a stable political environment. Some people

may argue that investors like a predictable regime but I think introducing new policies does notamount to being an unpredictable.

Pertinently, as we all understand, government levies taxes on individuals and corporate bodies toenable it to provide essential services to its citizens. One major principle of taxation, regardlessof the jurisdiction, is that it must be simple to administer i.e it must not be expensive for ZRA (inour case to execute). Another principle is that tax must not cause unnecessary hardships on theintended group, in other word must not be costly.

If we start off with the two, I think it would be fair to say that if the windfall tax is to be paid onexcess profits, then the second requirement is met as it would not cause any hardships on the

intended group-mining. Government has the responsibility to ensure that individuals andorganisations pay fair taxes on their earning. It does so by enacting relevant legislation to guidewith the calculations and requirements etc.

Government has no obligation to pass legislation that is tailored to favour individuals orcorporations and in this case if government thinks that windfall tax should be introduced then itshould simply go ahead but must do it cautiously keeping in mind that it shouldnt impact

negatively on the intended group.

One major problem I think is defining what would be considered as excess profits in this

case. The legislation would have a hard time defining that one because it would have to

take a lot of things into consideration and in my opinion that would make or create a lot ofloophole and a huge burden on ZRA and the two factors would be a recipe for disaster.

One major problem I think is defining what would be considered as excess profits in this case.The legislation would have a hard time defining that one because it would have to take a lot ofthings into consideration and in my opinion that would make or create a lot of loophole and ahuge burden on ZRA and the two factors would be a recipe for disaster.

But if the intention is to collect these taxes as a one off, which is what it should be, then the timeto do it, is now when the copper prices are high and leave the legislation in place that triggerswindfall tax when copper prices rise by a certain %. I note that in 2008/2009 Zambia raised$77m in windfall taxes. This is a lot of money.

But the good question is how has it been used? If we are going to collect taxes and use therevenue otherwise than intended, then perhaps its not moral either. I find it hard, how a

company could consistently declare loses and get away with it in a country where a publiccompany is required, by law, to be audited by a qualified auditor.


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ZRA has the powers to nominate its own auditors to ascertain that the financial statements of acompany represent a true and fair view of the affairs of the company as at that time. Weimmediately run into one big problem and that is we have a lot of happy auditors who are readyto give a clean bill to the company dubiously. Thats the biggest problem plaguing the nation.

Now should we or should we not introduce windfall tax?

In my opinion perhaps we shouldnt but instead:

1. Increase the royalty fees to two figure percentages because companieswould have to pay royalties whether or not they make a profit;

2. Strip off the oppressive incentives that these companies enjoy. At themoment each company has its own incentives which it enjoys includinglong tax holidays of up to 10 years;

3. Introduce a specific mining related tax or modify the current variable taxin force;

4.

Government can enact specific legislation which excludes miningcompanies from enjoying certain reliefs as to bring more profits into thetax web;

5. Government should try to close down all the tax loopholes to enable moreprofits to be subjected to companies tax. In particular it should discouragethe designer schemes whose main purpose the avoidance or even evasionof tax;

6. Government should not entertain companies taking the country for a rideby being given silly conditions but is should be firm and introduce stronglaws that penalise all companies that enjoyed designer conditions orschemes with exit charges should they wish to pull out within a certain

period of time so as to recover the taxes that could have been paid hadthose conditions not existed;7. Windfall tax might also disadvantage the workers as the companies are

likely to be reluctant to increase salaries and offer any bonuses to theiremployees as the money meant for that would be reserved for offsettingwindfall tax;

8. Arguably, it is also true that companies may withhold investment as thefunds meant for investment have been diverted to paying off windfall tax.This is generally, explained earlier, reliance on borrowing will;

In my opinion, windfall tax will not guarantee a constant flow of revenue from the mines as it isa tax on excess profits only which means if the copper prices plummate to record lows, then thegovernment is not going to get any extra revenue from the mines.

I hope I have reflected on the matter to the best of my abilities given the limited information thatwe have. We are all just commenting using abstract information with no solid figures. We dontknow how much the mines invest annually in equipment, machinery and human resourcesneither do we know how much profits they make.


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It is all based all the fact that copper prices are rising and we feel windfall tax should beintroduced. But having said that, I would like to believe that the government has the figures andtheir decisions are on solid information.

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COMMON SENSE! says:

Fri Oct 21 at 5:18 am

Senseand well articulated article,keep it up!,the key word is to increase revenuecollection which should be used to uplift the living standards of bthe people.Thishowever will only be achieved if the money,infinitacimal though it may be is chanelledinto productive and meaning projects that have direct or indirect benefit on thecitizenry.Well articulated article.windfall or any name,the key word is that Zambia
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should be a beneficiary of the birth right(Mining so it can contribute atleast 15% to thenational coffers unlike the current less or slightly above 10%.Viva Zambia!

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msana wanzili says:


Too much waffling sir get to the point quick as we do not have all day to go through suchlong essays, e.g next time leave out definitions as we can google if need be. still reading,ill comment later.

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3

Jimbo says:


Sata promised us windfall taxtime is running out 60 DAYS TO GO

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Enka Rasha says:


Coffee,chocolate,menand zambia.the richer they come, the better.So i say tax the

mines using windfall tax.

..and one more thing.A good essay,at least by zambian guys standards,should be like awomans skirt.Short enough to rouse interest and just long enough to cover the essentials.

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5. -4

5

Caradon says:


No.1 , Thank you for the observation, people dont have time to read these long essays. Iknow maybe what this guys is saying is try but I am sorry I couldnt even finish the first

paragraph. People should know that most of us reading these things are educated, youdont need to give us explanations of every single word because we look at you as being

foolish.

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6. -1

6

Mwiponta Mukabwela says:


bwana author, we know what windfall tax can do or cant do, so next time write an articleshort and straight to the point.
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7. 0

7

Patrick says:


Too long indeed. You mention that all of us talk about windfall tax but without data.Come on guys, what do the people at ZRA do? When a company comes to Zambia andinvests, let us understand in detail its capital, costs inccured, how much minerals it is

extracting and exporting, salaries and be able to put a finger on profits and then demandwhat belongs to us. We hear stories like export of metals have been suspendd becausetheir was some kind of under declaring i.e. wat is on paper being less than wat isexported! Who is responsible for monitoring? Fire him or her if it comes out to betrue.Accounts, please use microsft excel and auditors stop being corrupted!

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8. +4

8

THE CHANGE WE WANTED says:


LET PF RE-INTRODUCE IT AS PROMISED DURING CAMPAIGNS

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9. 0


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9

Wantanshi says:


I didnt read it. I came straight to the comments, they are more interesting than a

rambling article on a tired subject that almost everyone knows by heart. The prudent useof the money we get from mining activities is whats important. Its drummed andburned into our heads from childhood that metals are wasting assets and one day theywill just simply varnish. Yet we still depend on a single commodity to survive as anation. Is it not common sense that other sources of income must be vigorouslypromoted, eg, manufacturing, services, energy, agriculture etc?

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10.-1

10

New Guy, New Gov't, New Laptop, New Phone, New Wife and New ... says:


What we need is a win win situation

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11.+1

11

Potpher Mbulo says:


I find some the arguments put up in the above article to be very shallow:To argue that Windfall tax might also disadvantage the workers as the companies arelikely to be reluctant to increase salaries and offer any bonuses to their employees as the


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money meant for that would be reserved for offsetting windfall tax, is superficial becausethe same can be said about variable profit based tax. Should we stop taxing companies onaccount of the phobia that employees would surfer loss?

Again, though it is true that companies may withhold investment as the funds meant for

investment have been diverted to paying off windfall tax, the same hold for variableprofit tax.

Yes it is logical to say government should try to close down all the tax loopholes toenable more profits to be subjected

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12.0

12

hello hello says:


Tax is on profits i.e after salaries wages etc have been considered. I am trying to see howone tries to reduce on wages so that they can have higher profits that will subsequentlyentail more taxcan someone educate me??

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13.0

13

chali says:


We also have a broad understanding of the taxes but what is buffling is that the authorsaims at achieving a diversion from what we expect. We as government have an obligationto our people and its high time we bring it on for them to feel a part.


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14

Time Will Tell says:


Nonsence, We just want a quarter of the super profits that must remain in our country.We will just introduce a simple formular that is linked to the profits

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15.+1

15

General says:


There is not reason to give them companies tax holidays at the expense of sufferingzambians. 47 years after independence, Zambia should not be poor, guys, with so muchcopper and other minerals, guys, wind fall or whatever you call it Government should taxthese companies. Others companies which have been evading tax are communitioncompnies, CELL TEL then it became, ZAIN, and I do not know what it will be bychanging hands in the name of evading tax while enjoying tax holidays yet they makehuge profits. Auditors who are corupt by fals declaration of the should be stripped offtheir practicing certificate and labelled as corupt, if possible jail them.

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16

Valley Mouth Piece says:


Truly ZRA is doing us a lot of bad tell you. These investors are going away with a lot ofprofits because the ZRA system is so poor or they even have one in place. This is been acry in the safari industry more especially in south luangwa. The only company which ispaying right service charge to its workers is Mushroom Lodge owned by Friday Njobvu,a Zambian. However, Isaac his son was confronted but some of the safari operators thatwhat he was doing would alarm the situation in the whole valley. The Accountants end atdoing just wages and advances which are obvious. No Accountant knows what thecompanies are making and therefore the owners decide what to give in Service Charge.You know what! When they still from us they are definitely robbing the government too.Mr. President HELP US!

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17

the nut cracker says:


who cares about the work load that is put upon ZRA, all we need is a fair share.

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18

Rio says:



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Article made a nice read; though I would sincerely love that the government come outtransparent and tell us the citizenry which companies have these tax incentives, to whatextent and on what basis. The public should be made aware of such arrangements as wefeel they were corruptly architectured to rob the Zambians; failure to do so will continueto fuel corruption and dubious activities that have continued to rob us Zambians of

essential development. I rest my case.

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19

The Accountant says:


Nice article, yes no 1 i agree with you we need to get more of the mines it doesnt matter

what name the tax will be called. ZRA has a problem when it comes to monitoringprophets in companies and they are too corrupt such that they cant even inspect somecompanies due to the handouts they get speaking from experience here. sorry those ofyou complaining about the article being long author just wanted to give a clear picture.lol

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20

Great Kalu says:


The writer raises some interesting points regarding the use of a windfall tax personnally, Iwould prefere the windfall taxt to be used to set up a sovereign wealth fund along thelines of the NOrwegian model that will provide benefits to future generations. Thewindfall tax is based on the fact that when the mining companies do their investmentanalysis, it is based on an estimated copper price, most say at privatisation this was


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around $3000/ tonne. Due to the huge demand from China the copper price is nowhovering between $6500-$8000 and the country should benefit from this unexpectedprofit. What the money is used for and whether it used responsibly is another issue, butthe tax should be levied.

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21.0

21

Pulamasaka says:


this is all nonsense..we need our money!!

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22

MAKADOSHI says:


Man we have other things to do why writting such a long essay? next time get to thepoint, ever heard of summary? i did not read it all.

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Kabimba says:


GO-GO-GO still waiting for tough decisions to come-wilber we are waiting

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24

PM says:


The government should also require that companies use local suppliers or or supplierswith local content andr that downstream processing be done domestically. It isfundamentally correct to say the mining industry in Zambia is no longer paying a fairshare to the Zambian people for the resources it exploits.

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Rev. Kasongo wa Musongo Kasongo Jean Pierre says:


We was promised windfall tax and windfall tax we shall demand now that it appears theCobra is developing amnesia in that department. They may want to forget but we willnot.

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26.0


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26

Luciferous Calyptus says:


Bottom line is that mines must do more for society because they do a lot of harm both tothe environment and to human lives. With great ability comes greater responsibility. LikeI said, mines do not pay a lot of current year taxation. They pay about K100,000,000 incurrent tax and defer most of the taxes due so that they can be paid later.

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27

Fine! says:


Real leaders find it easier to high produce results than to make high promisses.PF is slowly learning that leadership is a reality rather than a fantasy.PF is leaning to understand that when in Govt, you do not behave like you are inopposition.

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28

TOKITO says:



17/22

BAKAMBA CAN YOU SUMMERISE YOUR ESSAY NEXT TIME,LIKE YOU SAIDA SUDDEN UNEXPECTED PIECE OF GOOD FORTUNE OR PERSONALGAIN,MY FRIEND, DONT YOU KNOW THAT COPPER PRICE HASINCREASED,ITS HIGH TIME WINDFALL TAX PLAY ITS ROLE.WE NEED ITBRO.

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29

NSHUMFWA says:


If the GVT increase other taxes and drop windfall, what shall happen then to investmentsof the said groups in times copper price falls? Are they going to afford that high fixed taxyou said despite low profit margin? I feel windfall is fair. in the times of plenty, they payand when copper price falls, it is a tax holiday. A win -win situ is more sensible. Taxholidays are not right.

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Fine! says:


#29 NSHUMFWA ,I totally agree!!Great questions my man!!No one builds the economy on windfall tax because it is a tax of chance.The most sure tax for any govt is PAYE, and if the current govt can create an equilibriumbetween workers wages and employer profitability such that most of the workers in theseprivate firms go above the non-taxable threshold and begin to contribute to govt coffers,


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dangerous windfaltax is.It is an opportunistic tax.But other taxes like cooperate tax canensure flow of cash.We need to revise the mineral policies.Optimise coporate taxesmineral royalties to world standared.Value addition is also needed.We can not just allowcopper cathode being exported to china.Why not allow the investors to manufactureproducts from copper for job creation

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Luciferous Calyptus says:

Fri Oct 21 at 12:25 pm

@PM, great analysis. That is very true, I think if people saw eye to eye with your policyit would be good. The only way government can have substantial influence is in thechange of ownership structure. Perhaps they need not even pay cash upfront, a buy in of apercentage of ownership can come from taxes owed to them by the mines- of course on aslice basis. Government needs to understand that it is dangerous that in institutions ownedby them like NAPSA, ZRA and the like, people hold positions for over 15 years, I thinkwe need to review that one. I think creation of jobs will come when legislation preventspeople from holding one public job for over say 10 years! People will think of investing!

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Ba shi Musonda says:


The article is just ok. People complaing of the length because they enjoy insulting eachother instead of bringing out issues. Not everyone on this blog is an economist oraccountant and who wants to waste time reseaching on what windfall blar blar is? As for


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the tax, call it what you may, but us Zambians just want our fair share. Once the copper isfinished you cant plant it like maize.

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walasa says:


What the author does not understand is the distinction between taxable profits andfinancial profits. Please do not mislead the people especially where wages are concerned.Mind you those are tax deductible. These things are straight forward. Windfall tax willonly affect those making abnormal profits. Its like you go drinking expecting to take twobeers only. Then i buy you a crate and leave. What will stop you from sharing with yourfriend who joins you? We are saying hey guys share the good unexpected fortune that isall.

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UK-Zed Observer says:


Good points. Length of article is ok. I hope the govt has read it.

Biggest problem is corruption at the time the contracts or permits were negotiated. Thoseindividual deals should be revoked. Also creative accounting by the investors should becramped. They are stealing from us.

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Ugly Truth says:


Those complaining about the article being long are probably used to the hommonewspaper that insults people everyday,they find such thought provoking articles toolong.Yes windfall tax should be introduced like it was in 2008.This is cant afectinvestment or operations thats why its called windfall,if the company does not meet thethreshold of windfall,then they are not affected as simple as that.

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Punch Drunk Cobra says:


One reason for introducing windfall tax; its what got PF elected. So it must be done.Thearticle is right, but forget it.

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Bakulu says:


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I think the point being made by the author of this article is that windfall tax (whateverthat is) is (1) not a panacea, and (ii) it is interrelated to other taxes and issue includingworkers wages.

I personally would agitate a policy that distributes more of the cake to employees ratherthan government. In my world big government is bad because it is unproductive.Whatever this windfall tax tax thing is is simply a redherring and clouds the policydiscourse in Zambia. The fact is this. There is no guarantee that Government will put thismoney to good use anyway. I would support a scheme that invests in the local area ratherthan the money heading to Lusaka.

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da sylky says:
http://www.lusakatimes.com/2011/10/21/winfall-tax/?replytocom=686571#respondhttp://www.lusakatimes.com/2011/10/21/winfall-tax/?replytocom=686571#respondhttp://www.lusakatimes.com/2011/10/21/winfall-tax/?replytocom=686571#respond

Date post:	07-Apr-2018
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A Look at Windfall Tax

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