Presentation to the Public Discussion Forum

on Mining taxation in Zambia22 June 2010

ByFrederick Bantubonse

General Manager

Agenda/Content

• Background

• Life cycle of mines

• Contributions to the economy

Background

• Pre-nationalisation – 1900s to 1970s– High international commodity prices– Rapid development of infrastructure, e.g. Rail,

south-north road, Kariba dam etc. – Rapid development of towns & townships

Nationalised Mine Assets1972-1990s

– Little or no investment in mining sector– Existing mines run down requiring significant

investment– Insufficient national reserves for investment

Privatised mining assets 2000 to date

Privatisation – Attracted FDI now over US$ 4 billion by 2008– Plant rehabilitation, new processing facilities and new mines.– Production up from 257,000mt in 2000 to over 650,000mt in

2009.

Investment – International metal prices start to increase - rose by 269% on average at

its peak

– All new investments in Zambia by “junior” mines

– “Junior” mines perceived to be more risky by institutional investors – therefore expect higher returns

– Financing for junior mines more difficult to obtain

2yrs -20yrs

1 2 3 4

1 Mine Exploration - 7-10 years

2 Mine Development- 5-10 years

3 Mine Operation 2-20 years

4 Mine Closure 2-10 years

7-10yrs 5yrs -10yrs 2yrs -10yrs

The mine Cycle Production

Time

Life cycle assessment

• On average it takes between 15 to 25 years for a mine to establish itself and realise regular returns

• For e.g. Lumwana Mining, Ore body discovered around 1962

• Took 8 years to develop the mine– Define ore body, produce bankable feasibility,

financing, construction and finally operations– All this time the company was incurring costs with no

revenue

Life cycle assessment

• Early years predominantly characterised by exploration activities

• Significant investment which may or may not be realised

• This is followed by bankable feasibility study• Organising and raising finance• Significant upfront investment – to build new

mines• Modernisation and rehabilitation• Depletion and closure (few years to 100 years)

Life cycle assessment –development phase

• Significant capital expenditure required not just on mining operations but on:– Infrastructure development– Support to local industry– Employment and training– Community development projectsAll this with significant challenges:- High cost of doing business- Poor transport & telecommunications network

Contributions to the Economy

• It takes time before a country can realise tax revenues from mining investment

• Empirical studies show that on average it will take at least 15 years after commencement of operations before a country will reap reasonable tax revenues

• The major benefits accrue from investment and only a small amount is realised from tax revenues

Total Tax Contribution

When considering the taxes received by a State there is need to take account of all contributionsThis should include:

– Obvious and easily identifiable and measurable taxes;

– Expenses of business that are not allowed relief (hidden taxes);

– Expenditure incurred on infrastructure and social and community welfare projects for the mining community

Tax statistics

• Current focus in Zambia when assessing mining contributions is on: - Corporate tax;

- Variable profits tax;

- Mineral royalties;

- Export levy.

However in reality need to take a/c of:

- PAYE

- VAT

- Customs duties

- Fuel levy

- Duty on diesel

- Property taxes

Metal Sales

2007 2008 2009

No. Description Tonnes (000) Tonnes (000) Tonnes (000)

A1 Copper sold 459 515 656

Taxes and Duties

2007 2008 2009

No. Description US $ 000 US $ 000 US $ 000

         

C1 Corporate Tax 98,193 113,709 15,419

C2 Royalty Tax 19,469 66,892 50,730

C3 Variable Profit Tax 0 0 0

C6 Export Levies 22,326 32,616 22,396

C7 Customs / Import Duties 20,457 15,597 9,243

  Local Authorities      

C8 . Property Rates 3,152 3,385 5,633

C9 . Personal Levies 89 85 72

C10 PAYE 97,913 106,629 106,803

C11 Windfall tax 0 35,844 1,737

  TOTAL 261,599 374,757 212,033

Investment

2007 2008 2009

No. Description US $ 000 US $ 000 US $ 000

         

E1Capital Expenditure on Property, Plant and Equipment 891,987 830,317 476,999

E2 Exploration expenditure 2,863 20,377 53,271

         

  TOTAL 894,850 850,694 530,270

PAYE 2004-2006

Sector 2004 2005 2006K'Millions K'Millions K'Millions

Manufacturing 38,404 34,302 46,615 Agriculture 6,077 9,444 13,386 Mining 167,117 144,144 180,103 Tourism 18,536 22,917 29,465 Other 43,316 82,372 64,093 Total 273,450 293,179 333,662

Mining % contribution to PAYE 61% 49% 54%

Source: Zambia Development Agency

PAYE 2004-2006

• The mining sector clearly has the greatest impact, in value terms. This is not surprising, given both the magnitude of investment and salaries and employment levels in the sector.

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

Manufacturing Agriculture Mining Tourism Other

Sector

K'M

illio

ns 2004

2005

2006

Source: Zambia Development Agency

VAT 2004-2006

Sector 2004 2005 2006Manufacturing 108,038 121,566 184,413 Agriculture 4,589 7,629 7,192 Mining 359,776 338,807 317,853 Tourism 53,494 56,579 60,496 Other 71,740 7,971 140,656 Total 597,637 532,552 710,610

Mining % contribution 60% 64% 45%

%age of VAT contribution decreases temporarily because of significant capital investment

Source: Zambia Development Agency

VAT 2004-2006

VAT contribution by sector

-

50,000

100,000

150,000

200,000

250,000

300,000

350,000

400,000

Manufacturing Agriculture Mining Tourism Other

Sector

K'Million

2004

2005

2006

Source: Zambia Development Agency

Corporate and variable profits tax

• Given that most mining companies have had significant investment costs there will be little contribution to corporate and variable taxes despite the increase in prices because:

- of accelerated capital expenditure;

- increased operational costs in earlier years;

- increased finance costs in earlier years;

- significant carry forward tax losses (2000 to 2004)

• The above coupled with boom bust cycle since the 1960s means that there has been insufficient time for mining companies to establish and realise significant AND consistent returns

Total tax contribution

Investment in non mining operations:– Infrastructure– Mine hospitals– Schools– Health care programmes – e.g. malaria

control, HIV, etc– Training academy– Community development projects– Township development

Major benefits of attracting mining investments

• Attracts more FDI in terms of suppliers and subcontractors

• Increased FDI brings about – increase in employment, skills base, increased capital investment, increased technology

• Money into the economy• Increase in foreign exchange reserves• Strengthens Kwacha – reduces import costs• Corporate social responsibility programmes

Strategy and policy

• The benefits of FDI can multiply and accelerate growth and development providing appropriate environment and framework is created by government

Sector 2004 2005 2006K'Millions K'Millions K'Millions

Mining 347,259 3,128,154 3,598,888 Non Mining 183,588 306,497 377,238 Total contribution 530,847 3,434,651 3,976,126

Mining % contribution 65% 91% 91%

Exports-2004 to 2006

Source: Zambia Development Agency

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2004 2005 2006

Year

K'M

illio

ns

Mining

Non Mining

Exports- 2004 to 2006

Source: Zambia Development Agency

Employment Generation (new jobs)

Sector 2004 2005 2006Manufacturing 4,577 4,691 4,838 Agriculture 2,448 3,575 4,028 Mining 5,574 6,266 18,375 Tourism 1,843 1,957 1,742 Other 1,535 1,680 2,466 Total 15,977 18,169 31,449

Mining % Contribution 35% 34% 58%

Source: Zambia Development Agency

Employment Generation (new jobs)

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000

Manufacturing Agriculture Mining Tourism Other

Sector

No

. of

Em

plo

yees

2004

2005

2006

Source: Zambia Development Agency

Thanks you