Presentation to the Public Discussion Forum
on Mining taxation in Zambia
22 June 2010
By
Frederick 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 Assets
1972-1990s
– 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
The mine Cycle
Production
1
Mine Exploration - 7-10 years
2
Mine Development- 5-10 years
3
Mine Operation
2-20 years
4
Mine Closure
2-10 years
Time
7-10yrs
1
5yrs -10yrs
2
2yrs -20yrs
3
2yrs -10yrs
4
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 projects
All 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 contributions
This 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
No.
A1
Description
Copper sold
2007
2008
2009
Tonnes (000)
Tonnes (000)
Tonnes (000)
459
515
656
2007
2008
2009
US $ 000
US $ 000
US $ 000
Taxes and Duties
No.
Description
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
3,152
3,385
5,633
89
85
72
97,913
106,629
106,803
0
35,844
1,737
261,599
374,757
212,033
Local Authorities
C8
. Property Rates
C9
. Personal Levies
C10
PAYE
C11
Windfall tax
TOTAL
Investment
No.
Description
E1
Capital Expenditure on Property, Plant and
Equipment
E2
Exploration expenditure
TOTAL
2007
2008
2009
US $ 000
US $ 000
US $ 000
891,987
830,317
476,999
2,863
20,377
53,271
894,850
850,694
530,270
PAYE 2004-2006
Sector
Manufacturing
Agriculture
Mining
Tourism
Other
Total
Mining % contribution to PAYE
Source: Zambia Development Agency
2004
2005
2006
K'Millions K'Millions K'Millions
38,404
34,302
46,615
6,077
9,444
13,386
167,117
144,144
180,103
18,536
22,917
29,465
43,316
82,372
64,093
273,450
293,179
333,662
61%
49%
54%
PAYE 2004-2006
200,000
180,000
160,000
K'Millions
140,000
120,000
2004
100,000
2005
2006
80,000
60,000
40,000
20,000
Manufacturing
Agriculture
Mining
Tourism
Other
Sector
Source: Zambia Development Agency
•
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.
VAT 2004-2006
Sector
Manufacturing
Agriculture
Mining
Tourism
Other
Total
Mining % contribution
2004
108,038
4,589
359,776
53,494
71,740
597,637
60%
2005
121,566
7,629
338,807
56,579
7,971
532,552
2006
184,413
7,192
317,853
60,496
140,656
710,610
64%
45%
Source: Zambia Development Agency
%age of VAT contribution decreases temporarily because of significant capital
investment
VAT 2004-2006
VAT contribution by sector
400,000
350,000
K'Million
300,000
250,000
200,000
2004
150,000
2005
2006
100,000
50,000
Manufacturing
Agriculture
Mining
Sector
Source: Zambia Development Agency
Tourism
Other
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
Exports-2004 to 2006
Sector
Mining
Non Mining
Total contribution
Mining % contribution
Source: Zambia Development Agency
2004
2005
2006
K'Millions K'Millions K'Millions
347,259 3,128,154 3,598,888
183,588
306,497
377,238
530,847 3,434,651 3,976,126
65%
91%
91%
Exports- 2004 to 2006
4,000,000
3,500,000
3,000,000
K'Millions
2,500,000
Mining
2,000,000
Non Mining
1,500,000
1,000,000
500,000
2004
2005
Year
Source: Zambia Development Agency
2006
Employment Generation (new jobs)
Sector
Manufacturing
Agriculture
Mining
Tourism
Other
Total
Mining % Contribution
Source: Zambia Development Agency
2004
4,577
2,448
5,574
1,843
1,535
15,977
35%
2005
4,691
3,575
6,266
1,957
1,680
18,169
2006
4,838
4,028
18,375
1,742
2,466
31,449
34%
58%
Employment Generation (new jobs)
20,000
18,000
16,000
No. of Employees
14,000
12,000
2004
10,000
2005
2006
8,000
6,000
4,000
2,000
Manufacturing
Agriculture
Mining
Sector
Source: Zambia Development Agency
Tourism
Other
Thanks you