Future Policy Options and Recommendations

How can Zambia benefit from its minerals? First, it must adopt a fair tax policy and tax regime. To assess this perspective, two metrics are often used: the Average Effective Tax Rate (AETR) and the Marginal Effective Tax Rate (METR). To “maximise government revenue”, there are several principal options of government of Zambia to get a fair share on its minerals:

Fiscal policies should generate fair benefits to both government and mining resource companies with an effective tax rate within the range of 60– 40 as universally agreed. Effective tax rate is the total revenue sharing between government and resource companies. Wise revenue management entails balancing government budget in such a way as addressing social development with supporting infrastructure development that grows the economy through private sector expansion while saving any trade surplus or surplus revenue in form of sovereign wealth fund. Communities around resource extraction areas need to be engaged in benefit sharing in order to create economic opportunities. This should be through channelling of resources to community trusts that look into area development activities such as health, education, water, and agriculture and infrastructure services in order to promote local content and other economic linkages.

As owner of the mineral resources, Zambia needs to have direct and indirect taxes as well as royalty policies that balance the government’s desire for revenues with a royalty regime that is economically sound in application.
A fair royalty is a payment either based on a charge or gross output or a percentage share of revenues of its minerals.
In the 2008 approved windfall tax policy and new Act paved the way for the introduction of the below provisions:

i. The first graduated tax bracket for windfall tax was levied at a rate of 25 percent on gross proceeds when the copper price exceeds US$2.50 per pound (US$5,512 per ton); the second tax bracket at 50 percent when the copper price exceeds US$3.00 per pound (US$6,614 per ton); and the final tax bracket capped at 75 percent in excess of US$3.50 per pound (US$7,840 per ton) on norm prices.
However, on implementation after April 2008, it was only the lowest tax bracket of 25 per cent that applied, due to an administrative order issued by the ZRA following instructions from the Ministry of Finance and initiated by the State House.

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ii. An increase in the royalty rate to 3 percent from 0.6 percent of gross revenue on copper and from 2 percent for other base metals. Note: In 2012, the royalty rate was further raised to 6 percent.
iii. The corporate income tax rate was revised from 25 percent to 30 percent. Simultaneously, the rate applicable for non-mining sectors was reduced to 30 percent from 35 percent.

iv. A new variable profit tax rate under which the marginal tax rate would rise from 30 percent to 45 percent when taxable profits exceed 8 percent of gross revenue.

v. Withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors for all mining companies was reintroduced and pegged at a standard rate of 15 percent.

vi. Reduction of capital allowances from 100 percent of expenses to a conventional 25 percent per annum (and deductible only in the year production commences rather than in the year the expense is incurred).

vii. Hedging as a risk management mechanism treated as a separate activity from mining.

The government calculated that, at prevailing international copper prices, revenue from mining under the new 2008 fiscal regime would increase to approximately US$250 million (1.7 percent of GDP) in 2008 from US$20 million (0.1 percent of GDP) in 2007. The source was mainly royalty payments generated from gross mining proceeds estimated at US$3.8 billion at the time.
However, actual collections from new tax measures amounted to about US$90 million, generated from export receipts of US$4.0 billion. This amounted to a 65 percent underperformance. In part, the reason for low revenue collection following the revision of the fiscal regime stemmed from the contest mounted by some mining companies, which later was captured through windfall tax arrears after reaching a settlement following demands by the mining companies to abolish windfall taxation and new government of President R.B Banda foolishly accepting the demand by the mining houses.
Since 2010, copper prices have rebounded, which has created opportunities to capture a sizable share of mineral revenues but to no avail as the successive governments did not address this matter of Zambia benefiting fairly from its minerals.
The UNDP study (August 2013) estimated earnings in their scenario 2 to be as follows:
“ The average mineral revenue as a share of GDP over the 13-year period is forecasted to be 6.2 percent, picking up in 2015 to reach 8.8 percent, before gradually decreasing to 4.0 percent in 2025. This scenario indicates a potential US$45 billion in total mineral revenue (average of US$3.5 billion per annum). In NPV terms, average revenue flows could amount to US$2.2 billion. Relative to the baseline case (but less so with respect to Scenario 1), this scenario offers a significant opportunity for capturing higher revenues in absolute and relative terms. Even in terms of direct revenues, the proportion of tax receipts from royalty and corporate tax payments is higher at 5.5 percent of GDP. Nonetheless, this scenario also imposes a larger tax burden on mining firms (ETR of 47.3 percent for total revenues and 40 percent for direct revenues).”
The counterfactual scenario indicates that US$1.6 billion (3.7 percent of GDP) in additional revenue would have been raised. How much could this have accelerated the country’s development process is impossible to say with certainty. However, by way of illustration, had these funds been mobilized, it would have been enough to finance activities needed to ensure achievement of all the health targets under the Millennium Development Goals.
The estimated total revenue foregone is almost five times the estimated US$500 million financing requirement for addressing the country’s infrastructure deficit (Foster & Dominguez, 2011). To meet this financing gap, the MMD government issued a euro bond in September 2012 and raised US$750 million. The bond issuance pushed the government’s external debt stock higher to US$3.2 billion in 2012 from US$2.0 billion in 2011 (an increase of 61 percent).
Looking ahead, the projections for the period 2013-2025 suggested that revenues from the mining sector could on average be 6 percent of GDP and this kind of revenue could have in an expanded way contributed to poverty reduction.
It should be noted that in 2010, poverty incidence in Zambia was 60.5 percent. The depth of poverty was 0.28. The poverty line was US$30.4 /month. With the total population of about 13 million then, it is possible to estimate what it would cost in financial terms to lift households above the poverty line assuming a uniform transfer of the value of the poverty line to all those under it, would cost roughly US$2.9 billion annually. This amount is well within the average annual revenue estimates under the revenue scenarios outlined above.
The United Nations University (UNU) 2013 study noted the following:
“If we take into consideration the previously mentioned complications in assessing the impact of the 2008 reforms, it is still possible to examine the immediate effects in 2008/09. An estimate of additional mining revenue to the state from the revised mining tax regime introduced in 2008 was US$415 million for the 2008/09 fiscal year (budget statement of 2008 by Minister of Finance Ngandu Magande). This meant that for the 2008/09 fiscal year a total of US$557 million was the mining revenue target since the estimate without the changes was US$142 million. The GRZ anticipated that on average the changes would raise the effective tax rate from 31 per cent to 47 per cent, but that the actual tax revenue would vary from year to year depending on levels of costs and prices. Much of the estimated increase was expected to come from the new windfall tax boosted by an anticipated global copper price in early 2008, considerably above the lower trigger prices, and exports estimated to reach 600,000 tons of copper.”
For the 2008 financial year, a full payment in the year of the estimated windfall tax liabilities would have increased total mining tax payment from US$415 million (registered actual mining tax collected) to US$625–645 million (somewhat above the estimate at the beginning of the fiscal year). With this, the windfall tax contributions in the 2008/09 financial year in the total mining tax collected could have risen from 8 per cent to 38–40 per cent. This clearly shows the potential effectiveness of the windfall tax to increase government mining revenue.