FOCUS: Zambian copper industry warns new tax regime will hit investment, jobs in Africa’s major producing country

In less than two weeks, the Zambian government is set to introduce a new series of tax measures: rocketing tax rates have prompted some copper producers to shut down their operations, while others have cut production and costs to keep their businesses running in the world’s sixth largest copper producing country.

A tax regime comprising a new sales tax and an increase in mineral royalty tax (MRT), which will no longer be deductible, will transform the landscape of Zambia’s copper industry.

Zambia is home to Africa’s largest copper mine, Kansanshi, as well as other major sites including Sentinel and Konkola.

Market sources gave different estimates on Zambian mined copper production last year, ranging 678,000 to 861,000 tonnes. According to the World Bureau of Metal Statistics (WBMS), Zambia produced 998,400 tonnes of copper metal contained in mined concentrate in 2018. It is second only to neighboring Democratic Republic of Congo (DRC) as Africa’s biggest copper source.

To extract more tax revenue from the copper sector, the Zambian government has defied threats from miners and smelters that they will pull out of investments and followed through with plans to carry out reforms.

Under the proposed tax regime, the effective tax rate for Zambia’s mining companies could rise to 86.3%, adding to pressures on miners at a time when the outright copper price is under $7,500 per tonne, according to a report by Ernst & Young.

That represents a substantial rise from the current 61.5% as calculated by the accounting firm’s advisory arm, making Zambia the least competitive among 12 major mining countries.

One of the controversial measures facing intense opposition is the replacement of the 16% value-added tax (VAT) with a non-refundable sales tax announced in a budget speech in 2018.

Sales tax rate unknown
Zambia Revenue Authority has confirmed with Fastmarkets the implementation timeline for the sales tax is April 1, 2019.

“The modalities for this tax are currently being prepared by government through the Ministry of Finance. These modalities include the rates that shall apply. We shall soon make available to the public all information regarding this tax,” a ZRA spokesman said by email on March 13.

No official notice of the rate of the new sales tax has been released, and Zambian copper miners and smelters have reported hearing mixed information.

Fastmarkets talked to three major metal companies operating businesses in Zambia who all offered different estimates on the sales tax rates ranging 3-10%. There are also no available details for taxable items.

“There’s a two-page document. It just looks like a random printout made with Microsoft Publisher. It states that the new sales tax rate will be 10%. But it didn’t mention the details - whether the 10% is on the exports of metals, buying of chemicals, it didn’t say anything,” a producer source, who has seen a document, said.

A second producer source also said the company has been informed by the government that the sales tax rate is 10%.

Meanwhile, a third source said a Chinese-owned smelting operation in Zambia received a proposal of sales tax rates between 3-5%, spurring speculation that rates will vary across different companies in Zambia.

“It could be the case that there are different rates for different companies after all there are not so many major players in Zambia,” the first producer source said.

Meanwhile, government exemptions on certain transactions and products could cause the final sales tax rate to differ from company to company, the source added.

Another difference between the current VAT and the new sales tax is that the latter will be non-refundable. However, while the VAT is currently refundable, various Zambian copper producing company sources told Fastmarkets they have not received refunds from the government for six months to a year.

“There has always been delays. We haven’t received VAT refunds for over one year already. The Zambian government kept telling us they will pay us later when they have cash,” the third Zambian producer source said.

Non-deductible MRT 'leads to double-taxation'
Another new measure coming this year is related to a mineral royalty tax (MRT), a tax applied as a consideration of the extraction of minerals.

As part of the measures, the sliding scale for the MRT of 4-6% has been increased by 1.5 percentage point, and the duty will no longer be tax deductible from corporate income tax.

The increase in scale could already mean an actual 25-37.5% increase in the MRT, according to the EY report.

“The government in Zambia don’t understand what they’ve done. They similarly don’t understand that making royalty non-deductible against corporate tax is double-taxation in anybody’s language. But challenged with this they slip into denial,” the second producer source said.

Under the new tax regime, EY calculated that the effective tax rate for Zambian miners could be over 105% if the copper price surpasses $7,500 per tonne.

Changes to the regime are likely to drain investment in the sector, and result in slower growth, reduced employment and lower tax revenue in the medium term, the advisory report said.

Copper, cobalt imports duty already leading to closures
In under three months, the impact of some new tax measures, namely the 5% import duty on copper and cobalt concentrates, have already surfaced in Zambia. The import duty came info effect at the start of 2019.

ERG decided last month to halt its 55,000 tonne-per-year Chambishi copper refinery as the rising tariff will be charged on the raw feed from its Boss Mine and Frontier Mine in DRC.

As long as the tax is still in place, there is slim chance of production resumption, Fastmarkets understands.

Other Zambian copper smelters, Vedanta’s Konkola Copper Mines (KCM) and CNMC’s Chambishi, which both receive DRC-origin feed, also plan to cut their capacities this year.

Part of the DRC copper concentrates freed up from capacity cuts are piling up in Zambia’s bonded zone as a result. Some are pending export to Europe, Taiwan, and China, although some will still possibly be brought into Zambia.

“I fear what we’ll see are more examples like Chambishi [refinery], where the cost of doing business is just so high that mines will slip into either maintenance or closure entirely,” the second producer said.

Infographic - Zambia, DRC copper industries

U-turn unlikely on new tax policy
Despite threats of layoffs and shutdowns, the Zambian government is unlikely to roll back the new tax measures in the near future, based on a general bullish outlook for copper prices and a bet that economic losses would be limited.

“If the government believes the market will remain strong, they will be emboldened to raise taxes, at least to the extent that the mines feel they can continue operating,” David Manley, senior economic analyst with Natural Resource Governance Institute, said.

“However, if prices were to crash I imagine this belief would evaporate and in fact this is what happened previously,” Manley, formerly a senior economist in the Zambia Revenue Authority, added.

Citing an expected uptick in Chinese copper demand, one copper analyst expects the red metal price to reach $8,000 per tonne this year, he said at Fastmarkets’ International Copper Conference in Amsterdam last week. This compares with the current level of $6,400 per tonne.

While the Zambian government casts hope on the new tax regime revenues lifting the country out of debt, the metals industry remains skeptical of the structure.

“They are not going anywhere - won’t see any increase in tax revenue at all. It is just wishful thinking of Zambian [government]. Attracting investment will – but that can’t be done by introducing taxes that they don’t understand themselves,” the third source said.

The debate between the Zambian government and mining companies escalated when Zambia Chamber of Mines said it expects over 21,000 job losses as a result of the tax reform.

First Quantum, owner of Sentinel and Kansanshi, is mulling a layoff of 2,500 staff in Zambia in the first quarter this year, while the suspension of Chambishi refinery has already put 351 jobs on hold.

“On previous occasions when companies have threatened to close and lay off workers, it’s happened to an extent but never quite matched their threat. The situation is somewhat different this time, and the latest tax rise might be just too much for many companies, but the government might think that the companies have cried wolf too many times,” Manley said.

Yet producer sources do not think alike.

“The market economy will do its work - their policies will first fend off the overseas investors, then dampen the domestic economy,” the second producer source said.

“[The government] won’t retreat for now. It can’t lose face. But two years later they will have to remove everything - tariffs, sales tax and non-deductible MRT,” the source predicted.

Archie Hunter

archie.hunter@fastmarkets.com

Julian Luk

julian.luk@fastmarkets.com

Published

Archie Hunter

Julian Luk

March 18, 2019

12:12 GMT

London