So What Is Wrong With SI 89 of 2013???

There has been a lot of debate over this piece of legislation leading to its death. Few actually know what it entails. I thought I should touch on this matter as a way to get back online after weeks of absence!

So what is it? Statutory Instrument 89 of 2013 had one action and it can simply be explained as: it allowed mining companies to export mineral ores and concentrates without paying export duty. So they only paid mineral royalty and then got free "exporting rights". Mineral ores and concentrates? - That is rightly described by our president as soil! I agree with him in full. 

Some say, but mineral royalty was paid! Yes it was! But like all costs of production, mineral royalty is deductible! So its taken as a cost and will affect their overall "profitability" for tax purposes. But on the other hand, export duty sticks and will be "revenue" to government and the people of Zambia. Especially that the item being exported is in raw or intermediate state. on the other hand, if value addition has been done to this, from concentrates or ores to finished or semi-finished products, you can export without duty since you have added value. I actually believe our mineral royalty is useless on the basis of being deductible if we want to get something out. But sticking with best practices, we have it!

From the above therefore, one would expect mining companies to be interested in adding value and then export without duty. But we have a strange bunch of investors that would otherwise find any loop-hole to export without paying taxes. So they stockpile and make it impossible for the people of Zambia to collect the mineral royalty. In my own belief, this is the worst kind of blackmail that we have since in the mining sector and it should be fought with strategy.

Export duty would be the only sure way of getting something out of this. But it was almost tactically dodged! I wont go into who did this and why. That to me is a political and assumption laden topic which would not do justice on this blog.

Mining Tax Regime

I think our mining tax regime needs not only a face-lift, but an entire body work. There has to be a way that we make sure the mines do the best in there work and contribute to this country. 

Our selling of the mines is the greatest mistake that Zambia made. We may have had to sell, but we should have done it with out heads, not cheques! Any sell is welcome, but it must be done in a way that will benefit this country and the future generations especially that it involves non-renewable resources. It is for this reason that I always regard Chiluba's government as selling the biggest part of Zambia. I stand by my words.

Let us be frank, if the mines wont pay taxes and are not owned by us, then why do we have them? If we own them and don't pay taxes, its our mines, our exports and our returns. If we make no profits, we have at least got the benefits that the mines currently get. Why would they own mines which will never make any profits? But there are towns in europe that benefit from the returns on the mines when the same mines fail to pay export duty is it really rational for us to let the mines be in the same private hands they have been?

Option one as far as I am concerned is get the mines back and pay them for the wasted time. We then find a way to run the mines. 

Inefficiency? Well, every parastatal is expected to be inefficient. But serious, ZTE, Philips and BBC are parastatals, would we say they are inefficient? I should add that Zamtel is a parastatal and there must be something that was done when it was sold that has improved its efficiency. That is what is needed to be done also in the mining sector. If the current owners have made it efficient, we too can make it efficient. After all, they have made foreign owners happy!

Option two is to make sure we change the mining tax regime and ensure that the mines pay their fair share of taxes. Why is it that there is always a blackmail when government changes or tries to tax the mines? Employment is the only contribution these mines add to Zambia. They also use it as a tool to blackmail us to have their way. So if we run the mines, we control the employment, get the financial benefits and don't have to worry about tax avoidance which to me has been a bigger problem. If we can't tax them properly, we will never get anything out of this, and we will continuously complain about it.

We need to resolve this issue in full and in our favour. I hate thinking about the silly court cases that they always want to threaten the people with. But seriously, I think we need to up our game and prepare adequately in getting back the mines. This is a failed attempt at privatization. 

Back to S.I. 89 of 2013, it allowed mining companies to export mineral ores and concentrates without paying export duties. Clearly this meant, they mine and get everything without a single ngwee left in the country except the employment they created. No one should support this, and we should make sure we do everything possible to stop it.

Time To Nationalize

It is always interesting to look at how Economist look at different views they have on an issue in the economy. An interesting view if you are an Economist in the field also.

I have been looking at the issue of the mines and the outcomes of which party is in charge of the mines. Right now, we are made to believe mines are not making any profit and so their contributions to taxation. Seriously if the operations are so bad that no one pays taxes, it would not make business sense to even own the mine. So why don't the owners leave? Why would anyone continue with a business operation which does not make sense (both generic, economic or business sense). If it really was the case, they would have left. 

I believe they have not left because all these loses that they complain about is a properly engineered part of transfer pricing! They find all loses in the chain and the money and profits show up in Switzerland. How else will a company pay taxes in Switzerland over Zambia's minerals when Switzerland has no copper? That is an issue that shocks me. 

My perspective is even strange to other economists. I think it will make good sense if the same loses that the mining companies are complaining about leading to no payment of taxes to be enjoyed by government. Why can't government take over the burden from the mining companies and the little resources enjoyed by the owners of the mines be ploughed back into Zambia? The country will not experience loses as much as the mining companies. The difference will be, there will be worry about the loses and exports since all returns from the mining activities will be back here in Zambia!

I know any modern Economist avoids using the words of nationalization and favours privatization. I believe things should be looked at a different angle altogether. Zambia has been using modern economic theories and perspectives since time in memorial, have we seen any goodness out of that? When the mines were owned by the people of Zambia, the mining towns were doing way better than today. Even ZESCO was selling electricity properly and a rate better than it is today. So the two experiences we have had should give us a lesson we can surely use to our advantage. Even the football pitches were a marvel to be in. Need we forget the schools that we all dreamt of going to? So what has changed with going back and getting the best out of it.

From where I stand, the whole western world has ganged up on Africa and its resources. There is too much complex way of ripping the resources of Africa such that if we try to follow the logical steps, we will be doomed. Ireland, Luxemburg, Netherlands and now even Mauritius have been set up in such a way that they will use all possible ways of reducing taxes so that Multi-Nationals find their way to Africa through these places and rip all the resources. There is 10 times more resources leaving Africa than the ones coming in in form of "AID"! Had this been a straight forward business, Africa would have been far better than any country in Europe or the Americas. But that does not appear to be.

Moreover, if we look at the China arrangement, you will agree with me that China does not follow the "modern" economics. They use planned economy and have been heavily criticized by the west. Did the Chinese system fail them? No they have producing for the world! So anyone looking at a way to develop, would surely think China is a way to go! They have more state owned enterprises competing in the world than you would imagine. We have taken these as our brands for some reason without looking at them and their history. Look at these:

ZTE Corporation (Zhongxing Telecommunication Equipment Corporation)

ZTE is no upstart. The company was founded in 1985 by a handful of state-owned companies affiliated with the Ministry of Aerospace Industry and has grown along with China's big phone companies, which are ZTE's top customers.That is pure genius!

China National Petroleum Corporation (CNPC)

British Broadcasting Corporation (BBC)

ABN AMRO Bank N.V. 

Bharat Electronics Limited

So why do we fear nationalization  After all I think the mines will contribute more to the economy when all their owners are Zambians. Many countries have a way of dealing with State-owned enterprises, we can find a way that can work if we divorce politics from the running.

I know its wishful thinking, but it is worth every typed word. We should nationalize the mines - The benefits far, far out weigh the costs (I am a student Economist, I should know that!)

Mining Taxation - What Are We Doing About It?

Many economists in Zambia right now call for windfall tax for the mines in order to make mines contribute their fair share of taxes. Basically the idea is that mining is receiving a lot of returns as the copper prices are high. We should therefore setup a mining tax regime that will be able to capture that "extra" profit that the mines are getting. Its a fair argument and one that makes sense when you look at it. Every work pays taxes, Zambia being a small economy, the taxes needed to provide services are smaller. Therefore the profits that the mines make in a day would nicely cover all the expenses.

However, we must never live believing the mine owners are interested in the wellbeing of Zambians. If they did, the economy of Zambia right now would be far better than were it is right now. Only a fraction of what they get would change everything. But its that greedy and selfishness of mine owners that make the windfall tax a useless path for me. I know a lot of economists would be shocked to hear that. But I have points that need to be taken into consideration before you judge me.

Stealing Benefits Them

Mine owners will do everything they can to steal every little Ngwee they can from Zambia and proudly send it to the west without a problem. Switzerland makes more money from mining of copper than Zambia. Do the Swiss people have windfall tax?

These people will proudly contribute to the tax in Switzerland than Zambia where the copper comes from. All sorts of transfer pricing and complex avoidance of tax methods are employed to make sure they pay nothing to Zambia and pay a lot more to Europe.

The point is, its not the windfall that will make someone eager to steal wealth from our mines to contribute a fair share. They aim at stealing and having a windfall tax when there is a complex plan of transfer pricing, will bring little to the treasury in any case.

Most mines "sell" the produce at "arms length" to their sister companies. Now if that was true, Zambia would raise money tax revenue from copper that Switzerland. Since it isn't, there is a proper case to assume the "arms length" being talked about does not exist. If there was even an ounce of honest in mining companies, the returns from copper would be in levels that we would not complain about.

Government Has Sovereign Right to Tax 

We have to remember for this discussion that a government has the sovereign right to tax. Government is the only power that can tax or not. It has control on what it can tax and how it can tax it."

Allison Christians

"Tax policy creates and reflects relationships between the market, the citizen, and the state. As a result, traditional tax policy discourse centers around the premise that decisions about taxation should be made exclusively within nations, independent of outside concern and interference."

What we need to add to that is that, tax avoidance has outside interference and its that outside force that make certain decisions irrelevant. Windfall tax being one of them. It is easier to avoid the complexity of taxing these companies that make people choose a simple path of windfall tax. I think otherwise. We should remember that our government has the right to tax without interference, and it should make the right decision to tax.

So unless there is no way of detecting the avoidance of tax in the system, the government should make the right decision and take necessary steps to tax all that need to be.

Are We Going Back on Tax?

I always complained about lack of export duty on mineral outputs. Seriously, this is a wasting asset and we allow it to go out of the country without the exporter paying anything? That was a bad thing that the previous government took on board.

 

However, this has been nicely worked on and there is progress in that direction. What worries me is the loss of the "Sovereign Right" to tax. What we cried about on copper seem to have been transferred to Manganese!

Manganese is it now the new plan to change from copper to manganese? Or is it that the new players in the powers are linked to manganese? This is something we need to work on and not go back on taxation.

 

Why allow people to export and not pay for the wasting assests and you complain about the failure of the mining industry to contribute to the revenue share!

 

Nothing is more to my heart that a failure of the system due to the people involved in it. Seriously, we have the most sacred job of taking care of the country now for future generations to benefit from the wealth that we have. But the moment we come into the picture, we come up with plans of making sure people "steal" the assets that are needed to develop the country. We should not make statements which are parallel to what is happening on the gorund we must take it upon ourselves to ensure we do what is right for the nation. This clearly is not happening at the moment. It has not been happening for the past 30years or so. Zambia is bigger than all of us and we must be within our powers what is right.
I seriously didn't expect that the country's wealth will continue getting out of this country without paying the simplest of all charges - export duty. But it is happening.