Zambia – No ‘Green Light’ For Mining Investment In The 2021 Budget
In a statement recently released by the Zambia Chamber of Mines, the 2021 Budget announced recently again missed an opportunity to stimulate growth in the sector.
The Chamber welcomed the permanent withdrawal of duty on ore imports that was suspended in March as part of the COVID-19 reliefs and acknowledged the extreme delicacy of the task that the Minister of Finance had to perform, given the recently announced initiation of negotiations to suspend bond repayments. But protecting relatively small amounts of revenue today, knowingly at the expense of far larger investment sums tomorrow, would not reassure our international partners that there was a sustainable plan to rebalance the nation’s finances, said the Chamber.
Understanding the precariousness of the fiscal situation, the Chamber of Mines had focused its pre-Budget engagements with Government on one single provision within the current mining regime, that if it were reversed, could unlock a series of investment approvals, and kickstart an economic recovery.
The provision is this: since 2019, mineral royalty payments are no longer treated as a deductible expense for the purposes of calculating corporate income tax. The effect of this is that mining companies end up being taxed on income that has already been paid over as a royalty – a situation referred to as double taxation. This one provision substantially increases the effective tax rate, handing over almost all the proceeds of mining to the State.
The failure to remove this provision to protect revenue far smaller than the investment sums in the offing will not be lost on the Eurobond holders ,a good proportion of whom also hold shares in the listed companies that are mining and prospecting in Zambia. These bondholders will have been looking to the renewed growth that should have followed to mitigate their income loss during the proposed moratorium on coupon payments.
The US$1 billion Kansanshi Mine sulphide expansion and life of mine extension project, the US$1 billion Lubambe Mine expansion, and the underground equipment fleet expansion at the NFCA Chambishi South East Ore body are three major mining sector investments that are tangible and achievable – but not without a competitive, fair and transparent tax code in place that equitably distributes the rewards of mining, and compensates investors for the risks they take. In all three cases, investors have indicated that the effect of non-deductibility, which removes all reasonable returns on investment, is a key obstacle to approving the project.
Furthermore, the removal of non-deductibility is a key condition for investment into other minerals such as gemstones, nickel, manganese, and gold, if we are to diversify our minerals offering in a formalised manner.
Quite apart from the weight of opinion from Zambia’s own miners, there is also the very recent experience of two of our neighbours – Zimbabwe and Namibia – both of whom have now decisively rejected non-deductibility, on the clear evidence that it was impeding investment into their mining industries.
According to the Chamber of Mines of Namibia, no less than five major mining investments have been approved since the Namibian Government withdrew non-deductibility in this year’s Budget announcement on 27th May. These include the development of two underground gold mines, an extension of the Rosh Pinah inc mine, and a conversion of Skorpion’s zinc refinery into a toll refinery facility.
According to the Zambia Chamber of Mines, following the clear example of our two neighbours, and withdrawing this one provision would have been – and still could be – the ‘green light’ signal to investors that Zambia is once again open for business.
