Zambia’s 2023 Budget: A return to global norms

Tax Partner at KPMG Zambia, Michael Phiri, unpacks the Budget measures designed to set in motion a mining-led economic recovery

The dust has now settled since the announcement of the 2023 National Budget, during which the Minister of Finance set out the Government’s plan to revive Zambia’s economy. In this, the first in a series of exclusive interviews with financial, economic, and mining experts, Michael Phiri, Tax Partner at KPMG Zambia, sheds light on why certain Budget measures have been proposed, and how they will set in motion a mining-led economic recovery.

You used the word “harmonious” to describe the 2023 Budget during the Public Symposium on 3 October. Please explain why you view it as such.

It was evident from the sort of questions that were posed by various stakeholders to the Minister of Finance that people were in agreement about this being a good Budget, a ‘people’s budget’, and one that will push the country forward. It was almost as if we were singing in unison from the same hymn sheet – both those from the ruling party and those from the political opposition – hence the term “harmonious”. In the past, politics tended to polarize the population. Now, we’re moving to a point where everyone is looking toward economic development and looking for how the Budget will get us there. I think that’s a very positive thing.

There is plenty of commentary in the national media characterizing the mining tax reforms that are underway as “tax holidays” or “tax breaks”. This implies that mining companies are being excused from paying tax, or that these reforms are introducing an ultra-low tax environment. Is this actually what is happening?

The idea that the Government is giving mines tax breaks or tax holidays through the measures that it is implementing a relatively popular narrative, but it is far from the truth. We need to demystify the concept of “tax holidays” or “tax breaks”. There are no tax breaks that have been given to the mining sector.

Zambia was an outlier in the past, and many of our policies were alien to the mining sector. We were the odd one out amongst mining players across the globe. What the Minister is simply doing now is to apply similar taxes to those in place in competitor jurisdictions. The goal is to bring us in line with international norms and best practices, so that we’ll be able to attract investment into Zambia.

You say that Zambia has been “the odd one out” from a policy perspective. How does our current mining tax regime compare to other mining jurisdictions, and how will this change in January 2023 once the newly announced reforms are in place?

The tax regime that has been proposed by the Minister of Finance is one that allows for graduated mineral royalty scales, similar to how Pay As You Earn (PAYE) operates. What he is doing is cushioning the distortions of the old system where, if the price went above a certain amount [i.e. $ 9000 per tonne] then 10% mineral royalty tax (MRT) was applied to all this revenue. In future, higher tax rates will be applied to the incremental value in each adjusted price band, as opposed to the aggregate value when the copper price crosses a price threshold.

Editor’s note: If the system by which mineral royalties are currently calculated was applied to PAYE, it would require employees earning more than ZMK6,900 a month to pay 37.5% tax on their entire salary. The proposed adjustments to the MRT system would, instead, allow people to pay 37.5% income tax on the balance of any income above ZMK6,900 (and, by extension, 25% on income above ZMK4,500 and lower than ZMK4,801), with lower tax rates applying to income below these thresholds.

What will the impact of these proposed MRT changes be?

I think the proposed measures are positive, especially when you consider that the mineral royalty rates in Zambia are on the high side, compared to other jurisdictions. A rate of around 3% MRT is an average on the global scale. In Zambia, we’ve ended up with a base rate of 5.5% MRT, which increases very quickly to 10% [when copper prices rise]. With other jurisdictions paying MRT rates of 3% (or even lower) and mines in Zambia paying 10% MRT, it creates a very wide gap.

The beauty of the changes that are expected from 1 January 2023 is that, when the price of copper goes below $4,000 per tonne, companies will pay a base rate of 4% [instead of paying 5.5% when it goes below $4,500, under the current regime]. Mining companies will still have to deal with high production costs – which can be as high as $3,500 per tonne – but these adjustments will generally enable companies to continue operating when prices are depressed, albeit with very low margins. When times are good and they’re able to get better prices, they’ll contribute MRT at a higher rate. International commodity prices are constantly fluctuating so these measures are positive; the gains that mines are making on good days can be used to cushion the bad days.

Why does Zambia need to compare its mining tax regime with other jurisdictions?

Zambia is not the only country with copper underground, nor does it have a global monopoly on the mineral. The previous tax regime made investing in Zambia unattractive. It encouraged companies to leave traditional copper producers like Zambia and begin to look for alternative investment jurisdictions. We saw the departure of some of the country’s major mining houses because of the way it stood out. Zambia is also a landlocked country, so even transporting copper to the ports and other buyers becomes an additional cost. These adjustments recognize the fact that Zambia needs to compete with other jurisdictions for investment capital. Bringing Zambia more in line with comparator jurisdictions makes it a little more attractive than it was before. Essentially, Government is creating an opportunity for new investors to come into Zambia.