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Windfall Tax in Zambia - A Critical Analysis

Windfall Tax in Zambia - A Critical Analysis

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Published by Zambian-Economist

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Published by: Zambian-Economist on Jun 14, 2012
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10/01/2013

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ZAMBIAN ECONOMIST
Ideas for a better Zambia
WINDFALL TAX CONTROVERSY – A CRITICAL ANALYSIS
The Concerns
It is nice to feel that one comes from a country like Zambia which is blessed with abundantnatural resources and minerals like copper (cu), cobalt, uranium and others. But thecelebratory mood soon dissipates when especially one looks at the situation in the long run –for these resources can get exhausted.Take copper for instance, this is not only a waste resource, but since it is finite, at somepoint later, it will therefore be exhausted. What happens then? As one politician lamented,once all the profitable minerals are taken out all we’ll have left with will be “big holes” in theground. Some estimates put our love affair with copper to end in 50 years. That means my 7year old granddaughter will only be 57 years old then. What will she live on there after?This situation is compounded because while copper life is going good, currently hardly anysavings are being made for neither a rainy day nor any substantial investments; are beingundertaken to diversify our economic activities away from copper. When debating on
windfall taxes
Hon Yamfwa Mukanga (
Kantanshi Constituency MP 
) said, “We needsomething to show to our children when copper is gone that – this is what we built from thecopper taxes”
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. Today, probably more than 90% of our GDP is generated from copper proceeds. In short, no copper no economic growth and no growth, no reduction in poverty. Itis that simple. And we should not forget about the reprehensible damage caused by mining activities.Environmental degradation always occurs. So while we mine other ills and hazards are alsobeing created. We have heard stories of poisonous gas fumes in Mufulira, contaminatedKafue river, and not to ignore the huge copper waste dump in Nkana. All the bad by-products produce a social cost. But who is going to pay for these costs? These costs are
externalities
to the producer and are never taken into consideration. Corporate socialresponsibility is not on the agenda of many companies.When air is polluted and drinking water is full of toxic effluents and chemicals – our health iscompromised. So, even if all the profits from minerals were to be surrendered to us, it wouldbe too late – for everybody would be dead by then.If the long-term prospects are bleak because of depletion – in the medium to long-term, we’llalso be faced with problems of 
substitution effects.
That is, as the price of copper soars,consumption of this commodity is bound to plateau. Why? In due course, persistently highprice would force copper consumer industries in China, India, Japan and elsewhere to lookfor other cheaper 
substitutes
. All profit making organizations in free enterprise, behave thatway. They aim for cutting costs to boost their profits. As we speak, already copper has lost some market to alternative materials like aluminumand plastics. When the price of expensive nickel fell from $50,000 per tone to below 50percent more of it got used instead of copper. Hence, the higher the copper price, couldeventually outstrip its viability for use in say construction piping.In addition, architecture, plumbing and other energy efficient methods have impacted copper demand somehow. In China perhaps the largest consumer of copper, they have startedusing simpler fabricated products for roofing. Plumbers have switched to PVC tubing
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ZAMBIAN ECONOMIST
Ideas for a better Zambia
instead of copper. Simply put, due to inventions and/or new technology, we could one daywake up and find our copper completely
obsolete
or 100% replaceable.We should also not ignore the fact that economic growth even in China has began to slowdown. Mind you, we don’t even know how much stockpiling Chinese have been doing. Wecan’t bank our hopes only on the fact that China continues to consume some 65% of allworld produced copper to feed its modernization program for electricity and infrastructureexpansion.From experience, we should also know that eventually, the total world demand is bound tofall – along with the price. We can recall that copper prices fell drastically in late 70s/early80s under Kenneth Kaunda’s rule. Also if we were to take into account the impact of 
excessive supply 
on the price from other producers (whose decisions are beyond our control) like: Chile, Mexico, Peru, Russia, DR Congo, and China itself – [if it so wished toinfluence prices], we can’t be banking on perpetually good copper prices.In summary – these are some of the issues we should keep in the background I think, whenwe discuss this sensitive but import matter of windfall taxes.
The Big Debate
In our local media – newspapers, TV, Radios and discussion forums on the internet –especially the social websites: a heated debate is raging on regarding different forms of 
mineral taxes
: royalties, operating profits taxes, and in particular –
WINDFALL TAX
a formof taxing the revenues. Revenues in this case concerns copper earnings. And the questionis: should Zambia levy these revenues, and if so, by how much? Should our concern only belimited to profits?This serious debate has developed into two distinct camps – one pro and the other against,basically the
re-introduction
 
of 
windfall tax
(WT). Unlike LAZ who offer their opinion onimportant national issues, our EAZ stays silent. I have taken liberty to offer my own opinion.The sharpest salvo on WT came from the current
PF Minister of Finance
Hon Alexander Bwalya Chikwanda
(ABC or Alex), who has labeled those seeking the re-introduction of the25% windfall tax as “lunatics”. [
The Post, March 22, 2012 
]. Alex thinks that production costs – including sea and inland costs are already enough burdens on producers. As such, thenwe shouldn’t levy them more – apart from the merger 6 per cent
royalties
he proposed in thebudget.This position is probably not shared by some of the PF “back bench” or “freshmen ones”,especially those who faced the youth and miners in the campaign like Hon Wylbur Simuusa(Nchanga Constituency MP). As one might expect, the sharpest response to counter this, comes from none other than theformer 
Minister of Finance
under Pres. Patrick Levy Mwanawasa (Levy)
Ng’anduMagande
. Curiously both men happen to be economists. Magande who by the way firstproposed windfall taxes sharply argues that:
Windfall Taxes
are a must if Zambia is to raisesufficient revenue – while the going is good with copper prices for investments and thediversification program. He adds that “moreover PF was propped into power on thepromise of re-introducing the very WTax”. [
The Post, March 23, 2012 
]. So why chicken outnow, he asks?
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ZAMBIAN ECONOMIST
Ideas for a better Zambia
In addition Magande strongly feels that, re-introducing WTax now would be a
good policy direction
– without which otherwise the investors’ confidence would be affected. He further feels that, flip flopping on WT question puts pressure on the Zambian Kwacha. A
third force
in this discussion comes from the previous MMD government people – bestrepresented by ex
Minister of Finance
Hon.
Dr Situmbeko Musokotwane
. Withoutexplicitly saying whether he is for windfall tax or not, Musokotwane however charges that –so long as PF government fails to immediately
re-instate the WT 
as they promised during theSeptember campaign, getting to power would be seen as by “false pretences”. [
The Post,December 7, 2011
].Under Pres Rupiah Banda (RB), Musokotwane was the strongest voice fighting against there-introduction of windfall tax, even if many people still remained skeptical. In fact, there aremany Zambians who accused both Musokotwane and RB as being unpatriotic sons for opposing the windfall tax. The inspiration for what I call “
RB/Musokotwane doctrine
” wasbased on the premise that – China would continue propping up Zambia financially, hence,sources of budget money was secure. Along these lines i.e. being either in favor of or against WT, let me now discuss some
main themes
I see pertain to either side. For those seeking more details, there is a robustdebate on this topic on
Zambian Economist
. [see www. zambian-economist.com]. About ayear or two ago, Chola Mukanga (Cho) – founder of Zambian Economist, presented anexcellent discussion on WT in an essay form headed:
Eight Reasons for Rejecting Higher Mineral Taxes
. Cho discussed in detail pros and cons for each reason.My attempt here is therefore not to repeat that discussion but just to draw distinct boundariesbetween those who support the re-introduction of WT and those who don’t. A foundation weshall fall back on later when I go through the
economic analysis
. Among the arguments raised by those
who are
 
against
higher taxes (the Musokotwanegroup) – increasing windfall taxes, include:-
This camp contends that there is no investor who could risk their capital if at all theycannot expect good returns. By extension, this group therefore sees low taxation as astrong incentive for attracting more investments.
They argue that unless you have favorable tax holidays, concessions, and exemption or low both royalties and windfall taxes, you cannot expect to attract foreign directinvestments (FDI). [The assumption here being that the bulk of investments would haveto come from outside].
Regarding the viability of taxes, Prof Clive Chirwa, a presidential aspirant (
BoltonUniversity 
) – [
see Zambian Economist, Nov, 2010 
], observed that: “good investors with aheart will accept tax of eight per cent on royalty and 25 percent on windfall tax”.
But this group believes that if the PF government re-introduces a 25% windfall tax thatwould be scaring away new investors.
In cases where agreements and other concessions have been signed between theZambian government and the mining investors – those should not be broken, terminatedor tampered with. Doing so would not only be regarded as violation of ‘
Rule of Law’ 
, butwould be sending a bad signal to the investors. According to this view, the rule of lawmeans respecting international agreements, which are legal contacts. These must remainbinding no matter what.
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