Understanding the changes in the tax system in Zambia

Zambia’s new EITI Report informs the tax debate as it adjusts to a new era of low commodity prices.

On 15 December, Zambia published their new EITI Report covering 2014. At the launch of the report, Christopher Yaluma, Minister of Mines and Minerals Development, stated that the EITI Report now includes information on the structure of the extractive sector in Zambia and the relevant legal framework, in addition to information on how much is paid by companies and received by government. He said that “this sort of information is intended to increase citizens’ understanding of the mining sector and help them contribute to informed public debate”.

According to the report, Zambia’s mining sector contributed more than 77% of total export revenue and 32% of government revenue in 2014. Five companies contributed approximately 70% of the revenue from the sector and payments made by one company, Kansanshi Mining, accounted for more than one third of the revenues. Kansanshi Mining is Zambia’s biggest copper producer and the largest payment streams from this company were corporate income tax, royalties and dividends from shares held by the state-owned mining company (ZCCM-IH).

The report also shows that the five largest tax streams contributed 77% of the total extractive revenues collected by government, with import value-added tax (VAT) being the largest revenue stream. Apart from import VAT (some of which is later refunded), mineral royalties is the largest revenue stream.

 

Challenges ahead for the copper giant

Zambia is one of the countries that have felt the immediate impact of the lower commodity prices. In September this year the Mopani Copper Mines, in which Glencore is a majority shareholder, suspended their copper and cobalt production for 18 months. Mopani is one of the country’s largest mines, making up for 26% of the Zambia’s copper output. The closure of mines poses challenges to the Zambian economy, which is highly dependent on mining as its major productive industry. According to the EITI Report, the copper and cobalt producers contributed 93% of total extractive revenue to the government in 2014, while the Mopani Copper Mine contributed 11.5% of total extractive revenue to the government.

Understanding changes in the tax system

Zambia’s tax regime governing the mining sector has undergone various changes over the years, and the new EITI Report provides an overview of these changes and what they might mean for government revenue and companies operating in the country.

The report also discloses information on tax refunds for companies operating in the extractive sector. As most of the mining companies are exporters, they can have their value-added tax payments refunded. The report shows that almost USD 300m  (ZMW 1,811,277,497) in VAT refunds was claimed by 10 companies in 2014.

Other information about the context of the extractive sector in the report includes the contribution of mining sector to local governments. The report notes that there are insufficient mechanisms in place for the transfers of mining royalty payments to local governments, and that the lack of a formal distribution of such revenues makes it difficult to determine whether local governments receive what they should. The report also discloses information on corporate social responsibility payments and transfers to the environmental protection fund.

Read the full Zambia 2014 EITI Report (PDF) 

To find out more about the EITI in Zambia, visit the country page on eiti.org or Zambia’s EITI website.