Zambia’s 2015 budget, which contained proposals for far-reaching reforms to the mining fiscal tax regime, would have significant implications for the mining industry, leaving several mines cash flow negative and unsustainable, so much so that mining companies with high production costs would have to cease operating and exploration investment would dry up, Pan-African advisory firm africapractice CEO Marcus Courage has warned.

Under the proposals, the Zambian government intended to do away with the accepted norm of taxing businesses after they had recovered their investment costs, preferring a blanket tax on revenues or mining royalties, which Courage believed would nullify incentives to invest in the country.

Zambia Finance Minister Alexander Chikwanda said in his 2015 budget speech, in October, that the country would increase underground mining royalties to 8% from 6%, while opencast mining operations would be subjected to a 20% mineral royalty, as part of efforts to revamp the country’s tax system.

The new system outlined by Chikwanda was also aimed at collecting revenue from the industry at different stages of the production pipeline by introducing a 30% corporate processing and smelting tax, while another 30% tax would be applied to income earned from tolling.

Speaking to Mining Weekly, Courage said the government’s motivation for the tax reforms was to make it simpler to administer revenue from the industry.

He pointed out, however, that the consequence of doing away with corporate tax and increasing royalties would be devastating for the industry and the Zambian economy. 

“Nowhere in the world has this been attempted before and under the proposals, those mines which have the highest costs and which employ the most people would be subject to the highest taxes,” he explained.

Zambia-based independent news site Zambian Watchdog reported that global miner Barrick Gold’s openpit copper producing Lumwana mine, in Zambia, would close its operations once the proposed mineral royalty tax increase was approved by Parliament and effected in January 2015.

The report stated that a fact sheet circulated by Lumwana mine said that, if the budget was approved as proposed, Lumwana would definitely close, as it would not be viable to continue operating.

The fact sheet documents what Lumwana said would be the direct losses to Zambia and people of the North-Western province, in particular, if the mine shuts.

The fact sheet said 4 000 direct jobs would be lost, 2 000 of which were employees of Lumwana (94% of whom were Zambian nationals) – the remainder being contractors working for the mine.

Moreover, this came at a time when the Zambian mining industry was still reeling from the government’s decision to withhold $600-million in value-added tax (VAT) refunds owed to mining firms.

The lack of any clear strategy to resolve the refund of the VAT had seriously affected the cash flows of all exporters in Zambia, which, after over 15 months, still did not appear any closer to resolution, said Courage.

Cabinet is due to convene a meeting to review the concerns raised by the mining industry, under the auspices of the Zambian Chamber of Mines. Industry is recommending wider consultations over the new tax regime to ensure existing and planned investment in the sector is protected.