The New Dawn Mining Tax Regime

In the 2022 budget speech, Minister of Finance, Situmbeko Musokotwane outlined changes that have been made to the mining tax regime in the country. Among these is the re-introduction of deductibility on mineral royalty for corporate tax purposes and increasing the period for disallowed interest deduction to 10 years. These two measures are projected in the short term to reduce tax revenue from the mining sector but envisaged to actualize the UPND administration’s target of producing 3 million metric tonnes of copper in 10 years. Beyond this the Minister has committed to revise the calculation of mineral royalty making it similar to the calculation of PAYE, where only applicable income is taxed at a higher band. This writing will break down these changes, their implications and how they will contribute to this target.

Mineral royalty is a tax levied on the total number of minerals extracted or total minerals sold by a mine. The rate paid by a mining house is applied on the product of what was sold and the monthly average price on the London Metal Exchange on a sliding scale that increases with commodity prices. Mineral royalty is a revenue based tax and is often preferred as governments do not have to wait for the mine to become profitable to begin collecting taxes. The concept of deductibility arises in the computation of corporate income tax (CIT). CIT is charged on profits and thus is levied on what remains after the mine has deducted its costs. Critics of the previous tax regime, particularly mining houses, argued that the non-deductibility of mineral royalty imposed a double tax on their operations as what they pay in royalties was not removed from the computation of CIT. Zambia remained one of the few economies on the continent not allowing for the deductibility of mineral royalty, with a number such as Ghana (Mineral Commission Ghana, 2022) and Namibia recently adopting this approach. In the case of the latter, a significant increase in mineral investments was experienced as a result. Therefore, though this policy alteration will result in reduced taxes for Government, to the tune of K3.2 billion (Budget Speech, 2022), it is in line with international best practice and will make Zambia more competitive in the market for investment.

Regarding the disallowed interest deduction, the interest that corporations pay on loans obtained to finance business operations such as capital projects is deductible as an expense for CIT purposes (ZRA, 2022). This deduction, however, is limited by law to 30% of a company’s earnings before, interest, tax, depreciation and amortization (EBITDA). Amounts not deducted in a given year can be carried forward to subsequent years provided the total amount remains within the 30% limit. In previous years interest deductions by the mines could only be carried forward for a period of 5 years. By doubling this, mining houses will be incentivized to invest in operations and expand production as they have a longer timeframe within which given interest expenditures are deductible.

It is clear that through these and other measures the UPND administration hopes to remedy the fractured relationship that was characteristic of the PF administration and the mines, at the same time make the investment climate friendlier to existing and potential mining houses. This is with a view to restore Zambia to its former position of being the largest copper producer on the continent, a position currently held by the Democratic Republic of Congo. This was underscored by the president in his address at the recently held mining indaba where he re-iterated his administration’s commitment to creating an investment climate which is transparent, consistent, predictable, fair and intolerant to corruption (Financial Insight Zambia, 2022).  

The mining community has already began to respond to these reforms and change in stance by the state, as evidenced by the recent announcement by First Quantum Minerals of approval of a $1.35 billion investment in their mining operations at Kansanshi and the Nickel facility (Bloomberg, 2022). This move will extend the life of the mine well into the 2040s and raise copper and gold production by 25%. Also, Anglo-American, a British multi-national mining firm, announced a joint venture with ARC, a junior exploration firm, to take a majority stake of the firm’s copper cobalt licenses in Zambia’s North Western province (Business Day, 2022). A return of the major mining house to Zambia after 20 years.

As I conclude, 3 million metric tonnes of copper produced is an ambitious target. Putting this into perspective in 2020 the second highest copper producer in the world, Peru, produced 2.2 million tonnes of copper (NS Energy, 2021). An output of 3 million will therefore place Zambia in the upper echelons of copper producers on the global scale with far reaching benefits for the rest of the economy. Attaining this will require concerted efforts to revolutionize the copper industry, a process that has begun. As a citizen, it is my earnest hope that this will come to fruition, however, only time will tell. However, I am assured that whatever the case, with the advent of the green movement and change in government, the mining sector is on a positive trajectory which bodes well for the well-being of us as Zambians.