…for a more sustainable mining tax regime in Zambia

By Caleb Fundanga, Odd-Helge Fjeldstad and Lise Rakner

The choice of tax bases in extractive sectors varies between countries. For Zambia, it is important to secure stability, predictability and transparency in the mining tax regime. Experiences with the rise and fall of the mining tax regime provide some lessons for policymakers.

1. The tax regime should be predictable for investors. The erratic and frequent changes in the mining tax regime, especially since 2009, have damaged the credibility of the mining tax regime in Zambia, and have had negative impacts on trust relations between the Government and the industry. Stability does not imply that changes cannot be made, but these should be well prepared and based on consultations with key stakeholders.

2. Consensus among key stakeholders is a prerequisite for a sustainable tax regime. The absence of real and substantive consultations on major tax reforms have contributed to undermine trust between the industry and the Government.

3. There is a need to establish clear, unambiguous rules with few exemptions and equal treatment of companies. The original Mining Developing Agreements in Zambia were damaging in this respect, establishing different tax regimes for individual mining companies.
4. The tax system should be simple to understand and implement for both tax administrators and taxpayers. The royalty regime proved to be difficult to administrate since it implied different royalty rates between open and underground mines. The royalty rates did not take into consideration that some deep shafts produce high-grade minerals, which can be extracted at relatively low costs, while some open pits produce low-grade minerals, which are relatively costly to extract. For some mines, it was also difficult to assess what share of the extracted minerals came from open and deep shafts, respectively.

5. Zambia should revamp its mineral revenue model and move towards a national modelling team anchoring transfer pricing, costs and pricing monitoring, and audits into this. This may help develop better mechanisms for information and data sharing between key public finance management agencies, and, thus, contribute to develop more reliable data for revenue projections and tax policy design.

The ‘best’ way to tax natural resources
Revenues from extractive resources are volatile. This is something Zambia has experienced many times. As a series of short-lived and varied attempts at changing the mining tax system since the privatisation in the late 1990s have shown, diversifying public finances by broadening the tax base is important for budget stability. In this perspective, a broad-based tax system that includes the majority of enterprises and citizens is essential for accountable state-citizen relations. A ‘good’ natural resource tax regime is one that does not undermine — or strangle — the development of the ordinary tax system. The tax debate in Zambia is mainly about mining.

There is a need for a broader approach to tax reform. One needs to think holistic about the tax system, since the different segments of it interfere with each other; the way extractive sectors are taxed, including exemptions, tax holidays, abusive tax avoidance, impacts on other taxpayers’ behaviour, etc. If the most resourceful taxpayers do not contribute to tax revenue through exemptions and other measures, this will affect the tax behaviour of other taxpayers, including domestic companies. Building a robust tax regime in Zambia is not only about administrative capacity. It is largely about politics and building accountable state-citizen relations. To achieve this will require strong and sustained citizen engagement around taxation.

•    Caleb Fundanga, President, Institute for Finance & Economics, and Executive Director, MEFMI

•    Odd-Helge Fjeldstad, Senior Researcher, and CMI Research Director, ICTD Extraordinary Professor, ATI

•    Lise Rakner, Professor, University of Bergen, Senior Researcher, CMI