Windfall tax threatens Zambia’s booming copper industry

THERE IS a major threat to further economic growth and development in Zambia. The government has introduced a windfall tax which means that if the price of copper increases over a certain amount then the percentage of tax on revenue increases as well. This is an additional tax over and above the regular tax payable by the copper mines. Hypothetically, even if a mine is running at a loss, it will have to pay tax if the price of copper goes above a certain price. According to a source in the freight industry, the tax has been instituted as the Zambian government feels it cannot trust the financials of mines, that costs are inflated and auditors collude in the process. He notes that this is effectively shortening the lifespan of mines. When the tax was introduced at the beginning of 2008 the mines tried to fight it but the government introduced it regardless of their concerns. All previous agreements between the government and the mines have therefore become null and void and the new tax is now law. Most of the industry sources contacted by FTW expressed concern about the negative effect the windfall tax could have on freight transport as the mines were likely to cancel contracts to save on costs. A senior mining official confirmed that the windfall tax was introduced unilaterally, effectively raising the tax rate of copper mines to 70%. He said that the mines were willing to renegotiate, provided the original teams were in place and the process was completely transparent. Their request was ignored and four mines have since put in legal letters of dispute for international arbitration as the new tax is not in the letter or spirit of the original development agreement with the Zambian government. He does, however, add that it seems as if the government is backtracking but since it has already been signed into law there is a major problem. The negative effects for the entire economy cannot be ignored. The mines are forecasting production of 600 000 tons of copper this year; before privatisation the country only produced 250 000 tons. Over US$3 billion have been invested in the country by mining houses but by implementing the windfall tax, the government is forcing capital expenditure to come to a grinding halt. The official warns that if the issue is not resolved soon, the mining houses will move their capital to the DRC and other neighbouring countries.