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Zambia: Mines Audit Reveals Massive Tax Evasion

The issue of windfall tax on Zambia’s main export, copper, refuses to go away for the current administration of President Rupiah Banda, which it removed a couple of years ago apparently because of low international copper prices at the time. The latest issue is the revelation that mine companies, or at least one of them, Mopani Copper Mines is involved in a massive tax evasion scam.

Today, the price of the mineral has hit the US$10,000 mark and yet the Zambian government refuses to re-introduce it. However, what is more embarrassing for the government is the release of the audit report of an exercise undertaken by an international team comprising Grant Thornton and Econ Poyry auditors which was engaged by the Zambia Revenue Authority to conduct a pilot audit of selected mining companies operating in Zambia.

Some of the big mining companies operating in Zambia include First Quantum Limited, Konkola Copper Mines and China Non-Ferrous Metals.

The issue of tax evasion whose report the Zambian minister of finance and economic development, Dr Situmbeko Musokotwane, is said to have received last year, has not received any coverage in the state-owned media while the Post newspaper has given it some coverage. Zambian bloggers and netizens have played their part by putting meat to the bone.

One blogger, Chola Mukanga, was forced to pull out the full report from his blog apparently because he received threats from people connected to the government.

Maravi, had this to say about the audit:

The audit revealed that Glencore AG, the purchaser, determines prices and that some copper from Mopani is sold under an “old” contract with copper in one instance being sold at 25 per cent of official prices at LME. ” In other words, they are not paying taxes over 75% of the copper ‘sold’ to Glencore under that contract.  Also see the summary to the Pilot Audit of Mopani Mine in the comments below from Friends Of The Earth.

On Glencore International – it is operated by old Bill Clinton friend Marc Rich, who has also been convicted for tax evasion in the US, as well as for trading with Iran. He was pardoned by President Bill Clinton. Rich's legal representation was Lewis ‘Scooter’ Libby, who himself barely escaped prison after a conviction for his role in outing CIA agent Valerie Plame Wilson. (More on Marc Rich on Youtube.) At one point rich was on the FBI's Most Wanted list, for “trading with embargoed states, tax evasion, racketeering and arms trafficking” (quoting Keith Harmon Snow's article Merchants Of Death). I would say the mines are better off in the hands of the state, with a proper legal framework in place.

Chola Mukanga, on his Zambian Economist blog had this to say:

As many of you know we make great effort to put out information and hold government to account. In taking forward this website we of course continue to receive threats from largely supporters of the current government – the usual “we will get you” or “we will shut you down” looms large. As recent as December 2010 even one relative was contacted on my account. These things of course don't bother me because every noble cause carries some sacrifices. I have always published and written with a clean conscience before God. In this vein I pay zero attention to such threats and until now I have never mentioned to readers. A time will come when this website is no more, but I am convinced such threats will never be the reason to stop updating it.

The reason I mention this now is because we have just uploaded a report passed onto us by concerned people and we now had yet again someone issuing threats that we should not have done so. I apologise to the readers that we have to remove the report. We hope the Zambian government, and the MMD in particular would stop this activity of threatening me constantly. I also hope that they will show some leadership and begin to publish reports that should be in the public domain. If they give people the information they deserve we would all get along nicely.

At the height of the windfall tax debate last year, Francis Muma, a PhD candidate in China, wrote on the Lusaka Times website on the pitfalls of the windfall tax and argued thus:

I have listened with interest to the debate on the windfall tax—a tax which seems to find so much favour in some quarters. We are told that the windfall tax is a one-off, but it seems to me to be spread over a span of corporate years.

Therefore, like most taxes, it will have downstream consequences and an ever-growing tail of expenditure, which will cause considerable difficulties for the Ministry of Finance in future years. Windfall tax is merely a tax levied on any supernormal profit or to use a street language it is simply a tax paid by fat cats.

I believe that the only honest way to raise tax to tackle a difficult situation is by means of income tax.

It is immediate, quick and effective of taxation. I am not sure that to grab a windfall tax just because it is handy is the best way to proceed and I fear that, in the long term, it will be proven not to have been a wise way to proceed. Essentially for any country to raise tax is to increase GDP so that fiscal revenue per GDP (T/GDP) is raised and maximised.

How do you achieve this? This is simple if you encourage investment, but how can you encourage investment if you are creating disincentives for the main drivers of economic growth by coming up with such taxes like windfall tax?

In response to Muma’s write up, Che Guevara, had this to say:

no wonder you went to china. its your sponsors who told u to write such tosh. you are the pipo who are enjoying while my relatives in northwestern are going on an empty belly. if the company has made profit why not get some of it to the people.
Look at Bafokeng in South Africa. see how sharp the king of the Bafokeng has out classed you. for every Titanium and Platinum mined from his area, grudaz have to go back and that why they have built even one stadium where the world cup will be held next month.

Senior Citizen's reaction:

Very good researched article. Let me add on by saying as we can see, slowly but sure the economy in most of our mining cities and indeed the country as a whole is now getting better. We should not error by succumbing to shortsighted theoretical politician trumpets on taxation. Theoretical politicians look at macroeconomic variables with paranoia. These mining companies invest billions in their production before they take one penny out. Let’s avoid doing anything to jeopardize their investment in the mining sector.

I believe that over taxing mining isn’t the way to move Zambia out of its economic challenges. State government needs to become “more efficient and determined in diversification of the economy from mineral dependency syndrome
With exponential investment in the economy, I predict a recovery and real economic growth in 2010-2011 when jobs in the state should grow by an inspiring percentage after many years, followed by 8 percent GDP growth in 2010.

Mukanga’s Zambian Economist has also been publishing regularly updated post with quotes from leading analysts and public figures urging the government to reintroduce the windfall tax. A quote from Professor Oliver Saasa, a Zambian economic and business consultant:

This report is very damning on the part of the mines and should be seen as a wake-up call to government….And this should not be politicized. This report means the problem may not only be confined to Mopani, but it maybe symptomatic of more complex, much longer and wider problems in the mining sector. Although this report maybe preliminary, it shows the inadequacies of our tax system.

The government has not really, maybe them mines, realise that compliance to the country’s tax policy is important….When you had the former president late Mwanawasa announce the windfall tax, a number of them foreign mining firms refused to pay. Now, you are talking about the government negotiating with the mines to pay that tax obligations. Where do you hear negotiations on that policy? Now, they are even refusing to have them auditors access to valuable information.
In light of the revelations of the audit, the windfall tax is the only tax that can secure what the government can get.

Anothe quote from former Finance Minister and opposition Forum for Democracy and Development (FDD) president, Edith Nawakwi:

Can you imagine Nigeria is a far much greater economy than Zambia but they have introduced windfall tax on their oil, but here we don’t have? The people in front of us (leaders), they have eyes but they can’t see, or they can see but are not just interested…They are indifferent, because if we have more money we will put up another university in Namushakende. We will build bridges. People are living in squalor in Misisi; we will build new houses as our friends are doing in other countries. But somebody is sitting in an air conditioned office at the Ministry of Finance and says ‘we can’t collect windfall tax’, and the President is watching.

Zambia’s public infrastructure is in a state of disrepair because of lack of funds which are mostly provided by the donor community. Windfall tax campaigners say it is disappointing that government cannot collect the money due to it from the mines, and to add salt to injury, mining companies even evade paying the taxes that they are legally supposed to pay. The failure by government to re-introduce windfall tax is likely to be a campaign issue by the opposition parties for the forthcoming presidential and parliamentary elections later this year.

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