An open letter to President Hichilema on how foreign mining companies do not appreciate and reciprocate tax incentives!
By Dr. James Musonda.
Lusaka, Sept. 28 – Greetings to you and your family and welcome back from China. This is my second letter since your election as president. In last year’s letter I provided reasons why it was wrong to give Konkola Copper Mines to Vedanta. This is largely on account of the company’s deserved bad reputation.
Also Read: The decision to re-engage Vedanta reeks of corruption!
A recent report by Foil Vedanta summarises various legal judgments against Vedanta across its operations, highlighting its abusive modus operandi such as: illegal mining in Goa, pollution and tax evasion in Zambia; illegal expansion and pollution in Thoothukudi, Tamil Nadu; industrial disaster at Korba in Chhattisgarh; land settlement and pollution issues in Punjab; displacement and harassment of activists in Lanjigarh, Odisha, and; a mineral allocation scam in Rajasthan.
Many Zambians remember Vedanta, for among other problems its ability to avoid, evade and refusing to pay taxes, retrenching thousands of workers and then subcontracting them on very poor working conditions (low pay, short term, insecure jobs that lack union protection and social security) and for failing to remit pension contributions after deducting from workers’ salaries; polluting the waters on which the poor people in Chingola depend; failing to meet its investment pledges; failing to pay for electricity and; its contractors and suppliers.
It is clear that if you read my previous letter, I was not convincing enough because your government eventually handed out KCM back to Vedanta for a promise of investments, wage increases and Corporate Social Responsibilities (CSR). In this letter however, I am writing on a different topic about taxes and illicit financial flows involving foreign mining companies that are lacking in your mining policy.
Since your electoral victory your government has pledged to increase mining production from the current 800 Mt to over 3000 Mt, and placed this responsibility squarely on the private sector.
You have also proposed several tax incentives to the mining companies, including foregoing about K6bn in mineral royalty tax incentives for 2022 and 2023. This is to both create an enabling environment and attract foreign direct investments in mining.
Drawing on empirical evidence from previous tax incentives offered by previous Zambian governments and the behaviour of foreign mining companies including Vedanta, I argue however, that foreign mining companies do not reciprocate and appreciate these incentives. I begin with a brief background.
◾Background: We sold the mines for a song and gave away the taxes!
In 2000, under pressure from the IMF, World Bank and international donors Zambia under the Movement for Multi-Party Democracy (MMD) privatised its US$3 billion valued Zambia Consolidated Copper Mines ZCCM, at about US$650m, making an estimated US$2.3m loss on the sale of the country’s lifeline.
The new mine owners then demanded exemptions them from key taxes and allowing them to carry forward losses for between 20 to 30 years. They also demanded changes in labour laws allowing them to retrench workers in line with global commodity market fluctuations, reduce social welfare benefits especially housing, water and electricity, and children’s education, and the introduction of subcontracting (short term, poorly paid employment that lacks union protection and pension). What was mandatory, mining community maintenance during ZCCM was relegated to non-mandatory Corporate Social Responsibility (CSR).
These conditions coupled with a steep increase in copper prices enabled mining companies to increase production from around 230 Mt to over 800 Mt between 2002 and 2008. Between 2002 and April 2008, copper prices rose from around US$1,500 per ton to over US$9,000 per ton, at current prices. Cobalt prices rose by a similar amount before a short lived fall of 70% between April and December 2008, before stabilising. By mid-2009, prices had returned to approximately US$6,000 per ton.
“This price boom dwarfed anything seen since Independence. Prices at their peak in 2008 were 20% higher than their 1974 peak and double the average price since the end of the First World War” (Adam and Simpasa 2010, 13).
Consequently, export earnings from the mineral sector rose from US$670million in 2002 to US$4bn in 2008, an increase of almost 500%.
Compared to aid flows, Adam and Simpasa estimate that in 2002 earnings from copper were around twice as large as net overseas development assistance; in 2008 the ratio was approximately seven. Otherwise stated the total net windfall income accruing to the economy from 2002 to 2008 was K14.8 trillion, equivalent to around 66% of base-year GDP (Adam and Simpasa 2010, 14). Computing the annuity value of 15 the addition of the windfall to national wealth, and using a discount rate of 8%, suggests that the boom increased permanent income by around 5.3% of pre-boom GDP.
These estimates represent a net present value of total windfall savings of approximately K6.5 trillion at 2002 prices out of windfall income, computed on the basis, of K10.9 trillion which implies a savings propensity of 60%. However, given the generous tax regime, about three quarters of all the net capital outflows was repatriated as profits and dividend payments by the mines to their foreign shareholders (Adam and Simpasa 2010, 15).
As if the tax incentives were not enough, these mines did everything possible not to contribute anything to the Zambian fiscus through illicit financial flows, mainly through doggy and shady tax evasion and tax avoidance practices. A War on Want Report in 2015 for example, revealed that Zambia loses up to $3 billion a year due to tax avoidance and tax evasion by multinationals. At the heart of these illicit dealings is Vedanta, the company which your government recently handed KCM back, and Glencore, whose subsidiary has been shortlisted on those buying Mopani, a company Glencore bought for US$30 million, but sold back to the Zambian government under former president Lungu for US$1.5 billion taking advantage of the COVID-19 pandemic.
In 2014 an arbitration hearing in the London High Court of Justice revealed how Vedanta used a Dubai based subsidiary called Fujairah Gold to buy under-valued copper from its subsidiary KCM, and hide its profits, in a scam known as transfer mispricing. Fujairah Gold is a subsidiary, controlled by several other Vedanta subsidiaries and managed by Anil’s son Agnivesh Agarwal.
In 2020, the Supreme Court of Zambia fined Mopani Copper Mines and its Swiss parent company Glencoe $13 million for tax evasion, in particular for violating the Arm’s Length Standards (ALS), in which a buyer and seller are expected to act independently without one party influencing the other. Similarly, First Quantum Minerals (FQM) Zambia sells all of its copper to FQM’s Swiss trading company, Metal Corp Trading to sell on the global market and in turn carries out sophisticated derivatives management to handle price risk’.
CzAlthough Metal Corp Trading has a brass plaque and a letter box in Zug, its main business is carried out through offices in London’s Great Portland Street housed in the same building as First Quantum Minerals Ltd UK headquarters.
We got nothing in return
Of course, increased mining activity led to a boom in construction on the Copperbelt and Solwezi, but these were largely indirect costs, as the bulk of the revenue and windfall was entirely remitted offshore in the form of profits and dividends. Contribution of the mining sector to the country’s economy remained almost zero. For example, the tax revenue as a share of GDP remained unchanged at just under 18% over the boom period. Virtually zero revenue accrued directly from the mining sector. In 2007, the revenue yield attributable to specific tax measures levied on the sector, amounted to only 0.2% of GDP, earned almost entirely through the royalty on production. Put simply, the twin effects of large loss carry-forward provisions afforded to the mining houses and the provision for full expensing of investment expenditure, conventional profit taxes in the mining sector yielded precisely zero revenue to the government.
In 2008, the Zambian government sought to address the above problem by introducing the following tax adjustments: a) corporate income tax rate from 25 to 30 %; b) mineral royalty rate on base metals from 0.6% to 3 % of gross revenue. (The royalty rate for other precious metals was raised from 2% to 3 %); c) the re-introduction of 15 %; withholding tax on interest, royalties, management fees and payments to affiliates or subcontractors for all mining companies; d) reduction of capital allowances from 100% expensing to a conventional 25 % per annum straight-line allowance (and deductible only in the year production commences rather than in the year the expense is incurred). The second key element was the introduction of a degree of progressivity into the tax as follows: a) a variable profit tax rate under which the marginal tax rate would rise from 30% to 45 % when taxable profits exceed 8 % of gross revenue; b) a graduated windfall (royalty) tax levied at a rate of 25 % on gross proceeds when the copper price exceeds US$2.50/pound (US$5,600 per ton), at a rate of 50% when the copper price exceeds US$3.00/pound (US$6,720 per ton), and 75% in excess of $3.50/pound (US$7,840 per ton) and; lastly, the introduction of an export levy (of 15% on value) on the export of copper concentrates, ostensibly as an incentive to produce finished copper products (bars, ingots, cathodes) (Adam and Simpasa 2010, 19-20). These measures would have enabled Zambia to raise approximately US$400 million in 2008 compared to the US$20million it raised in 2007. With a responsible government, this revenue would have completely changed Zambia’s economic outlook forever.
But this did not happen. Supported by the IMF, the mines argued that these measures increased the average effective tax rate from around 31% to 47%, making Zambia the highest tax regimes amongst developing countries. But this estimate undermined the fact that the increases related mainly to above normal profits the mines were making. Therefore mining companies resisted these measures with threats of closing down the mines and retrenching workers. The powerless Zambian government, eventually abandoned these tax measures. In short ZCCM was sold at a loss and the conditions offered to the foreign companies could not allow the Zambian state to collect sufficient revenue from the privatised mines, even when these mines made abnormal super profits. The privatised mines did not hide their intentions, namely to make and externalise their profits to their foreign shareholders.
The PF still got nothing.
Like previous governments, the PF government, first led by Michael Sata, and later by Edgar Lungu also unsuccessfully tried to maximise benefits for Zambia from the mines and this was evident in the frequent change of mining taxes during their reign. However, the most notable efforts of the PF government concern, Konkola Copper Mines.
In 2014, barely three years following the PF’s electoral victory, a video clip went viral on the Internet showing Anil Agarwal, the majority owner of Vedanta, bragging about making an easy profit of $500 million each year from KCM, the mine he purchased for a mere $25 million. This is despite the company declaring losses every year, failing to invest, and failing to bring in the FDI the company promised to develop the KDMP. The same year, KCM announced its intentions to retrench an excess of 1,529 employees. The government immediately commenced an audit of the entire operation of KCM, which revealed: high indebtedness and the threat of insolvency. The total liability of the company as of 30 September 2013, stood at US$1.567 billion exceeding its current assets by US$123 million. It was also under the threat of receivership from Standard Bank for defaulting on its US$700 million loans.
But Vedanta was unconcerned. For example, in September 2011, Vedanta prematurely recalled the US$500 million loan it had given to KCM earlier which was supposed to have been repaid in 2012. Vedanta also failed to fulfil its commitment to inject US$397 million into KCM as FDI. Instead, the company used all the funds it generated within KCM towards capital projects. This deprived the company of the necessary funds for operations and maintenance. The government’s efforts of reviving the company by providing it with a Business Improvement Plan (BIP) to increase production from 132,318 tonnes of finished copper in 2013, to 178,994 tonnes by 2017 were frustrated by Vedanta’s failure to fulfil its commitments resulting in a further decline in production to 86,585 tonnes. In 2018 the Zambian government had no option but to threaten the repossession of the mine. But this did not result in any improvements forcing the government through its minority shareholder, ZCCM-IH to commence the liquidation of the company. At the time of liquidation: KCM’s debt had exceeded UU$2.5 billion; developments at KDMP had stalled; underground operations at Nchanga suspended, while the open pit was operating at very low capacity; the smelter was not running at full capacity due to lack of concentrates. The company depended on imported concentrates to run and operate the mine; the acid generation at the acid plant had declined alongside the reduced operation at the smelter. Vedanta’s case is an example of a company that not only refused to pay taxes, offer decent employment, but also failed to run the mines. Yet, Vedanta, did not give up on KCM and sought legal redress from courts within and outside Zambia, until the PF lost power to the UPND in 2021.
◾Conclusion
Drawing on empirical evidence from previous tax incentives offered by previous Zambian governments and the behaviour of foreign mining companies including Vedanta, I argue that foreign mining companies do not reciprocate appreciate these incentives. In this sense, your idea that providing incentives to the mines is not empirically supported. The reverse is true. My advice is that if the mines cannot generate sufficient jobs, thanks to technological advancements that require less and less of labour, and they cannot provide revenue from taxes, it is better for us to nationalise the mines, or increase ownership to not less than 50 percent. This allows us more benefits through dividends and also to identify illicit financial flows. Evidence since 1920 when large scale mining started in Zambia also shows that foreign mining companies are here to make profits and not to develop our country.
About The Author: Dr. James Musonda is a socio-political anthropologist at Université de Liége in Belgium.
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