A look at Windfall Tax, perhaps Zambia should not introduce it

TIME PUBLISHED - Friday, October 21, 2011, 5:01 am

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By Marko Sovi:Regarding windfall tax, it is important to understand why governments legislate to tax the profits as windfall. The concept of windfall tax on specific industries is not new. Most countries have had it in one industry or the other-China, Australia , Chile , Peru (still negotiation on copper profits). However, the motive for many governments is the same which is to uplift the living standards of the people in disadvantaged areas, especially, those areas affected by the industry/(ies) in question. In 2008, the UK government introduced a windfall tax levied on (state owned) companies that where sold at an under value in the early 1990 when privatisation hit the globe. The companies affected where, typically, utilities firms especially those providing energy and gas. This, however, was a one-off tax base on the companies profits for the past four years multiplied by the index of 9 (to even out the profits). The governments rationale was that these companies had enjoyed the profits which, in other words, they did not deserve because they were bought cheaply and most of them had the share price double or at least 50% higher than it was when sold just a few days after selling.

This meets the definition of windfall tax as defined by the financial times a tax that must be paid by a company that has suddenly and unexpectedly earned a large amount of money, especially a large company that has recently been privatised (sold by the government). Another source defines it as taxes levied primarily on the companies in a targeted industry that have benefited the most from an economic windfall, most often commodity-based businesses such as big oil companies. And windfall itself is defined as: 1. A sudden, unexpected piece of good fortune or personal gain. 2. Something, such as a ripened fruit, that has been blown down by the wind. I honestly do not understand the mechanics of this tax in the Zambian context and how it is going to be implemented and administered? I also do not understand governments projections regarding the revenue that will be collected from the windfall tax. Its very true that those mines were sold for peppercorn prices and that they have ridiculous incentives which are not the same across the industry- they are tailor made per company as per negotiations. Now regarding the economics of windfall tax, it is true that it will have a knock on effect on investment if the mining companies will divert the profits to offset the taxes instead of investing the excess profits in equipment, machinery and human resource development. It is also true that in its desperation to sell the mines, government agreed to free those mines from the social responsibilities that they had shouldered when they were under ZCCM such as the provision of schools, hospitals and social amenities(sports grounds and equipment) etc. These were errors that were made at the expense of the Zambians and as to whether they were honest or deliberate errors I stand on the left. Now regarding the economics of windfall tax, it is true that it will have a knock on effect on investment if the mining companies will divert the profits to offset the taxes instead of investing the excess profits in equipment, machinery and human resource development. It is also going to be a disincentive if the tax is going to increase their cost of borrowing as the case maybe (assuming they rely heavily and only on external finance). However, arguably, companies do not always finance their investments from profits-that would be pathetic financial management! I personally do not believe that the tax would deter investment and that it would chase the investors away from Zambia ; that line of reasoning would be nave and even, in my mind biased and corrupt! Investors invest because they know they are going to get a return. They however finance their investment, mostly through loans, bonds etc. If this is true then we are saying that the tax wont affect their ability to invest as they can always borrow at their adjusted cost of borrowing.

I personally do not believe that the tax would deter investment and that it would chase the investors away from Zambia ; that line of reasoning would be nave and even, in my mind biased and corrupt! Investors invest because they know they are going to get a return. They are happy that their investment is safe and in a stable political environment. Some people may argue that investors like a predictable regime but I think introducing new policies does not amount to being an unpredictable. Pertinently, as we all understand, government levies taxes on individuals and corporate bodies to enable it to provide essential services to its citizens. One major principle of taxation, regardless of the jurisdiction, is that it must be simple to administer i.e it must not be expensive for ZRA (in our case to execute). Another principle is that tax must not cause unnecessary hardships on the intended group, in other word must not be costly. If we start off with the two, I think it would be fair to say that if the windfall tax is to be paid on excess profits, then the second requirement is met as it would not cause any hardships on the intended group-mining. Government has the responsibility to ensure that individuals and organisations pay fair taxes on their earning. It does so by enacting relevant legislation to guide with the calculations and requirements etc. Government has no obligation to pass legislation that is tailored to favour individuals or corporations and in this case if government thinks that windfall tax should be introduced then it should simply go ahead but must do it cautiously keeping in mind that it shouldnt impact negatively on the intended group. One major problem I think is defining what would be considered as excess profits in this case. The legislation would have a hard time defining that one because it would have to take a lot of things into consideration and in my opinion that would make or create a lot of loophole and a huge burden on ZRA and the two factors would be a recipe for disaster. One major problem I think is defining what would be considered as excess profits in this case. The legislation would have a hard time defining that one because it would have to take a lot of things into consideration and in my opinion that would make or create a lot of loophole and a huge burden on ZRA and the two factors would be a recipe for disaster. But if the intention is to collect these taxes as a one off, which is what it should be, then the time to do it, is now when the copper prices are high and leave the legislation in place that triggers windfall tax when copper prices rise by a certain %. I note that in 2008/2009 Zambia raised $77m in windfall taxes. This is a lot of money. But the good question is how has it been used? If we are going to collect taxes and use the revenue otherwise than intended, then perhaps its not moral either. I find it hard, how a company could consistently declare loses and get away with it in a country where a public company is required, by law, to be audited by a qualified auditor.

ZRA has the powers to nominate its own auditors to ascertain that the financial statements of a company represent a true and fair view of the affairs of the company as at that time. We immediately run into one big problem and that is we have a lot of happy auditors who are ready to give a clean bill to the company dubiously. Thats the biggest problem plaguing the nation. Now should we or should we not introduce windfall tax? In my opinion perhaps we shouldnt but instead: 1. Increase the royalty fees to two figure percentages because companies would have to pay royalties whether or not they make a profit; 2. Strip off the oppressive incentives that these companies enjoy. At the moment each company has its own incentives which it enjoys including long tax holidays of up to 10 years; 3. Introduce a specific mining related tax or modify the current variable tax in force; 4. Government can enact specific legislation which excludes mining companies from enjoying certain reliefs as to bring more profits into the tax web; 5. Government should try to close down all the tax loopholes to enable more profits to be subjected to companies tax. In particular it should discourage the designer schemes whose main purpose the avoidance or even evasion of tax; 6. Government should not entertain companies taking the country for a ride by being given silly conditions but is should be firm and introduce strong laws that penalise all companies that enjoyed designer conditions or schemes with exit charges should they wish to pull out within a certain period of time so as to recover the taxes that could have been paid had those conditions not existed; 7. Windfall tax might also disadvantage the workers as the companies are likely to be reluctant to increase salaries and offer any bonuses to their employees as the money meant for that would be reserved for offsetting windfall tax; 8. Arguably, it is also true that companies may withhold investment as the funds meant for investment have been diverted to paying off windfall tax. This is generally, explained earlier, reliance on borrowing will; In my opinion, windfall tax will not guarantee a constant flow of revenue from the mines as it is a tax on excess profits only which means if the copper prices plummate to record lows, then the government is not going to get any extra revenue from the mines. I hope I have reflected on the matter to the best of my abilities given the limited information that we have. We are all just commenting using abstract information with no solid figures. We dont know how much the mines invest annually in equipment, machinery and human resources neither do we know how much profits they make.

It is all based all the fact that copper prices are rising and we feel windfall tax should be introduced. But having said that, I would like to believe that the government has the figures and their decisions are on solid information. Follow LusakaTimes.com on Twitter, become a fan on Facebook. Stay updated via RSS

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1 COMMON SENSE! says: Fri Oct 21 at 5:18 am Senseand well articulated article,keep it up!,the key word is to increase revenue collection which should be used to uplift the living standards of bthe people.This however will only be achieved if the money,infinitacimal though it may be is chanelled into productive and meaning projects that have direct or indirect benefit on the citizenry.Well articulated article.windfall or any name,the key word is that Zambia

should be a beneficiary of the birth right(Mining so it can contribute atleast 15% to the national coffers unlike the current less or slightly above 10%.Viva Zambia! Reply 2. -4

2 msana wanzili says: Fri Oct 21 at 5:23 am Too much waffling sir get to the point quick as we do not have all day to go through such long essays, e.g next time leave out definitions as we can google if need be. still reading, ill comment later. Reply 3. 0

3 Jimbo says: Fri Oct 21 at 5:25 am Sata promised us windfall taxtime is running out 60 DAYS TO GO Reply 4. +2

Enka Rasha says: Fri Oct 21 at 6:00 am Coffee,chocolate,menand zambia.the richer they come, the better.So i say tax the mines using windfall tax. ..and one more thing.A good essay,at least by zambian guys standards,should be like a womans skirt.Short enough to rouse interest and just long enough to cover the essentials. Reply 5. -4

5 Caradon says: Fri Oct 21 at 6:13 am No.1 , Thank you for the observation, people dont have time to read these long essays. I know maybe what this guys is saying is try but I am sorry I couldnt even finish the first paragraph. People should know that most of us reading these things are educated, you dont need to give us explanations of every single word because we look at you as being foolish. Reply 6. -1

6 Mwiponta Mukabwela says: Fri Oct 21 at 6:57 am bwana author, we know what windfall tax can do or cant do, so next time write an article short and straight to the point.

Reply 7. 0

7 Patrick says: Fri Oct 21 at 7:01 am Too long indeed. You mention that all of us talk about windfall tax but without data. Come on guys, what do the people at ZRA do? When a company comes to Zambia and invests, let us understand in detail its capital, costs inccured, how much minerals it is extracting and exporting, salaries and be able to put a finger on profits and then demand what belongs to us. We hear stories like export of metals have been suspendd because their was some kind of under declaring i.e. wat is on paper being less than wat is exported! Who is responsible for monitoring? Fire him or her if it comes out to be true.Accounts, please use microsft excel and auditors stop being corrupted! Reply 8. +4

8 THE CHANGE WE WANTED says: Fri Oct 21 at 7:01 am LET PF RE-INTRODUCE IT AS PROMISED DURING CAMPAIGNS Reply 9. 0

9 Wantanshi says: Fri Oct 21 at 7:13 am I didnt read it. I came straight to the comments, they are more interesting than a rambling article on a tired subject that almost everyone knows by heart. The prudent use of the money we get from mining activities is whats important. Its drummed and burned into our heads from childhood that metals are wasting assets and one day they will just simply varnish. Yet we still depend on a single commodity to survive as a nation. Is it not common sense that other sources of income must be vigorously promoted, eg, manufacturing, services, energy, agriculture etc? Reply 10. -1

10 New Guy, New Gov't, New Laptop, New Phone, New Wife and New ... says: Fri Oct 21 at 7:25 am What we need is a win win situation Reply 11. +1

11 Potpher Mbulo says: Fri Oct 21 at 7:44 am I find some the arguments put up in the above article to be very shallow: To argue that Windfall tax might also disadvantage the workers as the companies are likely to be reluctant to increase salaries and offer any bonuses to their employees as the

money meant for that would be reserved for offsetting windfall tax, is superficial because the same can be said about variable profit based tax. Should we stop taxing companies on account of the phobia that employees would surfer loss? Again, though it is true that companies may withhold investment as the funds meant for investment have been diverted to paying off windfall tax, the same hold for variable profit tax. Yes it is logical to say government should try to close down all the tax loopholes to enable more profits to be subjected Reply 12. 0

12 hello hello says: Fri Oct 21 at 7:58 am Tax is on profits i.e after salaries wages etc have been considered. I am trying to see how one tries to reduce on wages so that they can have higher profits that will subsequently entail more taxcan someone educate me?? Reply 13. 0

13 chali says: Fri Oct 21 at 8:29 am We also have a broad understanding of the taxes but what is buffling is that the authors aims at achieving a diversion from what we expect. We as government have an obligation to our people and its high time we bring it on for them to feel a part.

Reply 14. 0

14 Time Will Tell says: Fri Oct 21 at 8:30 am Nonsence, We just want a quarter of the super profits that must remain in our country. We will just introduce a simple formular that is linked to the profits Reply 15. +1

15 General says: Fri Oct 21 at 8:37 am There is not reason to give them companies tax holidays at the expense of suffering zambians. 47 years after independence, Zambia should not be poor, guys, with so much copper and other minerals, guys, wind fall or whatever you call it Government should tax these companies. Others companies which have been evading tax are communition compnies, CELL TEL then it became, ZAIN, and I do not know what it will be by changing hands in the name of evading tax while enjoying tax holidays yet they make huge profits. Auditors who are corupt by fals declaration of the should be stripped off their practicing certificate and labelled as corupt, if possible jail them. Reply 16. 0

16 Valley Mouth Piece says: Fri Oct 21 at 8:47 am Truly ZRA is doing us a lot of bad tell you. These investors are going away with a lot of profits because the ZRA system is so poor or they even have one in place. This is been a cry in the safari industry more especially in south luangwa. The only company which is paying right service charge to its workers is Mushroom Lodge owned by Friday Njobvu, a Zambian. However, Isaac his son was confronted but some of the safari operators that what he was doing would alarm the situation in the whole valley. The Accountants end at doing just wages and advances which are obvious. No Accountant knows what the companies are making and therefore the owners decide what to give in Service Charge. You know what! When they still from us they are definitely robbing the government too. Mr. President HELP US! Reply 17. 0

17 the nut cracker says: Fri Oct 21 at 8:56 am who cares about the work load that is put upon ZRA, all we need is a fair share. Reply 18. 0

18 Rio says: Fri Oct 21 at 9:00 am

Article made a nice read; though I would sincerely love that the government come out transparent and tell us the citizenry which companies have these tax incentives, to what extent and on what basis. The public should be made aware of such arrangements as we feel they were corruptly architectured to rob the Zambians; failure to do so will continue to fuel corruption and dubious activities that have continued to rob us Zambians of essential development. I rest my case. Reply 19. +1

19 The Accountant says: Fri Oct 21 at 9:01 am Nice article, yes no 1 i agree with you we need to get more of the mines it doesnt matter what name the tax will be called. ZRA has a problem when it comes to monitoring prophets in companies and they are too corrupt such that they cant even inspect some companies due to the handouts they get speaking from experience here. sorry those of you complaining about the article being long author just wanted to give a clear picture. lol Reply 20. 0

20 Great Kalu says: Fri Oct 21 at 9:06 am The writer raises some interesting points regarding the use of a windfall tax personnally, I would prefere the windfall taxt to be used to set up a sovereign wealth fund along the lines of the NOrwegian model that will provide benefits to future generations. The windfall tax is based on the fact that when the mining companies do their investment analysis, it is based on an estimated copper price, most say at privatisation this was

around $3000/ tonne. Due to the huge demand from China the copper price is now hovering between $6500-$8000 and the country should benefit from this unexpected profit. What the money is used for and whether it used responsibly is another issue, but the tax should be levied. Reply 21. 0

21 Pulamasaka says: Fri Oct 21 at 9:22 am this is all nonsense..we need our money!! Reply 22. 0

22 MAKADOSHI says: Fri Oct 21 at 9:31 am Man we have other things to do why writting such a long essay? next time get to the point, ever heard of summary? i did not read it all. Reply 23. 0

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Kabimba says: Fri Oct 21 at 9:36 am GO-GO-GO still waiting for tough decisions to come-wilber we are waiting Reply 24. +1

24 PM says: Fri Oct 21 at 9:54 am The government should also require that companies use local suppliers or or suppliers with local content andr that downstream processing be done domestically. It is fundamentally correct to say the mining industry in Zambia is no longer paying a fair share to the Zambian people for the resources it exploits. Reply 25. 0

25 Rev. Kasongo wa Musongo Kasongo Jean Pierre says: Fri Oct 21 at 10:06 am We was promised windfall tax and windfall tax we shall demand now that it appears the Cobra is developing amnesia in that department. They may want to forget but we will not. Reply 26. 0

26 Luciferous Calyptus says: Fri Oct 21 at 10:48 am Bottom line is that mines must do more for society because they do a lot of harm both to the environment and to human lives. With great ability comes greater responsibility. Like I said, mines do not pay a lot of current year taxation. They pay about K100,000,000 in current tax and defer most of the taxes due so that they can be paid later. Reply 27. 0

27 Fine! says: Fri Oct 21 at 11:36 am Real leaders find it easier to high produce results than to make high promisses. PF is slowly learning that leadership is a reality rather than a fantasy. PF is leaning to understand that when in Govt, you do not behave like you are in opposition. Reply 28. 0

28 TOKITO says: Fri Oct 21 at 11:37 am

BAKAMBA CAN YOU SUMMERISE YOUR ESSAY NEXT TIME,LIKE YOU SAID A SUDDEN UNEXPECTED PIECE OF GOOD FORTUNE OR PERSONAL GAIN,MY FRIEND, DONT YOU KNOW THAT COPPER PRICE HAS INCREASED,ITS HIGH TIME WINDFALL TAX PLAY ITS ROLE.WE NEED IT BRO. Reply 29. 0

29 NSHUMFWA says: Fri Oct 21 at 11:38 am If the GVT increase other taxes and drop windfall, what shall happen then to investments of the said groups in times copper price falls? Are they going to afford that high fixed tax you said despite low profit margin? I feel windfall is fair. in the times of plenty, they pay and when copper price falls, it is a tax holiday. A win -win situ is more sensible. Tax holidays are not right. Reply 30. 0

30 Fine! says: Fri Oct 21 at 11:56 am #29 NSHUMFWA , I totally agree!! Great questions my man!! No one builds the economy on windfall tax because it is a tax of chance. The most sure tax for any govt is PAYE, and if the current govt can create an equilibrium between workers wages and employer profitability such that most of the workers in these private firms go above the non-taxable threshold and begin to contribute to govt coffers,

we will have indirectly made great benefit from the private business activity. But if the introction of windfall tax is gona be seen as a hinderance to increasing workers salaries such that very little comes from PAYE, windfall tax may just be less than half of what would be coming from PAYE should the profit/wage equilibrium shift upwards. So where do you get more benefit?? Reply 31. 0

31 PM says: Fri Oct 21 at 11:56 am The bottom line is that the total tax collected from the Zambian mining industry, when measured against profits has more than halved over the last few years. Zambia must wake up from its post colonial slumber and witness the changing trends in the global minerals sector. While the rest of the world is advocating for indigenous participation in terms of ownership structure, Zambia is telling the world that you can come and take everything we have in exchange for jobs. We need policy and institutional reform priorities urgently so that we can create a developmental State in Zambia through our mineral resources Reply 32. +1

32 Boma says: Fri Oct 21 at 12:03 pm Windfall tax does not allow for constant flow of cash.The authour pointed out one exprience of windfall tax in UK where utilities companies were undervalued and sold.There share price plummeted suddely, this forced the Gov to introduce windfall tax in order to channel money into social development.The commodity prices are volatile and at any time due to reactions from markets copper price can reduce, so this is how

dangerous windfaltax is.It is an opportunistic tax.But other taxes like cooperate tax can ensure flow of cash.We need to revise the mineral policies.Optimise coporate taxes mineral royalties to world standared.Value addition is also needed.We can not just allow copper cathode being exported to china.Why not allow the investors to manufacture products from copper for job creation Reply 33. 0

33 Luciferous Calyptus says: Fri Oct 21 at 12:25 pm @PM, great analysis. That is very true, I think if people saw eye to eye with your policy it would be good. The only way government can have substantial influence is in the change of ownership structure. Perhaps they need not even pay cash upfront, a buy in of a percentage of ownership can come from taxes owed to them by the mines- of course on a slice basis. Government needs to understand that it is dangerous that in institutions owned by them like NAPSA, ZRA and the like, people hold positions for over 15 years, I think we need to review that one. I think creation of jobs will come when legislation prevents people from holding one public job for over say 10 years! People will think of investing! Reply 34. 0

34 Ba shi Musonda says: Fri Oct 21 at 12:47 pm The article is just ok. People complaing of the length because they enjoy insulting each other instead of bringing out issues. Not everyone on this blog is an economist or accountant and who wants to waste time reseaching on what windfall blar blar is? As for

the tax, call it what you may, but us Zambians just want our fair share. Once the copper is finished you cant plant it like maize. Reply 35. 0

35 walasa says: Fri Oct 21 at 12:51 pm What the author does not understand is the distinction between taxable profits and financial profits. Please do not mislead the people especially where wages are concerned. Mind you those are tax deductible. These things are straight forward. Windfall tax will only affect those making abnormal profits. Its like you go drinking expecting to take two beers only. Then i buy you a crate and leave. What will stop you from sharing with your friend who joins you? We are saying hey guys share the good unexpected fortune that is all. Reply 36. 0

36 UK-Zed Observer says: Fri Oct 21 at 12:54 pm Good points. Length of article is ok. I hope the govt has read it. Biggest problem is corruption at the time the contracts or permits were negotiated. Those individual deals should be revoked. Also creative accounting by the investors should be cramped. They are stealing from us. Reply

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37 Ugly Truth says: Fri Oct 21 at 1:00 pm Those complaining about the article being long are probably used to the hommo newspaper that insults people everyday,they find such thought provoking articles too long.Yes windfall tax should be introduced like it was in 2008.This is cant afect investment or operations thats why its called windfall,if the company does not meet the threshold of windfall,then they are not affected as simple as that. Reply 38. 0

38 Punch Drunk Cobra says: Fri Oct 21 at 1:57 pm One reason for introducing windfall tax; its what got PF elected. So it must be done.The article is right, but forget it. Reply 39. 0

39 Bakulu says:

Fri Oct 21 at 2:51 pm I think the point being made by the author of this article is that windfall tax (whatever that is) is (1) not a panacea, and (ii) it is interrelated to other taxes and issue including workers wages. I personally would agitate a policy that distributes more of the cake to employees rather than government. In my world big government is bad because it is unproductive. Whatever this windfall tax tax thing is is simply a redherring and clouds the policy discourse in Zambia. The fact is this. There is no guarantee that Government will put this money to good use anyway. I would support a scheme that invests in the local area rather than the money heading to Lusaka. Reply 40. 0

40 da sylky says: