Zambia Proposes Tax Hike on Mining Companies to Help Country Cash in on High Copper Prices

The Zambian government proposed Friday to raise a tax on mining companies, aimed at helping the copper-rich but impoverished nation cash in on high global copper prices.

The proposed tax increase is part of the government’s austere US$3 billion (euro2.3 billion) 2007 budget, released Friday?

Finance Minister Ng’andu Magande said the government planned to negotiate with the mining companies on tax revisions

He said the country’s economy had grown by 5.8 percent in 2006, up from 5.2 percent in 2005, and that inflation stood at 8.2 percent at the end of the year — both signs, he said, of “prudent monetary and fiscal policies.”

International donors have cheered the Zambian government for its free-trade and anti-corruption policies, and have eliminated almost all of its foreign debt over the last two years.

But more than 70 percent of the population still lives in poverty, which has led to frustration with policies of recently re-elected President Levy Mwanawasa, evidenced in last year’s bitter presidential elections. The distribution of copper benefits has become a key element of that debate.

Magande said the government wants to increase the country’s royalty tax on copper earnings from 0.6 percent to 3 percent, increase the company income tax from 25 to 30 percent, and reintroduce a 15 percent withholding tax on dividends, interest, royalties and other mining sector transactions.

The existing 0.6 percent royalty tax, which is particularly low compared with taxes in other copper-producing countries, was put in place during an industry downturn early in the decade, when the Zambian government was desperate to attract foreign investment. Copper accounts for more than 60 percent of the southern African nation’s exports.

Copper prices have since risen from less than US$1 per pound to more than US$3 per pound (about euro5 per kilogram), driven in large part by growing demand from China. Zambian copper production rose by 7.9 percent in 2006, Magande said, from 459,324 metric tons to 492,016 metric tons. The mining industry now directly employs almost 50,000 people in Zambia, he said.

“At the time when copper prices on the international market were low, mining companies were offered tax concessions in order to make their projects viable,” Magande said in prepared remarks. “Now that the prices are high, there is need to review these concessions so that the nation can benefit from increased earnings from the mining companies.”

Talk of revising the copper tax has raised fears, however, of a backlash among foreign mining companies many of which entered into long-term contracts with the government.

Magande said the government would now seek negotiations with those companies “so that there is mutual consent by contracting parties to revise the tax regime to the new rates.”

Education and health will get 15 and 10.7 percent of the budget’s spending, respectively. Magande said the government would recruit 4,000 new teachers and 1,900 new medical personnel. Zambia’s health care sector is under severe strain, with a 16 percent HIV/AIDS prevalence rate.

Zambia is heavily reliant on foreign donors, with almost 30 percent of its budget coming from foreign sources.

Source: AP via biz.yahoo.com