MACIG Connect Series
Throughout Africa there is a substantial infrastructure deficit and access to capital remains challenging. How will future large development projects be financed and what role will private equity funds play?
Jason Kazilimani Jr. (JK): Looking at the case of Zambia, over the past three years, funding for infrastructure has mostly come through borrowing, either in the form of direct loans from other countries (particularly China) and through the issue of two rounds of Eurobonds with a total value of $1.75 billion. Most financial experts would like to see more involvement from private equity and more prominence given to public private partnerships (PPPs). There are already some PPPs in place but they are not very significant in the broader context of the country’s development. Private equity is relatively new to Zambia. It is only in the past few years that we have seen any interest from the sector. So far, appetite has been for smaller investments in the range of $5 million to $20 million, which is not sufficient to finance a power plant or mine. Nevertheless, if these small projects are successful then larger players will be attracted to the country. The large funds have tended to focus on Nigeria, because of its large population, and South Africa, Kenya and Egypt, which all have more vibrant economies. For now, Zambia’s population is quite small and it must increase in size in order to spur growth.
After the many changes to the tax code that have taken place in the last year will we finally see some stability with the arrival of the new regime in July?
Michael Phiri (MP): At the moment it seems that the royalty for underground operations will be reduced to 6%, while open cast will pay 9%. There may also be some limitations in the extent to which mines can claim off losses. We are hoping that there will be a moratorium period for greenfield projects during which they can still claim up to 100%. If this is not the case, the new requirements may serve as a disincentive to new investments. Nevertheless, we are confident that the new regime will be far better than the previous code introduced in January 2015 and it has been generally well-received by the mining community.
How exactly are the royalty payments calculated?
MP: Royalties are calculated based on the London Metal Exchange (LME) prices. In the case of unprocessed ore, the calculations are made based on the anticipated copper yield. When the ore is processed and the exact quantities are known, the final payment is adjusted to fit.
In terms of corporation tax will the standard 30% rate now be applied to mines and will the variable profits tax come back into force?
MP: We will see a return to the standard 30% corporation tax with a variable profits tax of up to 15% levied on mines with a net profit in excess of 8% of their turnover. This increases the total effective corporation tax for companies with high profits to approximately 43%. Royalty payments actually come under a separate piece of legislation, the Mines and Minerals Development Act, which is also being updated.
There is considerable friction between the mining industry and the government over non-payment of VAT refunds. What are the causes of this issue and are we going to see a resolution coming anytime soon?
MP: Before March 23, 2015, any company exporting minerals was required to provide the revenue authority with a certificate of import from the final purchaser. Given the nature of global trade and the predominance of middlemen traders in the metals industry, this was extremely difficult. There was also a stipulation for the ultimate buyers to deposit their payments in a Zambian bank, which is also problematic. These rules have since been relaxed but exports made prior to March 23 were deemed to be local sales and liable to be taxed at the full rate of 16%. Now most of the exporters are sitting with huge liabilities on their accounts, which means they will not be able to receive any refund. The mines must therefore work to provide all the documentation that was required before the regulations were changed.
After SI 33 and SI 55 were repealed in 2014 what measures exist to control transfer pricing and ensure that a certain proportion of mine revenues make it back into the Zambian economy?
MP: There is a lot of political will to clamp down on transfer pricing but it is unclear whether the measures are having much effect. The ZRA has trained its staff to recognize and flag up instances of transfer pricing and has acquired several extensive databases to make benchmark comparisons. Within Zambia’s existing legal framework, there is legislation that can help to prevent transfer pricing but we are yet to see much implementation. Aside from this, most of the mines in Zambia are operated by multinationals with headquarters in countries that implement OECD action plans against such practices.
Given that all the Big Four audit firms are present in Zambia, what factors help to differentiate KPMG’s services?
MP: At KPMG, we believe in responsible tax. Throughout our practice we go beyond what is spelled out in the legislation and consider ourselves to be proponents of tax morality. Companies entering Zambia should contribute and help to develop the communities where they work, and we are keen to embrace any new entrants that wish to play a part in this development. In parallel, we have a strong global network, an in-depth knowledge of the country and its regulations, and offer our clients a seven-star service. In the next five years, we aim to be Zambia’s preferred provider across tax, audit and advisory services.
This interview was part of research being conducted by GBR for its upcoming Mining in Africa Country Investment Guide (MACIG) 2016. A pre-release report on the Central African Copperbelt was released in May 2015 and can be accessed here. To participate in this report, please contact Molly Concannon at email@example.com or +244 940 514 806.
IMAGE: Jason Kazilimani Jr., Senior Partner and Chief Executive