Written by Dale Choi -As I expect Windfall Profits Tax (WPT) to be the biggest issue in grand finale of fascinating free daily soap opera called Oyu Tolgoi, I decided to learn about effects of WPT on copper concentrate.
I really like the country as I more read more about it. For once, it is landlocked, so we share the “landlocked” issues. Secondly, believe it or not, its economy is also based on copper mining, the country being Africa’s largest copper exporter.
Hoping to benefit from strong copper prices, in April 2008 its government enacted WPT of 25 percent, which seems pretty reasonable by Mongolian standards based on arguments something like “Even Britain did it.” Well, not surprisingly, economic growth fell, mines started laying off its miners, country’s main industry was in danger, foreign exchange earnings dropped. Then interesting things happened. In January 2009 Finance Minister pleaded with the budget speech to parliament to abolish controversial WPT after government consultations with foreign mining firms.
In March 2009 in a pragmatic move Zambian parliament agreed to repeal the tax earning Zambia a bucketful of good faith from its private sector mining partners. The Mines Minister then said “We were aware as the government of constraints created by higher taxes at the mines. Zambia will now be perceived as a friendly country in terms of tax regime and it will attract more investments.”
Parliament also approved a proposal to cut a duty on heavy fuel oils to 15 percent from 30 percent and removing customs duty on copper powder, copper flakes and copper blisters. As a result of these efforts, Zambia is widely rated a low-risk investment destination and has attracted high levels of foreign investment in recent times. The government plans to develop large mining assets in all major provinces to create greater employment opportunities.
According to forecasts, the mining industry in Zambia is forecast to grow at an average rate of 10 percent during 2008-2013 with Zambia being 7th largest copper exporter in the world with over half-million tons of copper produced.
The Zambian WPT story is that with attractive tax regime more investment is attracted, more investment brings more taxable profits, so ultimately, and lower tax rate actually brings more tax revenues.
Dale Choi is a market commentator of Frontier Securities