CHAMBER OF MINES' PROPOSALS TOWARDS 2015 NATIONAL BUDGET

TODAY, I have decided to feature an abridged version of the Chamber of Mines of Zambia (CMZ) submission on the mining sector budget proposals for the 2015 national budget and 2015-2017 Medium Term Expenditure Framework (MTEF).

The document reads:

Following the call by the Ministry of Finance to stakeholders to make submissions on tax and non-tax revenue measures to be considered by Government as it prepares the 2015 National Budget and 2015-2017 Medium Term Expenditure Framework, the CMZ ... we would like to put forward the proposals below for inclusion in the overall submissions.

VALUE ADDED TAX (VAT) RULE 18

Measure: We propose amendments to Rule 18, specifically amending sub-section (ii), to read as follows:

"Rule 18 of the principal Rules is amended by the deletion of sub-rule (1) and the substitution therefor of the following:

 (1)     Unless the Commissioner General shall otherwise allow, a taxable supplier claiming that a supply is zero-rated under the Second  Schedule to the Act on the grounds that the supply is an exportation
of goods, shall produce to an authorised officer-

 i.      Copies of export documents for the goods, bearing a certificate of shipment provided by the Authority or Import documentation into the next country of passage or destination provided by the customs authority of that country.

 ii.     Tax invoices for the goods exported;

 iii.    Proof of payment, made by the customer, for the goods;

 iv.     Documentary evidence, proving that payment for the goods has been
made into the exporter's bank account in Zambia; and

 v.      Such other documentary evidence as the authorised officer may
reasonably require."

a)      Reason: Current VAT practice as guided by Rule 18(1) VAT (General) Rules, 1997, allows an export of goods from Zambia by or on behalf of a taxable supplier to be zero-rated, subject to provision of evidence of exportation as the commissioner general may require.

In its current format, Rule 18 prescribes, among others, the following documentary evidence to support exports:

"ii)    certified copies of customs import documents at the country of destination, bearing a certificate of importation into the country of destination by the customs authority for that country;"

Finance Minister Alexander Chikwanda is expected to present the 2015 National Budget to Parliament on Friday next week.

The mining sector has had no problems producing documentation all the way up to the border or point of exit as these documents are within our control.

The mines, however, have had difficulties with fulfilling sub-section (ii) above as they sell their products to commodity traders, who have their own commercial arrangements with various customers all over the world.

In addition to the fact that they cannot trace documentation in the final country of destination for the goods as they have no access to the final customers, it is further implausible that the ZRA would demand documentation beyond what its own officers have verified as exported as indicated above, and would instead want to rely on third party documentation from other tax jurisdictions.

The failure to provide documentation required in (ii) above has resulted in the ZRA withholding huge sums of their VAT refunds, which has resulted into various operational problems with severe impact on cash flows impacting very negatively on their ability to fund critical expansion projects as well as normal operations.

Specifically, the withholding of this VAT has resulted into inability to fund critical expansion projects, corporate social responsibility projects as well as maintain cash flow to support normal operations.

CAPITAL ALLOWANCES

Measure: The capital allowances on mining plant, machinery and equipment should be reverted to 100 per cent per annum for the cost to be fully claimable within one year.

Reason: Under Section 33 of the Income Tax Act currently, capital allowances are claimable at the rate of 25 per cent on cost and upon commissioning of an asset, meaning that this cost can only be claimed
in full after four years.

In the mining industry, it is not uncommon for expansion projects to take for instance three to four years before completion and commissioning.

During this period of construction the companies will be spending money without getting any tax relief on what they spend.

Even upon commissioning of an asset, it will still take another four years for them to fully claim the related capital allowances.

PREMIUMS DISCOUNTS

Measure: The Reference Price for sale of metal products between related parties should allow adjustments for premiums and discounts that are made based on the quality of the metal products at
finalisation.

Reason: The Income Tax Act under Section 97A currently requires an adjustment of all sales between related parties to the LME price, even when the price actually charged is justified based on international best practice.

This has resulted in finalization adjustments for premiums and discounts not being taken into account, despite this being a commercial reality.

 The Act should therefore be amended to permit use of alternative prices where these are commercially or otherwise justified.

 EXPORT DUTY ON CONCENTRATES

Measure: The government should consider revoking the tax on concentrates exports.

Reason:  The revoking of Statutory Instrument number 89 that allowed concentrate exports to be duty exempt need to be re-introduced as a good number of mines had large stocks of concentrates which for some technical reasons could not be processed locally.

These include high insol materials that may not be able to be smelted locally and Government needed to understand that the industry only exported the concentrates it could not technically and/or economically treat.

This would also help tackle the perception that companies were smuggling other metals within the concentrates.

VAT ON IMPORT OF COBALT CONCENTRATES

 Measure: The Government should reintroduce permanent VAT deferment on cobalt concentrate imported.

 Reason: Due to shortage of higher grade cobalt concentrate in Zambia, Zambian processing/tolling plants have to import most raw materials from the Democratic Republic of Congo to maintain cobalt production in Zambia.

 Currently Zambia produces approximately seven to eight per cent of the world's cobalt metal. Over 90 per cent of this is produced from imported cobalt concentrate.

 For comments call: 260 0955 431442, 0977 246099, 0964 742506 or email:jmuyanwa@gmail.com.

IT WILL BE TIGHT 2014 BUDGET

IT looks like it will be a tight budget!

Yes, the 2014 National Budget looks like it will be a stiff one due to the current economic trends including the deficit which is expected to stretch from about 4.3 per cent of the Gross Domestic Product (GDP) to about 8.5 per cent.

From my perusal of current reports by the Ministry of Finance, the International Monetary Fund (IMF) and the World Bank it is obvious that the major job for Finance minister, Alexander Chikwanda (below),  as he presents the budget on Friday, will be more of where to get the resources than what to spend it on.

The deficit has been compounded by two opposing factors, the reduction in the revenue collection by the government chief tax collector, the Zambia Revenue Authority (ZRA) and the increase in expenditure.

Government expenditures this year is expected to be above the budget as the result of the payment made on fuel subsidies which were incurred before the removal of the provision in May.

The unprecedented salary increment for civil servants which was effected last month has also added to the fiscal pressure as well as other expenditures.

On the flip side, on average, the ZRA has been failing to meet the collection targets due to various factors which could not be the subject of this column.

Realistically speaking the government will, under the 2014 national budget, need more funds to cure these fiscal ills than it will be ready to give out.

Yes, like the IMF observed, to address the fiscal challenges the government will have to use a combination of stepped-up revenue collection and tight expenditure controls.

This is more so since the government aims at reducing the deficit to about five per cent of GDP, similar to what was originally planned for 2013.

Ensuring that this budget is adhered to will be another important thing for macroeconomic stability and hence the foundation that will support continued strong growth of the Zambian economy.

That said, I feel the 2014 National budget will require stakeholders and other interest groups including civil servants to be realistic and water down their expectations in terms of increased direct benefits.

At the risk of sounding like a pessimist or indeed a prophet of doom, I would say that I am not expecting much in terms tax rebates on both personal income and the corporate one.

Last year, the government increased the pay as you earn (PAYE) exemption threshold from K2,000 to K2,200 per month.

The K200 increment translated into 10 per cent and I cannot foresee the threshold being increased by a bigger figure for next year than that.

In short the government will have to ensure that it sets aside more funds on production than on consumption to help bridge the current deficit.

Coming at the time when the mine houses who the major contributors to the GDP are grumbling about the current mining tax regime, there will be no “free money” in this budget.

They have been complaining that the current mineral royalty is too high saying the situation has been compounded by the high electricity tariffs being charged by the power suppliers.

In terms of expenditure the government is expected to stiffen the various fiscal disciplinary measures to ensure that spending agencies stick to the budget.

Interestingly the stakeholders including the general citizenry will also be looking out to see how the government will hand the issue of the removal of subsidy on fuel.

This is with a view to seeing which sectors will attract the funds which could have otherwise gone towards the offsetting of the subsidies.

Some provision is expected on the resuscitation of the closed parastatals as well as on beefing up the capital levels for government-sponsored banks to support the local business and farming communities.

Having allocated K3.4 billion for road construction throughout the country in this year’s budget the government will ensure that projects are completed.

For comments/other contributions call: 0955431442, 0977246099 or email: jmuyanwa@gmail.com.