Chapter 7 - Paper 3.4 (Advanced Taxation)

CHAPTER 7 TAXATION OF MINING OPERATIONS
LEARNING OBJECTIVES: After studying this Chapter you should be able to understand the following: The History of Zambian Mining The Zambian Governments Mining Poli y !hy Mining Companies are Ta"ed #ifferently $ights to Minerals in Zambia Types of Mineral $ights %arge & ale Mining operations $etention %i en es &mall & ale Mining 'perations Mineral $oyalty Ta" (n ome ta" #edu tions for Mining (nvestments Ta" Con essions for the Mining (ndustry Ta" Treatment of )"penditure on Community &ervi es* (nfrastru ture and Compound or Mine Township $oads+ (nternational Aspe ts of Mining Ta"ation Carry forward of Mining %osses in ,nited &tates #ollars (nde"ation of Mining losses and apital allowan es
7.1 BRIEF HISTORY OF ZAMBIAN MINING
The Mining and refining of copper constitutes by far the largest industry in the country and is concentrated in the cities of the Copperbelt. Cobalt, Zinc, Lead, Gold, Silver, Gemstones, and Coal are also mined. Copper accounts for over 8 ! of foreign e"change. Copper minerali#ation $as first discovered at the turn of the century but large scale production only commenced in the %&' (s $ith the start)up of *oan +ntelope Mine in %&'%, follo$ed rapidly by ,-ana Mine opened in %&'., Mufulira Mine opened in %&'' and then ,changa Mine opened in %&'&. Copper production e"ceeded / , tons per annum in the late %&0 (s and reached a pea- of 1 , tons per annum in the period %&2&)%&12 before beginning a progressive decline and sin-ing to a %&&0 lo$ of ' 1, tons per annum. 3o$ever, the privati#ation of Zambia Consolidated Copper Mines 4ZCCM5 is anticipated to activate the remaining industry and halt this decline. 6ith a total mineral resource of at least t$o billion tones on the Copperbelt alone, there is no doubt that copper and cobalt production $ill soon begin a significant up$ard trend. 6hile the privati#ation of Zambia(s copper Mines may not have been as successful as originally hoped, the process has at least resulted in the long do$n$ard spiral in copper production being
224 L.3 Advanced Taxation Amendment Act 2006/07
decisively reversed. +nnual production of copper, around 1 tones ' years ago, dropped to .1 tones in %&&& and ./& tones in . , the year $hen the privati#ation process $as completed. 7t has no$ once again moved up above the ' tone mar-, $ith 8on-ola Copper Mines 48CM5, the dominant player on the Copperbelt, producing ... tones in . . and Mopani Copper Mines 4MCM5, the second biggest producer, 9ust over % tones. :espite the production increases, profitability has proved to be an elusive goal. Many of the Copperbelt Mines are old and deep and really need a copper price much higher than the present ;S<% 2 =tonne or so to be comfortable. 8CM and MCM have both reported losses in recent years and so have the other operations in the sector. >ut there are signs that production costs are coming do$n and both 8CM and MCM are predicting a return to profitability. Zambia has a history of gold mining on a relatively small scale, $ith the t$enty larger deposits having produced a total of slightly more than . tones of gold since modern mining began in %& .. The largest past producers are :unrobin 4&& -g gold5, ?essie 4'& -g5, Sasare 4'& -g5, and Matala 4..0-g5@ :unrobin has recently been re)opened by *eunion Mining and is scheduled to produce 0 )2 -g gold per annum. More than ' gold occurrences have been reported throughout the country. Copper produ !"o# ou$d re% & '(( ((( !o#) per %##u* 7t is interesting to speculate on $here total Zambian copper production might be three to four years hence. + Abest caseB figure is easily $or-ed out. 8CM is targeting .0 tones a year, MCM at least %10 tones, >$ana M-ub$a = Lonshi ' tones and Metore" about %. tones. +dd in % tones from 8ansanshi 4although the figure $ill li-ely be higher in the early years of the mine5 and another / tones from ,CC +frica Mining and the total is 9ust above 2 tones 4and could even be higher depending on $hat happens at >aluba and Lum$ana5. This is an impressive level of production and more than double the figure of . . ,one of the figures seem inherently improbable, although much $ill depend on developments at 8CM. M"#"#+ , !&e E o#o*Cor the past si"ty years the Zambian economy has been heavily reliant on the mining of copper and cobalt and despite the positive steps ta-en to diversify the industrial and manufacturing base, the reliance remains. The mining sector contributed ;S<8.. million to the total e"port.
7.. MINING /OLICY The Government has adopted a pragmatic mineral policy $hich is designed to enhance investment in the Mining industry and to ensure the development of a self)sustaining minerals)based industry. The privati#ation of many state)o$ned companies and especially the Copper Mining industry, formally managed under the parastatal umbrella of Zambia Consolidated Copper Mines Ltd 4ZCCM5, is a clear demonstration of this intent. Dnactment of this policy is being promoted by the Ministry of Mines and Minerals :evelopment through the technical support available from its three constituent departments ) Geological Survey, Mines :evelopment and Mines Safety. T&e Z%*0"%# M"#"#+ /o$" 8ey ob9ectives of the governmentEs Mining FolicyG
To ma-e the private sector the principle producer and e"porter of mineral products through putting in place a private sector initiative in the development of ne$ Mines in order to increase and diversify mineral and mineral based products and e"ports. This $ill ma"imi#e long term economic benefits to the Country. To promote the development of the Small scale mining industry $hich has the potential to significantly contribute to the economy. To promote the development of gemstone Mining and facilitate liberali#ed mar-eting arrangements in order to realise the industryEs potential to contribute to the development of the economy. To promote the e"ploration and e"ploitation of industrial minerals and to encourage the establishment of a ferrous industry. To reduce the danger of ecological damage arising from Mining operations as $ell as damage to the health of $or-ers and inhabitants of the neighborhood through $ater, air and land. To promote the local processing of mineral ra$ materials into finished products for added value.
To promote private participation the Government of Zambia has developed a ne$ mining policy $hich brought in a Mines and Minerals +ct in %&&0. The ne$ policy aims to encourage foreign investment in e"ploration and ne$ large)scale developments, and to encourage private investment in medium and small)scale mining. This is achieved by enshrining in the legislation the follo$ing basic assurances that the foreign investor e"pectsG

&e ure title to mining rights &tability of the fis al regime -oreign e" hange retention
226
L.3 Advanced Taxation Amendment Act 2006/07
$ight to mar.et mine produ ts $ight to assign /right to trade the mining right0 &tability in environmental management (nternational arbitration -reedom of ommer ial operation
The Government policy is not to participate in e"ploration or other mining activities or any shareholding other than regulatory and promotional role. M"#"#+ Le+")$%!"o# The Mine and Mineral +ct 4%&&05 ) $hich greatly simplified licensing procedures, places minimum reasonable constraints on prospecting and mining activities, and creates a very favourable investment environment, $hilst allo$ing for 7nternational arbitration to be $ritten into development agreements, should this be deemed necessary. + frame$or- for responsible development has also been created through publication of the Dnvironmental Frotection and Follution Control *egulations. E1por! /ro edure) 7n all cases a Customs and D"cise :eclaration form has to be completed, usually accompanied by a letter of authori#ation from the Mines :evelopment :epartment. +dditional procedures have to be follo$ed for different commodities

Gemstones ) Haluation Certificate reIuired from Government *ecogni#ed Haluer. Frecious Metals ) provision of a sample for analysis. >ase Metals ) a one year letter of authority is issued by the mines :evelopment :epartment, rather than for individual shipments. *oc- and Soil samples of no commercial value ) the samples to be physically chec-ed before e"port
7.2 3HY MINING COM/ANIES ARE TA4E5 5IFFERENTLY6 +s $e have noted in 1.% above, the Mining 7ndustry is one of the largest and most important in Zambia. *evenues earned by the 7ndustry have over the years contributed significantly to the ,ational Dconomy. This is more the reason $hy the Government of the *epublic of Zambia has adopted Mining policies aimed at encouraging acceptable e"ploitation of the Country(s Mineral 6ealth. The special character of the Mining Sector and the dual nature of the role of the government lead to the dilemma, $hether ta"ation of the Mining Sector should be different from the general ta"ation system in terms of *ate structure and even
administration. Ta"es of general application may not al$ays be suitable for Mining Companies involving high capital intensity and long gestation periods. +t the same time, e"empting Mining Companies from general ta"ation is administratively inconvenient and also against eIuity principles. GRZ Mo!"7%!"o#) 8or M"#"#+ T%1%!"o# 7t is a $ell -no$n fact that Ta" policy is an important instrument of government intervention in any sector, including Mining. 6hile ta"ing the Mining Sector, the government has three ob9ectives to consider. The first emanates from the *ole of government as an agent responsible for achieving economic and social development. 3ere the Government has the responsibility to ensure that the Mineral e"traction is socially optimal and eIuitable, and at the same time, the sector ma-es due contribution to public revenues in the same $ay as other Sectors of the Dconomy to promote sustainable development. To fulfill these goals, the system of Mineral Ta"ation should be characteri#ed by the generally acclaimed principles of certainty, fiscal stability and administrative convenience apart from neutrality. The Second arises from the *ole of G*Z as J$ner of Minerals that reIuires the G*Z to secure an appropriate share in the Mineral *ent. 7f a valuable mineral is e"tracted, the G*Z should receive not only the *egular Ta" but also a separate payment over and above it. The Third aims at minimi#ing the damage to the environment and ecological balance li-ely to be caused by Mining Companies if not properly put under chec-. Mines are $asting assets. 6hen e"hausted they have very little residual value. To set up a Mining Henture involves the establishment of a costly infrastructure $ith a long pre production period in most cases. 7t also involves the ta-ing of great ris-s, as even though the research and e"ploration $or- might have been done, the success of the venture depends on numerous factors, among others, the timely set up of the Mine infrastructure, the Mining of the e"pected Iuantities and grades of ore, the containing of $or-ing costs and the commodity prices $hich can vary Iuite significantly. The high *is- and considerable e"penditure is underta-en in the first years of a Mine(s life. The 7ncome is only received after a considerably long time span and is minimal until the Mining operation is in full production. The paybac- period therefore also lengthens. 7nternational mar-ets are volatile and even $hen the Mine is in full production, profitability cannot be guaranteed. +s a result the Mining 7ndustry in Zambia and else$here in the 6orld has historically received different ta" treatment compared to other industries. This is especially so in relation to its Capital D"penditure. 7n many Countries, there e"ists a range of Mineral levies, each $ith a plethora of components, along $ith other methods such as eIuity sharing. These Ta"es and non ta"es impinge on the Mineral Sector at various stages of prospecting, e"ploration, trade and final consumption. The high *is-, high capital intensity characteristics coupled $ith long gestation lags involved in Mineral activity call for special ta" treatment of the sector. +nd as may be e"pected there are
unavoidable trade)offs bet$een *evenue, *is- and Timing of revenue receipts. Thus use of multiple fiscal instruments in ma"imi#ing Ta" *evenue from the Mining Sector is unavoidable.
7.9 R"+&!) !o M"#er%$) 7e)!ed "# !&e /re)"de#! Se !"o# 2:1; of the Mines and Minerals +ct states that all rights of o$nership in, searching for, and mining and disposing of, minerals are vested in the *epublican Fresident on behalf of all the Zambian people. 7t follo$s, therefore, that rights of prospecting for, mining and disposing of, minerals may be acIuired under the provisions of the mines and minerals +ct, that is to say that no one is allo$ed to under ta-e mining activities $ithout obtaining a mining right granted under the mines and minerals +ct. T-pe) o8 M"#"#+ R"+&!) The follo$ing mining *ights may be granted under the Mines and Minerals +ctGG + prospecting License + retention License + Large Kscale mining License + prospecting permit + small scale mining License + gemstone License +n artisan(s mining right. /er)o#) 5")<u%$"8"ed 8ro* &o$d"#+ M"#"#+ R"+&!) + mining right shall not be granted to or held byG 4a5 +n individual $hoG 7s under the age of eighteen years 7s or becomes an undischarged ban-rupt, having been ad9udged or declared ban-rupt. 4b5 + company, $hich is in LiIuidation, other than LiIuidation, $hich forms part of a scheme for the reconstruction of the company or for its amalgamation $ith another company. +n +rtisan(s mining right shall not be granted to a person $ho is not a citi#en of Zambia.
7.= LARGE SCALE MINING O/ERATIONS /ro)pe !"#+ L" e#)e) + prospecting License confers on the holder of the License e"clusive rights to carry on prospecting operations in the prospecting area for the minerals specified in the License and to do all such other acts and things as are necessary for or reasonably incidental to the carrying on of those operations. A re!e#!"o# L" e#)e) *etention License confers on the holder e"clusive rights to apply for a Large) scale mining License $ithin the area for $hich the retention License has been granted. L%r+e ) %$e *"#"#+ L" e#)e Such a License confers on the holder e"clusive rights to carry on mining and prospecting operations in the mining area, and to do all such other acts and things as necessary for or incidental to the carrying on of those operations.
7.' SMALL SCALE MINING O/ERATIONS /ro)pe !"#+ per*"!) + prospecting permit confers on the holder e"clusive rights to carry on prospecting operations in the prospecting area for the minerals 4e"cept gemstones5 specified in the License. S*%$$ ) %$e *"#"#+ L" e#)e This License confers on the holder e"clusive rights to carry on mining operations in the mining area for minerals other than gemstones. Ge*)!o#e L" e#)e) + gemstone License confers on the holder the same e"clusive rights as a prospecting permit and a small Kscale mining License, but only in relation to gemstone.
Ar!")%#>) *"#"#+ R"+&! +n +rtisan(s mining right shall confer on the person to $hom it is granted e"clusive rights to mine according to its terms in respect of the minerals specified in the permit. +ny citi#en of Zambia $ho has identified a mineral deposit may apply for an artisan(s mining right. I#!erpre!%!"o# o8 !er*) M"#"#+ Meaning the e"traction of mineral, $hether solid, LiIuid or gaseous from Land or from beneath the surface of the earth in order to $in mineralsL M"#er%$ Means any material substance, $hether in solid, LiIuid, or gaseous form, that occurs naturally in or beneath the surface of the earth, but does not include $ater, petroleum or any substance prescribed by the minister by regulation. /ro)pe ! Means to search for any mineral by means and to carry out such $or-s, and remove such samples, as be necessary to test the mineral Kbearing Iualities of any land. Ge*)!o#e) Means amethyst, aIuamarine, beryl, corundum, diamond, emerald, garnet, ruby, sapphite, topa#, tourmaline and any other non K metallic mineral substance, being a substance used in the manufacture of 9e$elryL I#du)!r"%$ *"#er%$ Means barites, dolomite, fluorspar, coal, graphite, guano, gypsum, ironstone, -yanite, Limestone, phyllite, magnesite, mica, nitrate, phosphate, parophyllite, sands, clay and talc.
7.7 ? MINERAL ROYALTY TA4 The Commissioner K General is responsible for the assessment and collection of mineral *oyalty. Mineral *oyalty is payable by holders of large scale mining License such as the 8on-ola Copper Mines, Chambishi Metals and Mopani Copper Mines to mention but a fe$. >ut $ith effect from % +pril . ', even Small and Medium Scale Mining companies are no$ reIuired to pay the Mineral *oyalty since these companies are also benefiting from natural resources. This measure has been ta-en to broaden the ta" base and ma"imi#e revenue collection.
Mineral *oyalty is calculated on the Gross value of minerals produced. The rate, $hich has been in force until '% march . ., is .!. 6ith effect from % +pril . ., Mineral *oyalty has been reduced from .! to .2! for any mining company holding a large scale mining licence and carrying on the mining of base metals. >ase metal means a non)precious metal that is either common or more chemically active, or both common and chemically active and includes iron, copper, nic-el, aluminium, lead, #inc, tin, magnesium, cobalt, manganese, titanium, scandium, vanadium and chromium.
Category
Mineral rate
royalty
3older of a large scale mining licence and carrying on mining of base metals 3older of a gemstone licence or small scale mining licence or an artisan mining right to mine gemstones, base metals or precious metals 3older of any other Mining Licence
.2!
0!
.!
T&e *e%#"#+ o8 +ro)) 7%$ue Cor the purpose of the calculation of mineral *oyalty, for M Gro)) @V%$ue ") defined to mean the reali#able value for a sale free on board, at the point of e"port from Zambia or point of delivery $ithin Zambia. T&e *e%#"#+ o8 Ne! A*ou#! ,et +mount means Gross sale amount LessG The cost of transport, including insurance and handling charges, from the mining area to the point of e"port or delivery@ and The cost of smelting and refining or other processing costs, unless such other proceeds costs relate to the processing normally carried out in Zambia in the mining area.
Frior to % +pril %&&&, Mineral *oyalty $as calculated on the ,et amount under section 22 of the Mines and Minerals +ct C+F .%' of the La$s of Zambia. This form of Ta"ation ho$ever raises some concerns at to its neutrality. 5ue 5%!e Section 22 4.5 of the Mines and Minerals +ct stipulates that mineral royalty is due and payable %/ days after the end of the month in $hich the sale of minerals is done. + penalty of 0! per month or part thereof is charged on late payments of mineral royalty as provided in Section 18 of the 7ncome Ta" +ct. Curther, interest is charged at the rate of .! above the >an- of Zambia. M"#er%$ ro-%$!- Re!ur#) Monthly mineral royalty returns are due $ithin %/ days after the end of the month. + penalty of 8%8 , for individuals or 8'2 , for companies is charged per month or part thereof for failure to submit a monthly mineral royalty return. Me%#"#+ o8 Neu!r%$"!+ ta" is simply a transfer payment by the private sector to the government. There is no direct productive activity on the governmentEs part in obtaining the ta" revenue. 7n economics, applying a ta" can have t$o effects, namely the income effect and the substitution effect. The income effect purports that real income and hence real consumption has fallen, causing the agent to feel poorer and thereby increase its effort. The substitution effect purports that, leisure has become relatively cheaper to consume, and hence there is an incentive to reduce effort. 7n order for the agent not to change production or consumption behavior the income and substitution effects must cancel each other out. 7n an open economy $ith no government sector, and under conditions of perfect competition, there should e"ist perfect productive and allocative efficiency. ,eutrality of a ta" implies that $hen it is applied, the productive and allocative efficient outcomes $ithout a government sector should continue. This is essentially the MeconomistsE perspective. ,eutrality can also be described in more practical terms. 6hen a ta" is levied, there is less disposable income left for the private sector. + neutral ta" $ould reduce disposable income, but not affect decisions on consumption, trade or production. 7t is clear therefore that the concept of neutrality is directed at the de isions of the private sector.
E o#o*" re#! , Au%)" ? Re#! 7n economics, four factors of production are recogni#edG land, labor, capital and enterprise. Dach of these factors reIuires compensation for its services. These can be classed as rent, $ages, interest and profit respectively. 6hen entering into a pro9ect, one can calculate a return. Dconomic rent is that return that is present after all costs to the relevant factors have been met. Dconomic rent may thus be seen as a bonus, Na financial return not reIuired to motivate desired economic behavior. +n important point needs to be mentioned here. ,eutrality is concerned $ith allocation. Dconomic rent is a surplus. 7t has no allocative conseIuences. The essential point about economic rent is the $ay in $hich it is distributed. 3ence a ta" is neutral if the revenue obtained by levying it is completely from economic rent. Moreover, a neutral ta" is concerned $ith the distribution of surplus rent and not ho$ the resources are allocated. Ouasi)rents can be seen as part of economic rent, but they only occur in the short run, due to some change in the mar-et. There could be a shift in demand, for e"ample, $hich temporarily increases the rent accruing to the firm. The point is that Iuasi)rents are transitory. Therefore, if an attempt to ta" these is made, then long term production decisions may be affected, implying non)neutrality. Therefore one can say that economic rent consists of pure rent plus Iuasi)rent. Cor a ta" to be completely neutral it must only ta-e income from pure rent. 8ay and 8ing describe as being neutral, a ta", $hich fell on pure, rent. 7n practical terms, one could then suggest that ta"es should be aimed at ta"ing positive net present values 4,FH5. The reason being that, ,FH discounts all future cash flo$s, and incorporates all the relevant re$ards to the factors of production. 3ence a positive ,FH could be li-ened to economic rent, a surplus above $hat is necessary. A# E o#o*" 5ep" !"o# o8 Neu!r%$"!This section $ill no$ sho$ neutrality formally from the perspective of economics and outline some of its implications. Consider the follo$ing diagramG
MC represents the aggregate marginal cost curve of production for the mines. Dach mine has a different cost of e"traction. The marginal cost curve is up$ard sloping reflecting the fact that the most profitable mine is e"ploited first. Crom this diagram economic rent is depicted as the difference bet$een the price available for the product and its cost of production. Therefore the triangle FTS represents the economic rent present for these mines. FTS is the total amount that the Government could ta" a$ay $ithout affecting allocative efficiency. 3o$ever, in order to do this successfully, it has to apply different ta"es to different mines in proportion to the economic rent they command. + Iuasi)rent could be depicted as a temporary shift in price up$ards, $hich $ould increase the si#e of the triangle FTS. E1%*p$e) o8 Neu!r%$ , No#?Neu!r%$ T%1e) The classic non)neutral ta" is the royalty ta", $hich is a production ta". 7t is levied on the physical Iuantity produced, or its value. 7t completely ignores costs and profits associated $ith the pro9ect. 7ncome ta" is an e"ample of a neutral ta". Ta" is calculated on ta"able income, $hich includes certain deductions and allo$ances. The distinction is that $hereas royalty does not ta-e any account of the level of economic rent that is actually present, income ta" focuses predominantly on surplus profits. 7f profits are #ero, then income ta" revenues are #ero. 6ith royalty, even if profits are #ero, the ta" revenue $ill be positive, assuming there is still considerable production.
I*por!%# e o8 Neu!r%$"!- !o Go7er#*e#! Neu!r%$"!- %) %# o0Be !"7e The main theme of this chapter is $hether the Government should hold neutrality as its prime ob9ective. The Government $ill $ant to ma"imi#e the level of revenue it obtains, and also give incentives to foreign companies to participate in its resource sector. ,eutrality for the Government implies that it earns ta" revenues $hen the company earns positive profits, and it $ill earn nothing $hen the firm earns nothing. + study has been conducted, $hich sho$s that if a Government s$itches from an ad valorem royalty to a *esource *ent Ta" 4**T5, its ta" revenue can be increased $ithout affecting the optimal level of investment. The **T is seen as a much more neutral ta". Ad7%#!%+e) o8 Neu!r%$"! Cirst and foremost is the fact that a neutral ta"ation regime captures pure economic rents. +s mentioned earlier, this has the implication that it should not hinder investment by firms to develop fields. This implies that it is consistent $ith the economistEs criteria for productive and allocative efficiency. This in turn implies the socially optimal level of production. 7ncreased foreign investment has the added benefit of being a foreign inflo$ of currency and a positive factor for the balance of payments account. + ma9or problem of resources industries is high grading. This occurs $hen companies e"ploit the most profitable fields first, and then leave marginal fields because the ta" regime ma-es it un)economical to produce them. + neutral ta" regime $ill only ta-e ta" from a company once it has made a surplus profit. This means that, ignoring the ta" regime, the company is encouraged to develop the field if it is profitable. This implies there is the potential of many more fields being developed and hence li-ely increases in total ta" revenue to the Government. + neutral ta" regime shifts ris- a$ay from the investor. +t first sight, this may seem to be a disadvantage to the Government. 3o$ever, $hen the investor considers a pro9ect, ris- $ill be calculated. The reIuired return is a component of a ris- free rate plus a rispremium. The lo$er this rispremium, then the lo$er $ill be the reIuired return from a pro9ect, as perceived by the company. This implies a bigger surplus leftover for the Government. A$!er#%!"7e O0Be !"7e) Zambia has continued to rely on ad valorem royalties as a means of resource ta"ation in the Mining Sector. 7f the investment)neutrality claims of the academic literature are accepted, it $ould seem that the reluctance of the Zambian governments to s$itch to a purely resource ta" regimes in the Mining Sector must be due to some other factor than their concern over its impact on investment levels. Moreover, **TEs unli-e royalties do not act regressively to changes in the Mining commodity price, $hich can have a negative impact on marginally profitable mines. 3ence there may be other factors $hich
Governments holds in higher esteem, than a neutral ta" regime. Crom the economistEs perspective, there are four other ob9ectives of a ta". These are efficiency, eIuity, clarity and stability. 7n the follo$ing paragraphs, these ob9ectives and others are outlined. Dfficiency simply refers to resource allocation. The problem ho$ever is that there may be a difference bet$een the socially optimal and the private optimal levels of efficiency. Therefore, although a neutral ta" regime $ould bring about a private optimal level of efficiency, this does not necessarily correspond to the socially optimal level. Cor e"ample, there may be negative e"ternalities present, $hich the Government may feel it has a priority to alleviate. + policy of eIuitable ta" incidence and distribution is also important. The Government may hold in high esteem a policy of spreading the ta" burden over a number of concessions $ith different firms operating them. The problem $ith economic rent is that it sho$s a surplus, but ho$ to collect and distribute this surplus eIuitably is a debatable point. 7n particular, $here production usually ta-es place there is great social unrest from the indigenous people of that community. 6ith neutral ta"es, revenues may not occur for years or ever, even though the company $ill be operating and costs are being met. 7t may be politically unfeasible not to have some revenues generated early on in the life of the pro9ect. Jne ma9or problem and disadvantage $ith neutral ta"es is their administration and monitoring. The marginal costs associated $ith different Mining Companies vary. + Government faced $ith this situation has to calculate the different levels of rent, discount rates and e"pected yields to actually value each Mining Company properly. This problem is specifically applicable to developing countries, $here administration and monitoring costs may be difficult to meet. Therefore, another ob9ective of the Government may be clarity and simplicity in the ta" regime. +nother destabili#ing factor for Governments is the volatile price fluctuations especially in commodities such as Copper. Zambia relies on mineral rents for most of its foreign earnings. Cluctuations in prices affect spending plans. There may also be short term problems for the e"change rate and e"ternal accounts $hich have a $hole host of macro)economic implications. 7n short, price fluctuations dent the economic development of a country. + non)neutral ta" regime based on production volume could help mitigate this. 3ence, stability in the ta" revenues may also be an important ob9ective of Governments. *evenue protection is another valid ob9ective to consider. 6hen a company develops a field, it e"tracts a resource that can never be replaced again. Therefore, regardless of $hat it is sold for, it is a piece of property being removed from someoneEs land. Zambia has a royalty policy, $hich is based on this very presumption. Many people see as senseless, a resource being e"tracted from a Country $ithout charge. 7t is for this reason that Zambia has a royalty policy on Minerals.
I*por!%# e o8 Neu!r%$"!- 8or !&e F"r* The attractions of a neutral ta" regime are obvious. The Company only pays ta" $hen it has recovered all its e"ploratory and development costs. Thereafter, it pays ta" out of its surplus profits. Since the company only pays ta" once it ma-es a profit, the pay)bac- period of the investment $ill be shorter than, if a royalty $as applied. 3o$ever, the rules on capital allo$ances and depreciation should also be favorable. + neutral ta" responds to the cyclical nature of the resources industries. Cor e"ample, if the price of the resource decreases substantially, the ta" incidence also responds correspondingly. *eserve replacement and value replacement are eIually important to companies. 7f a company is tied to a FSC, then its estimate of recoverable reserves $ill vary more $ith the oil price. 6ith a neutral ta" regime, the value of reserves to the firm is not as volatile. The reason for this is that the Government actually participates in the price ris-. This encourages the company to lo$er its discount rate due to a lo$er rispremium. This has the benefit of increasing the present value of the pro9ect to the firm. + neutral ta" regime aims to avoid decisions on the pace of recovery of a resource. This allo$s the company to freely plan its investment. 7n addition, reserve management becomes much easier, and its ability to respond to changing mar-et conditions is enhanced. The company is also then motivated to improve the technology of e"traction, increasing the value of reserves and hence potential surplus profits. +s can be seen from the foregoing, $hether or not a firm or Government should give sole priority to a neutral ta" regime depends on the circumstances of the region in Iuestion. The Government may have other considerations, $hich may ta-e priority over neutrality. Such considerations include damage to indigenous people, eIuity, stability in revenues and geology. The firm itself must also consider the geology, the political situation, the fiscal regime, security, profit repatriation and control. Therefore, neutrality should not necessarily be the prime ob9ective but should be one of many ob9ectives, $hich can be applied to different situations and circumstances, both from the perspective of the firm and the Government.
7.C ? INCOME TA4 5E5DCTIONS FOR MINING INVESTMENTS Li-e other non) mining businesses, mining companies are also allo$ed certain outgoings to be deducted from their income in order to arrive at their amount of ta"able income. CA/ITAL E4/EN5ITDRE Cor the purpose of the Mines and Minerals +ct, capital D"penditure, in relation to mining or prospecting operations, means e"penditureG Jn buildings, $or-s, rail$ay or eIuipment@ Jn shaft sin-ing, including e"penditure on sumps, pumps chambers, stations and ore bins accessory to a shaft Jn the purchase of or on the payment of a premium for the use of any patent, design, trade mar-, process of other e"penditure of a similar nature@ 7ncurred prior to the commencement of production or during any period of non K production on preliminary surveys, boreholes, development or management@ or >y $ay of interest payable on any Loan for mining or prospecting purposes. 7n accenting the Gains or profits from the carrying on of mining operations by any person in a charge year in respect of the capital e"penditure incurred by the person on a mine, $hich is in regular production in the year, deductions $ill be allo$ed. Se !"o# 92 B of the income Ta" +ct does not permit the deduction of any mineral *oyalty payable and paid for any charge year prior to the charge year ending '% March . .. 7.E ? TA4 CONCESSIONS FOR THE MINING IN5DSTRY Cor Iuite some time, there has been some form of discrimination in the ta"ation of mining companies. 8on-ola Copper Mines 48CM5 and Mopani copper mines 4MCM5 have al$ays en9oyed favorable ta"ation regimes that are by far much better than other mining companies. +s part of the process of resolving this current problem, Government has made a commitment, in $hich it $ill soon carry out a comprehensive revie$ of the ta"ation of the Mining Sector. 6e are eagerly loo-ing for$ard to seeing the changes in ta" legislation that $ill bring about ta" eIuity in the Mining 7ndustry and $e hope that this $ill not be too long from no$.
+s an initial step in leveling the playing field the follo$ing reliefs have been e"tended to all mining companies $ho are involved in copper and cobalt production other than 8CM and MCMG + reduction in the corporate income Ta" rate from '0! to .0! + reduction in mineral *oyalty Ta" from .! to .2! on the gross value or gross revenue of mineral *evenue produced in mining areas ,o payment of 63T on dividends, royalties and management fees to share holders or their affiliates, and on interest payments to share holders or their affiliates, including any Lender of money to the affected mining companies.
E4AM FOCDS PPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPP 7t is important to -no$ that the Mineral *oyalty Ta" is no longer payable only by holders of large)scale mining companies. ,o$, holders of Small and Medium Scale Mining Licenses $ill be reIuired to pay the Mineral *oyalty. This in effect means that they are no$ reIuired to payG The corporate income Ta" at the reduced rate of .0!@ and Mineral *oyalty Ta" at the reduced rate of .2! of the Gross *evenue of mineral revenue in mining areas. PPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPPP
7.1( ? E4/EN5ITDRE ON COMMDNITY SERVICESF INFRASTRDCTDRE , COM/ODN5 ROA5S S &oo$) %#d &o)p"!%$) 7t is common in Zambia for mining companies to run schools and hospitals for their employees, and sometimes for the general public. The ta" Iuestion is $hether or not the cost of running such schools and 3ospitals is capital or revenue e"penditure. 3ere $e can ta-e a Leaf from Messrs. 8FMG +78D, and FD+TS K+ Guide to mining Ta"ation in South +frica $hich seems to support the vie$ thatG 3ospitals, schools, shops or similar amenities K including furniture and DIuipment, o$ned and operated by the ta"payer mainly for the use of its employees is redeemable capital D"penditure. This implies that such costs are incurred in the ordinary course of trading, and hence allo$ed as a deduction in the Ta" Computation
Re re%!"o# 0u"$d"#+) *ecreational building and facilities o$ned by the ta"payer mainly for the use of its employees is also a redeemable capital e"penditure. D"penditure of amateur sports falls $ithin the ambit of Se !"o# 91 :I; ITA $hich provides as follo$sG )))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) A+ny amount paid by a person during a charge year to an ecclesiastical, charitable, research, educational institution of public character or to a ,ational amateur sporting association or to any fund of a public character $holly and e"clusively established for the use of the Fublic or for ecclesiastical, charitable, research, educational or amateur sporting purposes, shall be dedu !ed from the income of that person for that charge year ifG The payments are in money(s $orth@ The payment s are made for no consideration $hatsoever The minister of finance approves the institution, association or fund to $hich payment is made or to be madeLB ))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))))) Ro%d)G R%"$ I#8r%)!ru !ure >efore proceeding further, $e need to establish the ta" principle concerning e"penditure on road and rail infrastructureG %. *oads=*ail infrastructure costs of the Mine site constitute non K deductible e"penditure $ithin the meaning of the Mining :eductions provisions of both the 7ncome Ta" +ct and Mines and Minerals +ct .. *oads= *ail infrastructure costs on the Mine site constitute allo$able or deductible capital e"penditure. THo Au)!r%$"%# T%1 Ru$"#+) e1")! !&%!: 6here a company $as reIuired as part of the terms of being granted a mining lease for the purpose of commencing mining operations to ma-e a contribution to the relevant local +uthority for the upgrading of e"isting regional road system $here the regional road system did not solely provide access to the mining site nor to be used primarily and principally for the transport of the mining product a$ay from the mining site did not Iualify for deduction as its character $as considered a payment necessary to establish the mining operations similar to payments to holders of land intended for mining operations $hich $ere held not to constitute a Iualifying e"penditure in the case of DTAH de7e$op*e#! V) F.C o8 T%1e) 1= ACT 91(2. 6here a company incurred e"penditure on reconstruction of a minor public road, $hich $as used primarily and principally by the companyEs truc-s to transport coal from the mine to the nearest
main road, and hence to the shipping center, it $as accepted the e"penditure $as a Iualifying capital e"penditure. 7n our Zambian contest, it becomes easily notable that capital e"penditure incurred in the initial and conseIuent maintenance of Mining To$nship roads located on the mine site or plot are ta" allo$able. E4AM/LE: MINERALS GLOBAL
+ feasibility study $as started in . / $hose main ob9ective $as to e"plore the mineral potential of Chingola south. + reno$ned metallurgist :r *ao spearheaded the study. :uring the year . 0, an agreement $as signed bet$een the Zambian Government and Minerals Global, a ;8 resident Mining Company, $hose business interests in Zambia are ta-en care of by :r *ao. The agreement triggered a 8. billion commitment to a program of drilling, metallurgical and engineering $or-s, $hich firmly ushered the ne$ incorporated Zambian subsidiary of Minerals Global ) Minerals Global Zambia.
Cor the charge year ended '% March . 1, Minerals Global Zambia has presented the follo$ing profit and loss account.
I@((( Gross Trading Frofit Add: Add"!"o#%$ "# o*e Gain on sale of metallurgical eIuipment Gross *ent *eceived 4note .5 :ebenture interest received 4note '5 Le)): E1pe#)e) Fremium paid 4note /5 :epreciation Loss on :isposal of motor vehicles Legal fees 4note 05 :onations 4note 25 6ages and salaries :rafting and mapping :rilling D"penditure 7nfrastructure costs 4note 15 G*Z License fees D"change Loss 4note 85 ;tilities and Dlectricity Chingola Trust school 4note &5 I@((( 208, 0 , /0, 00, ))))))))))) C(CF((( %., ' , .0 , %0, 0, /. , 2, 8, .0 , / , %2 , . ,81% /8, )))))))))) 4%,2%/,81%5 ))))))))))))))) :C('FC71; ) 4.0 , 5 )))))))))))))))) :1F(='FC71; QQQQQQQQQQ
Loss before Ta"ation Ta"ation Frovision Cor Ta"ation 4note % 5 Ne! $o))
No!e) 1 Minerals Global Zambia is a holder of a large scale mining License $hose ,et mineral proceeds stands at 8%.. billion. The follo$ing costs $ere directly incurred in relation to mineral salesG I@((( Transport Cost of smelting 7nsurance up to port %/, . , ' , ))))))))) '9F((( QQQQ
No!e . The Gross *ental 7ncome $as received from Local contractors No!e 2 5e0e#!ure "#!ere)! re e"7ed: ? T&e Gross amount of debenture 7nterest received is sho$n in the profit and Loss account. 7ncome Ta" had been $ithheld at source at the appropriate rate. The debenture interest $as received from a Zambian company that is not a former mining division of ZCCM Limited. No!e 9 /re*"u* p%"d: ? T&e Company obtained a right for the use of a trade name from Minerals Global K ;8 at the beginning of the current charge year. The company paid a premium of 8%. million as consideration for the grant of right. The company $ill e"ploit the right over a / )year period. No!e = ? Le+%$ 8ee) These include the follo$ingG I@((( Cost connected $ith +cIuisition of fi"ed assets Cost associated $ith issuing ne$ share capital Cost associated $ith recovery of Loan General Legal D"penses 4all allo$able5 0, 2, ', %, )))))))) 1=F((( QQQQ
No!e ' ? 5o#%!"o#) These $ere made to approved charitable Jrgani#ations. No!e 7 ? I#8r%)!ru !ure o)!) These include the follo$ingG The Chingola Municipal Council as a pre) feasibility study condition for future granting of Mining License by the Ministry of Cinance and ,ational Flanning. This pro9ect cost 8% million.
The company constructed a Lin- road to the Chingola K 8it$e *oad, $hich is mainly used by Mine Truc-s. This cost 80 million. 8% million $as spent on the construction of a rail$ay line $ithin the Mining site. No!e C ? E1 &%#+e Lo)) The D"change Loss $as presumably unreali#ed. No!e E ? C&"#+o$% Tru)! S &oo$ These are running costs of the School, $hich is % ! $holly o$ned by Minerals Global Zambia and is mainly for the use of the employees. No!e 1( ? /ro7")"o# 8or T%1%!"o# The provision for Ta"ation is based on the total company ta" estimated at the beginning of the charge year and the amount of Company Ta" already paid under the provisional system of payment of Ta" for the charge year ended '% march . 1 is 8%0 million. No!e 11 ) Capital +llo$ances stand at 8%0 million Re<u"red Calculate the ta"able business profit for the company for the year ended '% March . 1. Calculate the final amount of company income Ta" payable by the company for the charge year . 2= 1. ANS3ER: MINERALS GLOBAL ZAMBIA Gro)) Re#! Re e"7ed This $ill be deducted from trading profit and Ta"ed separately under the 63T system. The rate of ta" is %0! 5e0e#!ure "#!ere)! re e"7ed The interest $as received from a Zambian company that is not a former mining division of ZCCM Limited. Cor all former mining divisions of ZCCM, and mining companies in general, there is no payment of 63T on interest payments to shareholders or their affiliates, including any Lender of money to them. >ut since the interest $as not received from a former mining division of ZCCM, the interest is sub9ect to 63T. This interest is accordingly, not a final ta". >ut it $ill be ta"ed separately under the rules of separate ta"ation.
/re*"u* p%"d Faragraph %/ of the fifth schedule provides for an allo$ance $here a premium is paid for the use of machinery, plant, a patent, a :esign, trade mar- or copy right or other property of a Li-e nature $hich is used for business purposes. The premium allo$ance $ill be calculated as follo$sG I@((( Cost of Fremium +llo$ance . 0= 2 Q %=/ %., 4' 5 )))))))) 11F7(( QQQQQ /%r%+r%p& 19 :.; states that the deduction allo$ed for any charge year shall not e"ceed the amount of the premium divided by the number of years for $hich the right of use is granted, in this case %., =/ Q 8' .
th
Le+%$ 8ee) Legal fees are allo$able provided that they are incurred in connection $ith the trade and are not related to capital items. Therefore, disallo$ the follo$ingG Cost connected $ith +cIuisition of fi"ed +ssets Cost associated $ith issuing ne$ share capital I#8r%)!ru !ure o)!): ToH# Ro%d The Chingola Municipal Council as a pre )feasibility study condition demanded the construction of this road. 3ence the payment can be considered to have a character of a payment necessary to establish the mining operations. This is therefore not a Iualifying capital e"penditure. L"#J Ro%d This road is mainly used by mine Tuc-s and is presumably constructed on the mine site. The cost of constructing such a road is a Oualifying capital D"penditure. R%"$H%- L"#e The cost of constructing a rail$ay line $ithin the mining site is a Iualifying capital D"penditure. C&"#+o$% Tru)! S &oo$ The cost of running a school, $hich is $holly o$ned by the mining company and is mainly, used by its employees is a Iualifying e"penditure.
Co*pu!%!"o# o8 AdBu)!ed Tr%d"#+ /ro8"! LJSS +S FD* +CCJ;,TS Add: 5")%$$oHed E1pe#d"!ure :epreciation Fremium 4%., K' 5 Loss on :isposal of motor vehicles Legal Cees 40 R2 5 7nfrastructure cost K To$n *oad ;nreali#ed D"change Loss I@((( 4%, 02,81%5 ' , %%,1 .0 , %%, % , %2 , ))))))))))) 8'.,1 )))))))))) :..9F171; /0, 00, ))))))))))) 4% , 5 )))))))))))) 4'./, 5 4%0 , 5 )))))))))))) 979F((( QQQQQQ
Le)): I# o*e T%1ed Sep%r%!e$Gross *ent :ebenture 7nterest
LessG Capital +llo$ances +d9usted Trading Loss F"#%$ A*ou#! o8 T%1 /%-%0$e T%1 o# Re#!%$ I# o*e: %0! S 8/0, , Q82, 10 , T%1 o# I#!ere)! .0! S 800, , Q 8%', 10 ,
T%1 ON Tr%d"#+ A !"7"!"e): ,il M"#er%$ Ro-%$ T%1 . Cirst calculate the Gross Mineral *evenue, $hich isG 8%.. billion R 82/ billion Q 8%, .2/, , . M*T Q .2! S 8%, .2/, , Q 81 0,8/ ,
Su**%r- o8 T%1 /%-%0$eG Re8u#d%0$e I> *"$$"o# Ta" on *ental income Ta" on interest M*T LessG Frovisional Ta" Faid Ta" Fayable 2,10 %',10 1,08/ ))))))))) .8, 8/ 4%0, 5 ))))))))) 12F(C9 QQQQQQ
=.11 I#!er#%!"o#%$ A)pe !) o8 M"#"#+ T%1%!"o# Zambia faces a ma9or problem $ith multinational mining companies employing profit shifting techniIues to reduce their ta" liability in Zambia. Three areas of international ta"ation that are of concern areG The basis of ta"ation of residents of Zambia Sugar Transfer pricing Thin Capitali#ation. T&e 0%)") o8 !%1%!"o# o8 re)"de#!): Zambia operates a source based system of ta"ation and every person in receipt of 7ncome from a source $ithin or deemed to be $ithin Zambia $ill be liable to 7ncome Ta" in Zambia. The concept of residence is of secondary importance in that it only e"tends the ta" net to cover interest and dividend income received from a foreign source. This means that Zambia does not ta" its residents on their $orld $ide 7ncome but only on Zambian sourced 7ncome and 7nterest and dividends received from sources outside Zambia. ;nder this system it $ould be open for Zambian residents to structure the affairs in such a $ay that some of the profits from mining operations could be derived from foreign sources. The most prudent $ay for$ard $ould be for government to ta" persons on their $orld $ide 7ncome $ith ta" credits allo$ed for foreign ta"es paid. Tr%#)8er /r" "#+ Transfer pricing is the practice of charging more or less than an independent party $ould pay for goods and services provided bet$een related parties across national borders. This practice allo$s multinational groups to decide $hich of its subsidiaries $ill ma-e profits and ho$ much those profits $ill be. The practice usually is to ensure that profits are ma"imi#ed in Countries $ith lo$ or no ta" rates 4Ta" havens5 or in Countries $hich offer specific e"emptions or ta" relief. Zambia
does not have any specific transfer pricing la$ although it appears that the double ta" treaties that Zambia has negotiated $ith other Countries do contain transfer pricing provisions. 6hen one part of a multinational organi#ation in one country transfers 4that is, sells5 goods, services or -no$ ) ho$ to another part in another country, the price charged for these goods or services is called N Tr%#)8er /r" eK This price, more often than not may be a purely arbitrary figure, meaning by this that it may be unrelated to costs incurred. The transfer price can be set at a level, $hich reduces or even cancels out the total ta", $hich has to be paid by the multinational Dnterprise. >ut in reality unrealistic transfer prices are not al$ays motivated by fiscal or ta" considerations. F% !or) %88e !"#+ !r%#)8er /r" "#+ +n unstable political environment may force multinationals to charge high prices $hen dealing $ith fello$ members of the M,D group to mitigate the potential ris-s associated $ith the political instability. 3igh rates of inflation *igid e"change controls Confiscatory rates of ta"ation Some countries may impose artificially high tariff barriers or other$ise restrict the free movement of goods in and out of their territory. M,Ds $ill do $hatever it ta-es to overcome these problems and in particular they $ill $ant to avoid economic double ta"ation. T&e Z%*0"%# %)e ? !&e "#%de<u% - o8 our !%1 $e+")$%!"o# 7n Zambia the problem of international transfer pricing is increasingly robbing the Country of its Ta" *evenues. +nd this to a larger e"tent is as a result of our ta" legislationEs inability to deal $ith the problem e"pressly. To be more precise, there is no transfer pricing legislation in our 7ncome Ta" +ct of %&22 as $e earlier noted. The Zambia *evenue +uthority has often relied on the provisions of Section &0 ) $hich is essentially a general +nti ) +voidance piece of legislation. Let us visit this section for a closer loo-G Se !"o# E= ITA ? Tr%#)% !"o#) 5e)"+#ed !o A7o"d T%1 L"%0"$"!S.E= :1; 6here the commissioner general has reasonable grounds to believe that the main purpose or one of the main purposes for $hich any transaction $as effected $as the avoidance or reduction of the liability to ta" for any charge year, or that the main benefit $hich might have been e"pected to accrue from the transaction $ithin the ' years immediately follo$ing the completion thereof, $as the avoidance or reduction of liability to ta", he may, if he determines it to be 9ust and reasonable, direct that such ad9ustments shall be made as respects liability to ta" as he considers appropriate to counteract the avoidance or reduction of liability to ta" $hich $ould other$ise be effected by the transaction.
>y any standard, this piece of legislation seems fraught $ith implementation difficulties because it may be difficult to prove that the one or the main purpose of a transaction $as the avoidance or reduction of ta" or that the main benefit accruing in the follo$ing ' years $as the avoidance or reduction of ta". 7f you are loo-ing at a sale or purchase of goods for e"ample, the main commercial purpose is usually 9ust to carry on the activities for $hich the company $as set up and on $hich it depends for its commercial survival. The level of pricing may Iuite all right have a ta" angle but that $as not the purpose of the transaction. 7t is ho$ever possible to see that in combating international transfer pricing using our domestic la$s, $e might as $ell see help in Se !"o# .E:1;:%; ITA 1E'' $hich prohibits the deduction of e"penditure not incurred $holly and e"clusively for the purposes of the business. +rguably an e"cessive price paid to an associated company or even an artificial reduction of a price received could be found $anting by this rule. T&"# C%p"!%$"L%!"o# + company is said to be thinly capitali#ed if a person funds the business $ith more debt than the business could sustain had it been funded as a stand alone entity, borro$ing from unconnected persons acting at armEs length. M,Ds use this scheme by e"cessively funding a branch or subsidiary $ith interest bearing loans rather than share capital. This is an attractive alternative for non)resident investors, as the borro$er generally receives a ta" deduction for the interest paid. >y contrast, dividends paid on shares are not deductible so that the underlying profits bear the full rate of company ta". Thin capitali#ation is a problem that has troubled most of the ma9or trading ,ations for many years particularly if they receive in$ard investment, as is the case for Zambia. Many Countries deal $ith this problem by rules $hich deny deductions for 7nterest in defined cases, and possibly re) characteri#e the payment of interest as :ividends. There are many technical and practical issues in implementing such rules. Jne such problem is caused by modern financial instruments. The evolution of diverse forms of financial instruments ma-es it easy for interest K li-e receipts to be converted into other forms of payment. M"#"*"L%!"o# o8 Hor$d !%1%!"o# !&rou+& !%1 p$%##"#+ Multinationals are rightly concerned about the danger of double ta"ation through incompatibilities in ,ational Ta" Systems but it is eIually true that they have opportunities to use these incompatibilities $ith the ob9ective of reducing their $orld$ide ta"ation costs. 7t is reasonable that they should do this by la$ful methods since ta" is an e"pense. The conseIuences of e"cessive ta" mitigation by M,Ds ho$ever could be to create an eIual and opposite economic distortion to that created by unrelieved double ta"ation and deprive countries of a reasonable
share in the profits of M,Ds. There are a number of methods, $hich are used by M,Ds ta" planners to minimi#e their $orld$ide ta"ation some of $hich $e have already discussed above, i.e. transfer pricing and thin capitali#ation. The other scheme used is the use of $hat are -no$n as ta" havens. T%1 H%7e#) Some Countries do not charge heavy ta"es on M,Ds established on their territory either through a parent or a subsidiary or a permanent establishment. These are -no$n as ta" havens. Ta" 3avens in ta" planning M,Ds may see- to reduce source and residence country Ta"ation, by profit shifting to ta" havens. Cor e"ample through, a simple transfer pricing, the parent company $ould sell goods to a related company in a ta" haven for cost plus a small profit, $hich in turn sells to a subsidiary in the source Country for an inflated price. ConseIuently, the subsidiary ma-es minimal profit, and most profit is in the ta" haven
=.1. CARRY FOR3AR5 OF LOSSES IN DNITE5 STATES 5OLLARS CHIBDLDMA MINES /LC V) ZAMBIA REVENDE ADTHORITY This is an +ppeal by Chibuluma Mines Flc, $hom $e shall hereafter refer to as Mthe +ppellant(. The +ppeal is in respect of assessments issued by the Zambia *evenue +uthority, herein after referred to as Mthe *espondent(. The Appellant is a ompany in orporated under the %aws of Zambia whose main ob1e tive is mining+ 'n 23th &eptember 4556* the Appellant* through a &ale and Pur hase Agreement* a 7uired various assets from Zambia Consolidated Copper Mines %imited /hereinafter referred to as 8ZCCM90 with a view of furthering its ob1e tives+ Apart from the as ertained and fi"ed monetary onsideration of ,&:46* ;33*333+33 /&eventeen Million -ive Hundred Thousand ,nited &tates #ollars only0 paid by the Appellant for the assets it a 7uired from the said ZCCM* there were other onsiderations whi h inter alia in luded payments to be made under an an illary ontra t alled the Cobalt Pri e Parti ipation Agreement+ -or the purposes of this Appeal* we shall refer to this Agreement as the 8Cobalt Agreement9+ The said Agreement was produ ed in the Appellants &ubmissions+ !e shall mar. it as 8P 49+
'n <th May and 43th =une 4555 the Appellant submitted to the $espondent respe tively ta" returns for the 4556>5? and 455?>4555 ta" years+ After re eipt of the said returns* the $espondent undertoo. an audit to verify the information ontained in the returns+ After this e"er ise* the $espondent did two things whi h form the basis of the Appeal+
-irstly* the $espondent disallowed payments made by the Appellant to ZCCM under the Cobalt Agreement+ The amounts disallowed were ,&:4*34?*333+33 /'ne Million )ighteen Thousand ,nited &tates #ollars only0 and ,&:@5A*?43+33 /-our Hundred and Binety Two Thousand )ight Hundred and Ten ,nited &tates #ollars only0 for the years 4556>5? and 455?>55 respe tively+ &e ondly* the $espondent* in its assessments* arried forward the losses of the Appellant in Zambian Cwa ha notwithstanding the fa t that the boo.s of a ounts for the relevant period had been .ept in ,nited &tates #ollars+ A ording to the Appellant* the payments to ZCCM made pursuant to the Agreement were disallowed by the $espondent for three reasonsD The e"pense was a apital item and not revenue in natureD The e"pense alternatively ould not 7ualify as a mining dedu tion under the fifth s hedule to the (n ome Ta" A t as Companies that are allowed dedu tions of the Cobalt Contribution under the (n ome Ta" A t are e"pressly stated and do not in lude Chibuluma Mines Pl + These fa ts* as presented in the Appellants submissions* were agreed by both parties+ Eoth parties ele ted not to all any viva vo e eviden e and indi ated to the Tribunal that the fa ts presented in written statements* submissions and do uments were not in dispute and were agreed+ !e were alled upon to determine the following points as a matter of lawD 4+ !hether payments made by the Appellant to ZCCM under the Cobalt Agreement were allowable e"penses under &e tion A5 or alternatively as read with the fifthFs hedule to the (n ome Ta" A t+ A+ !hether the Appellants losses ould be arried forward in ,nited &tates #ollars+ The Appellant in the main submission advan ed two grounds of Appeal in respe t of the two issues that need to be resolved+ A ording to the Appellant* the payments that have been made regularly under the Cobalt Agreement were not apital in nature+ The Appellant points out that in onsidering whether payments were apital or revenue* regard had to be had to the nature and hara ter of payments+ The fa t that the payments were made as part of the &ale and Pur hase Agreements should not be the ma1or fa tor in on luding whether the e"penses were for a 7uisition of assets of a revenue nature+ The Appellant referred us to Clause A+4 of the Cobalt Agreement /8P 490* whi h provides the formula whi h is the basis of the Appellant ma.ing payment to ZCCM+ (t provides:F 8The obalt ontribution shall be /@3G " A0 " E where HA is e7ual to the spe ified obalt pri e per pound andD HE is e7ual to the aggregate number of pounds of obalt sold by the ompany and whi h originates from Chibuluma !est Mine in ea h 7uarter on the basis of the re overy rate+9
The Appellant has submitted that the interpretation to be pla ed on this formula is that the obligation to pay obalt ontributions to ZCCM only arises when obalt from Chibuluma !est is sold in a 7uarter at a spe ified pri e+ The Appellant points out that the obalt ontribution payments are based on turnover and as su h are in ontrast with payments for pur hase of the apital assets+ They further add that payments of apital are usually fi"ed and are atta hed to the ost of assets a 7uired+ They point out that the obalt ontribution has no eiling and annot be lin.ed to a spe ifi asset in the balan e sheet+ They further refer us to Clause 5+4 of 8P 49* whi h providesD 8The obligation to pay the additional sum will ease on the date that mining operations ease at the Chibuluma !est Mine and the large s ale mining li en e overing su h operations is surrendered and not regranted /whi h for avoidan e of doubt shall in lude the li en e not being repla ed or submitted0 over the area omprising the Chibuluma !est Mining %i en e+9 The Appellants interpretation of this lause is that the Cobalt Agreement re7uires the Appellant to pay the ontributions as long as they ontinue mining at Chibuluma !est Mine+ They ontend that had the obalt ontribution been a payment towards the value of the assets a 7uired* there would have been an upper eiling based on the value of the assets a 7uired and beyond whi h no further payments would have to be made+ The Appellant has also argued in the alternative that if the obalt ontributions are not dedu tible as revenue e"penditure* then they should be treated as apital and be dedu tible under paragraph AA/40 of Part I( of the fifthFs hedule of the (n ome Ta" A t+ They point out that the provision allows for a dedu tion for apital e"penditure in urred+ They also submit that the law* whi h prohibits dedu tion of obalt ontribution payments* were for ertain e"pressly mentioned ompanies whi h only ame into effe t on 4st April A333 and hen e has no appli ation to the assessment under dispute+ The se ond ground advan ed is with respe t to the issue of ta" losses to be arried forward+ The $espondent has drawn our attention to the letter dated A@th Bovember 455?* whi h has been produ ed as part of the Eundle of #o uments+ !e shall refer to this letter as e"hibit 8P A9+ The $espondent granted approval to the Appellant to .eep its boo.s of a ounts in ,nited &tates #ollars pursuant to the provisions of &e tion ;;/20 of the (n ome Ta" A t+ A ording to the Appellant* on the basis of the approval from the $espondent* they were entitled to the following: Prepare and maintain its a ounting re ords in ,nited &tates #ollars+ At the end of ea h finan ial year* prepare its finan ial statements and in ome ta" omputations in ,nited &tates #ollars+ The finan ial statements and in ome ta" omputations denominated in ,nited &tates #ollars would be submitted to the Zambia $evenue Authority for purposes of omplying with &e tion @< of the (n ome Ta" A t+
-or payment purposes* the ta" figure omputed in ,nited &tates #ollars be onverted into Zambian Cwa ha at the rate ruling on the balan e sheet date as published by the Ean. of Zambia+ The $espondent has similarly advan ed two main grounds in opposing the Appeal+ -irstly* they argue that the obalt ontributions are apital payments on proper onstru tion of Clause A/E0 of the Agreement* whi h providesD 8The onsideration for the sale of assets by the seller will omprise* inter aliaD ,&:46* ;33*333+33* the seller loan note* the opper pri e parti ipation* the allotment to the seller /or a nominee thereof of fifteen per ent of the ordinary shares of the ompany J+9 The $espondent submits that it is normal pra ti e to get the meaning of words from di tionaries when su h words are not defined in the &tatutes+ They then urge us to onsider di tionary meaning of the word 8 onsideration9+ A ording to the $espondent* the obalt ontributions are an inseparable part of the total ost of the assets whi h the Appellant paid as onsideration for+ (n support of this argument* the $espondent has relied on the de ided ase of $'E)$T A##() K &'B& %(M(T)# v+ C'MM(&&('B)$& -'$ (B%AB# $)I)B,) ? T C <64+ The $espondent further points out that it is immaterial how payment is omputed or paid+ A ording to the $espondent* what is riti al is the hara ter of the e"penditure+ They further point to the de ision in G)B)$A% $)I)$&('BA$L K (BI)&TM)BT C'MPABL v+ HABC'CC* 6 TC 2;? where it was statedD 8(t seems to me impossible to hold that the fa t that a lump sum was paid instead of a re urring series of annual payments alters the hara ter of the e"penditure* as it would be held that* if an employer were under voluntary arrangement with his servant to pay the servant a years salary in advan e instead of paying ea h year a salary* as it fell due* he would be ma.ing a apital out lay J+9 As regards to the Appellants alternative argument that the obalt ontribution payments are dedu tible under part I( of the -ifthF& hedule* the $espondents position is that they do not 7ualify+ The $espondent argues that dedu tions for mining e"penditure fall under paragraph 45 of the -ifthF& hedule+ The payments allowed in paragraph 45/e0 are 8on the pur hase of or on the payment of a premium for use of a patent pro ess or other e"penditure of a similar nature+9 The $espondent points out that e7ually paragraph 45/C0 annot be used in aid of the Appellants ase as it refers to 8interest payable on any loan for mining or prospe ting purposes+9 The $espondent has referred us to paragraph A3 so as to buttress its argument+ They point out that paragraph A3 prohibits the allowability of nonFmentioned apital e"penditure under mining dedu tions+ They further refer the Tribunal to
paragraph A4/40* whi h does not allow for dedu tion of the e"penditure not defined+ The $espondent has also argued that the (n ome Ta" A t Amendment of A333 does not in any way support the Appellants argument on this point+ They argue that all what this amendment does is to onfirm that prior to 4st April A333* obalt ontribution payments were not held as dedu tions under the -ifthF& hedule of the (n ome Ta" A t+ !ith respe t to the se ond ground that tou hes on arry forward losses* the $espondent has argued that it is a legal re7uirement for Zambia $evenue Authority to inform ta"payers of their liability through an assessment in terms of &e tion <;/40 of the (n ome Ta" A t+ They point out that they did not* through their letter e"hibit 8P A9* state that the assessments and omputations would be in ,nited &tates #ollars+ A ording to the $espondent* all what the letter did was to state that the Appellants omputations would be onverted at the Ean. of Zambia rate into Zambian Cwa ha+ The $espondent* in an endeavour to buttress this argument* has drawn us to the provisions of &e tion A5/40 of the Ean. of Zambia A t* whi h is to the effe t that legal tender in Zambia is the Zambian Cwa ha+ (n view of this* the ta" has to be assessed and omputed in Zambian Cwa ha as the legal tender+ !e have arefully onsidered the issues before us+ The first issue that we have to determine is whether the obalt ontributions were revenue e"penditure+ &e tion /A50 /40/a0 of the (n ome Ta" A t providesD 8(n as ertaining the gains in any harge year* there shall be dedu ted the losses and e"penditure other than of a apital nature in urred in that year wholly and e" lusively for the purpose of the businessJ+9 The Appellant has argued that the obalt ontribution payments were e"penses of a revenue nature and fall within the ambit of &e tion A5/40/a0 of the (n ome Ta" A t+ The $espondent points out that the payments were part of the onsideration for the pur hase of assets of Chibuluma Mine though to be payable over the life time of the mine+ (n our onsidered view* this e"penditure was not of a revenue nature+ !e entirely agree with the $espondent that these e"penses were not ne essarily in idental to the wor.ing of the mine+ The Cobalt Agreement 8P 49 is very lear+ Apart from the ,&:46*;33*333+33 /&eventeen Million -ive Hundred Thousand ,nited &tates #ollars0* whi h was paid for the pur hase of the mine and assets* there was other onsideration whi h inter alia in luded obalt parti ipation payments+ The de isions in both $'E)$T A##() K &'B& %(M(T)# v+ C'MM(&&('B)$& -'$ (B%AB# $)I)B,)? T C <64 and G)B)$A% $)I)$&('BA$L K (BI)&TM)BT C'MPABL v+ HABC'CC* 6 TC 2;?* in our view* supports the $espondents position+ The payments were not for purposes of wor.ing the mine+ They were part of the onsideration for a 7uiring
the assets+ (n our view* these payments annot properly fall within the ambit of &e tion A5/40 /a0 of the A t+ Having found that the e"penses were not revenue in nature and hen e not dedu tible under &e tion A5/40 /a0* we now have to onsider the alternative argument that the e"penses are dedu tible as apital e"penses under &e tion 22/a0 of the (n ome Ta" A t+ The Appellant has argued that the $espondents position is that the obalt ontribution payments are an inseparable part of the total ost of the assets whi h the Appellant paid a onsideration for+ !e have arefully onsidered the arguments on this issue+ (ndeed the $espondent for efully argued that the payments were not of a revenue nature but apital in nature+ They however argue that though the e"pense is apital in nature* it is not permitted to be dedu ted under &e tion 22/b0 of the (n ome Ta" A t as read with part I( of the -ifthF& hedule+ They point out that paragraph 45 of Part I( of the -ifthF& hedule 7ualifies what is to be dedu ted+ The $espondent further augments this position by referring us to paragraph A3 of Part I( of the -ifthF& hedule* whi h is to the effe t that there shall be no apital e"penditure dedu tions allowed e" ept under the provisions of this part+ 'n determining this issue* the starting point should be &e tion 22/b0 of the A t* whi h providesD 8Capital allowan es are dedu ted in as ertaining the gains or profits of a business and the emoluments of any employment or offi e for ea h year M for apital e"penditure in relation to mining operations* a ording to the provisions of parts ( and I( in lusive of the fifthFs hedule9 Part I( spe ifi ally relates to mining dedu tions+ However* &e tion 22/b0 does not restri t the dedu tions to only those that are in part I(+ &e tion 22/b0 refers to 8the provisions of Parts ( to I(9 in lusive of the -ifthF& hedule+ This wording is onfusing+ (t suggests that in determining apital allowan es for mining operations* parts ( to I( should be ta.en into a ount e7ually+ (t should not be restri ted to part I(* whi h spe ifi ally refers to mining operations+ The onfusion is heightened by the provisions of paragraph A3 of part I( of the -ifthF& hedule whi h suggests that there shall be no apital e"penditure dedu tions allowed e" ept under the provisions of this part+ The part being referred to is part I(+ The $espondent has relied on this provision for its argument that e"penditure is restri ted to what has been defined in paragraph 45 of part I(+ A ording to the $espondent* the obalt ontribution does not fall under paragraph 45/a0+ That paragraph statesD 8Capital e"penditure means e"penditure in relation to mining M on buildings* wor.s* railway lines or e7uipment on shaft sin.ing* in luding e"penditure on pumps* pump hambers* stations and ore bins a essory to a shaft on pur hase of or on the payment of a premium on the use of any patent* design* trademar.* pro ess or other e"penditure of a similar nature in urred prior to the ommen ement of produ tion or during any period of nonFprodu tion on
preliminary surveys* boreholes* development or management by way of interest payable on any loan for mining or prospe ting purposes9
A ording to the $espondent* the onsideration an only fall under / 0 or /e0 of paragraph 45+ A ording to the $espondent* subFparagraph /e0 annot apply as the obalt ontribution does not relate to the payment for a premium or use of a patent or pro ess+ &imilarly* they argue that subFparagraph / 0 mentions payment of interest on any loan for mining or prospe ting purposes+ They point out that the obalt ontribution does not fall under this subFparagraph+ The $espondent further buttresses this argument by stating that paragraph AA/40 does not allow for the dedu tion of any .ind of apital e"penditure under mining dedu tions provisions+
(n our onsidered view* the $espondents submissions on this argument would be tenable if we were to find that the provisions for mining dedu tion are only to be found in paragraphs 45* A3 and AA of the -ifthF& hedule+ However* &e tion 22/b0 where from the -ifthF& hedule derives its authority* ma.es it very lear that in as ertaining gains or profits of mining operations* apital e"penditure has to be ta.en into a ount in a ordan e with the provisions of parts ( to I( in lusive of the -ifthF& hedule+ /The underlining is ours for emphasis0+ The $espondent simply wants us to interpret paragraphs 45* A3 and AA of part I( of the -ifthF & hedule+ However* this is not what &e tion 22/b0 states+ (n EA$C%AL& EABC ZAME(A %(M(T)# v+ ZAME(A $)I)B,) A,TH'$(TL F 4555>$AT>;3* we referred* with approval* to the oft ited di ta in E$AB#L &LB#(CAT) v+ (B%AB# $)I)B,) C'MM(&&('B)$& F N45A4O (CE <4@D 8There is no presumption or e7uity about ta"+ Ta" is simply what the law states+9 Therefore* in determining this issue* we will loo. at all relevant provision in parts ( to I( of the -ifthF& hedule in lusive+ (t has been a well established general prin iple of law that ta"ation of a sub1e t is not to be done lightly+ The ta"ing statute must not leave room for doubt and ontroversy +f the Tribunals $uling in &P)CT$A '(% C'$P'$AT('B %(M(T)# v+ ZAME(A $)I)B,) A,TH'$(TL M 4555>$AT>22 where we referred to (B%AB# $)I)B,) C'MM(&&('B)$& v+ AL$&H($) )MP%'L)$& M,T,A% A&&'C(AT('B %(M(T)# M 45@< 4 A%% )+$ <26+ There is nothing in the language of &e tion 22 that pre ludes us from loo.ing at all provisions of parts ( to I( of the -ifthF& hedule in de iding whether the obalt payments* whi h was part of the onsideration for a 7uisition of assets were apital e"penses+ Having ome to the on lusion that we are not restri ted to the provisions of paragraphs 45* A3 and AA* we have ta.en the liberty to loo. at paragraph A; of part I( of the -ifthF& hedule* whi h providesD
8&ub1e t to the provisions of paragraph A<* when hange in the ownership of a mine ta.es pla e* the onsiderations for the assets* whi h 7ualify* for the purposes of this part* as apital e"penditure shall* for in ome ta" purposes M be allowable as apital e"penditure in urred by the ownerJJ9 A ording to the undisputed fa ts* the following assets were bought by the Appellant from ZCCM:F %eases* The benefit of the &ervi e Contra ts* The fi"ed patent* The )nvironmental %i en e* The benefit of the li ensed intelle tual property* The ma hinery The motor vehi les* 'ffi e e7uipment* The re ords mentioned by the seller prior to the effe tive date* The sto .* All other property and assets owned by the seller and used in the operations immediately prior to ompletion+ A ording to the Appellant* most of these assets for whi h obalt ontribution payments were used as part of the onsideration* 7ualifies for dedu tion on their own under the -ifthF& hedule+ A ording to paragraph A<* if these assets 7ualify for dedu tions under the s hedule* the e"pense in a 7uiring the same by the new owner* as su h 7ualifies as a dedu tion+ !e therefore hold that the obalt ontributions are dedu tible as mining dedu tions and the Appeal on this ground su eeds+ !e now turn to the issue of whether the Appellant an arry forward its ta" losses in ,nited &tates #ollars+ A ording to the proven fa ts* by the letter dated A@th Bovember 455?* e"hibit 8P A9* the $espondent allowed the ompany to .eep and submit finan ial statements in ,nited &tates #ollars+ The said letter also permitted the Appellant to submit its ta" omputations denominated in ,nited &tates #ollars for the purposes of &e tion @< of the (n ome Ta" A t+ The $espondent has however de ided to arry forward the ta" losses in Zambian Cwa ha+ The Appellant maintains that on the basis of the approval given in e"hibit 8P A9* the ta" loss should be denominated and arried forward in ,nited &tates #ollars and that in the future* should there be ta"able in ome from the same sour e* that in ome will be denominated in ,nited &tates #ollars and the ta" losses would then be relieved against that in ome in the same urren y+ A ording to the Appellant* the resultant profit /if any0 would be denominated in ,nited &tates #ollars and the ta" due thereon would be onverted into Zambian Cwa ha at the appli able or ruling rate of e" hange+ (n determining this issue* we have loo.ed at the relevant provisions of the (n ome Ta" A t+ &e tion ;;/20 of the A t providesD 8A person arrying out mining operations may ele t to .eep boo.s of a ounts in ,nited &tates #ollars of all transa tions relating to* onne ted with or in idental to* su h operations if the CommissionerF General is satisfied that not less that seventyFfive per entum of that persons gross in ome is earned in the form of foreign e" hange from outside the $epubli +9
(t is not in dispute that the Appellant had the approval+ 'n the other hand* &e tion @</40 provides thatD 8)very person liable to ta" in a harge year* other than an individual whose in ome entirely onsists of emoluments within the provisions of part (I /whi h relates to Pay As Lou )arn0* shall furnish* to the CommissionerFGeneral* a return of in ome and su h parti ulars as may be re7uired for the purposes of as ertaining the in ome hargeable* if any* and the ta" liability due* if any* under this A t+9 &ubF&e tion /A0* inter alia goes on to provideD 8The return re7uired under this se tion shall: F Contain a statement of the persons in ome liable to ta"* in luding in ome deemed under this A t to be the in ome of the person in respe t of whom the return is submittedD Contain a statement of the persons in ome liable to ta"* of the amount of ta" due* based on rates of ta" appli able for su h harge years* and JJJJ The in ome ta" returns and omputations that are submitted for purposes of &e tion @< are prepared on the basis of figures ta.en out of boo.s that are .ept by the ta"payer+ (n this parti ular ase* the Appellant .ept its boo.s in ,nited &tates #ollars+ The $espondent argues that though the Appellant was allowed to .eep its boo.s in ,nited &tates #ollars* it is a legal re7uirement for Zambia $evenue Authority to inform a ta"payer of its liability* whi h should not be in ,nited &tates #ollars+ The $espondent has buttressed its arguments by referring us to &e tion A5/40 of the Ean. of Zambia A t* whi h is to the effe t that the legal tender in Zambia is Cwa ha+ !e have arefully loo.ed at the arguments of the $espondent that have been based on &e tion <; of the (n ome Ta" A t and &e tion A5 of the Ean. of Zambia A t+ &e tion <;/40 providesD 8Boti e of assessment shall be given to the person harged+9 (n our onsidered view* this se tion is not helpful to the $espondents argument that returns and omputations should be in Zambian Cwa ha+ (t simply states that the noti e of the assessment should be given to the ta"payer+ )7ually* &e tion A5 of the Ean. of Zambia A t is unhelpful+ A return is not a unit of urren y or 8legal tender9 for the purposes of the Ean. of Zambia A t+ The Appellant has not proposed that it pays its ta" liability in ,nited &tates #ollars+ (n fa t* the $espondent* through its written submission has statedD 8The Zambia $evenue Authority submits that our letter dated A@th Bovember 455? ategori ally mentioned under paragraph /b0 that for payment purposes the ta" omputed will be onverted into Cwa ha at the rate of e" hange ruling on the balan e sheet date as published by the Ean. of Zambia+9 !ith due respe t to the $espondent* this is the e"a t argument that the Appellant has ta.en+ The Appellants position is that the ta" loss should be arried forward in ,nited &tates #ollars and be available for offset in ,nited &tates #ollars against profit e7ually denominated in ,nited &tates #ollars and the resultant ta" thereon be paid in Zambian Cwa ha+
(f a ompany that maintains its boo.s in ,nited &tates #ollars registers a ta"able profit* ta" on that profit is naturally payable to the Zambia $evenue Authority in Zambian Cwa ha at the ruling rate of e" hange+ The ta" loss that will be arried forward in ,nited &tates #ollars will e7ually be offset against the ta"able profit that will be omputed in ,nited &tates #ollars+ (n our onsidered view* at the time of the assessments under dispute* there was no e"press provision in the (n ome Ta" A t that prohibited the denominating of losses in ,nited &tates #ollars and submitting returns in ,nited &tates #ollars+ The assessments are for the 4556>5? and 455?>55 harge years+ 'ur view is fortified by the amendment to &e tion ;</40 ontained in A t Bo+ 2 of A33A+ This amendment introdu ed a new &e tion ;</40* whi h providesD 8Botwithstanding the provisions of subse tion /20 of se tion fiftyFfive* every return furnished under subse tion /40 of se tion fortyFsi" by any person shall be a ompanied by su h a ounts and other do uments* in Cwa ha* as are ne essary to support the return and shall be signed by the person furnishing the return+9 This amendment ame into effe t on 4st April A33A+ (t appears that before 4st April A33A* ompanies that were allowed to .eep boo.s in ,nited &tates #ollars under &e tion ;;/20 of the A t ould submit returns in ,nited &tates #ollars for the purposes of &e tion @<+ The amendment of 4st April A33A e"pressly prohibited that+ (n effe t* the amendment intended to ure a mis hief+ The mis hief in this ase was to prohibit the submission of returns in ,nited &tates #ollars notwithstanding the provisions of &e tion ;;/20+ (n &P)CT$A '(% C'$P'$AT('B %(M(T)# v+ ZAME(A $)I)B,) A,TH'$(TL M 4555>$AT>22* this Tribunal ited* with approval* passages from Eennion on (nterpretation of &tatutes* 2rd )dition* at page 636D 8Parliament intends that an ena tment shall remedy a parti ular mis hief+ (t is presumed therefore that parliament intends the ourt onstruing the ena tment* to endeavour to apply the remedy+9 'n page 63? the author goes onD 8Parliament is ta.en to do nothing without a reason+ Therefore* there is reason for every A t and every )na tment within itJJso the reason for Parliament passing an A t must be in some defe t in the e"isting %aw* for were it not defe tive* Parliament would not need or want to hange it+ The defe t is the mis hief to whi h the A t is dire ted+9 The mis hief whi h A t Bo+ 2 of A33A intended to orre t was in no doubt the state of affairs whi h made it permissible to file ta" returns in ,nited &tates #ollars on the basis of &e tion ;;/20 as read with &e tion @<+ There is now no doubt that after 4st April A33A* returns must be submitted in Zambian Cwa ha* notwithstanding the provisions of &e tion ;;/20+ Eefore that* the law was not lear+ (f at all there is a doubt or ambiguity /as was the ase before 4st April A33A0* su h ambiguity must be onstrued in favour of the ta"payer+ C+f+ this
Tribunals ruling in (B#,&T$(A% C$)#(T C'MPABL v+ ZAME(A $)I)B,) A,TH'$(TL N4555>$AT>62O* where we referred to the prin ipal of 8doubtful penaliPation9 as enun iated in Eennion* &tatutory (nterpretation M 2rd )dition at page <26+ The Appellant has not proposed that the ta" be paid in ,nited &tates #ollars+ The ta" will be onverted and paid in Zambian Cwa ha* whi h is the legal tender+ As the assessments under review relate to the preFA33A amendment* the provisions of the new law do not apply to these assessments+ The Appeal on this ground su eeds to the e"tent that the ta" losses will be arried forward* in ,nited &tates #ollars whi h* however* must be available for offset against future profits in ,nited &tates #ollars at the prevailing rate of e" hange+
..12 IN5E4ATION OF MINING LOSSES AN5 CA/ITAL ALLO3ANCES Government is mindful of both the high capital reIuirements and the ris-s attaching to mining investment, and accordingly recogni#es the need for careful consideration of possible ta" incentives. 7n the . 2 ,ational >udget, the Minister has proposed to introduce inde"ation of losses and capital allo$ances for Mining Companies. This means that the losses carried for$ard and capital allo$ances $ill be protected against adverse movements in e"change rates. This is important for mining companies because they are allo$ed under the 7ncome Ta" +ct to use the ;nited States :ollars as the reporting currency, meaning that any adverse movements in the e"change rate has the potential to erode their deferred ta" assets. These provisions have been provided for by the insertion of a ne$ section ' 4+5 immediately after Section ' of the 7ncome Ta" +ct and is applicable to all Mining companies holding a large scale Mining Licence.
IN5E4ATION OF LOSSES
The . 2= 1 +mendment +ct, introduces the inde"ation of carried for$ard losses for any mining company holding a large)scale mining licence issued under the Mines and Minerals +ct and carrying on the mining of base metals. This measure allo$s mining companies to maintain real values of their losses carried for$ard by lin-ing the loss to the e"change rate of the 8$acha to the ;nited States :ollar. The suggested inde"ation formula is given belo$G
IN5E4ATION FORMDLA
1 + (R2 R1) x loss brought forward

R1
6hereG *% Q The 8$acha against the ;nited States :ollar e"change rate ruling on the last day of the preceding accounting year in $hich the loss is being claimed. *. Q The 8$acha against the ;nited States :ollar e"change rate ruling on the last day of the accounting year in $hich the loss is being claimed. The rate to be used for this purpose is the >an- of Zambia mid)rate at the end of the accounting period.
IN5E4ATION OF CA/ITAL ALLO3ANCES

The . 2= 1 +mendment +ct introduces the inde"ation of capital allo$ances for any mining company holding a large)scale mining licence issued under the Mines and Minerals +ct and carrying on the mining of base metals. This measure allo$s mining companies to maintain real ta" values of their capital allo$ances by lin-ing the allo$ance to the e"change rate of the 8$acha to the ;nited States :ollar.
IN5E4ATION FORMDLA 6hereG

*% Q The 8$acha against the ;nited States :ollar e"change rate ruling on the last day of the preceding accounting year in $hich the loss is being claimed. *. Q The 8$acha against the ;nited States :ollar e"change rate ruling on the last day of the accounting year in $hich the loss is being claimed. The rate to be used for this purpose is the >an- of Zambia mid)rate at the end of the accounting period.
1 + (R2 R1) x Capital allowance

R1
E4AMINATION TY/E ADESTION 3ITH ANS3ER
HORIZON 5EE/ MINING /LC 3ori#on :eep Mining Flc $as set up in :ecember . 0 after a long but fruitful ta-eover debate of one of the Mining divisions of the Zambia Consolidated Copper Mines Limited. The company has had difficult times in its first t$o years of operations but its directors are confident that the company $ill start ma-ing profits by the end of the third year $hen the company is fully capitali#ed. +nd this $ill, to a larger e"tent depend on a favourable response from the Ministry of finance concerning the companyEs reIuest for financial support. Cor the year ended '% :ecember . 2 the auditors have provided financial information $ith the follo$ing clause in their opinionG E6ithout Iualifying our opinion, $e dra$ attention to the fact that the financial statements have been prepared on a going concern basis, the validity of $hich depends upon the continued support of the Government at the set )up stage and in subseIuent early years of operations. 7n the absence of this support, ad9ustments may be necessary to reclassify and reduce the value of assets and provide for further liabilities, $hich might arise in future.E Hor"Lo# 5eep M"#"#+ /$ S!%!e*e#! o8 Ne! E1pe#d"!ure 8or !&e -e%r e#ded 21 5e e*0er .(('. DS M I>((( Jperating D"penses '%/, %8 %,%88,008 Salaries T related costs %8&,/& 2%&,&%0 D"change losses %',/0% %.,12',&'% :epreciation /',180 2 ,'0 Jther e"penses .8,1 1 81,/1 )))))))))) )))))))))))))) 08&,/0% %/,1. ,../ 7nterest received 4.%15 420%5 )))))))))) )))))))))))))) 08&,.'/ %/,1%&,01' Ta" 0. ..8 ))))))))) )))))))))))))) =CEF.C' 19F71EFC(1 QQQQQ QQQQQQQ I*por!%#! I#8or*%!"o# Tr%#)$%!"o# o8 8ore"+# urre# "e) Transactions during the year in foreign currencies are converted into Zambian 8$acha and ;S :ollars at rates ruling at the transaction dates. +ssets and liabilities at the balance sheet date, $hich are e"pressed in foreign currencies, are translated into Zambian and ;S :ollars at rates ruling at that date. The resulting differences from the conversion and translation are charged to net e"penditure during e"ploration and to profit and loss during the period of mining operations.
E1 &%#+e 5"88ere# e) The 8$acha e"change losses are a result of translation of the amount pending allotment of shares from ;nited States :ollars to 8$acha. The ;nited States :ollars e"change losses result from translation of 8$acha e"penditure into ;nited States :ollars. Se+*e#! I#8or*%!"o# The company is involved solely in e"ploration mining, $hich is done $ithin the *epublic of Zambia in Chingola South. E1p$or%!"o# %#d pro)pe !"#+ e1pe#d"!ure The e"ploration and prospecting e"penditure incurred by the company are accumulated until such time as an economic ore body is defined or prospect is abandoned. Costs for a producing prospect are $ritten off on a unit of production method $hile costs for a prospect abandoned are $ritten off. Costs are e"pensed in full in the year of abandonment. Lo))e) The company has ta" losses of appro"imately 80%,1&0,00., . 7n accordance $ith current ta" legislation, the losses are available for set off against future ta"able profits from the same source for a ma"imum period of % years. Su**%r- o8 I# o*e 8or !&e -e%r: >an- interest received Gross Loss LessG D"penses 4Chec- Statement of net D"penditure5 Ne! $o)) Add"!"o#%$ "#8or*%!"o# No!e 1 Jperating D"penses +ccounting and audit fees :rafting, mapping and surveying Dngineering, geological T geographical surveys Meals ) travel Miscellaneous 7nsurance, drilling, freight T G*Z licences I>((( 0',20' &2,..2 0'1, 8 '&% .8/ 0 ,&&0 ))))))))))))) 1F1CCF==7 I>((( 20%, 420 ,11.5 )))))))))))) ..8 4%/,1%&,8 %5 )))))))))))))))) :19F71EF=725 QQQQQQQQQ
QQQQQQQQ No!e . S%$%r"e) %#d re$%!ed o)!): Salaries and $ages Contract labour ) site ,+FS+ Fersonal Levy I>((( 2%0,&0' '2& .,0.8 %, 20 )))))))))))) '1EFE1= QQQQQQ I>((( .0, .0 0 . 281 %,2' 0&,2.0 ))))))))) C7F9'E QQQQQ I>((( 8%,%22 %1,% 8,//& ., 2& ))))))))) 1(CF7C9 QQQQQ
No!e 2 O!&er E1pe#)e) Medical Travel Meals Dntertaining Jther allo$able business e"penses
No!e 9 C%p"!%$ %$$oH%# e S &edu$e DIuipment, commercial vehicles T furniture Computers and related accessories Jffice eIuipment 7ndustrial buildings
Re<u"red: Uou are reIuired to compute the 7ncome ta" payable by the company, if any for the Charge year . 2= 1.
ANS3ER: HORIZON 5EE/ MINING /LC 21.(2.(7 Co*pu!%!"o# o8 AdBu)!ed T%1%0$e I# o*e ,et Loss as per +ccounts LessG >an- interest 4Ta"ed Separately5 I@((( 4%/,1%&,01'5 42%0, 5 ))))))))))))))))) :1=F229F=72; Add 5")%$$oHed E1pe#d"!ure: Translation D"change losses :epreciation Meals K travel Miscellaneous Travel Meals Dntertaining %.,12',&'% 2 ,'0 '&% .8/ 0 . 281 %,2' )))))))))))))))) :.F=('F7EC; Le)): C%p"!%$ %$$oH%# e): DIuipment, commercial vehicles T Curniture Computers and related accessories Jffice DIuipment 7ndustrial buildings Ta" losses brought for$ard 48%,%225 4%1,% 5 48,//&5 4., 2&5 )))))))))))))))) 4.F'1=F=C.; 40%,1&0,00.5 ))))))))))))))))) :=9F911F129; NNNNNNNN
T%1%!"o# o8 I#!ere)!: 20%, , S '0 ! Q 8..1, 80 ,
VVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVVV

Chapter 7 - Paper 3.4 (Advanced Taxation)

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Chapter 7 - Paper 3.4 (Advanced Taxation)

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CHAPTER 7 TAXATION OF MINING OPERATIONS

7.1 BRIEF HISTORY OF ZAMBIAN MINING

225 L.3 Advanced Taxation Amendment Act 2006/07

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Le)): I# o*e T%1ed Sep%r%!e$Gross *ent :ebenture 7nterest

246 L.3 Advanced Taxation Amendment Act 2006/07

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1 + (R2 R1) x loss brought forward

IN5E4ATION OF CA/ITAL ALLO3ANCES

IN5E4ATION FORMDLA 6hereG

1 + (R2 R1) x Capital allowance

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E4AMINATION TY/E ADESTION 3ITH ANS3ER

262 L.3 Advanced Taxation Amendment Act 2006/07

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T%1%!"o# o8 I#!ere)!: 20%, , S '0 ! Q 8..1, 80 ,

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Le)): I# oe T%1ed Sep%r%!e$Gross ent :ebenture 7nterest