Zambia’s 2015 Budget, which contains proposals for far-reaching reforms to the mining fiscal tax regime, will have significant implications for the mining industry, leaving several mines cash flow negative and unsustainable, so much so that mining companies with high production costs will have to cease operating and exploration investment will dry up, Pan-African advisory firm africapractice CEO Marcus Courage warns.

Under the proposals, the Zambian government intends to do away with the accepted norm of taxing businesses after they had recovered their investment costs, preferring a blanket tax on revenues or mining royalties, which Courage believes will nullify incentives to invest in the country.

Zambia Finance Minister Alexander Chikwanda said in his 2015 Budget speech, in October, that the country will increase underground mining royalties to 8% from 6%, while opencast mining operations will be subjected to a 20% mineral royalty, as part of efforts to revamp the country’s tax system.

The new system outlined by Chikwanda is also aimed at collecting revenue from the industry at different stages of the production pipeline by introducing a 30% corporate processing and smelting tax, while another 30% tax will be applied to income earned from tolling.

Speaking to Mining Weekly, Courage says the government’s motivation for the tax reforms is to make it simpler to administer revenue from the industry.

He points out, however, that the consequence of doing away with corporate tax and increasing royalties will be devastating for the industry and the Zambian economy.

“Nowhere in the world has this been attempted before and under the proposals, those mines which have the highest costs and which employ the most people will be subject to the highest taxes,” he explains.

Zambia-based independent news site Zambian Watchdog reports that global miner Barrick Gold’s openpit copper producing Lumwana mine, in Zambia, will close its operations once the proposed mineral royalty tax increase is approved by Parliament and effected in January 2015.

The report states that a fact sheet circulated by Lumwana mine says that, if the Budget is approved as proposed, Lumwana will definitely close, as it will not be viable to continue operating.

The fact sheet documents what Lumwana says will be the direct losses to Zambia and the people of the North-Western province, in particular, if the mine shuts.

The fact sheet says 4 000 direct jobs will be lost, 2 000 of which are employees of Lumwana (94% of whom are Zambian nationals) – the remainder being contractors working for the mine.

Moreover, this comes at a time when the Zambian mining industry is still reeling from the government’s decision to withhold $600-million in value-added tax (Vat) refunds owed to mining firms.

The lack of any clear strategy to resolve the refund of the Vat has seriously affected the cash flows of all exporters in Zambia, which, after over 15 months, still does not appear any closer to resolution, says Courage.

Cabinet is due to convene a meeting to review the concerns raised by the mining industry, under the auspices of the Zambian Chamber of Mines. Industry is recommending wider consultations over the new tax regime to ensure existing and planned investment in the sector is protected.