January 30, 2009 / 2:34 PM / 8 years ago

Zambia abolishes 25 pct windfall mining tax

4 Min Read

<p>A copper mine in Chililabombwe, 500km (300miles) north of the Zambian capital Lusaka in a file photo.SALIM HENRY</p>

LUSAKA (Reuters) - Zambia, Africa's top copper producer, said on Friday it would abolish a controversial 25 percent windfall tax to cushion its key copper mining industry from weak prices stemming from the global financial crisis.

Zambia's Finance Minister Situmbeko Musokotwane said in his budget speech the southern African nation's economic growth would fall to 5.0 percent in 2009 from an estimated 5.8 percent expansion last year, due to the global crisis.

Annual inflation was seen braking to 10 percent in December 2009 compared with 16.6 percent last year, he said.

Musokotwane said in a speech to parliament the government would abolish the tax to safeguard the country's economic lifeblood at a time when commodity prices had fallen.

Musokotwane said the government reduced the windfall tax after consultations with foreign mining firms, which have complained of higher taxes, high electricity tariffs and fuel prices and falling global metals prices.

Zambia depends on copper and cobalt for more than 63 percent of government revenues. Less copper demand would translate into reduced foreign exchange earnings.

"In light of the impact of the global crisis on the mining sector, I propose the following refinements, to remove the windfall tax and retain the (15 percent) variable tax, which will still capture any windfall gains that may arise in the sector," Musokotwane said.

Musokotwane said the government would cut duty for heavy fuel oils from 30 percent to 15 percent and to remove customs duty on copper powder, copper flakes and copper blisters.

"These measures will reduce the operating costs of mining companies as well as encourage the utilization of local smelting capacity," Musokotwane said.

The move is seen as part of efforts to save jobs. Zambia's Luanshya Copper Mines (LCM) laid off all of its 1,740 miners after halting operations in November after copper prices fell. Prices have plunged 65 percent since record highs last July.

Copper Prices

The metal, used in power and construction, is expected to average $3,417 a tonne this year from the average price of $6,959 per tonne in 2008, a Reuters survey showed.

On Friday, three-month copper on the London Metal Exchange fell 3.4 percent to a low of $3,130 a tonne.

Zambia introduced the windfall tax last April during the commodity boom. It also introduced the 15 percent profit variable tax on income above eight percent.

In moves backed by the International Monetary Fund, the country also raised mineral royalty to 3.0 percent from 0.6 percent and corporate tax to 30 percent from 25 percent.

Some foreign mining firms had threatened to take legal action.

Foreign mining firms operating in Zambia include Canada's First Quantum Minerals, Australia's Equinox Minerals Ltd., Swiss firm Glencore International AG and London-listed Vedanta Resources Plc.

Musokotwane said preliminary copper production estimates indicated that copper output rose 3.7 percent in 2008 to 569,891 metric tonnes. Cobalt production rose 19.5 percent from 4,414 metric tonnes in 2007 to 5,275 tonnes.

He said economic growth in 2008 was mainly driven by expansion in the transport, storage and communication, mining, manufacturing and trade sectors. In 2009, Zambia would spend more on infrastructure and social services.

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