….Mines’ threat of mass layoffs upsets government and Zambians……
By Kalima Nkonde
- The bottom line is that illicit financial flows leads to a loss of resources on the part of the government, and the resources are actually lost into foreign hands. Our call as civil society has always been ,can we ensure that we tackle the issue of illicit financial flows because even the debt burden that we are now suffering from is just as a result of that.(Patrick Nshindano Executive director, Civil Society for Poverty Reduction (CSPR), 2017)
- We will not allow situations where mining houses start dictating what type of taxes we should have! What government would like to do in these tax measures is to ensure that we seal transfer pricing, tax avoidance, which been perpetuated by these multinationals companies (Mines Minister, Richard Musukwa, December, 2018)
- What we have been highlighting is the paradox with African countries. We see a continent that has the largest shortage of finance but also at the same time we are seeing a massive amount of money fleeing the continent. We’re talking about money that’s being stolen or embezzled out of the continent. So the paradox is you have a continent that needs money but it’s a continent that is also financing the rest of the world, in countries that don’t need the money. Money is being lost which could have been used to finance investments (Professor Léonce Ndikumana from the University of Massachusetts Amherst.)
- The House may wish to note further that the contribution of the mining sector revenue as percentage of GDP remains low at 4%. Further, provisions on capital allowances and carry forward of losses eliminated potential taxable profits. Mar. Speaker, the tax structure was simply illusory as only two mining companies were paying company income tax.(Former Zambia Finance Minister, Alexander Chikwanda,2015 )
- I am convinced that today there is more money leaving a continent like Africa due to money laundering and tax evasion and illicit financial flows than the money that goes in through official development aid, and this is a common responsibility of the international community (UN Secretary-General António Guterres, 2017 )
- Our heads of State and government are aware that the problem of illicit financial flows is exacerbated by corrupt tendencies, lack of or weak African institutions both at national and continental levels in all sectors, governance challenges, weak tax administration, and lack of capacity to monitor and curb such criminal activities (Former President Thabo Mbeki, Chairman, AU High level Panel on IFFS)
- Illicit financial flows (IFFs) out of the developing world are a key impediment to tackling poverty and inequality. They rob the African continent of an estimated $70-billion each year – funds that could be used for development. IFFs are “the ugliest chapter in international affairs since slavery”. An estimated $70-billion, and increasing, leaves Africa each year through illicit outflows. (Global Financial Integrity President Raymond Baker)
The untold story of Zambia’s excessive debt and low foreign reserves is the negative impact that illicit financial flows have had and continue to have on the country. Zambians need to be made aware that the debt that the country has accumulated, is in a large measure, due to the fact that billions of US dollars disappear each year without a trace and end up in tax havens and/or absorbed into Western economies and now China, forcing government to accumulate excessive debt to fill the gap created in order to carry out development projects.
In the light of the mining houses, threats of massive layoffs of over 21,000 Zambians, following 2019 budget tax reforms affecting them which are meant to ensure Zambians benefit more from their resources, rather than continue accumulating debt while shareholders of mining houses are getting richer, it is appropriate that the debate should be extended to illicit financial flows which mines are alleged to be among the major culprits.
According to research by Global Financial Integrity and other renowned economists like Professor Dikumana of Massachusetts University, Zambia and other African countries are net creditors, which mean far more money flowed out of Zambia than into them thus exposing the hypocrisy of the benefits of foreign direct investment and donor funding. Recent research shows that the total sum that leaves developing countries each year as unreported financial outflows, referred to as illicit capital flight, amounts to as much as ten times the annual global aid flows, and twice the amount of debt developing countries repay each year.
It is important to have a full picture of the extent of illicit financial flows problem, by taking a holistic and helicopter view, with regard to the conduits or channels used to siphon funds out of Zambia. There are three broad channels that billions of dollars are lost. These are: through multinational enterprises, smuggling of natural resources and through corruption and money laundering activities.
Multinational Enterprises tax avoidance and evasion
The major culprits of illicit financial flows are Multinational Enterprises (MNEs) through the manipulation of trade transactions. Trade misinvoicing ( under valuing exports and overvaluing imports), transfer pricing, payments between parent companies and their subsidiaries, and profit-shifting mechanisms designed to conceal revenues are all common practices by companies seeking to maximise profits in the process undermining or negating the expected positive effect of foreign direct investment and aid.
According to the World bank, MNEs like the mines have tended to structure their businesses by consolidating high-value functions and related intangible assets in hubs that provide goods and services to their global operations. They locate them in low-tax jurisdictions or in jurisdictions allowing the establishment of preferentially taxed special purpose entities.
According to Stephen Yeboah, a Research Consultant at the African Natural Resources Centre of the African Development Bank (AfDB), Nigeria and Zambia are among the worst affected in terms of not benefiting from their resources in Africa.
“The practices of misinvoicing in Nigeria’s oil and Zambia’s copper exports and imports reflect the challenges that illicit financial flows present to Africa’s extractive sector. Between 1996 and 2014, under invoicing of oil exports from Nigeria to the United States was worth $69.7 billion. In Zambia, over the same period, a record of $28.9 billion of copper exports to Switzerland, which is more than half of all its copper exports, did not reflect in Switzerland’s import statistics,” He wrote in his research paper.
In 2012,the then Deputy Minister of Finance, Miles Sampa reported that Zambia had lost $2 billion dollars in tax evasion by Mining houses. Sampa said that only two mines claimed profits in that year and that “the other mines for one reason or another, some genuine, some not, are always making losses. Most of it is due to transfer pricing or tax avoidance.”
In their 2013 report on illicit financial flows (IFFs) from Africa, Global Financial Integrity and the African Development Bank said Zambia had lost approximately US$8.8 million in IFFs from 2001 to 2010.
The amount of money mining houses make from Zambia which is not apparent to the Government and Zambians was further confirmed in a video four years ago by Vendeta’s majority shareholder Anil Agarwal speaking in March 2014, where he revealed how he bought KCM for just $25 million. Speaking to the Jain International Trade Organisation (6) in Bangalore, India, March 22 – 23 2014, he is quoted as having boasted about his investment in KCM:
“It’s been 9 years [since we’ve owned the company], and since then every year it is giving us a minimum of 500 million dollar, plus 1 billion dollar, every year it has been continuously giving back.”
In July, 2017, the Zambia Financial Intelligence Centre reported that multinational mining companies were robbing Zambia an estimated $3 billion annually through tax evasion and illicit financial flows (IFF).
In its 2019 Budget, the Zambian government has made a number of proposed tax changes mainly affecting the Mining sector. Mining houses have threatened jobs cuts in thousands and to cut in future capital investments. The Government, on the other hand, through the Minister of Mines, Richard Musukwa, has reacted angrily. The Minister was quoted by The News Diggers Newspaper that, it will not tolerate the arm twisting and black mailing tactics of the mines.
“The schemes being postulated by mining houses are arm twisting tactics, something they cannot do in their home countries. But we will not allow situations where mining houses start dictating what type of taxes we should have! Imagine having a country where we have foreigners telling us how we should tax them? When they come here, they come under a guise of investors and enjoy a lot of concessions and tax holidays. In fact, at the time when they start making profits, most of them wind up operations they would have already made huge profits! So, what government would like to do is these tax measures is to ensure that we seek transfer pricing, tax avoidance, which have been perpetuated by these multinational companies,” Musukwa was quoted by News Diggers.
President Lungu, through his Spokesman, Amos Chanda, as reported by News Diggers, said that the threats of mass layoffs by mines have no merit.
“The government does not accept that mining companies that fully comply with Sales Tax in Australia, in the US, Canada would fail to comply with Sales tax in Zambia. The President does not see merit in the opposition to Sales tax as things stand. “Amos Chanda said.
According to Lusaka Times of 29th December, 2018, on arrival on the Copperbelt for the PF provincial Conference, President Lungu amplied on the issue by categorically saying government will not allow mine owners lay off workers with impunity.
Lusaka Times reported that, “President Lungu said he will a not allow mine workers lay off workers with impunity. Government will not be intimated by threats from mine owners’ to lay off workers. Investors in the Mining industry are reminded that mines and minerals are assets of the country which Zambians must benefit from through taxes to build roads, health centres, schools.”
It is clear that State House is not amused by Mining house’s tactics. President Lungu should not be taken for granted based on how he gave in to miners’ demands in the past. Although he does appear weak, slow and indecisive to his critics, he has demonstrated in the past that he can take tough and bold decisions as he did with the removal of electricity, farm subsidies and venders, which affected ordinary Zambians who are his voters.
The indications from government are that the PF administration have reached a tipping point with regard to Multinationals and are throwing the kitchen sink at them. Mining houses are well advised that given all the allegations of tax avoidance, tax evasion, suspected illicit financial flows, their continued extortionary threats, they may just open a Pandora’s box, which will result in a Tanzanian’s Magufuli type mining reforms where they will be worse off. The Zambian government is under tremendous financial pressure of debt servicing and from the Zambian public who are overtaxed and hurting economically. It has its back on the wall.
On the other hand, Zambians on social media and other fora are in uproar about the greed of mining houses and are overwhelmingly in support of government 2019 budget tax measures .The influential Economic Association of Zambia- whose opinion the current administration respects and listens to- led by Dr. Lubinda Haabazoka, has come in support of government tax proposals and even made some draconian suggestions of nationalisation.
Zambians are of the view that they have been bearing the bulk of the country’s tax burden. They feel overtaxed with direct, indirect taxes and levies while at the same time subsidising the mines with power. It’s time the Mines paid their fair share of taxes.
The gripe among Zambians is that the Mining houses are treated like sacred cows in Zambia when their contribution to the ordinary Zambian, has had minimal impact based on a number of metrics including poverty alleviation. Mining Houses retrenched an estimated 15,000 miners when copper prices were low in 2015 but very few were rehired when prices soared to $7,000 and Zambians have been quiet. Mining houses have previously rejected over five different tax and other proposals to benefit Zambia by government such as: windfall tax, revision of VAT rule 18, increase of royalty tax to 8% and 20% for underground and Open pit respectively,7.5% on imports of copper concentrate tax, Statutory instruments 33 and 55(SI33 and 55) to monitor and stem illegal or illicit outflows.
And each time, the government has curved in 100% after threats of closure of mines or retrenchment. This has made government critics to conclude and accuse the Zambian government of being weak and compromised because other governments like Tanzania, DRC, South Africa have resisted the arm twisting and black mail tactics of mining houses in their countries.
Zambians are urging the government to stand its ground and not budge. There are some who are even suggesting the revocation mining licences if they retrench or do not comply; others are suggesting that Zambia should ask Chinese investors to take over as copper and cobalt mining’s future is bright with the car electric revolution on the horizon. Others are asking for nationalisation or increase of government stake in mines through ZCCM – IH so that Zambia benefits more from its resources.
The bottom line, Zambians argue, is that the country’s benefits from foreign direct investments especially the mines, has been minima in terms of tax revenue, employment creation, foreign exchange earnings, forward and backward linkages, technology and skills transfer and community social benefits through Corporate Social responsibility. It is time that Zambia pressed a reset button regarding FDI by recalibrating its policies, incentives and generally revisits the current development model which is dysfunctional.
Natural resources smuggling
The other channel that Zambia is losing billions of dollars, which is currently being ignored, is the smuggling of the country’s natural resources. There is no doubt that there is illicit exploitation of natural resources such as gold, cobalt, uranium, timber, emeralds, diamonds , manganese and other precious metals and wildlife which is being exported abroad illegally. These activities are being carried out by criminal gangs and some big multinational companies, some who are involved in the exportation of “soil” and late President Sata once put it. The question one would ask is: if Canada’s Barrick Gold’s subsidiary in Tanzania, Acacia Mining, was caught red handed with containers containing concentrates more than 10 times the amount they declared at the port of Dar-es- salaam, what could prevent multinationals in Zambia doing the same?
The recent revelation by the News diggers Newspaper that China imported 20 times more Mukula timber from Zambia than was declared gives credence to the assertion that there is so much revenue being lost through smuggling.
“High volumes of mukula continue to be exported as logs despite regulations prohibiting it. Recent mukula production in Zambia could have amounted to about 110,000 m3 per annum, with revenue losses of about US$3.2 million and bribes paid to state officials of about US$ 1.7 million. While official statistics remain incomplete and unclear, comparing Zambia and Chinese customs data reveals significant differences.” The Centre for International Forest Research (CIFOR) regional scientist and Chief Researcher Dr Davison Gumbo was quoted as saying by the paper.
According to the President of The Gemstone and Allied Workers Union of Zambia, Sifuniso Nyumbu as Quoted the MAST newspaper, Zambia lost an estimated $7billion due to illegal mining and sale of gemstones.
“The illegal activities are dotted around all parts of the country and as of 2017, we are talking of about $7billion which was being lost through illegal mining and exports of gemstones,” He said. “Zambia has the best emeralds and amethyst in the world but there is very little being done to realize revenue by government.”
External borrowing and Money laundering fueled Capital flight
Although the writer has not come across evidence suggesting that Zambia is losing money through the third channel of illicit financial flow, according to James K. Boyce of the Department of Economics & Political Economy Research Institute University of Massachusetts Amherst in the USA, extensive research has found out that most of the highly indebted African countries lose money through external debt fuelled Capital flight.
“External borrowing can lead to capital flight, and capital flight can lead to external borrowing. Understanding these linkages is important for the formulation of appropriate policy responses. In debt-fuelled capital flight, external borrowing finances private wealth accumulation outside the borrowing country. The borrowing government contracts loans in the name of the public. Officials and other politically connected individuals then siphon part or all of the money into their own pockets – via kickbacks, padded procurements contracts and diversion of funds – and stash part or all of the proceeds abroad for safekeeping,” He said when addressing the United Nations on Illicit Financial Flows in Africa.
According to James K. Boyce, some of the borrowings by most African governments are odious borrowings which are defined as loans contracted by government without the consent of the people and from which the people will not benefit and the lenders are also aware of this but still they lend the countries.
There is no argument whatsoever that Zambia is losing billions through sophisticated multinational machinations, smuggling, corruption and money laundering. The African Union, the Africa Development Bank, the G20, the World Bank and the United Nations have all agreed and confirmed this. Although the challenge of fighting illicit financial flows is a mammoth one and no one country can fight it alone, there still some measures that can minimise the scourge, as the evidence of international studies have shown that countries like Botswana have the lowest illicit financial outflows in Africa whereas Zambia and Nigeria have the highest.There is, therefore, something that Zambia can do. The fight against corruption is a starting point as there appears a positive correlation between corruption and illicit financial flows.
The Zambian government can also seriously look at building and strengthening the capacity of Zambia Revenue Authority (ZRA) as it is currently not well resourced with technology and specialized staff with sufficient qualifications and experience to handle the sophisticated machinations of Mines and MNEs. There is also need to research the structures, value chain characteristics and processes of the mining industry in their home countries.
In order to fight and limit smuggling of resources, simple security measures can be a deterrent. There is need to put in measures of monitoring small aerodromes in rural Zambia especially North Western Province and inspections of light aircraft and drones bound for foreign countries. The army and Air force could be useful in the enforcement of Zambia’s economic security by limiting smuggling.
Zambia has no problem with finance for development; it has a problem with finance mobilisation and enforcement of laws and regulations. We are endowed with resources and if domestic resources were mobilised so that we benefit from our natural resources like Botswana has done, we would borrow so much.
The Zambian government’s current business development model in practice is based on two pillars. One, the lop sided promotion of foreign investment without joint venture arrangements while paying lip service to indigenous high value entrepreneurs. Two, the raising of development finance through excessive borrowing rather than mobi lization of domestic revenue. This is a flawed business model and will not bring development as it only promotes billions of dollars flowing out of the country with little retained in the country for multiplier effects.
No country has ever developed from excessive borrowings and foreign direct investments alone. Ask China , South Korea, Vietnam and others South East Asia countries. Domestic revenue mobilisation and aggressive promotion of indigenous and local investors and providing incentives to Joint venture with foreigners is the key and only way for Zambia to develop. Foreigners never developed any country but merely complemented locals. There are thousands of Zambians including the writer with multi-million dollar viable projects in mining, banking, transport, manufacturing, tourism which are rotting because government through ZDA have no such data base and have not aggressively to find them and matched them with foreigners with cash like the Chinese and but they just allow 100% owned foreign investors to set up shop. China does not do that; learn from them.
The writer is a Chartered Accountant by profession and a Private Sector Development expert and an Entrepreneur. He is an independent finance and economic commentator/analyst and a Patriot.