Anglo faces headwinds in keeping restructuring on track
Anglo has been forced to accelerate its restructuring after successfully holding off a bid from BHP, the world’s biggest miner.
In a move that may prove a forerunner for other resource-rich economies, Zambia’s Finance Ministry on Monday 6 May announced new measures aimed at curbing tax avoidance by foreign investors. The country estimates that it loses around US$2bn each year to the problem, a sum equivalent to over 10% of its $19.2bn GDP in 2011.
Under the new regulations, the government will from 16 May onwards require foreign currency earned from all exports over $10,000 in value to be deposited in a commercial bank in the country within 60 days and evidence to be provided for the reasons behind transferring the funds offshore.
Zambian officials have acknowledged that securing higher revenues from its mining sector, currently estimated to contribute between 9-10% of the country’s GDP and expected to grow to $1.35bn in size by 2015, is a prominent objective of this move.
The country doubled its royalties on copper production from April 2012 but refused to introduce a windfall tax on company profits, a levy under consideration in fellow metals producer countries Ghana, Cote d’Ivoire and South Africa. Kenya and Tanzania also introduced higher royalty regimes in 2012, a move that may be echoed further afield in Poland, Romania, Quebec, Mexico and Brazil in the year ahead.
Higher taxes, higher collection
While straightforward tax increases will remain a weapon in the policy arsenal, transfer pricing – essentially charges across different jurisdictions between legal entities within the same corporation to achieve fiscal efficiencies – may emerge as the latest front in the increasingly complex and contentious ‘resource nationalism’ equation involving mining and energy investors and their host governments.
If Zambia’s decision is seen to improve revenues without significantly deterring investment, other countries can be expected to follow suit – in much the same way that royalty adjustments, windfall taxes and retrospective reviews of individual companies’ licence agreements have all been enthusiastically replicated across multiple jurisdictions in the recent past.
Despite industry concerns, international winds appear to be blowing in Zambia’s direction on this topic and potentially strengthening the hand of other administrations keen to follow in its footsteps. The April 2013 G20 Finance Minsters’ Communique stated that “More needs to be done to address the issues of international tax avoidance and evasion.”
Revenue mobilisation through higher and broader tax collection meanwhile remains a key pillar of the IMF’s technical assistance work with developing countries around the world, while the African Development Bank in 2012 opined that “royalty rates… in the region can be increased to enable countries to better profit from the sector while allowing firms to realize reasonable returns on their investments.”
Shifting sands beneath the tax landscape
Against this potentially growing enforcement backdrop, forecasting and managing emerging fiscal risks will remain a key priority for natural resources companies around the world – especially in Zambia’s neighbourhood. According to the World Bank, sub-Saharan Africa is already both the most onerous and most aggressive tax region in the world – requiring an average of 39 separate payments and 319 hours per year to complete processes accounting for an average rate of 57.8% of profits.
The continent’s revenue authorities also feature regularly at or near the top of surveys of its most corrupt institutions – with aggressive investigations of alleged arrears often used as a pretext for bribery demands.
Both Zambia’s administration and other governments are increasingly keen to secure the greatest possible array of economic and social development benefits from the depletion of their finite natural resources.
Companies involved in that extraction process, meanwhile, complain that ever more onerous requirements targeting their profits, limiting their ownership and mandating ever greater ‘localisation’ of skills and other inputs damage operating margins and deter high-risk investments in volatile commodity classes that can take decades to achieve meaningful returns. With many companies’ input costs rising and grades declining, recent downward trajectories in commodity prices – especially gold – will only heighten the stakes and squeeze the margins further.
