MINERAL ROYALTIES SHOULD BE PAID, NOT ON REVENUE OR SALES BUT ON PROFIT
ZCCM-IM, FQM royalty
deal neat solution – Saasa
By Kombe Chimpinde Mataka
I EXPECT that the royalties payments will be income tax deductible for Kansanshi as these are a cost to the business, says economist and mining consultant Oliver Saasa.
Professor Saasa says royalty payment model entered into by ZCCM-IH and Kansanshi Mines could be a model for all mining business in Zambia to consider.
He told Mining for Zambia in an exclusive interview that the royalty should be paid on profits and not the revenue or sales.
“I expect that the royalties payments will be income tax deductible for Kansanshi as these are a cost to the business. In other words, tax will not be paid on revenue (or sales) which are not retained by the company, but on profits, which is in line with general tax principles and best practice. However, as income to ZCCM-IH, I expect these sums to be subject to tax by the [Zambia] Revenue Authority (ZRA). In this regard, the dividend-royalty agreement will be tax neutral from the ZRA standpoint,” Prof Saasa said.
He said the overall average revenue from the royalty model that ZCCM-IH has opted for is expected not only to be higher, but also more predictable and consistent.
“If you ask me, this could be a model for all mining business in Zambia to consider. As I see it, it’s quite clear that ZCCM-IH will be able to extract more value from Kansanshi than would have been the case through dividends,” he said. “The synergy is clear. This agreement can be viewed as a very neat solution to the misalignment of FQM and ZCCM-IH’s interests which, ultimately, have been inhibiting production at Kansanshi. As I said before, there had previously been an inherent conflict of interest between ZCCM-IH and FQM and its investors over the use of annual returns for reinvestment. Because ZCCM-IH will now directly benefit from reinvestment and expansion of operations – as any increase in production will be reflected in a commensurate increase in the royalty payment – this will no longer be a source of disagreement.”
Prof Saasa said for those in disagreement , one needed to justify the argument that 3.1 per cent is too low in light of reality.
“The 3.1 per cent is also on the high end of the average global range, which should bring sufficient comfort to the public,” he argued.
“The ZCCM-IH royalty in no way replaces mineral royalty taxes. The new arrangement will have no effect on the overall amount of tax payable to the State. It is completely incorrect for anyone to be comparing the discussions with the Panamanian government to the Kansanshi agreement. The Panama discussions (which are ongoing by the way) are between FQM and the government regarding the taxes to be applied and paid to Panama’s government. In other words, it’s equivalent to discussing the amounts that Zambia’s government collects from FQM. The Kansanshi agreement, on the other hand, is an agreement with a minority shareholder, namely ZCCM-IH, to change the way they receive a return on their investment. These commentators are simply not comparing apples with apples.”
Prof Saasa said the bad blood and resulting disputes between FQM and ZCCM-IH over the years had been very damaging for both parties, reputationally and operationally.
“If we are to kickstart our mining industry back to life, it is essential that the interests of the parties involved are aligned towards driving production. For that reason, this agreement genuinely is a win-win for both parties, and I think this has been overlooked in much of the analysis so far,” Prof Saasa argued. “By the way, ZCCM-IH will continue to hold all of its current shares, meaning that it continues to be a 20 per cent shareholder in Kansanshi. ZCCM-IH also continues to have two directors (out of 10) on the Kansanshi board, with voting rights. In terms of governance, the company has full visibility of Kansanshi’s operations, including the right to attend the mine site and to inspect Kansanshi’s books and records to ensure it is satisfied with royalty calculations.”
The economist however said he expects full details of the financial impact of the restructuring from ZCCM-IH will be made public by ZCCM-IH itself prior to its AGM.
“Perhaps it may be helpful for the government and ZCCM-IH to clarify these details for the general public before then,”said Prof Saasa. See less