Sunday 1 April 2018

The ZRA-First Quantum Tax Story

About two weeks ago, the Zambia Revenue Authority (ZRA) announced that a preliminary assessment had uncovered tax irregularities involving a prominent copper mining company in the country. In an interview with News Diggers, ZRA communications manager Topsy Sikalinda gave the following additional information:

we [ZRA] are announcing the preliminary assessment of K76.5 billion (U$7.5 billion) issued to a prominent mining company for misclassifying consumables and spare parts at importation for the last five years. The said items were declared as mining machinery -- which attract customs duty at zero percent -- when in fact not. The applicable duty rate for the items ranges from 15 to 25 percent.

ZRA did not reveal the name of the company in question. However, an inside source from within the company itself told News Diggers that Kalumbila Mine was the company in question. Kalumbila is owned by Canadian company First Quantum Minerals Limited (FQM) -- its Canadian owners like to refer to it as Sentinel Mine.

Following ZRA's statement and news confirmation that an FQM subsidiary was at the center of a tax investigation, FQM quickly organized a conference call from Canada to give their side of story and to basically refute ZRA's assessment. In the call, FQM acknowledged receiving a letter from ZRA itemising moneys owed as follows:

                1. US$150 million as ZRA's assessed taxes due
                2. US$2.1 billion as penalties
                3. US$5.7 billion as interest on possibly the penalties and taxes due.

All this seems to be traced to some US$540 million worth of imports by Kalumbila that were declared as capital equipment or raw materials or intermediate goods instead of finished goods. According to ZRA's Schedule of Customs Taxes, capital equipment, raw materials and intermediate goods attract lower customs duties of between 0% and 15%. Finished goods attract a duty of 25%. The rationale for such tax differentials is to encourage the importation of productive goods (capital equipment, raw materials, etc...) and to disincentivize the importation of finished goods.

ZRA thinks all of the US$540 million imported by Kalumbila were, in actual fact, finished products. In other words, ZRA believes Kalumbila made false declarations. And false declarations, as per the Customs and Excise Act, attract hefty penalties.

Interestingly in their conference call, FQM acknowledges that a "high level analysis" by themselves following ZRA's letter had revealed some "incorrect assignments" of imports but such mis-assignments were minor. In other words, even they themselves acknowledge that false declarations might have been made even though they believe these to be minor (their choice of language is to refer to these as "incorrect assignments", i.e. innocent errors).

Now this is nothing but a plain-vanilla tax dispute involving a taxable entity and a tax authority. Kalumbila, even though it acknowledges some minor "errors", refutes the substantive aspects of ZRA's accusations. On the other hand, ZRA thinks Kalumbila has systematically been evading taxes by falsely declaring imports. Tax disputes of this nature are legion across the globe. But you would not get the sense that this was a run-of-the-mill tax dispute by reading international reactions to the story.

For example, frequent international tax commentator Maya Forstater of the Washington-based Center for Global Development in a guest post for a Zambian mining industry-aligned website rubbishes ZRA's claims. In the post, she relies heavily on FQM's version of events and succeeds in painting ZRA as an incompetent third world tax authority lacking in capacity to properly perform its functions. ZRA's incompetency is severally implied, for example when she says:

1. The disputed entries in question were previously signed-off by FQM and ZRA (FQM also, unsurprisingly, stress this point in their conference call)
2. ZRA irresponsibly placed the fact that FQM was being investigated in the "public domain"
3. ZRA has been receiving self-improvement help from the likes of the EU, World Bank and Norwegians.

As for point 1, yes ZRA agents might have previously signed-off the transactions but the duty (excuse the pun) is always on the taxable entity to make correct declarations. Nobody suggests incompetence on the part of the Internal Revenue Service in the US every time it's revealed that some hollywood actor has been evading taxes (see this long list of hollywood tax evaders). Also, are we ruling out FQM-induced corruption of agents in the field? 

As for point 2, ZRA in their press statement didn't mention Kalumbila or FQM by name. They merely informed the nation that some mining company (and there are many in Zambia) had been written a letter notifying them of a tax assessment. Someone within Kalumbila revealed that the letter in question had been addressed to Kalumbila. This is hardly an indictment of ZRA.

As for point 3, many of my very competent friends within ZRA will tell you about how such "capacity-building" jamborees are time wasters. My friends know what's to be done but often they find themselves entangled/constrained in their efforts by that age-old dalliance between foreign capital and the local elites who facilitate extraction. Many of those sponsoring capacity-building initiatives have ironically at one time or the other furthered the interests of foreign capital at the expense of the local population.

It's quite likely that ZRA has gotten this entire thing wrong. It's quite likely that ZRA has gotten a small portion of it wrong. But the important thing to note is that this is a standard tax dispute which the two sides will hopefully resolve amicably in due course. And the country will be the better for it because we will know and learn from the exact circumstances that led to this dispute. In other words, we will know the truth. But calling it a mafia style "tax shakedown" as some outsiders have is completely irresponsible.