Tax expert warns of falling investor confidence

NOEL IYOMBWA writes INVESTOR confidence in the country is waning as Value Added Tax (VAT) refund payments are delayed further constraining operation in the mining sector, the country’s biggest industry, tax experts have warned. In a statement issued to The Sun, Marius van Oordt, a senior lecturer at the African Tax Institute, said that by not […]

Tax expert warns of falling investor confidence
NOEL IYOMBWA writes INVESTOR confidence in the country is waning as Value Added Tax (VAT) refund payments are delayed further constraining operation in the mining sector, the country’s biggest industry, tax experts have warned. In a statement issued to The Sun, Marius van Oordt, a senior lecturer at the African Tax Institute, said that by not refunding VAT, inflation and cash flow-related costs are incurred by businesses, dampening investment. “Prompt payment of refunds stimulates investment. Delayed refunds impact investors’ cash flows and can result in a direct cost where interest on refunds is not paid or paid at a rate lower than inflation. The non-payment of refunds is always a direct cost to investors. These costs are large enough for investors to forego an investment opportunity,” said Dr Oordt. The tax expert, who is also a member of the United Nations sub-committee on extractive industries taxation in developing countries, noted that if the investment is foregone or delayed, it may lead to less employment and in the local economy and decrease Government’s fiscal take. He also stressed that the importance of paying VAT refunds should not be underestimated as investors in the extractive industries consider the VAT refund practices of countries in making investment decision “Investment follows certain, consistent, good tax practices…in the extractive industries, investors consider the VAT refund practices of countries in making investment decisions. This is so since the non-payment of refunds is equal to a tax on investment at the standard VAT rate,” added Dr Oordt. “It is in the government’s best interest to pay VAT refunds promptly. This incentivises investment and formalisation through VAT registration and increases efficiency in tax compliance and administration. This is true for all economic sectors, but especially for the extractive industries,” he said. “Owing to the capital-intensive and export-oriented nature of these industries, the VAT refund practice of the country is central to the investment decisions in minerals, oil and gas. These sectors are too important for Zambia’s economic development to be exposed to poor tax practices. “In making investment decisions, investors look for predictability and need to be confident in their investment decisions. Delayed or non-payment of VAT refunds signals unpredictability for investors and creates uncertainty in their investment decisions.  “This uncertainty and accompanying reputational harm to a country can decrease investment over the long run, negatively impacting the local economy and hampering economic development. Thus, the delayed or non-payment of VAT refunds by a government may decrease the welfare of its own citizens.” Dr Oordt further said solutions are available for government to manage VAT refunds. “A solution is to develop a VAT refund forecasting and monitoring system, similar to that being proposed by Angola, to estimate a percentage of VAT received that a government must refund,” proposed Dr Oordt. To address the backlog of VAT refunds, government can allow reputable firms to offset the refunds owed against other tax liabilities. This would require a robust debt management system that shows the total tax liability for all taxes, he added. Meanwhile, local think-tanks and civil society organisation such as the Zambia Institute for Policy Analysis and Research (ZIPAR), the Centre for Trade Policy and Development (CTPD) and Consumer Unity Trust (CUTS) have called for stability in the mining tax regime so miners can contribute more to national development. The top five mining companies – Kansanshi Mining, KalumbilaMinerals, KCM, Lumwana and Mopani – accounted for 96 per cent of the copper production in 2018 and the first half of 2019. But production figures have declined in recent months. While production for the top 5 mines declined by 2 per cent, production in the smaller mines declined by 45 per cent in the first half of 2019 when compared to the first half of 2018. Mining accounts for 12 per cent of Zambia´s GDP and 70 per cent of total export value. The sector is also a significant source of government revenue and formal employment, both directly and indirectly. During the first half of 2019, the mining sector’s direct contribution was 13 per cent of domestic revenues. Continuing to attract investment in the sector is crucial to the country’s growth since it constitutes 62 per cent of foreign direct investment. The Sun