Namibia and the ‘perfect’ Mining Tax
Margret Thatcher, the first female Prime Minister of UK, thought she had the perfect tax. It was administratively simple, low cost and had plenty of precedent. She was always a woman enthralled by right wing economic ideologues and as she had succeeded in doing what the right wing thinkers had told her. She lowered company and personal taxes, she smashed the trade unions, closed the coal mines and got re-elected after waging a war with Argentina over a spec of land in the South Atlantic - the Falkland Islands.
But then power and hubris got in the way of the ‘Iron lady’ as it does with many leaders everywhere and she introduced a Poll tax. This was so simple. Instead of having council taxes based on property that funded British councils the ‘Council fee’ as it was known was based on the same principle as the 17th century Poll tax. Each individual, rich or poor would pay the same amount to council. It was used in the UK in the 17th century and in Africa by the British colonialists in the 19th and early 20th century. It was called ‘hut tax’ in many colonies. This tax was strongly resisted in Africa and in Europe because it was so patently unfair. No matter how poor you were you paid the same as any rich person. The tax resulted in the worst riots in the modern history of the UK when some 200,000 people rioted in Trafalgar Square in March 1990. Within a few months Thatcher was forced to resign as PM and her replacement John Major repealed the hated Poll tax in his first speech in parliament.
History is littered with those who simply don’t understand that if you impose the wrong type of tax at the wrong time or too much tax you will be relegated to the dustbin of history very quickly. The American Revolution, after all, began as a tax revolt.
For years Namibia has been looking for the ‘perfect tax’, for mining companies operating in its jurisdiction. There is no perfect tax but a good tax must be one that collects revenue, is simple to administer but does not dissuade investors from coming to invest in Namibia. Importantly it must also be seen to be ‘fair’
Most of the government’s revenues from mining comes from the diamond sector. Despite being a relatively high cost operation they are very profitable and Namibia receives the highest unit export price for its diamonds of any diamond producing country. In the non-diamond sector there is very little tax revenue because the government has granted tax free status to Skorpion Zinc (soon to close), Tsumeb copper and Trekopje Uranium (now under care and maintenance). It also has three new mines which have heavy capital costs to write down which they are allowed to do in their initial years.
What government really wants is a tax that, when prices of many of the country’s base metal exports improve, will give the country more revenue without increasing the tax rates. The tax on minerals is not widely understood. The tax is the price the owners of the mineral i.e. the people of Namibia get for giving away a mineral to a foreign investor. If it gets no tax revenue then the mineral is free, though its extraction is costly. To sell a non-renewable resource with no tax makes no sense.
As painful as it may be to delicate ears, most people are dreadful liars and if you look at the psychological studies that have been done on lying you will find that the majority people lie on a daily basis. Mining companies are run by people and yes some of them lie to the tax man. In the diamond trade, diamantaire never declare profits and so the governments of Israel, India and Belgium where diamond trading is significant don’t even ask these companies what profits they make. They simply send them a tax bill based on sales and if you don’t like it, shut down and go and trade somewhere else. For the Namibian mining industry this option is problematic because they may well go somewhere else.
As it is so easy to lie about profits how do we operate in a manner that makes sure that the people of Namibia get a fair return on their minerals. One way to do this is to have a progressive tax based on the gross revenues that the company earns - not profits. The mining companies think the perfect tax is no tax e.g. the Trekopje uranium mine and if you can’t get that then the second best is one based on profits where you can easily lie and cheat the tax authorities.
How do we stop the mining companies from lying? The best way is to tax them based on sales because it is so much simpler to calculate than profits. You only have to know the world price of say copper or zinc and the volume and quality of what is exported and then you impose a tax based on a percentage of that revenue. As the volume and price can be easily known or set by reference to the world price, as Zambia does then the option to cheat is more limited.
But what needs to be done to stop the cycle of resource nationalism as it has been called along with the recriminations from the mining company? The best way is to have a progressive tax that rises and falls with the price of the mineral. This would allow Namibia to automatically decrease the tax rate as prices fall and it would rise automatically with the world price. In Zambia they have tried to reform the mining tax system 9 times since the privatization of the copper mines by Chiluba and the World Bank in 1999. The continual change sin tax and mining rules have only hurt Zambia but the current system is based on a percentage of sales which rises and falls with the price of copper.
The mining companies hate this idea officially because it raises costs and results in earlier mine closure. This is the good reason and it is correct, but the real reason it is hated is because it is so much harder to cheat. In 2016 Zambia received 17% of its exports in government taxes and royalties. This compares to some 3% in Namibia.
There is no perfect tax, only reason and compromise and so the government must sit down with the Chamber of Mines and the mining companies and determine a simple straightforward system that assures Namibia gets its fair share when commodity prices rise again as they inevitably will, and which is understood and will not change with the whim of one or other politician, as has been the case in Zambia.
These are the views of Professor Roman Grynberg and Mr Fwasa Singogo and not necessarily those of UNAM.
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