On 30 July 2020 the OECD published on its website a case study summarising assistance given to Zambia’s tax administration in relation to base erosion and profit shifting (BEPS) in the mining sector. The case study details how support was given by the Intergovernmental Forum on Mining, Minerals, Metals, Sustainable Development (IGF); the African Tax Administration Forum (ATAF) and the OECD to help Zambia improve revenue collection from the mining sector. The support was part of the BEPS in Mining Program and looked at the important issues relating to tax revenue from mining in the context of a whole of government approach, working not just with the Zambian Revenue Authority (ZRA) but with the Ministry of Mines and Ministry of Finance in activities that included training of government officials.
Government revenue from mining comes mainly from mining royalties and from taxes. The amount received by the government is calculated on the basis of the sales price (or in some cases a relevant quoted price) of minerals and the volume of minerals sold. The government therefore needs information on how minerals are priced and measured if they are to establish the correct amount of mining royalties and tax.
Mining companies operating in Zambia often sell the minerals to a related party such as an affiliated smelter or refinery in Zambia; or a related marketing or trading entity based in a low tax jurisdiction. The structure may have been set up to facilitate tax avoidance and minerals may be exported to related parties at a low price.
Zambia has combated profit shifting by using reference pricing under a type of “sixth method” and by the examination of third party sales agreements between the related party receiving the minerals and the final customer. Accessing such agreements had been difficult owing to the lack of a legal basis to obtain them from the mining company or its related party. Generally, only where there was a double tax treaty with a marketing hub jurisdiction could information be requested. The IGF, ATAF and OECD worked with Zambia to enhance the relevant domestic legal provisions in relation to transfer pricing and the extractive industries. The ZRA was thereby empowered to calculate on the basis of the publicly quoted price for a mineral rather than the sales price to the third party. The ZRA also obtained the power to request third party sales agreements from the foreign related parties as part of its enquiries.
Another problem encountered by the ZRA has been the valuation of manganese ore for export and for calculation of the mineral royalty. Improvements in the methods of valuation have led to fewer disputes and increased government revenue. Analysis of transfer pricing risks for other mining projects has given the ZRA guidance on selection of cases for audit, allowing resources to be prioritised and used efficiently.
The Zambian government has created a Mineral Pricing Working Group to use expertise from different branches of government to continue developing a internal risk assessment framework for pricing certain minerals.
