Business and tax reforms are on the cards in Zambia as the Government seeks to rebuild the economy and stimulate growth in the wake of the COVID-19 pandemic.
The Zambian 2021 National Budget, presented to the National Assembly towards the end of September, amounts to ZMW 119.6 billion – almost 11% higher, in nominal terms, than the 2020 budget of ZWM 106 billion. As at end of August 2020, the country’s inflation hovered above 15.5%, exceeding the medium-term target of 6% - 8%.
Presenting the budget, Minister of Finance Dr Bwalya Ng’andu, reported that Zambia is facing its first economic recession since 1998 as a result of the COVID-19 pandemic and ongoing electricity shortages.
However, economic growth is expected to rebound to 1.8% in 2021, supported by a national budget explicitly focused on achieving economic recovery. Its theme is to ‘Stimulate economic recovery and build resilience to safeguard livelihoods and protect the vulnerable’.
The recovery plans revolve around reviving the travel and tourism industry, stimulating local manufacturing, bringing some much-needed stability to the mining industry and protecting the country’s tax base through, among others, changes to the Transfer Pricing Regulations.
Five of the proposed business and tax reforms are of particular interest to corporates and multinational enterprises operating in Zambia.
Import duty boost for mining
Mining companies are sure to welcome the Minister of Finance’s proposal to remove the 5% import duty on copper ores and concentrates (of HS code heading 2603).
This proposal seems to be aimed at addressing the negative impact of previous mining tax amendments and injecting some stability into the mining tax regime.
The removal of import duty on copper ores and concentrates will undoubtedly ease the pressure on producers and stimulate local processing of these metals, which will ultimately enhance the mining sector value chain.
No other substantive tax changes are in store for the mining sector, but the Government has announced some important developments in its plans to create a diversified, export-oriented mining sector. These include establishing the Zambia Gold Company Ltd to spearhead gold mining and trading, acquiring a majority stake in Glencore’s Mopani Copper Mines and seeking a strategic investor for Konkola Copper Mines, where liquidation proceedings have commenced.
Property transfer tax for the indirect transfer of shares
From 1 January 2018, in an effort to increase its tax base, the Government imposed property transfer tax (PTT) on the value attributable (Realised Value) to a Zambian company in transactions involving indirect transfers of shares in a Zambian company.
It has not been as easy as expected to calculate the Realised Value, however. For this reason, the Minister proposes amending the PTT Act to redefine how the PTT payable on the indirect transfer of shares is determined. The aim is to capture only the Zambian proportion of the value realised.
The proposed amendments will also restrict the application of the PTT Act for an indirect transfer of shares to a transfer that represents at least 10% of the value of shares in the Zambian company. The intention is to exempt the transfer of shares by minority shareholders of the foreign company.
While the proposed amendments will provide some certainty on the PTT payable, it is not yet known whether the tax authorities will rely on the information provided by the parties to transactions or undertake their own assessment to determine the value attributable to a Zambian company.
Transfer pricing amendments
Small business and multinational enterprises alike have reason to take an interest in the proposed transfer pricing amendments. Two important changes are envisaged to the Income Tax (Transfer Pricing) (Amendment) Regulations, 2018.
First, an amendment is proposed to the Country by Country (CbC) report, providing for the automatic exchange with other tax jurisdictions of the CbC reports for multinational enterprises operating in Zambia.
This amendment will enable the Zambian tax authorities to perform more efficient transfer pricing assessments on transactions between related parties and BEPS risk assessments, as well as enable the authorities to measure the fiscal and economic effects of tax avoidance.
However, one of the conditions for receiving and using CbC reports is that a jurisdiction must have the necessary framework and infrastructure in place to ensure the appropriate use of report information. Zambia has yet to meet this requirement.
The second proposed amendment is aimed at local small and medium-sized businesses. It seeks to increase the threshold for providing transfer pricing documentation from ZMW 20 million to ZMW 50 million.
Tax relief for tourism enterprises
The COVID-19 pandemic has dealt a crippling blow to the Zambian travel and tourism industry, which is expected to lose around USD 400 million in income. The safari tourism sector alone is projected to lose about USD 100 million, with over 7 000 jobs at risk, according to the Eco-Tourism Association of Zambia.
In a bid to revitalise the sector, the Government has proposed a reduction from 35% to 15% in the corporate income tax (CIT) rate earned by hotels and lodges on accommodation and food coaches.
In addition, registration fees for hotel managers are to be suspended, along with licence renewal fees paid by hotels and lodges, and retention fees paid by tourism enterprises.
In other proposed relief measures, the 15% customs duty on certain tourist buses, coaches and safari game-viewing vehicles will be suspended for one year from 1 January 2021.
These measures will have an effect on revenues and might temporarily exert pressure on the 1.8% growth objective. They might also be seen as a departure from Zambia’s policy on avoiding sector-specific tax rates. However, considering that tourism provided 469 000 jobs in 2019, its return to health is key to the overall economic recovery of Zambia.
Incentives for local manufacturing
The Minister proposes introducing a local content allowance for income tax, relating to the use of selected raw materials, at the rate of 2%. The aim is to encourage local manufacturing and processing of products that use mangoes, pineapples and cassava.
Notably, the incentive is not an isolated development in the fruit-growing and beverages sector as the Minister has also announced that the Industrial Development Corporation will establish a tomato and fruit processing plant in 2021.
It remains to be seen whether the 2% incentive is substantial enough to sway beverage manufacturers to substitute imported raw materials with locally produced fruits. That said, the introduction of the tax incentive is a major step forward towards the implementation of the National Local Content Strategy.
Concrete action towards economic recovery
The National Budget growth targets also contend with the fact that in 2021 (August), Zambians will go to the polls to cast their ballots for president with the possibility of a run-off should no candidate garner more than 50% votes. In the same year, the country is scheduled to conduct the national census of population and housing.
The success of any recovery plan ultimately depends on how efficiently and effectively it is executed. The Government has its eye on 1 January 2021 as the commencement date for most of the changes. The necessary legislative amendments are therefore likely to go through the National Assembly swiftly as is always the case with legislative amendments implementing budget pronouncements.