International Development CommitteeWritten evidence submitted by United Church of Zambia
1. Taxes in Zambia are mainly levied in order to raise revenue to fund government developmental operations, to assist in reducing disparity between rich and poor, and to reduce poverty. This means that the funds that are realised from taxes assist the government in funding the national budget. Therefore, interferences with the collection of these taxes have an adverse effect on meeting the national budget.
2. Zambian taxes are broadly categorised into three groups as follows: income taxes, consumption taxes and trade taxes. These taxes make up the domestic revenue base for the country. These taxes contribute up to 70% to the national budget. Other revenues that Government mobilises to supplement tax revenue come from funding from external donors through budgetary support, Foreign Direct Investment (FDI), and debt provision. Apart from these revenue sources, other sources are not fully exploited yet. These include local government revenues and alternative taxes such as a wealth tax. However, these alternative sources of revenue have challenges that need to be addressed if they are to be reliable and predictable sources of revenue.
3. In Zambia, income taxes are the major sources of revenue followed by consumption taxes (domestic VAT, import VAT and excise duty) and trade taxes (customs duty and export duty), as shown in figure 2. Up until 10 years ago, international trade taxes used to account for the bulk of the taxes collected but now there has been a shift to income taxes, particularly Pay As You Earn (PAYE). During this same period, the proportion of consumption taxes (domestic VAT, import VAT and excise duty) has also increased steadily. These are the taxes that have been widely evaded, Cobham (2005). In addition, Schneider (2005, 2007) confirms that developing countries lose US$285 billion per year due to tax evasion in the domestic shadow economy. This is the main reason why Jubilee-Zambia called on the Government and church leaders within to help find the lost sense of financial accountability and patriotism by civil servants in Zambia. This was as a result of shocking revelations of massive evidence of negligence and irresponsibility demonstrated by many Zambian officials in the handling of the debt Zambia owes Donegal International (originally owed to Romania) in the just-concluded trial where the Zambian Government was sued by a commercial creditor over an unpaid debt.
4. The public services and infrastructure are key factors in the economic development and growth of a country. Many developing countries like Zambia fail to raise the tax revenue required to fund their public sectors due to many bottlenecks found in the process. According to Christian Aid (2009), tax avoidance and tax evasion are widely believed to be important factors limiting revenue mobilisation to finance the sectors especially seeking to meet the Millennium Development Goals (MDGs). This proposed case study shall review existing empirical data on tax revenue losses due to tax avoidance and tax evasion in developing countries, and discuss the role of tax expenditure and other determinants of revenue mobilisation.
5. Existing empirical studies on tax revenue losses due to tax avoidance and evasion in developing countries distinguish between a domestic component and an international component. The domestic component includes tax evasion, which occurs due to the domestic shadow economy. The international component includes profit-shifting by corporations and offshore holdings of financial assets by private individuals.
6. The United Church of Zambia is aiming to study this issue in more depth, motivated by the poor performance of the revenue system in Zambia in the last decade. In particular, there has been an evident decline in the share of tax revenue to Gross Domestic Product (GDP). The performance of some tax types, such as domestic VAT and trade taxes, has also progressively declined. The performance of the mining sector taxes has equally not been impressive and there has been concern as to whether it is being taxed optimally. Another factor that motivated the study was the need to analyse the role of the informal sector in the tax system and how it can sustainably contribute to domestic revenue mobilisation. This is because, up until now, the tax system has relied solely on revenues from the formal sector while the informal sector remains largely untaxed. The last motivating factor was the need to explore how Zambia can raise extra revenue from its traditional exports, like copper, through a financial transaction tax.
7. The premise of our more detailed study is that Zambia has the potential to raise more tax revenue and improve social justice by employing prudent policies and practices that improve tax revenue administration. The major objective of the study is to contribute to the existing body of knowledge on the tax system in Zambia by identifying the key challenges and possible success factors. The Methodist Tax Justice Network shall use the information generated by this study as research, education, and advocacy tools to lobby relevant authorities on how the current tax system can be best utilized and reorganised in order to attain social justice for the people of Zambia.
8. There is evidence of serious loss of income for Zambia by tax-dodging, for example in the 2010 report from Christian Aid, Blowing the Whistle, which highlighted significant copper exports to Switzerland disappearing to the tune of billions of dollars. There was also in Eurodad’s 2011 report Missing Billions information on Swiss-based commodity trader Glencore’s alleged tax evasion in Zambia worth around $150 million.
9. Increasing the tax-take from international trade and from wealth transactions can increase the tax base and allow the government to reduce the highly unequal burden on the formally employed, which is unfair and creates economic distortions. The closest tax that reflects wealth transaction in Zambia is the property transfer tax. However, this tax has not performed well because properties are mostly undervalued, which negatively affects tax revenue realized from property transactions. The lack of well-trained tax inspectors in property evaluation compounds the problem and as such, tax evasion is common.
10. The tax administration system faces several challenges, among them the following: a large informal cash economy; low taxpayer compliance; complexities associated with taxation of international transactions; poor traceability of taxpayers; smuggling; and inadequate funding to the Zambia Revenue Authority (ZRA) for infrastructural and technological development. The Zambian tax system has numerous tax types and rates that can result in high effective taxation. The many taxes and rates also have the potential to make the tax system complex, and therefore increase the cost of compliance and encourage non-compliance.
11. Further, the tax system is mature and has undergone several administrative and policy reforms. The tax formulation process is inclusive (both government and private sector participate in the formulation process), although it still has some challenges. Zambia’s “windfall tax” is a tax on mining sales revenues. However, such a tax regime can put firms under financial strain when costs rise relative to the mineral prices. With a “windfall tax”, operators of more costly mines, such as underground and old mines, would be inequitably taxed compared to those with relatively less costly mining operations, such as open-pit and new mines. A “windfall tax” may, therefore, pose a threat on the viability of some mines and lead to closure and related job losses.
12. Zambia has another option for taxing the mining sector, using the “variable profit tax” regime. Consistent with the principle of taxation, it is a much better instrument as it is more focused towards profits, unlike windfall tax which is insensitive to the cost structure of the mines. This notion of “variable profit tax” or taxing super-profits is currently applied in the financial sector and will be applied to the telecommunication sector, as announced in the 2011 budget. In both the financial and telecommunications sectors, it is configured on profits and not revenues.
13. Zambia’s debt has been brought down to financially sustainable levels because of the Highly Indebted Poor Countries (HIPC) and Multilateral Debt Relief Initiatives. The country’s growth and stability records are largely favourable and have been projected by the International Financial Institutions to remain stable over the medium term. However, Zambia continues to face many challenges that will make its progress towards the Millennium Development Goals (MDGs) more difficult. Economic growth in Zambia has been hampered by many domestic and external factors that have limited its size and quality, and ultimately it has not been “pro-poor”.
14. Even if Zambia may yet find herself in an “MDG trap” because of extensive debt relief, resulting in insufficient access to predictable financing to address the MDGs, domestic resource mobilization and external grants have been limited and the Poverty Reduction Growth Facility conditionalities have continued to restrict both external and domestic borrowing. However, Zambia’s return to creditworthiness—the objective of the HIPC initiative—means that Zambia will need to assess carefully how much it borrows in future and for what purpose. At the same time, more progress needs to be made on increasing Official Development Assistance (ODA) and improving its quality.
15. Analysing the trends in income poverty, the UNDP (2003) concludes that Zambia shall not meet this MDG and observes that the state of national support to meet this goal is weak but improving. This improvement is attributed to the creation and the implementation of the PRSP which has improved government’s focus on poverty reduction priorities.
16. Using the same official poverty line, the UNDP (2003) shows that the goal to eradicate extreme poverty, and particularly halving it between 1990 and 2015, implies a target of reducing extreme poverty from 58.1% in 1991 to 29.1% in 2015. Yet, the key question remains, how much growth must be generated in order to reach the set target?
17. According to UNDP (2003), universal primary education (UPE) is one of the MDGs that may be achieved by Zambia. Net enrolment rate (NER) at primary education level stood at 76% in 2003. The target is to reach an NER of 100% by 2015. There was a slight disparity between boys and girls as regards enrolments at primary education level. During 2003, the NER for boys was 71% while that for girls was 75%. Although enrolment levels for girls look high, the number of girls who completed primary school (grade seven) is lower than for boys. During the same in the year, 2003, the proportion of pupils starting grade 1 who reach grade 7 was 80% for boys and only 66% for girls. Thus achieving UPE also implies ensuring all children are accorded full primary education, regardless of gender.
18. Zambia’s PRSP (2002) and the Transitional National Plan (2003) identify education as the key social sector in the country’s poverty reduction effort. This prioritisation helped Zambia focus her attention on the education sector. However, there is still more that is needed to be done in terms of earmarking resources for the sector, if the MDG for UPE by 2015 is to be met.
19. Gender equality is an important goal if Zambia is to achieve the full potential of development. Females lag behind males in education attainment, non-agricultural employment and participation in politics (UNDP, 2003). The ratio of literate females to males (15–24 year olds) declined between 1990 and 2002, while the Zambian education system is characterised by a gender disparity especially at secondary school level and higher, these disparities are later manifested in the labour market where women are disadvantaged. The score of women in formal wage employment in the non-agricultural sector declined from 39% in 1990 to 35% in 2000.
20. The consistent adverse experience felt disproportionately by females in the education, employment and health sectors culminates in a situation in parliament where, despite some improvements even after being a signatory to many international protocols, in 1991 only 6% of the members of parliament were female. This figure rose to 10% in 1996 and to 12% in 2001 but still falls well below the SADC requirement of 30% (UNDP, 2003). A good education system needs money.
21. In order to ascertain whether Zambia will meet this goal first requires an assessment or projection of how much economic growth is required to meet it. Estimating this growth involves two steps. First, it involves calculating the elasticity of poverty to economic growth and inequality. Secondly, using the elasticity estimates, the required growth of the economy is estimated. To estimate the required economic growth, this study relies on the findings of McCulloch et al (2000). Using CSO household surveys of 1991, 1996 and 1998, McCulloch et al estimate the relationship between poverty, growth and inequality. Therefore, some exploration to assess whether Zambia shall attain the MDGs, and the related extent of tax collection in our country, would be a welcome idea considering that (ibid) a $1 a day poverty line would be extremely high in the Zambian context. We therefore hope to undertake a further more in-depth study.
Recommendations
(a)
(b)
(c)
(Submitted to the UK Parliament Select Committee for International Development enquiry, February 2012, by the Methodist Tax Justice Network)
References
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Christian Aid (2009), False Profits: robbing the poor to keep the rich tax free.
Christian Aid (2010), Blowing the Whistle.
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Cobham, A (2005). Tax evasion, tax avoidance, and development finance, Queen Elisabeth House Working Paper No. 129.
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McCulloch, N, Baulch, B and Cherel-Robinson M (2000). “Poverty, Inequality and Growth in Zambia during the 1990s.” An IDS Working Paper No 114.
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March 2012