International Development CommitteeWritten evidence submitted by First Quantum Minerals Ltd

First Quantum Minerals Ltd (FQM) is a Canadian-parented mining company, carrying out mining operations and development projects (through its subsidiaries) in Zambia, Mauritania, Australia, Finland and Peru.

In Zambia:

The Company’s first operation was at Bwana Mkubwa, the first significant private investment in the Mining Industry in Zambia since the days of Nationalization. It was a small 10,000 tonnes per annum copper operation with an associated acid plant. FQM commenced there in 1996.

In 2001, FQM acquired an 80% stake in the Kansanshi Copper Mine, and brought it into production in 2005.

Now Kansanshi is the world’s seventh biggest copper mine. The Government of Zambia owns the other 20% and has representation on the Board of Directors. FQM has just announced its Board’s decision to go ahead with development of a further area in Zambia known as the Trident Development. Initial commitment from FQM is for investment of US$1.7bn with a further US1.4 billion committed to upgrades and improvements at the Kansanshi Mine over the next three years. Given this level of investment, FQM are intensely interested in the stability of Zambia and its practises and processes.

Since 2005, when the Kansanshi Mine came into production, FQM has paid more than US$1.8 billion of taxes in Zambia. Kansanshi has won the large taxpayer of the year award for 2009 and 2010 (awarded by the GRZ). We estimate that our taxes will amount to 10%–12% of all taxes collected in Zambia during 2012, and this proportion is likely to increase exponentially in future years. FQM have been the largest tax-payer in Zambia for some years, and are likely to continue in that role for the foreseeable future.

Currently, FQM employ more than 5,000 employees in Zambia. With the new development, this will reach 7,000 in due course.

FQM have invested substantial amounts in social projects since beginning operations in Zambia:

For example, FQM has funded the renovation of the Solwezi general hospital, renovation of key rural health centres and other health related activities.

Set up and run malaria and HIV/AIDS programmes.

FQM are currently upgrading the Solwezi airport to enable direct international flights and are single-handedly renovating the Chingola-Solwezi road.

FQM will build townships both at Kansanshi and at Kalumbila, in the first instance to provide our workforce with good quality housing and infrastructure, and eventually to form the core of new, sustainable economic and social areas which will endure and thrive beyond the life of the mines.

The full suite of taxes levied on mining operations in Zambia is amongst the highest in the global mining community. We believe that Kansanshi Mine is either the most highly taxed copper mine in the world, or at least one of the most highly taxed copper mines in the world. Despite this, external commentators such as the IMF and World Bank have repeatedly told GRZ that the mining sector as a whole is underperforming in terms of its contribution to the Zambian economy. The measure used for this comparison is taxes paid/gross revenues, and without the Kansanshi taxes, would be very low indeed. This underperformance is a source of instability to FQM, with frequent threats to increase the level of mining taxes, or to implement new, incremental mining taxes, and public opprobrium spread across the entire mining sector.

The core mining tax in Zambia is the Mineral Royalty Tax (MRT). The incoming Patriotic Front (PF) Government doubled the rate from 3% to 6% in its first budget (National Budget 2012). The Industry was told frankly that the reason for this change was that the Zambian Revenue Authority has neither the capacity nor the capability to collect profit based taxes. The MRT only has three components: the tax rate (set by legislation); quantities of metal produced; and the price (a norm price set by reference to transactions recorded on the London Metal Exchange). Hence the only uncontrolled component is quantity (and quality) and even here, there is a belief amongst Zambians that they are being short-changed on quantity (through smuggling).

The MRT is a classic revenue-based royalty. In its nature, it is a regressive tax, which means that it becomes more onerous as profitability declines. Despite that, we do understand what it is for and why it is necessary. If a host nation relies solely on profit-based taxes, it may be some years after production commences before the host nation sees any benefit at all from a mine, and classic royalties ensure that from the earliest production, the host receives some return on its national resources. This contribution should be one of the key guarantees of stability for an investor and as such, should be accepted. There is, however, a different issue when the host nation relies on a royalty for too great a proportion of its rent for the resource. The damage that a high royalty can cause is felt most keenly (by the investor):

when the mine is in its early days, and struggling to reach profitability;

if the mine is a high-cost/low-margin mine in which case a royalty can make the difference between commercial survival and failure; and

when metal prices fall severely. In that scenario, the mine may be struggling to stay in existence and a royalty can be unbearable.

The MRT in Zambia, at 6%, is at a level which is clearly not healthy for the industry. However, we understand that we will not see any mitigation of this royalty until the ZRA are able to collect Profit Taxes more effectively. Zambia is for the most part, a high-cost environment for the mines, and it seems that some may never reach profitability for Profits Tax purposes. Without an MRT, Zambia would receive nothing from those mines—excepting employment and PAYE taxes. A royalty should remain as a component of the tax system, but at a rate of 4% or below. The consequence of maintaining the higher MRT rate in the medium to long term is that the next generation of mine developments, which feature an ore body with much lower concentration of copper than previously, will not be feasible to develop as they rely on extremely efficient processes and tight cost control for their profitability. Zambia risks losing an entire tranche of future development and the taxes and employment that go along with those developments.

There is considerable debate about Windfall Taxes, and whether they have a place in the mining industry. It’s is hard to point to an environment in the extractive industries where a Windfall Tax has been implemented which has successfully increased the host nation’s share of resource rents when prices spike. However, it should be possible to design a profit-based system with a progressive series of rates which recognise profitability. There is always a suspicion that it is just the resource value which increases, whereas the experience of miners is that the cost base increases at the same time, and so it is important to recognise profitability. In this context, it will be vital to monitor new taxes introduced in Chile and Peru with just that intention.

There has also been much debate about revenue-based Windfall Taxes, or Price Participation Adjustments (a stepped royalty). GRZ implemented a revenue-based Windfall Tax in 2008, when copper prices spiked. The way in which this tax was structured left the miners facing marginal tax rates in excess of 100%, at which point their reaction would have been to close the mine. The lesson learned from this tax, which was removed very quickly, is that both resource owner and miners must understand clearly the impact of any tax or levy before it is implemented. Mines involve very long-term investment of huge sums of money and such investments are made with the belief that it will be possible for the miner to recover their investment in a long term, stable environment.

We firmly believe that it is possible to address windfall issues through a properly structured progressive profit-based tax. We point to new taxes introduced in Chile and Peru, which have just such a purpose.

The impact of mining taxes other than MRT in Zambia is under-mined by poor legislation, combined with a lack of capacity and capability in the ZRA. It is known that the IMF have inset a former senior Australian Tax Office official [employee], who is providing in depth training to the Mining Tax group in the ZRA, spread over a period of two years. In addition, the Norwegian Revenue Service has seconded personnel to assist with future mining audits. However, this does not address the underlying problem with weak legislation which does not support or underpin the efforts being made.

The weakness of the legislation is particularly evident in the area of transfer pricing. Here, far too much is left in the hands of ZRA officers who are not equipped either in terms of skills, or in terms of relevant training or of the databases which allow decisions on pricing of goods or services to be compared, for example, across the entire mining community in Zambia, or even of mining operations in other countries. In addition, the legislation lacks cohesion and leaves loopholes. This is not a problem restricted to Zambia, or even the African continent, as the most sophisticated fiscal authorities struggle with transfer pricing issues, but where it is matched with a lack of capability or capacity, then the legislation should close as many loopholes as possible, and restrict the number of subjective decisions left to tax officers. For example, norm pricing (or posted prices) as applied in the calculation of MRT restricts the arguments about what constitutes an arms-length price for the metals; more sophisticated restrictions on intra-group financing than a simple thin-capitalisation test can reduce the use of such financing as a transfer pricing tool.

FQM’s approach to transfer pricing has been to follow market-pricing models, for both goods and services. However, we have moved forward and are just completing a transfer pricing study carried out by one of the major accounting houses which will result in a systematic transfer pricing policy throughout the company, wherever it does business. We have gathered documentation which will be available to any relevant fiscal authority to demonstrate that all of our intra-group transactions are at market-prices and aligned with the OECD guidance on transfer pricing.

FQM supports the concept of full information exchange between relevant authorities. Tax planning should always be carried out in the belief that all transactions are visible to all parties (it is an old dictum that tax planning which relies on something not being found out is poor tax planning). We fail to see any argument against information exchange.

FQM is a strong supporter of the EITI process, and have reported full details of tax payments into the 2008 and 2009 EITI process in Zambia. As EITI develops, we believe that it precludes further complex reporting, and detail can be replicated in the company’s Annual Reports. However, we are concerned that different countries will not adopt EITI, but one of the other similar initiatives which are currently available. One of the valuable features of EITI would be consistent reporting country by country, so that clear comparisons can be made and valid conclusions draw. Using different initiatives which aren’t entirely consistent in format and content will reduce the value of the data considerably.

FQM believes that EITI is not just useful for interested parties to consider the contribution made by a particular miner to a country, but also for the citizens of that country to have a picture of taxes collected which should allow good quality debate within the democratic process on how those taxes have been applied. Opacity, either in the hands of the payer or the payee, is not helpful. In a country such as Zambia, publication of this data will also reveal beneficiaries of a number of advantageous side-deals allowed to participants in the mining industry, and should produce pressure to reduce reliance on this kind of inequitable arrangement.

In the context of transparency, FQM have looked with admiration at the tax reporting undertaken by RTZ. We have also looked at tax data supplied by Anglo-American in the same light. FQM will aspire to that standard, but in its present level of organisational maturity, will choose to rely in the first place on the data that FQM will use for EITI, providing a country-by-country breakdown which will align with external EITI reporting in each country where we do business.

FQM are encouraged by the efforts made by DFID in this and other environments, and specifically in the context of Zambia and of taxation, suggest DIFID consider three potential courses of action:

We have mentioned in the body of our comments some of the aid which Zambia is receiving in the area of tax & tax administration. What is missing presently is any one body taking on an oversight or coordinating role. Many events and initiatives seem to be mis-aligned with others, or proceed with insufficient information, or without sufficient reliable context. There is an important role to be taken on and performed, on behalf of the Ministry of Finance & ZRA, so that the best use is made of various incentives being offered or provided from outside of Zambia. The vision should be for any changes or improvements to be cohesive and to make sense as part of a wider plan.

The second suggestion is that there is also a narrower but vital role. There is currently no evidence that the legislative drafting process to support these changes and initiatives is moving at the same speed or with the same quality of input, and so FQM suggests that DFID may be able to take on that role (using experts as necessary).

The third suggestion is that DFID, working with HMRC and HM Treasury, should explore a systematic process of exchanges and training for ZRA officers. As above, it is important that this is done within a cohesive and rational plan, rather than on a random basis, and DFID could act as a coordinator to bring together all of the opportunities for international training and development.

In summary, FQM places a premium on stability in the countries where it invests considerable funds over a very long period. Consistent with that, FQM seeks to meet its fiscal obligations in such a way that the company is able to be transparent about any of its arrangements, especially cross-border transactions not at arm’s length.

15 May, 2012

Prepared 21st August 2012