Modelling the Impact of Royalty Tax on the Mining Industry: A Case Study of Zambia

Abstract

Mineral taxation is an important exercise that every government must undertake to raise revenue. The implemented tax system must strike a balance in meeting revenue needs for both the government and mining firms. Thus, before any tax system is implemented it must be modeled for its merits and demerits both on the side of the government and mining houses. This is to instigate a win-win situation between the two parties. This paper models the impact of introducing or increasing the royalty based tax on the Zambian mining industry using Lumwana and Kansanshi Mines as case studies. The impact has been modeled using the methodological framework of the breakeven analysis which is based on linear equations of total revenue and total cost. This paper addresses the modeling of two traditional royalties namely, ad valorem and unit based. It is concluded that introducing or increasing these royalties on the mining industry increases the cutoff grade which stimulates the use of high grading mining technique. This technique generates economic and technical devastating effects on the mining industry and government. It was concluded that mineral royalty is not an equitable tax system due to the different mineralization of orebodies. The result of this research suggests that governments should diverge from regressive tax schemes to ones which are mildly progressive by implementing either a hybridized or variable rate royalty system.