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Looking ahead

2014 Budgetarychanges

11 October 2013

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2014 National Budget

Looking aheadCommentary


As Zambia prepares to celebrate 50years of independence in 2014, theGovernment has reiterated its pledgeto achieve more equitable distributionof wealth.

Building on last year’s theme, the 2014budget reflects the Government’sintention to ‘consolidate growth andsocial justice in peace and unity’.

GDP growth falls in line withregional average

GDP growth is projected to be above6% in 2013. This is slightly lowerthan the 7% growth forecast byGovernment last year due to a declinein agricultural output. It doeshowever remain in line with theprojected regional average for Sub-Saharan Africa (excluding SouthAfrica) in 2013, according to theWorld Bank1.

Inflationary pressures remain

Although inflation was targeted at nomore than 6% in the last budget, it hasremained above target at 7% in 2013.This reflects inflationary pressuresassociated with the removal andreduction of the fuel and maizesubsidies earlier in the year.

To address these inflationarychallenges, the Bank of Zambia raisedits policy rate in the first half of theyear from 9.25% to 9.75%.

Further inflationary pressure is likelyto arise from the significant increasein public sector pay, which came intoeffect in September 2013. This couldhowever be countered by theannouncement in the current budgetto remove customs duty on crude oilimports, which may reduce the cost ofpetroleum products and help keep

1 Zambia’s Economic Brief, October 2013, The

World Bank

inflationary pressures in check in2014, if the cost savings are passed onto the end consumer.

Copper output expected toincrease

Commodity prices have generally beenlower in 2013 due to slower growth inthe world economy. Copper prices fellfrom an average of US$7,960 permetric tonne in 2012 to US$7,416between January and September 2013.Despite this, copper productionincreased by 13.2% in the first half of2013 to over 374,000 metric tonnescompared to the same period in 2012.Based on this, copper production forthe year is expected to exceed that oflast year.

Fiscal deficit higher thanexpected

This year’s fiscal deficit of 8.5% ofGDP significantly exceeds last year’sprojected fiscal deficit of 4.3% of GDP.

According to the World Bank, the 2013budget has come under stress due toseveral unplanned expenditures and ashortfall in revenue collection. It saidthe additional expenditures havearisen from accumulated fuel supplylosses, public sector wage awards,higher-than-expected spending on theFarm Input Supply Programme, andthe expected repayment of FoodReserve Agency loans guaranteed bythe Government in 2012.

In addition, the expected shortfall indomestic tax collection of 1% of GDPin 2013 will contribute to theincreased fiscal deficit, with miningrevenue in particular expected to fallshort of earlier estimates. Thisreinforces the need for Government torigorously pursue its diversificationpolicy to reduce the economy’sdependency on mineral extraction.

GDP growth for2013 of 6% belowtarget of 7%

Copper outputrises by 13%despite fall incommodity prices

Fiscal deficit of8.5% of GDPsignificantlyexceeds target

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International reserves

Gross International Reserves stood atUS$2.7 billion as at the end ofSeptember 2013, about US$200million more than this time 12 monthsago. This translates into three monthsof import cover and falls short of lastyear’s target for 2013 of at least fourmonths’ import cover.

Job creation targets for themedium term

As in last year’s budget, theGovernment has reiterated itslaudable aim of creating 200,000‘decent jobs’. Formal sectoremployment rose by over 58,000 inthe first nine months of 2013,although the Government said thisfigure did not reflect the number ofjobs created in the overall economy. Itis not clear whether ‘decent jobs’means formal sector jobs, so it isdifficult to measure whether theGovernment’s job creation target willbe met. Furthermore, with the numberof youths joining the labour forceexpected to more than double to300,000 by 2030, more challengingtargets may be needed in the mediumto long term.

Mining tax largely untouched

Taxation of the mining sectorremained mostly unchanged. This islikely to be welcomed by the miningsector and investor community atlarge as it demonstrates theGovernment’s intention to maintainstability and encourage investment.However, a 10% export duty on semi-processed metals and base metals hasbeen introduced to encourage localvalue addition and employmentcreation.

Foreign gemstone sales halted

In April, the Government bannedforeign sales of Zambian gemstones ina bid to improve revenue collectionfrom the sub-sector and create morevisibility. The development of localauctioning will be welcomed providingthe Zambian producers can realiseworld market prices.

Government says SI 55 will notamount to exchange controls

SI 55 of 2013 was introduced in July2013 to monitor balance of paymentstransactions. The Government hopesthis will facilitate better monitoring offinancial flows between Zambia andthe rest of the world. Government hasreiterated that this does not amount toexchange controls and that theGovernment has no plans to introducesuch controls. However, it is criticalthat the Government implements thispolicy in a manner that is responsiveto the commercial needs of business.

Kwacha rebasing exercise asuccess

On 1 January 2013, Governmentrebased the Kwacha in an exercisedesigned to streamline accountingprocedures. The Kwacha rebasing hasbeen executed efficiently, with K3.7trillion of the old currency having beenwithdrawn from the economy by theend of September, a withdrawal rate of97%. The cash exchange exercise willcontinue until the end of 2015 toenable Zambians, particularly those inrural areas, to exchange their oldcurrency for new.

Internationalreserves at threemonths of importcover

Stability in miningtaxation will bewelcomed

Governmentreiterates thatSI55 does notconstituteexchange control

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Allocation of the US$750Eurobond

Following the successful issue of aUS$750 Eurobond in September 2012,the Government this year outlinedhow it intends to spend this money.The large majority of the money hasbeen allocated to infrastructureprojects including power generation,roads and railways.

Independent sources indicate thatwork has commenced on the variousroad projects due to benefit from theEurobond with a total project value ofUS$210 million.

However, it appears work has yet tostart on any of the power projects dueto benefit. Rehabilitating of railinfrastructure has been held up byprocurement delays.

There have been recent calls by publicbodies to allow them to follow theGovernment’s lead and tapinternational debt markets for funds.As yet, the Government has notindicated publically whether it willallow this to happen. Caution shouldbe urged until a clear debtmanagement strategy is created tominimise escalation of Governmentdebt.

Tourism services to pay VAT

The successful hosting of the UNWTOconference should have raisedZambia’s profile as a touristdestination. However, proposals inthis year’s budget to add VAT to sometourism activities will increase costsfor tourists visiting a country that isalready an expensive touristdestination.

Health personnel shortageslikely to remain

The health sector has been awarded9.9% of the budget for 2014. The

Government plans to continue todevelop regional hubs to decentralisestorage and distribution of medicaldrugs and supplies, and to continueinvesting in district hospitals andimprove services in tertiary-levelhospitals. However, with the publicsector recruitment freeze, it may bedifficult for the Government toaddress the shortage of doctors andnurses that afflicts the sector.

Education spending does notaddress quality issues

Expenditure on education hasincreased by 53%. The World Banknotes that the quality of basiceducation remains ‘poor’, with thepoor, rural youth and girls inparticular disadvantaged in terms ofaccess to good quality basic education.It also notes that although enrolmentin basic education has increased, itwould appear that schooling is nottranslating into skills that aretransferrable to the jobs market.

While building additional educationinfrastructure is important, it remainsunclear how the Government plans toimprove the quality of education inZambia’s schools and colleges.

Progress made onroad improvementprojects

Expenditure oneducationincreases by 53%

Commitment toinvest in districtand tertiary levelhospitals

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Key Tax Changes

Revenue raising measures

In the context of the Government'scommitment to reduce the fiscaldeficit, the majority of the taxmeasures are revenue raising innature. The key measures include:

Excise duty on airtime increasedfrom 10% to 15%

Increase in excise duty on clearbeer from 40% to 60%

A new tax on money transferservices set at 0.2% of the value ofmoney transferred

An increase in property transfertax on land and shares from 5% to10%

Changing the VAT status from 0%to the standard rate of 16% on arange of items including certaintourism and international logisticsservices, and bio fuel products

While it is clearly necessary to controlthe fiscal deficit, it is important thatthe impact of any tax measures isproperly assessed so that it does nothave an adverse or unintended impact.It should be noted that some of themeasures outlined above couldadversely impact the diversificationprogramme and growth prospects.

Increase in tax free band of 36%

The 36% increase in the tax freethreshold from K2,200 to K3,000 permonth is welcome as it shouldincrease lower paid workers’ realspending power given that it exceedsinflation by 29%.

New measures to tackle tax avoidance

A number of measures have beenannounced to enhance the powers ofthe Zambia Revenue Authority and tocounter perceptions of unacceptabletax planning by certain businesses.This is unsurprising in an era ofunprecedented scrutiny of the taxaffairs of multi-national businesses bycivil society bodies. Measures whichincrease transparency and counter taxavoidance, for example, throughinappropriate transfer pricing, are tobe welcomed. However, it isimperative that the new rules arebalanced and practical, and do notimpose an inappropriate level of costsand additional compliance burdens onbusinesses.

Tax raisingmeasures addressfiscal deficit

Strengthening ofTransfer Pricingrules addressesconcerns raised bycivil society bodies

Increase in taxfree allowancemay provide afiscal stimulus byincreasing take-home pay

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Summary

Two years after assuming office, theGovernment has made some positivesteps towards meeting its campaignpromises, most notably through theincrease in minimum wages in 2012,above inflation annual increases to theminimum tax threshold, the creationof new jobs and the initiation ofinfrastructure development projects.

Whilst a significant budget deficit hasarisen this year due to unplannedexpenditure the Government hasannounced tough decisions to reducethe fiscal deficit in the 2014 Budget. Itis essential that this course is held inthe years leading up to the nextgeneral election.

While the Government’s proposeddiversification and developmentinfrastructure plans arecommendable, it would appear thereare constraints and challenges inimplementing these projects in aprudent and effective manner.Echoing the sentiments ofinternational agencies, theGovernment needs to strengthen itscapacity to appraise, monitor anddeliver on projects.

Overall, in our view the outlook for theZambian economy remains positiveand there is no reason why, withappropriate management, thechallenges the Government facescannot be overcome.

Appraisal,monitoring anddelivery ofGovernmentprojects is critical


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The Economy

Looking aheadThe Economy


The theme of the 2014 NationalBudget is ‘Moving forward toconsolidate growth and social justicein peace and unity’. This themesignifies the Patriotic FrontGovernment’s commitment tocontinued economic growth in orderto ensure job creation.

In keeping with the theme of thebudget, the Government has expressedits commitment to ensure allZambians benefit from the country’sgrowth.

Whilst the 2013 Budget mainlyfocused on increasing employmentlevels and improving infrastructure,the 2014 Budget has laid an emphasison the need for fiscal discipline andmaintaining continued growth.

The total 2014 budget is K42.68billion (30.7% of GDP). This will befinanced by K29.54 billion domesticrevenue, grants of K 2.63 billion andthrough foreign and domesticborrowings of K10.51 billion.

The 2014 budget has outlined thefollowing macroeconomic targets:

• Achieve real GDP growth ofabove 7%;

• Create at least 200,000 decentjobs;

• Attain year end inflation of nomore than 6.5%;

• Increase international reservesto over 3 months of importcover;

• Maintain a fiscally sustainablepublic external debt level sothat debt service andamortisation do not exceed 30per cent of domestic revenues;

• Increase domestic revenuecollections to over 21 per cent ofGDP; and

• limit domestic borrowing to 2.5per cent of GDP and contain the

overall deficit to no more than6.6 per cent of GDP.

Economic Performance

Gross Domestic Product

Over the last five years, Zambia hasachieved a sustained high level ofeconomic growth. In 2013, the growthin the domestic economy is estimatedto close at 6% in comparison withprojections of 5% and 2.9% growthrates for Sub-Saharan Africa and theglobal economy respectively.

This rate is slightly below last year’sactual growth rate and the target set inthe 2013 Budget, both of which wereat 7%. The target was not achieved in2013 mainly due to a 7% drop incopper prices and a decline inagricultural output. Despite reductionin copper prices, the mining sectorcontinued to grow. The other keysectors driving the GDP growth areconstruction, manufacturing andtransport and communication.

2013 GDP growthis expected to closeat 6% from 7% in2012

Total budgetexpenditure ofK42.68 billion


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The Economy



Inflation

The inflation rate as at September2013 was 7%. Government’s target wasto restrict inflation to not more than6%. Price increases following theremoval/reduction of subsidies onmaize and fuel were the maincontributors to the higher than targetinflation rate. Increases in civil servicesalaries effected at the end ofSeptember are expected to causefurther inflationary pressure.

Exchange rate

The Kwacha has stabilised against theUnited States Dollar and is currentlytrading at K 5.4 to 1 US$. This reflectsthe improved supply of foreignexchange during the third quarter of2013. However, this represents a 5%depreciation from the start of the year.

In May 2013, Statutory Instrument 55,“Monitoring of Balance of Payments”was introduced. The law facilitatesbetter monitoring of financial flowsbetween Zambia and the rest of theworld. The Government has reiteratedthat this Statutory Instrument doesnot signify the introduction ofexchange controls.

Domestic and internationalborrowing

As part of its macroeconomic targetsin the last budget, government set outto limit the fiscal deficit to 4.5% ofGDP. However, the fiscal deficit isprojected to close 2013 at 8.5% ofGDP. This is the result of expenditureand investment in various governmentprogrammes exceeding the budgettargets and ZRA tax collections fallingbelow expectations.

Government’s external debt stood atUS$3.13 billion as at the end ofSeptember 2013 compared toUS$3.08 billion at the end ofSeptember 2012. The country’sdomestic debt stood at K18.52 billioncompared to K15.12 billion at the endof 2012.

Inflation stood at7% as at September2013

Fiscal Deficit isprojected to closeat 8.5% of GDP


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The Economy



Interest rate

In 2012, the government introduced amonetary policy rate which iscurrently at 9.75% compared to 9.25%in September 2012. The increase inthe rate was considered necessary tomitigate inflationary pressure.

With effect from 1 January 2013, theGovernment capped the marginsabove the policy rate at whichfinancial institutions can chargeinterest. Average bank rates of 16.25%as at September 2013 were relativelyconsistent with those as at September2012. Government still believes thatthese rates are unacceptably high.

Significant regulatory policychanges and other developments

Amongst the significant changes in theyear was the revision in the minimumcapital required by Banks (which hasbeen postponed to December 2013).

The Zambian currency was rebasedwith effect from 1 January 2013. As atthe end of September, 97% of the oldcurrency had been withdrawn fromcirculation.

In April 2013, government removedthe subsidies on maize, fuel andfertiliser. These were consideredineffective because they were not welltargeted to the most vulnerablemembers of the society.

Monetary policyrate increasedfrom 9.25% to9.75% inSeptember 2012


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The Economy



Sector Analysis

Mining

The performance of the sector hasremained positive and accounted forapproximately 78% of export earnings.

The mining sector has attractedinvestment in excess of US$ 8 billionsince 2000 creating 74,000 jobs by2012. Copper production has beenincreasing since 2000 with the sectorrecording an output of over 800,000tonnes in 2012. On account of newmining projects underimplementation, copper production isprojected to reach 1.5 million tonnesby the 2015.

An increase in output is planned as aresult of improved mining productiontechniques and significant investmenton existing mines. The opening of newmines such as Lubambe andKalumbila as well as the ramping up ofproduction at Mulyashi copper minewill also contribute.

In 2013, local auctioning of gemstonescommenced with the governmentencouraging the initiative and urgingsmall scale gemstone miners to usethis market to get better value for theirgemstones. The Government considersthat Local auctioning will improvetransparency.

Tourism

Tourism is a priority sector. Thegovernment’s national tourismpolicies have promoted private sector-driven tourism which has seen anincrease in tourist arrivals into thecountry.

In August 2013, Zambia andZimbabwe successfully co-hosted the19th Session of the UNWTO General

Assembly. The government invested inexpansion of the Harry Mwaanga

Nkumbula International Airport aswell as road infrastructure and socialamenities in Livingstone.

Further infrastructure investment tosupport development of the tourismsector is expected.

Manufacturing

The manufacturing sector accountedfor about 11% of the country’s GrossDomestic Product (GDP) in 2012. Thesector has been growing at an averageannual growth rate of 3% in the lastfive years and is expected to grow by4.3% in 2014.

In 2013, the government allocatedK107 million to the Development Bankof Zambia to support the financingneeds of the industry with focus onSmall and Medium Enterprises.

The government will continue withdevelopment of the Multi -FacilityEconomic Zones and Industrial Parkssuch as Lusaka, Chambishi and Ndolawhich are intended to create over110,000 jobs.

Agriculture

The agricultural contribution to GDPwas approximately 20% in 2012 andhas been growing at an average growthrate of 7.7%. However, growth in 2013was disappointing and contributed toa reduction in the overall level of GDPgrowth.

The total allocation to the sector is7.2% of the 2014 budget. Thegovernment’s focus is on diversifyingthe agricultural sector and alsosupporting small scale farmersthrough the Farmer Input SupportScheme.

Copper productionin 2013 is expectedto exceed 2012production levels

Infrastructuredevelopment is keyto unlockingZambia’s tourismpotential


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The Economy



From 2014, the operations of the FoodReserve Agency will be funded directlyfrom the budget and the governmenthas assumed the Agency’s outstandingobligations to commercial banks.

The government has allocatedK1 billion to secure and maintainstrategic food reserves.

The government has revamped theoperations of Nitrogen Chemicals tosupply fertiliser to the agriculturesector.

Energy Infrastructure

Growth in demand for electricity hascontinued to be a major challenge asdemand outstrips power supply due tothe expansion of the economyespecially in the mining sector.

The growth in demand is estimated tobe between 150 MW and 200MW perannum whilst demand for electricity islikely to increase to 2,400 MW by2015. This is projected to create adeficit of more than 550MW based oncurrent generation capacity.

Part of the Eurobond was injected intothe energy sector, with US$255million channeled to the Kafue GorgeHydro power project as well as furtherinterest in Zesco’s distributionnetwork.

Major electricity projects underwayinclude:

Kariba North Bank Extension(360 MW) to be completed by2013

Kafue Gorge Lower HydroProject (750 MW) to becompleted by 2019

Itezhi-Tezhi Hydro PowerProject (120 MW) to becompleted by 2015.

Water supply and Sanitation

Government allocated K 417 milliontowards the provision of safe waterand sanitation.

Much of the allocation will go towardsincreasing the access to clean and safedrinking water for both urban andrural populations.

Transport and communication

The government has continued withits commitment to investment in theTransport and Communication. K6.07billion has been allocated to the sector.

In 2013, the Link Zambia 8000 andthe Pave Zambia projects werelaunched with 44,000 jobs expected tobe created. In 2014, Government hasproposed to spend K5.13 billiontowards these projects.

Zambia Railways Limited receivedK618.5 million from the Eurobondproceeds to go towards therehabilitation of the rail system. Afurther K339.8 million has beenallocated to the recapitalisation ofZambia Rail system and the TanzaniaRailway Authority (Tazara).

Harry Mwaanga NkumbulaInternational Airport in Ndola hasbeen upgraded to internationalstandards while the upgrade of theKenneth Kaunda, Mfuwe and SimonMwansa Kapwepwe Internationalairports and provincial aerodromeshas been planned.

With respect to telecommunications,the government has proposed toincrease excise duty on airtime from10 per cent to 15 per cent. This willincrease the cost of communicationand ultimately lead to an increase inthe cost of doing business.

Over 44,000jobs expected tobe createdthrough theLink Zambia8,000 projectand the PaveZambia 2000

Recapitalisationof ZambiaRailways andTazara railwaysystem

Upgrade of theHarryMwaangaNkumbulaInternationalAirport


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The Economy



Health

With the setting up of the ZambiaNational Health Strategic Plan in2012, the health sector continued toregister growth. Key milestones in theHealth sector included the following:

● Rehabilitation of 137health facilitiescountrywide. In addition,the rehabilitation worksfor 110 health facilitieshas commenced.

● Launch of theconstruction of the 21new district hospitalsand 114 housing unitscountrywide.

● Signing of contracts forthe construction of 650health posts across thecountry.

● Construction of a 220bed facility at the CancerDiseases Hospital that isexpected to be completedby the end of 2013.

In the current budget, government hasallocated 9.9% or K4.2 billion of thenational Budget compared to K3.6billion allocated in 2012. Of this, K245million of the budget will be spent onconstruction and rehabilitation ofdistrict hospitals in 2014.

Local Government andHousing/Decentralisation

For 2014, the government hasincreased grant allocations to localauthorities by 25% from K498 millionto K 627 million. Further, thegovernment has undertaken to

perform a comprehensive study tooverhaul the fiscal structure which willguide financial allocations to councils.

The above measures are intended toensure that Government’scommitment towards decentralisationpolicy, which has seen the creation of30 new districts in the past two years,is succesful in the long run.

Education and skillsDevelopment

The Government has, allocated 20% orK8.61 billion of the total nationalbudget. This represents a 53% increasefrom 2012 to the education sector.

Of this, K1.28 billion will go towardsthe infrastructure development suchas construction of primary, secondaryand tertiary schools.

Development of the country’s highereducation system remains high on theGovernment’s agenda. Construction oftwo more universities, in Luapula andWestern Provinces, three new teachertraining colleges and five traininginstitutions across the country hascommenced.

The building of school infrastructurein rural areas has been accompaniedby the construction of staff housingunits. The above measures areintended to contribute to an increasein the standards and quality of thecountry’s skills base which is neededto support increased economicactivity.

Increasedallocation to theeducation sectorrepresenting 20%of the total budget

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Looking aheadDirect Taxes


Personal Income Tax

Increase in income tax bands

Changes in the annual tax bands

The annual threshold of exemptincome has increased from K26,400 toK36,000. This represents an increaseof 36%. Thus, an individual earning upto K36,000 will not be liable to anyincome tax on their emoluments.

The increase in the exemptionthreshold has been partiallycompensated by a reduction in theincome tax band which is subject totax at 30%. The income band for the30% tax rate has been reduced fromK34,800 to K25, 200.

The reduction in tax from theproposed measure to a taxpayerearning chargeable emoluments equalto the new annual tax free limit ofK36,000 will be K2,400.

An individual earning K45,600 at thetop of the new 25% band will receivean additional K480 each year.

This means that the maximum annualbenefit to any individual taxpayer isK2,880.

Therefore, these measures will providea greater increase to the take homepay of lower paid workers as apercentage of total income. Thisshould have a positive impact on theeconomy by increasing consumerspending power.

However, the level at which the top35% rate commences is unchanged.Therefore, the failure to increase othertax bands in line with inflation willerode the earnings of the higher paid.

2014 2013

Income perannum

Taxrate

Income perannum

Taxrate

First K36,000 0% First K26,400 0%

From K36,001 toK45,600

25% From K26,401 toK36,000

25%

From K45,601 toK70,800

30% From K36,001 toK70,800

30%

From 70,801 35% From 70,801 35%

Tax free incomeincreased by 36%

No increase in thelevel at which thetop rate of 35%applies

These reformsprovide aproportionatelyhigher increase inthe take home payof lower paidworkers

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Withholding Taxes

Profits distributed by a Zambianbranch

The Minister proposes to introducewithholding tax on profits distributedby Zambian branches of foreigncompanies.

Currently distributions by branches donot attract withholding tax (WHT).

This measure will place foreign directinvestment in branches and Zambiancompanies in essentially the sameposition for tax purposes. In the caseof companies, WHT on thedistribution of profits is triggered bythe declaration of dividends. It is notclear however what the trigger forWHT to be paid by branches will be.

Payments to Non Residents

The Minister proposes to increasewithholding tax rates on payments ofcommission, public entertainment andhaulage and construction fees to non-resident contractors / serviceproviders from 15% to 20%.

This measure seeks to align thewithholding tax rates applied topayments for management andconsultancy fees and royalties to non-residents.

Rental Income

The Minister proposes to reduce thewithholding tax rate on rental incomefrom 15% to 10% which will be thefinal tax.

Landlords will no longer be able toapply turnover tax instead of incometax. Under the current system alandlord whose rental income fallsbelow the current turnover tax

threshold of K800,000 effectivelypays turnover tax at 3%. Therefore,such landlords could face an effectiveincrease in tax of up to 7%.

However a commercial landlord whocurrently pays tax at the top marginalrate of 35% on rental profits willbenefit with a reduction in effectivetax rate by up to 25%.

Interest payments made byProperty Loan Stock Company

Interest payments arising to Zambiaresident investors on loans ordebentures of a property linked unitpaid to Zambia investors in anyproperty Loan Stock Company listedon the Lusaka Stock Exchange will beexempt from withholding tax.

This measure is intended to increaselocal investment and stimulate theZambian listed property sector. Ifsuccessful, this should createadditional employment opportunitiesfor local people in the constructionsector.

Winnings from gamblingactivities

The Minister proposes to introducewithholding tax on winnings fromgaming, lotteries and betting at a rateof 20% as a final tax.

The above measure has beenintroduced to broaden the tax basebecause gambling winnings arecurrently free of tax.

This measure is likely to increase theadministrative burden on businesseswithin the gambling sector

Introduction ofwithholding taxon winnings fromgamblingactivities

Increase inwithholding taxrates on paymentsto non-residentsfor commission,publicentertainment feesand non-residenthaulage andconstructioncontractors

Reduction inwithholding taxrates from 15% to10% on rentalincome. This willnow be the finaltax but landlordswith relatively lowturnover will nolonger be able toapply turnover taxat a lower rate

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House Keeping Measures

Amendment to redefine incomearising from share options

We understand that this measure willprovide specific rules for the taxationof employee share option schemes.

The current provisions included in theIncome Tax Act only address thetreatment of ZRA approved shareoptions schemes. This measure isintended to provide better clarity onthe tax treatment of employee benefitsarising from unapproved share optionschemes.

Amendment to the Pay As YouEarn (PAYE) Regulations

The following measures are proposedin respect of PAYE:

The requirement to submitannual employer’s PAYEreturn is to be removed.

Currently, all employers arerequired to file both monthlyPAYE returns together with anannual PAYE return (FormP18) after the end of the taxcharge year. This measureshould result in a reduction inthe administrative burden forbusinesses.

The Minister has proposed:

The introduction of arequirement to remit tax on amonthly basis by Zambiancitizens who are employed byinstitutions that fall under thecategory of DiplomaticImmunities and PrivilegesAct, such as the UnitedNations and who are required

to self-account for tax on theiremoluments.

Currently, such individualsaccount for tax on a quarterlybasis. This amendment willresult in additionaladministrative burden andaccelerate the payment of taxfor those concerned.

Enable a taxpaying agentacting on behalf of a principalto sign the monthly PAYEreturns. Currently, the PAYEreturns can only be signed bythe principal.

Anti-Avoidance provisionsrelating to the Transfer PricingRegulations

Measures are to be introduced tostrengthen existing anti-avoidanceprovisions and to enable the Ministerof Finance to prescribe TransferPricing documentation rules.

ZRA information gatheringpowers

It is proposed that the CommissionerGeneral of the ZRA will be grantedadditional powers to access any type ofinformation required for tax purposesheld by legal practitioners,accountants and financial institutions.

Effective date

All of the above measures will takeeffect from 1 January 2014

Transfer Pricingdocumentationrules to beintroduced

CommissionerGeneral grantedpowers to accessinformation heldby legalpractitioners andaccountants

Tightening oftransfer pricingrules reflects anincreasing focuson the taxstructures ofmultinationalgroups in Zambiaand on aworldwide basis

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Property Transfer Tax

The Minister proposes to increaseProperty Transfer Tax (PTT) from 5%to 10%.

This measure will impact bothbusinesses and individuals as theburden of tax will double on thetransfer of any land, property, andshares.

Unlike capital gains taxation PTT ispayable by reference to the openmarket value or nominal value of theassets, whichever is greater. Whereassets subject to PTT are purchasedand sold frequently within a shortperiod of time, the transactions willresult in a high effective tax rate asthere is no deduction for the purchaseprice and transaction costs.

This could reduce returns for dealersthat trade in private property andunlisted equity stocks.

Effective date

The above measure will take effectfrom 1 January 2014.

Property TransferTax on landproperty andshares will doubleto 10%

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Looking aheadIndirect Taxes


VAT

Standard rating of goods andservices that were previouslyZero-rated

The Minister proposes to expand theVAT base by reclassifying supplies ofthe following categories of zero ratedgoods and services to the standard -rated category:

Ancillary services provided ata port of export;

Green gel;

All distinct tourism servicese.g. bungee jumping, gameviewing; and

Pre-booked tourism tourpackages (unless bookedbefore 1 January 2014).

Standard rating ancillary servicesprovided at the port of export couldincrease the cost of exports fromZambia thereby making our exportsless competitive.

Likewise, standard rating touristactivities will increase costs forindividual tourists . This could makeZambia a less attractive touristdestination.

Housekeeping Measures

Zero-rating of Governmentcontributions on co-financedprojects

Currently only purchases paid forthrough the donor funded portion ofany qualifying projects is zero-ratedfor VAT purposes. This measure willextend the zero-rating to cover the

Government’s portion of co-financedprojects.

Procedural measures

There are a number of proposedamendments which when takentogether will enhance ZRA’s authorityto enforce collection. These includeamendments:

To provide for tax and interestto be recovered upondetermination of the findingsby ZRA which are subject to areview before the expiry of thereview period of 30 days;

To empower theCommissioner General toplace a caveat on land untiltaxes are paid; and

To provide for off-setting ofVAT refunds against liabilitiesdue under other taxes.

Other measures

The Minister proposes a number ofother technical measures includingaligning the exemption of VAT on theimportation of goods where rebatesare provided for under the Customsand Excise Regulations.

Effective date

All of the above measures will takeeffect on 1 January 2014.

Change ofcategory for somegoods and servicesfrom zero rated tostandard ratedcategory eg VATat16% on touristactivities

Enhancement ofthe ZRAs powersto collect VAT

Zero rating ofGovernmentscontribution to co-financed donorprojects

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Customs and ExciseLooking aheadIndirect Taxes


Customs and Excise

Excise Duty on Airtime

The Minister proposes to increaseexcise duty on airtime from 10% to15%.

Airtime includes minutes of voicecalls, short message service (sms),multi-media services (mms), internetband width and other similar servicesthat a subscriber consumes on amobile cellular telephone or otherelectronic communication device.

The measure is intended to raiseadditional tax revenues.

This will however increasecommunication costs for bothindividuals and businesses alike andis contrary to Governments vision to

“...increase coverage, access andefficiency in the provision ofInformation and CommunicationsTechnology and meteorologicalservices in order to contribute tosustainable national economicgrowth…” as expressed in the SixthNational Development Plan.

Excise Duty on clear beer

The Minister proposes to increaseexcise duty on clear beer from 40% to60%. This proposed change willimpact clear beer made from barleyand sorghum.

The duty had previously beenreduced to 40% in 2010 to encourageproduction of barley and sorghum toimprove linkages between the farmerand manufacturers of beer with aview to increasing employment forlocal farmers.

If customers are sensitive to priceincreases in this sector, then theresulting reduction in demand forclear beer could negatively impact theZambian farming and brewingsectors.

Levy on money transfers

The Minister proposes to introduce acharge of 0.2% of the value of moneytransferred to a recipient within oroutside Zambia.

As the provision of money transferservices is a regulated activity underthe Banking and Financial ServicesAct, this levy is likely to apply tomoney transfers facilitated by banks,financial institutions, mobile moneyservice providers and otherorganisations that are permittedunder this Act to facilitate thetransfer of money.

The increase in cost of moneytransfers will increase the cost ofdoing business.

Removal of customs duty oncrude oil

The Minister proposes that Customsduty be removed on the importationof crude oil.

The principle objective of thismeasure is to reduce the cost ofpetroleum products. This will only beeffective if these savings are passeddown the supply chain to the finalconsumer.

Increase of exciseduty on talk timefrom 10% to 15%

Increase of exciseduty on clear beermade from barleyand sorghum

0.2% change onvalue of moneytransfers

PwC 18

Looking aheadIndirect Taxes


Change in Import Dutyincentive regime for new ZDAInvestment Licence holders

The Minister proposes to restrict theimport duty incentives previouslyavailable to all ZDA investmentlicence holders. Please see ZDAsection for more details.

Customs duty on copper blister,copper powder and flakes,lamellar structures and flakes

The Minister proposes to introducecustoms duty on copper blister,copper flakes and powder, lamellarstructures and flakes at a rate of 15%.

Export duty on semi-processedmetals and base metals

The Minister also proposes tointroduce export duty of 10% onsemi-processed metals and basemetals. The primary objective of thisis to encourage local value additionand consequently the creation of jobsin Zambia.

However, this may result in anincreased cost of mining productionin the short term if there isinsufficient local capacity to processbase metals.

Procedural measures

The Minister has proposed a numberof measures providing the ZRA withenhanced powers to facilitate efficientand prompt accounting of revenue toenhance compliance among clearingagents and taxpayers for goods heldin bond. These amendments includea reduction in:

the number of days withinwhich goods Removed inBond (RIB) may be enteredfor consumption,warehousing or re-exportfrom 30 to 15 days;

the period within whichgoods may be “entered” from30 to 15 days;

the period after whichwarehoused goods canbecome liable to seizure onexpiry of warehousing periodfrom 30 to 15 days; and

the period for the “Notice ofSeizure” from 30 to 15 daysand the period of forfeiturefrom the date of publicationin the Gazette from 45 to 30days.

The ZRA’s powers to amend exciseduty assessments have also beenincreased.

Other measures

The Minister has proposed anumber of technical measures tofacilitate the electronic lodgement ofcustoms documentation.

These measures should increaseefficiencies in the completion ofcustoms procedures and result inrelative reduction in the cost ofdoing business.

The Minister proposes to modify thebasis of calculating duty for certaingoods including:

Carrier bags; and Selected petroleum products.

The Minister also proposes to updatethe list of approved organizationsthat provide development assistanceto the Government.

Effective Date

All of the above will be effective from1 January 2014.

15% customs dutyon copper powderand flakes

Export duty onsemi processedmetals and basemetals

PwC 19

Looking aheadInvestment Incentives


Incentives under the Zambia Development Agency Act

Streamlining of Tax Incentives

The Minister proposes to amend taxincentives which are available toinvestors, both foreign and local, whopledge to invest US$500,000 or morein a Priority Sector or Product underthe Zambia Development Agency Act(“ZDA Act”).

Currently, the following investmentincentives are available to holders ofinvestment licences, which operate inqualifying sectors:

Zero percent tax rate on dividendsfor 5 years from the date ofcommencement of operations ofthe approved investment;

Zero percent tax on profits for 5years from the year ofcommencement of operations ofthe approved investment. Foryears 6 to 8 only 50 percent ofprofits are taxable and in years 9and 10 only 75 percent of profitsare taxable;

Zero percent import duty rate onraw materials, capital goods,machinery including trucks andspecialized motor vehicles for fiveyears; and

Deferment of VAT on machineryand equipment including trucksand specialized motor vehicles.

The Minister noted that Zambia hasone of the most generous tax incentiveregimes in the region. However,according to some studies certaininvestors have abused the incentives.

In light of the apparent abuse ofincentives, the Minister proposes

sanctions, which may includerevocation of investment licences forthose investors that violate theprovisions under which the incentiveswere granted.

The key considerations under whichinvestment incentives are grantedinclude:

1. The extent to which the proposedinvestment will lead to creation ofemployment opportunities anddevelopment of human resources;

2. The degree to which the project isexport oriented;

3. The impact the proposedinvestment is likely to have on theenvironment; and

4. The possibility of technologytransfer.

Currently the Commissioner-Generalof the ZRA is empowered to withdrawincentives granted for tax on profits ifa business enterprise fails or neglectsto fulfil its pledge for employmentof local citizens.

It would appear that the proposedmeasures may extend the powers ofthe Commissioner-General of ZRA toall investment pledges. Accordingly, ifany of the investment pledges are notmet, then he may be able to withdrawthe tax concessions granted underthen ZDA Act. In addition the ZDAcould also revoke the investmentlicence.

Investors who donot fulfil theirpledges to ZDA toface sanctions orthe withdrawal offiscal benefits

The developmentof MFEZs,Industrial Parkscritical toGovernmentsplans for jobcreation

PwC 20

Looking aheadInvestment Incentives


Alignment of Priory Sectors tothe Revised Sixth NationalDevelopment Plan (“SNDP”)

The Minister proposes to align thesectors declared as “Priority” underthe ZDA Act to the SNDP.

The ZDA Act declares the followingbroad categories as Priority Sectors:

1. Agriculture;

2. Education and skills training;

3. Energy;

4. Health;

5. Information and CommunicationTechnology;

6. Manufacturing and processing;and

7. Tourism.

The SNDP considers the following aspriority sectors for Government:

1. Agriculture, livestock and fisheries

2. Education and skills development;

3. Energy;

4. Health;

5. Infrastructure;

6. Tourism including Arts andCulture; and

7. Water and sanitation.

The alignment may result in theinclusion of infrastructuredevelopment and water and sanitationas Priority Sectors under the ZDA Act.

Import duty exemptions

The Minister proposes to remove thegranting of import duty exemptions

accessed through the ZDA to any newholders of investment licences. Thismeasure will be effective frommidnight 11 October 2013. However,the removal of import dutyexemptions does not apply to licenceholders in Multi-Facility EconomicZones (“MFEZs), Industrial Parks andbusiness enterprises in rural areas.

Under the current investmentincentives, investors are granted anexemption on import duty for a periodof five years on importation of rawmaterials, capital goods, machineryincluding trucks and specialized motorvehicles for five years.

This measure will increase the cost ofinvestment projects in Priority Sectorswhere duty will now apply on certainitems at rates of up to twenty fivepercent.

Housekeeping measures

We anticipate that amendments willbe made to the Customs and ExciseAct and Income Tax Act to align theprovisions of tax incentives accessedthrough the ZDA with the SNDP.

Withdrawal ofimport dutyexemptions formany newinvestment licenceholders

Priority sectors tobe aligned to theSNDP

21

Looking aheadZambia Tax Data Card


Corporate tax rates2014 2013

Standard rate 35% 35%Banks 35% 35%Telecommunication companies

Income not exceeding K250,000 35% 35%Income exceeding K250,000 40% 40%

Farming 10% 10%Income earned from organic fertilizer 15% 15%Export of non-traditional products* 15% 15%Foreign earnings of Sun International Limited 15% 15%All other companies except mining companies 35% 35%

New listings on LuSE** 2% discount 2% discountNew listings on LuSE> 33% shares taken up by Zambians 2% discount 7% discount

Turnover tax levied on business with turnover belowK800,000(excludes income earned from consultancy services, propertyrental, mining and VAT registered businesses) 3% 3%

Advanced Income Tax 6% 6%

Capital deductions***Investment allowance on industrial buildings**** 10% 10%Initial allowance on industrial buildings**** 10% 10%Industrial buildings allowance 5% 5%Commercial buildings allowance 2% 2%Implements, machinery and plant

Used for farming, manufacturing, tourism and leasing 50% 50%Implements, machinery and plant- Other 25% 25%

Motor vehiclesCommercial 25% 25%Non-commercial 20% 20%FarmingFarm improvement/ Farm works allowance 100% 100%

Carry forward of Trading losses No. of years No. ofyears

Non - mining companies 5 5Hydro and thermo power generation companies 10 10

* With the exception of minerals, electricity, services and cotton lint exported without an export permitfrom Minister of Commerce.** Discount applicable to corporate tax rates and only available for the first year.*** Capital allowances are computed on a straight line basis.**** Investment and Initial allowance granted in the charge year in which the industrial building has been putinto use.

22



Mining Companies - Income Tax

2014 2013Company rate

Basic rate 30% 30%Variable profit tax* Up to 15% Up to 15%

Capital deductions

Capital allowance on capital equipment 25% 25%

Trading losses

Carry forward of trading losses No. ofyears

No. ofyears

Konkola Copper Mines Plc 20 20From mining operations 10 10Prospecting and exploration companies 5 5

* Applicable when taxable income from mining operations exceeds 8% of the gross sales.

Payments made by companies carrying on mining operations

Resident Non Resident

Dividend 0% 0%

Interest to any lender

Management fees to Shareholders

Royalties

15%

0%

15%

15%

20%

20%

Haulage and Construction Services n/a 20%

Commissions n/a 20%

Tax Treaties

Canada, China, Denmark, Finland, France**,Germany, India, Ireland, Italy, Japan,Kenya, Netherlands, Mauritius, Norway, Romania, South Africa, Sweden, Switzerland,Tanzania, Uganda, United Kingdom, Yugoslavia*, Zimbabwe*

* These treaties have not been ratified and are therefore ineffective currently**Status of tax treaty currently uncertain

23



Income Tax Individuals

2013Monthly income bands

2014Monthly income bands

Housing benefit taxable in the hands of the employer

Rate at which employees annual taxable emoluments disallowed 30%

Tax on car benefit is payable by the employer at the corporate tax rate

based on the following scale charges:

Engine size < 1,800 cc: K9,000 p.a.

Engine size > 1,800 cc, < 2,800 cc: K15,000 p.a.

Engine size > 2,800 cc: K20,000 p.a.

Income

from

K

Income

to

K

Tax

rate

%

Tax on

band

(maximum)

K

Cumulative

tax on

income

(maximum)

K

First 0 2,200 0 0 0

Next 2,201 3,000 25 200 200

Next 3,001 5,900 30 870 1,070

Over 5,900 35

Income

from

K

Income

to

K

Tax

rate

%

Tax on

band

(maximum)

K

Cumulative

tax on

income

(maximum)

K

First 0 3,000 0 0 0

Next 3,001 3,800 25 200 200

Next 3,801 5,900 30 630 830

Over 5,901 35

24



Dividends from Lusaka Stock Exchange

Dividend income earned by individuals from on shares listed on the LuSE is

exempt from income tax

Withholding Tax

Resident Non

Resident

Dividend 15% 15%

Interest

Interest from a LuSE listed Property Loan Stock

Company

15%

0%

15% / 20% *

15%

Management or consultancy fee 0% 20 %

Royalties 15% 20%

Rent from a source within the Republic 10% 10%

Commissions 15% 20%

Non-resident construction and haulage contractor n/a 20%

Non-resident entertainers/sports persons fees n/a 20%

* withholding tax at 20% will apply to interest payments made to a non-resident

contractor by a person developing a Multi Facility Economic Zone (MFEZ) or an

Industrial Park as well as any person operating a MFEZ or Industrial Park

VAT

Taxable supplies- rate

Supply of goods & services in Zambia 16% / 0%

Import of goods & services into Zambia 16% / 0%

Export of goods & services from Zambia

*services are deemed to be exports only when

physically rendered outside Zambia

0%*

Registration

Threshold K 800,000 p.a.

Payment- due date

Supply of taxable goods & services 21 days following the end of

the VAT accounting period*

25



Repayment- due date

Standard 30 days after submission of a

VAT refund claim

*accounting period typically means the month following the month of registration and

each succeeding calendar month.

Property Transfer Tax (PTT)* 2014 2013

Land (including buildings)

Transfer or sale of mining right

Shares not listed on the LUSE

*PTT is paid by reference to the nominal value or

realised (open market) value whichever is greater

10% 5%

10% 10%

0% 0%

26



Concessions for Priority Sectors

Incentives for companies in Priority Sectors/Multi-facility Economic Zones(MFEZ) or an Industrial Park declared under the Zambia Development AgencyAct:

No tax on profits for a five year period from the date ofcommencement of business operations.

Only 50% of profits taxable in years 6 to 8.

Only 75% of profits taxable in years 9 to 10.

Deferment of VAT on machinery and equipment including trucksand specialised motor vehicles.

0% custom duty on raw materials and capital goods, machineryincluding trucks and specialised motor vehicles for a five yearperiod – restricted to licences granted before 12 October 2013and investors in MFEZs, Industrial Parks and businessenterprises in rural areas.

100% improvement allowance for tax purposes on capitalexpenditure for improvement and upgrading of infrastructure.

Exemption from customs duty on equipment and machineryimported for the development of MFEZ and Industrial Parks.

MFEZ are located in Chambishi, parts of Lusaka, Lumwana andthe Sub-Saharan Gemstones exchange in Ndola.

27



Carbon Tax

An annual carbon tax is payable on all motor vehicles as follows:

Note:

Validity period of the carbon emission tax certificate is 90 days for vehicles intransit and those that enter for short periods only.

Engine size < 1,500 cc K50 p.a.Engine size > 1,500 cc, < 2,000 cc K100 p.a.Engine size > 2,000 cc, <3,000 cc K150 p.a.Over 3,000cc K200 p.a.Vehicles propelled by non pollutant energy sources nil

28



Deadlines and Penalties

2014 Deadlines Penalty Interest

Income Tax- Companies

Provisional tax

Return deadlines:

31 March 2014, 30 June 2014, 30 September

2014 & 31 December 2014 (where applicable)

Payment deadlines:

Within 14 days following the return date

Note:

2/3 of the total tax liability payable by the

final quarter

Final tax return & payment

Deadline: 30 June 2015

Provisional tax:

Late filing of return:

K360 per month or part month

Late payment of tax:

5% per month or part month

Underestimation of tax:

25%





N/A

Late payment:

2% + DR*

N/A

N/A

Late payment:

2% + DR*

Income Tax- Individuals

Final tax return & payment

Deadline: 30 June 2014





Late payment:

2% + DR*

N/A

Withholding Tax (WHT)

Filing & payment deadlines: Within 14 days

after the end of the month of accrual / payment

Payroll (PAYE)

Filing & payment deadlines: Within 14 days

after the end of the month of accrual / payment

VAT

Filing & payment deadlines: 21 days after the

end of the accounting period*

WHT late payment of tax:


WHT late filing of return:


PAYE late payment of tax:


VAT late filing of return:

Daily penalty- higher of K180 and 0.5% x tax

payable

VAT late payment of tax:

Daily penalty- 0.5% x tax payable

Late payment:

2% + DR*

N/A

Late payment:

2% + DR*

N/A

Late payment:

2% + DR

Key

*DR= Bank of Zambia discount rate

** accounting period means the month following the month of registration and each succeeding calendar month

29



Looking aheadNotes


30



Looking aheadNotes


© 2013 PricewaterhouseCoopers Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopersLimited, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separatelegal entity.

The information on this budget bulletin and tax data card is based on the budget pronouncements of 11October 2013. The specific legislative provisions to effect the budget pronouncements are subject toenactment by Parliament. We therefore caution that the information highlighted in this bulletin and datacard may be subject to change. Accordingly, you should confirm the current tax position as necessary.

We emphasise that the information on this budget bulletin and tax data card is generic and may be subjectto update/amendment. Accordingly, you should seek specific advice and should neither act nor refrainfrom acting solely on the basis of the information provided here. PricewaterhouseCoopers Limited, itsaffiliates and/ or network firms shall have no liability for any action taken (or omitted) on the basis of theinformation provided on this bulletin and tax data card.

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