ZambiaInvest interviewed Jason Kazilimani Junior, Senior Partner and CEO at KPMG Zambia. ZambiaInvest and Mr.Kazilimani discussed the economic growth and development of Zambia, the tax framework and opportunities for investment.
Zambia-Invest.com: According to the World Bank, Zambia is the 7th best country to do business in the Sub-Saharan Africa and the 5th in SADC region. The country’s GDP has been growing at a sustained rate of about 7% over the last few years. How do you explain these economic performances?
Jason Kazilimani: I think it’s all down to a number of factors, but like in most countries, the political environment really drives what happens in the business world and affects the economy.
I think the big change for Zambia came in 1991 with the introduction of multi-party politics and the liberalization of the economy where a number of parastatal companies were privatized.
Some of the effects were negative, in that people lost jobs but overall I believe that it was positive. The economy opened up while a lot of FDI were coming in, initially mostly from South Africa and later on from the rest of the world.
We have had five presidents from 1991 to date and all this without any major turmoil so the politics has been overall very stable and I think this made attracting FDI easier.
In addition to that, during the last 5-6 years, the exchange rate has been relatively stable, apart from what has been happened over the last few months when the Kwacha has really slipped against the US dollar because of a number of factors, including the dollar itself strengthening against all world currencies and low copper prices hence fewer dollar receipts.
Inflation being within single digits has also been a significant factor in building investors’ confidence.
We have also been fortunate in that until two years ago, copper prices were really high, and that attracted a lot of FDI in the mining sector from big mining houses like Barrick Gold and First Quantum Minerals, bringing in millions of dollars in building green field mines, employing people, issuing contracts to local suppliers, and that really helped boost the local economy.
So all these factors have enabled Zambia to be a good investment destination.
In addition to that various measures were undertaken by the government to ease business. For example you can file tax returns electronically such as Pay as you earn (PAYE), income taxes and VAT without having to line up at the tax offices.
The government has also streamlined the various organizations that deal with investment and business in Zambia.
Before we had the Zambia Development agency (ZDA), we had a number of different bodies that have been amalgamated under one roof making it easier for anyone to come and do business in Zambia, to get the right information in the shortest period of time.
ZI: The Zambia Development Agency (ZDA) is working hard to promote investments outside traditional export activities such as mining. Which are in your opinion the hottest sectors for investment in Zambia?
JK: In my opinion the hottest sector for investment in Zambia is agriculture. Over 50% of Zambia’s land is suitable for arable farming, but out of that only about 14% is actually under cultivation.
And this despite the fact that we’ve large reserves of water, about 40% of the southern Africa’s water resources, but that water is not tapped for irrigation or for hydroelectric power generation.
So, agriculture in Zambia has great potential to grow almost every crop which can actually be exported.
Another sector of the Zambian economy with great growth potential is tourism. Everyone knows the Victoria Falls and some of the major game parks like the North and South Luangwa national parks, the lower Zambezi and so on, but there are also a lot of other sites particularly in the northern parts of Zambia.
Lake Bangweulu has white sandy beaches and there is great potential for fantastic golf estates on the shores of the lakes, banks of rivers and so on and so forth.
Zambia issued two eurobonds for USD 1.75 billion over the last three years and our understanding is that a lot of the proceeds of those bonds are going into revamping infrastructure, particularly the roads and the railways and some is going to additional power generation.
At the moment, we’ve been suffering from some power deficits but there are some projects on going both being led by government for example the Kafue Gorge power station and some independent power producers for example CEC who are building a fifty mega-watt power station in Kabompo, or the Olympic Milling Group who are building another one on the Lunzua river in the northern part of Zambia.
Once all these come on stream, which is expected by 2018, particularly the big ones like Kafue Gorge, the current powe deficit will be wiped out.
However, it will not be sufficient because we have two new mines being built which will require additional power: Kalumbila and Sentinel mine, both in the North-Western province.
So there is a lot that can be done in the area of hydropower electricity power generation and that’s another area that investors may want to look into.
Although these mines are predominantly for copper there could be other minerals as well. There are a number of coal deposits which give potential for thermo-power generation.
Then again when you look at the issue of gemstones mines, 20% of the world’s best high-grade emerald deposits are actually found in Zambia. So that’s another area with great potential that is still pretty much unexploited.
All in all I would say tourism, agriculture and infrastructure are areas where investors can really make money in Zambia.
ZI: How conducive to business and investments is in your opinion the current Zambian fiscal framework?
JK: Most of Zambia’s tax regime is actually pretty simple, except for the ones that affect mining and the VAT regime.
The Zambia Revenue Authority (ZRA) has done quite a lot to help simplify tax returns. For example, for corporate taxes entities now do their own assessments.
Zambia has got a lot of double tax agreements with a number of countries, basically all its neighbours, the UK and the main European countries like Germany, France and Italy, to name a few.
This has made business much easier for example to claim back withholding taxes and so on.
ZI: Do you consider the current corporate tax rate of 35% inviting enough for investors?
JK: Probably not. In my opinion that’s too high and a lower tax rate would increase opportunities for investment, and increase tax revenues as well, provided there is compliance.
ZI: VAT issues have been affecting the mining industry in Zambia. Could you clarify what is the current situation?
JK: There are some unique taxes that are specific to Zambia which irritate business, for example reverse VAT: if you are making a payment for supply of services to a foreign supplier of services, the foreign supplier needs to appoint a tax agent in Zambia who will raise a tax invoice on the company paying for that service.
That will enable that company to use that VAT invoice to claim back the VAT in its VAT return. If there is no tax agent appointed, basically the bottom-line is; the VAT must still be paid over to ZRA but the company locally will be unable to claim it back.
The VAT Rule 18 for exports has now been simplified. Previously, in order for companies, particularly those engaged in copper mining, to not charge VAT on their exported goods, they needed to produce documentation proving that the copper had actually reached the ultimate export country.
There has been a revision basically requiring companies to show that goods they have exported have left the borders of Zambia e.g. even by showing that the goods have been received in an intermediate country, en route to their final destination. There has also been a relaxation of other documentation requirements on proof of payment.
So, going forward, it will be easier for mining companies to be able to prove that they should not charge that VAT.
ZI: What are the main tax incentives in place for investors in Zambia?
JK: If you are a manufacturer and invest in the export processing zone, like the Lusaka Multi-facility Economic Zones (MFEZ) or the one in Chambishi, on the Copperbelt, you enjoy a number of fiscal incentives.
There have been some revisions but the original format is that you will be able to import equipment, plant and machinery VAT free and will not have to pay corporate tax for five years.
After that only 50% of your profits are available for tax. After that 75% of your profits are available for tax, such that you only become fully chargeable to tax after you have been in operation for about ten years.
So there are certain pretty good incentives to invest in Zambia but I advise investors to consult properly before actually coming in to understand all the nuances and the nitty-gritty of the Zambian tax laws.
ZI: In addition to taxation and audit, which other services KPMG can provide to investors in Zambia?
JK: We also provide a range of consulting services, for example forensic services, IT advisory and systems implementation, control environment reviews and so forth.
We provide deal advisory services, say, for companies who want to list on the Lusaka Stock Exchange (LuSE) or are looking for financing. For example we recently arranged financing for North West Rail and Grinrod who want to build a railway from the North-Western Province through to Angola.
The advantages we have is that KPMG Zambia is part of the KPMG Southern Africa practice, which comprises Zambia, Namibia, Botswana, Swaziland and South Africa.
We are basically one partnership so if some specialised services are not available locally here at the Lusaka office we can easily source them from, for example, our Johannesburg office which is much bigger. We are therefore able to deal with almost anything as our staff mobility is very quick.
We have serviced a number of clients from here using our resources from other countries and they actually don’t even feel the difference.
ZI: All in all what would be your piece of advice to those eying to invest in Zambia?
JK: I would tell them Zambia is a great place to invest and do business.
It’s a very stable political environment, and that apart from some factors that are not entirely within Zambia’s control like the exchange rates, the economic environment has been relatively stable when you compare with other countries.
I think there is a lot that ZDA has done to streamline inward investment and make investment easy.
Inflation has been stable at single digit for a number of years and GDP has been growing on average of 6% to 7% to every year for the last ten years.
Zambia is a land linked country with eight neighbours so it is ideal to set up a hub here for exports in the region.
So overall I’m positive about Zambia’s economic future and in my opinion it is the place to be.