Zambia’s government will roll back contentious mining taxes next week, backing down from a standoff that hit profits and production in Africa’s second-biggest copper producer.

A return to lower levies should be a windfall for foreign miners, including Glencore PLC and Barrick Gold Corp., that slowed operations in Zambia as the taxation dispute raged and global copper prices tumbled. At the same time Zambia’s government, which derives a third of its revenue from the sector, is likely to take a sizable hit to its coffers, making it more difficult to meet development goals.

Zambia’s running feud with these companies has become a litmus test for dozens of African countries seeking to balance compensation for their mineral wealth with conditions that will attract investment.

Mines fuel about half of Zambia’s economy and 67% of exports, according to the Extractive Industries Transparency Initiative, but contribute just 30% of the government’s tax revenue.

In a bid to increase that stake and narrow a yawning budget deficit, Zambia scrapped corporate income taxes in October, but required open-pit mines to pay up to a fifth of their revenue in royalties, up from 6% previously. Underground mines were told to pay 8% royalties, also up from 6%.

Glencore and First Quantum Minerals Ltd. shelved expansion projects worth $1.5 billion. Barrick threatened to close its Lumwana Copper Mine, and overall copper production dropped 10% annually in the first quarter of 2015, Zambia’s central bank said.

As of July 1, the government is expected to revert to a 30% corporate tax—which many companies avoid because they say they aren’t profitable—and softer royalties of 9% on open pit mines and 6% on underground operations.

“We listen very, very well to the mining industry,” Christopher Yaluma, Zambia’s mining minister, said at a copper industry conference earlier this month in Zambia’s capital. He added the negotiations had included “some not very, very lovely notes,” from mining executives.

But one point of contention remains unresolved.

The Chamber of Mines of Zambia says major copper miners are owed nearly $800 million in value-added tax refunds stretching back to 2013. “Clearly it’s unhelpful, there’s no doubt about that,” said John Gladston, head of government affairs for First Quantum in Zambia. He said First Quantum is owed about $250 million in VAT refunds.

Steven Din, chief executive of Konkola Copper Mines PLC, a subsidiary of Vedanta Resources PLC, said the withheld VAT costs the company about 16% on everything it produces. That means Konkola’s smelter has been operating well below capacity, said David Paterson, the company’s vice president of local economic development.

Still, Mr. Din said the mining industry’s relations with Zambia’s newly elected government are improving. “A lot of good work has been done,” he said.

President Edgar Lungu, who inherited the tax dispute when he was elected in January, made resolving the clash a priority. In his maiden address to his cabinet, Mr. Lungu directed the Zambia Revenue Authority to expedite talks with miners and resolve the impasse.

Mr. Banda said that the chamber would continue to discuss taxation changes with the government, including a request that open pit and underground mines differently. “There’s no logic to it,” Mr. Banda said.

The Wall Street Journal

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