Slide 1
CONTRACTUAL AND FISCAL TERMS APPLIED IN TANZANIA MINING
SECTOR
Presented by : Eng .Gilay Charles Shamika,Senior Engineer &
GemologistTanzania Minerals Audit Agency (TMAA)
([email protected],[email protected])
2DAYS WORKSHOP AT Mount Meru Lodge, Arusha, Tanzania: 15th -
16th JULY, 2014 HOSTED BY GLOBAL ACADEMY FOR MINING,OIL & GAS.
GENERAL THEME: DEVELOPMENT OF THE LEGAL AND REGULATORY FRAMEWORKS
IN MINING, OIL AND GASGeneral overview of the mining sector in
TanzaniaMining industry as a Cross-Cut sectorTimelines events led
into current legal, regulatory and fiscal regimeFiscal and
contractual terms used in Tanzania Mining Sector General benefits
of the Mining Industry in Tanzania PRIMA COBWEB concept as an
integral for development of Mining SectorChallengesThe
way-forward
OUTLINERegarded to be the countrys first priority and engine to
drive the country from developing country to the developed country
come 2025.Tanzania National vision 2025, predict the sector will
contribute to the tune of 10% of the GDP. The discoveries of
natural gas and oil, have increased the courage of the Government
to accomplish that vision of 2025Currently the sector contributes
3.3% GDP as of 2013.FDI is on the average of 482 USD Million per
year (average from 1997 through 2009)Tanzania ranked 4th among gold
producers in Africa and soon it will be ranked among oil/gas
producers as of now the discoveries have reached the sum of 46.5
trillion cubic ft. Availability of uranium measured and indicated
resources, is another credit to the sector taking consideration of
the contentious minerals nature..
GENERAL OVERVIEW OF THE MINING INDUSTRY IN TANZANIAYEAREVENTLate
1980sSector characterised by state control1990sThe importance of
restructuring emerges, National investment promotion policy and
National promotion and protection Act were enacted.Mid 1990sThe
government made economic reforms and mining sector was not
exceptional. 1994Mining sector policy framework established with
the supreme objective of revising mining laws and restructuring
regulatory frameworks, fiscal regime and divesting state-owned
mining companies.1997Mining policy of 1997 passedTIMELINE EVENTS
LED INTO CURRENT CONTRACTUAL AND FISCAL TERMS IN TANZANIAYEAREVENT
1997Financial law amendment Act 1997Tanzania investment Act,1997
was enacted1998The Mining Act,1998 was enactedAmendments to Foreign
exchange Act,19922006The Gvt conducted mining contract review to
access the inadequate contribution of mining sector. The mining
companies accepted to pay $200,000 annually to local
councils.2007Formation of the Presidential Mining Review
committee2009Mining policy of 2009; and2010Existing Mining
Act,2010TIMELINE EVENTS LED INTO CURRENT CONTRACTUAL AND FISCAL
TERMS IN TANZANIA(contd)MINERAL DEPOSITS IN TANZANIA(Countrys
Wallet of Minerals)
MINERAL OCCURRENCE AND MAJOR MININGPROJECTS IN TANZANIAThe
mining sector in Tanzania is governed by :5 Policies6 Regulations,
and18 Acts/lawsOn top of that, the mining sector is divided into
two types:MDAs operators/mining companies andNonMDAs (license)
operators/mining companies.Debate: Any importance of narrowing to
reduce bureaucracy or widen again for more participation?
MINING SECTOR AS A CROSS-CUT SECTORBulyanhulu in Kahama owned by
Bulyanhulu Gold Mine Limited. Contract signed on 5th August
1994;Golden Pride in Nzega owned by Resolute Tanzania Limited.
Contract signed on 25th June 1997;Geita Gold Mine in Geita owned by
AngloGold-Ashanti from South Africa. Contract signed on 24th June
1999;North Mara in Tarime owned by North Mara Mine Limited.
Contract was signed on 24th June 1999;Tulawaka in Biharamulo owned
by Northern Mining and Pangea Minerals Ltd. Contract signed on 29th
December 2003; andBuzwagi in Kahama owned by Pangea Minerals
Limited. Contract signed on 17 February 2007.
MDAs WITH EXISTING CONTRACTUAL AND FISCAL REGIMETypes of MDAs
:Ad hoc Agreement: singular, specific for a certain mineStandard
Model Agreement: Uniform, applied for all minesProforma Agreement:
reviewed continually until when seems it is perfect to be applied
and used as a model.
For Tanzania Section (10)(1) Confer a power to the Minister to
enter into agreement. Mining Act,2010 insists Standard Model
Agreement.The mining operators without MDAs, are covered by
conditions of the license and existing legislations.
TYPES OF MDAs APPLIED IN MINING WORLDWIDE
CONTRACTUAL TERMS WHICH NEED THOROUGH ATTENTION IN
MDAsContractual Terms MeaningEconomic equilibrium clauses (
pay-back clause)These require the government to compensate the
investor should the government enact any legislation or take any
administrative measures that aggravate the costs of the
project.Freezing clauses (not negotiable)These ensure that the
existing legal-fiscal regimes at the time of signing contracts do
not change over the lifespan of the project and that subsequent
legislation does not apply to the relationship between the parties
to the agreement. Stabilization clauses:( negotiable/free will
clauses)Stabilization clauses act as a contractual insulation
against fiscal legal changes during the lifespan of an agreement.
As a guarantee to profitability and stability of their projects,
investors normally insert a stabilization clause providing that the
terms will not be altered unilaterally or terminated by the State.
These are normally carried over the entire lifetime of the
agreements. Application of stabilization clauses limit powers to
seek more benefits from the contracts in the case of anomalies or
upward surging of minerals prices.
FISCAL TERMS WHICH NEED THOUROUGH ATTENTION IN MDAsFiscal Terms
MeaningUnredeemed Capital Expenditure: If a mining company has
incurred capital expenditure that is greater than the amount needed
to cancel all of its taxable income for the year on a particular
mine, then the balance of capital expenditure not offset for tax in
that year is carried forward for offset against the income of the
next year. The peculiarity is that the balance of unredeemed
capital expenditure is increased at the start of the next year by
15% as if this sum had been spent on additional capital goods even
though this has not actually occurred. As a result the date on
which the first tax is due from a mining operation can be deferred
for a considerable period of time. This additional unredeemed
capital expenditure has been cancelled in some recent mining
contract renegotiations as the deductions have no economic
substance. It seems likely that it was introduced at a time of high
inflation to make sure that the real value of the amount expended
was offset against income apparently worth more in a later
period.Capital Expenditure Ring Fencing: A company is only allowed
to deduct the cost of capital expenditure at a particular mine
against the income of that mine when calculating its tax bills. As
a result it cannot deduct the cost of capital expenditure at
another mine that is not yet making money from the income of the
mine now generating profits.
FISCAL TERMS WHICH NEED THOUROUGH ATTENTION IN MDAsFiscal Terms
MeaningRoyaltyEffectively a sales tax charged on the market value.
How this market value is calculated will determine the actual
royalty a company pays. Companies might claim to sell gold to their
buyers at a lower price (called the reference price) than the price
of gold on international commodity exchanges, which means they
would pay a lower royalty. It is therefore important for mining
agreements to have proper market pricing arrangements in place.
Corporate Tax: The tax paid by companies on their taxable profits.
Taxable profits are those declared in their accounts (see net
profit before tax) but some adjustments are usually made for tax
purposes. The most important by far is to add back to that figure
for net profit before tax the depreciation charge and to then
deduct from the resulting sum the capital allowance claim made for
expenditure made on capital goods. Since the expenditure on capital
goods often exceeds the depreciation charge it is common for
taxable profits to be lower than accounting profits and for the
actual tax due to be less than that which is apparently appropriate
when multiplying the declared net profit before tax by the
published corporation tax rate. Income Tax ,2004 incentives related
to Mining Sector in Tanzania: Mining companies to redeem funds
dedicated to environmental protection in implementing written
conditions set out by the Income Tax commissioner, under Section
15(3).Deduction of withholding tax from the payment made for
management and technical services provided by resident companies,
under Section 83(1)(a).The amount of tax is 5% stated under
paragraph 4(c) of the first table of the Income Tax
Act,2004.Deductions for services provided by non-resident companies
fall under Section 83(1)(b) and is 15%.
Tax depreciation rate for exploration and mining equipments
follows Wear & Tear Deduction Allowances as per Schedule III of
the Income Tax Act,2004 100% capital allowance in the year of
development expenditure in the computation of that years taxable
Income as stated in the Act.
Note: Additional Capital allowance of 15% for MDAs signed before
July 1,2001 applies but after July 1,2001 not apply. In 2006 some
companies accepted to remove such provision in their MDAs.
Income tax ,2004 incentives related to Mining Sector in Tanzania
(contd)Value Added Tax :Persons and institutions clarified in
Section 11,Cap 148 Revised Edition of 2006, are entitled in VAT
relief. Mining companies are subject to VAT especially on imported
goods which do not receive customs duty relief. This implies
companies are required to pay VAT and redeem them as per
procedures.
Fuel Levy : Only earlier MDAs holders received exemption from
fuel levy which exceeds $200,000 per annum, the rest pays through
price under Road & Fuel Act, chapter 220 and Gvt Notice of
February 5, 1999.
Local Government service levy : Local Government Finances
Act,1982 requires payment of 0.3% to Local councils from mining
companies. 0.3% of turnover for Non-MDA operators and $200,000 per
annum for MDAs operators.
Income Tax,2004 incentives related to Mining Sector in Tanzania
(contd)Customs duty: The exemption is offered to contractors and
mining companies but depending on the mining stage operationsStamp
duty: Duty rates are referred to Stamp duty Act chapter 189.
Excise duty: Exemption is offered to mining companies on
imported or domestically purchased oil only for mining
operations.
Points to Ponder: Do we still need these incentives for the
incoming investors.? Are all incentives or some are loopholes need
to be bridged .
Taxation/Fiscal termRates/Description VATVAT relief granted to
both import & domestic purchase for MDAs and PL
OperatorsCorporate tax30% on taxable profit RoyaltyOn gross value (
5% for rough Gemstones , Diamond and Uranium, 4% for Gold, Copper,
Silver and Platinum group Metals, 3% for building mineral, 1% for
Cut &Polished Gems)Mgt fee(Non resident)3% for MDA and 15% for
non- MDA operators charged on payment made.Mgt fee ( resident)3%
for MDAs and 5% non-MDAs operators charged on payment charged.
However for MDAs operator, if mgt fee is greater than 2% of
operating cost, the applicable rate shall not exceed 20%.Fuel
levyCharged at TZS 200 per litre and claim refund after
consumption.SUMMARY OF FISCAL RATES APPLIED IN TANZANIA MINING
SECTOR17Taxation/Fiscal termRates/Description Excise duty:
Exemption is offered to mining companies on imported or
domestically purchased oil only for mining operations.Import duty
on capital goods0%Ring fencingMine to mineLocal Government service
levy0.3% of turnover for Non-MDA operators and $200,000 per annum
for MDAs operators.Import duty5% charged on cost, insurance and
freight value after 1yr anniversary.Capital allowanceMining
companies are granted 100% capital allowance on prospecting and
development capital allowance.WHT on technical services-resident
companies3% for MDAs and 5% for non-MDAs operators changed on
payment made.WHT on technical services-non resident companies
3% for MDAs and 15% for non-MDAs operators changed on payment
made.
SUMMARY OF FISCAL RATES APPLIED IN TANZANIA MINING
SECTOR18Benefits2013Gold exports1.79 USD billionTanzanite + Diamond
exports50.53 USD millionRoyalty from all large scale mine72.90 USD
millionMining contribution to GDP3.3% ( as of 2013) FDI inflows482
USD /year (average from 1997-2009)Mining sector local goods and
servicesSpent USD 520.67 million (2012)Job creation and technology
transferLocal economic developmentForeign exchange earningsSource:
MEM Budget speech 2014/15BENEFITS OF EXTRACTIVE INDUSTRY IN
TANZANIAPRIMA is the abbreviation of POLICY, REGULATION,
INVESTMENT, MDAs and ACTSGenerally the Mining sector is built on
these I called PRIMA or Five Foundation Blocks of Mining sector.
Nothing can be said in mining sector which is not inclusive in
PRIMAThe experience shows that non-linkage of PRIMA is the source
of resource curse or dutch disease.Currently Tanzanian Mining
Policy is believed to be the best in Sub-Sahara region. But it lack
the connection with the best signed MDAs to the extent that the
Government has initiated the negotiations to review and do
recommendable reforms bilaterally.That means the Mining sector need
comprehensive approach which links all PRIMA and make it like
cobweb where any loopholes whether deliberately or incidental
created will be captured PRIMA COBWEB!!
PRIMA COBWEB CONCEPT AS AN INTEGRAL OF FUNDAMENTAL DEVELOPMENT
OF MINING SECTOR CONTRACTUAL , FISCAL ,LEGAL AND REGULATORY
FRAMEWORKS Like a cobweb, where is not easy to find the starting
point to untie the cobweb,Prima concept address the same logic,
that mining sector is nothing rather than PRIMA comprehensive
linkage. PRIMA Cobweb do not provide contractual and fiscal regime
loopholes. The linkage provide balance and checks.The policy and
Act may be appropriate but if MDAs are inadequate , then the
importance of good policy and Acts are irrelevant. Similarly, if
MDAs are good but policy and Acts are not, non-MDAs operators, will
relax.Prima is the five foundation blocks of mining industry, and
the panacea of resource curse or dutch disease.PRIMA COBWEB CONCEPT
AS AN INTEGRAL OF FUNDAMENTAL DEVELOPMENT OF MINING SECTOR
CONTRACTUAL , FISCAL ,LEGAL AND REGULATORY FRAMEWORKS The
challenges or lessons learnt from existing MDAs among others
are;Unnecessary incentives which led to the late-reap of benefits
from mining sectorConditions and terms used, do not provide room
for reforms (lock-in-effect)Non-linkage of PRIMA and different
approaches indealing with MDAs operators and Non-MDAs operators.Too
much expectations by citizens to benefit from the mining sector
caused by lack of knowledge on how mining companies operates
intensive capital.
CHALLENGES OF CONTRUCTUAL AND FISCAL REGIME IN MINING SECTOR IN
TANZANIAThe way-forward for the lessons learnt in existing
MDAsPrima cobweb considerationApplication of the standard model
MDAsOngoing negotiations to amend existing MDAs contractual and
fiscal loopholesRequirement for free carried interest and state
participationMDAs being subject to the periodic review by parties
after every five yearsGovernment to strengthen its capacity to
negotiate financial terms and conditions of MDAs, and to administer
tax system and agreements, to deal with transfer pricing issues,
and to audit the results.
THE WAY FORWARDThe way-forward for the lessons learnt in
existing MDAsTransparency and accountability in contracts :
Tanzania joined EITI on 16thFebruary,2009 to accept the condition
of transparency and accountability in running the extractive
industry ,and since then TEITI reports on shows that the
transparency ,accountability and revenues accrued reports between
government and that declared by operators are almost equal with
minimal discrepancy.So far 10% of minerals deposit ,is the only one
which has been tapped, 90% of known minerals resources are still
untouched. This means the country still has potentials to benefit
from minerals taking considerations of the above Government efforts
to run the sector responsibly.Mining sector is not sustainable by
itself, therefore can not bring sustainable development by itself.
The mining sector is for feeding traditional economic contributors
(engine as advocated by Prof.Muhongo) to make them robust and
become sustainable when mining sector reaches it closure time.
Therefore the multiplier economic effect from mining sector need to
be properly channeled.
THE WAY FORWARD (contd)The way-forward for the lessons learnt in
existing MDAs ;Government as a whole has done exemplary review and
negotiations are underway to bridge the gaps.It is the duty of
public and we academicians, professionals and NGOs to admit the
efforts made by the Government and help in one way or another to
excel those efforts rather than misleading the public.Lets keep
discussing in good faith for our country.
THE WAY FORWARD ( contd) THANK YOU FOR LISTENINGCLIMB MOUNT
KILIMANJARO THECLIMAX OF AFRICAAND
BUY TANZANITE
THE UNIQUINESSOF TANZANIA
THANK YOU FOR LISTENING