Tax regimes in the
mining sector
Kenya, Uganda, Tanzania
www.pwc.co.uk
24 September
2015
PwC
Overview of mining lifecycle
Entry Ongoing Exit
Key issues:
Setting up legal entity to
acquire mining rights
Branch vs Subsidiary
(local company)
considerations
Acquisition of mining
rights
Key issues:
Deductibility of
prospecting and
extraction expenditure
Recoverability of tax
losses
Funding- debt vs equity
Royalty payments to
government
Withholding taxes on
services obtained
Tax filing obligations
Key issues:
Disposal may be direct
or indirect
Direct disposal involves
sale of the mine asset
Indirect disposal
involves transfer of
shares in a company
holding a minining right
Different tax rules apply
for each disposal
Winding up and
deregistration
Slide 1September 2015
Tax overview of the mining sector in East Africa
PwC
Mining landscape
Slide 2
September 2015Tax overview of the mining sector in East Africa
PwC
Kenya
In summary
Slide 3
Kenya remains relatively unexplored attractive target
Kenya Government is overhauling mining laws to encourage
investment.
Theres increasing interest from the Kenya government, foreign
investors and other stakeholders.
2014 saw a complete rewrite of the tax schedule on mining in
the Income Tax Act.
There has been a recent trend by the government to increase the
royalty rates on minerals
New Mining Act passed on 16 September 2015 (Awaiting
presidential assent). Key measures relate to reducing mining
licencing requirements, better framework for dispute
resolutions and clarity on the level of government control on
the mining sector.
September 2015Tax overview of the mining sector in East Africa
PwC
Tanzania
In summary
Slide 4
Mining in Tanzania is somewhat more developed with mining
contributing circa 4% of GDP and it is Africas 4th largest miner
of gold.
There was an increase in royalty rates and change to the royalty
base in 2010.
Mining Development Agreements (MDA) include guarantee of
fiscal stability.
MDAs are only issued for investments of > $100m.
September 2015Tax overview of the mining sector in East Africa
PwC
Uganda
In summary
Slide 5
Ugandas mining industry remains relatively unexploited
despite the existence of significant commercially viable
reserves.
World Bank funded survey in 2014 found western and central
regions to be most mineral rich.
Variety of prospective and exploration licences governed by
Mining Investment Code.
No separate tax mining code for Uganda but as recently as July
2015, mining has come within the petroleum tax code.
September 2015Tax overview of the mining sector in East Africa
PwC
Entry considerations
Set up Ongoing Exit
Slide 6
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Choice of
legal entity
Foreign investors may set up local branches of a foreign company or register
a local company.
Dependent on investor specific circumstances.
Minimal tax considerations between branches and companies.
Common
entry
options
Mining licence right obtained directly from the government
Purchase shares in a company holding a mining right.
Taxes on
entry
No VAT on purchase
of shares.
Stamp duty is
payable but the
amounts are
minimal.
No VAT on purchase
of shares.
1% stamp duty on
purchase of shares
Minimal stamp duty
on issuance of shares.
No VAT on purchase
of shares.
Stamp duty is
chargeable at 1% on a
purchase of shares.
0.5% stamp duty on
company formation,
capital-raising
activities.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 7
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Expenditure Expenditure on costs
of acquiring an
interest, prospecting
information, farm out
agreement or in
undertaking
operations authorised
under a prospecting
right are allowable.
100% capital
allowances on
prospecting
expenditure in the
year in which the
expenditure is
incurred.
100% deduction for
exploration and
development
extended to
equipment used for
prospecting and
exploration of
minerals or
petroleum.
Deduction for
provision for future
environmental
expenditure.
All expenditure of a
capital nature
incurred in
searching for,
discovering, testing
and winning access
to mineral deposits
is tax deductible.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 8
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Expenditure Capital expenditure
incurred on
operations is
deductible upon
commencement of
production at a rate of
20% over a 5 year
period.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 9
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Ring fencing
of mining
areas
Mining areas are ring
fenced i.e.
Expenditure incurred
in a particular licence
area can only be
offset against income
derived from that
licence area.
A licence area is
defined as the area
that is the subject of
a mining right.
Ring-fencing rules
apply to separate
mining areas
Expenditure incurred
in a particular licence
area can only be
offset against income
derived from that
licence area.
Historically, mining
areas were not ring
fenced but recent
inclusion in
petroleum code calls
this into question.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 10
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Losses Can be carried forward indefinitely based on the licence area (in Kenya and
Tanzania) and generally for Uganda.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 11
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Financing At the early stages before production, equity financing may be better than
using debt.
15% Withholding tax
is payable on interest.
Interest restricted
where debt equity
ratio exceeds 2:1.
Deemed interest on
related party interest-
free loans provided is
subject to 15%
withholding tax.
10% withholding tax
payable on interest.
Interest restrictions
apply where the debt
equity ratio exceeds
3:7.
Risk of assessment of
deemed interest on
interest free loans
and potential
application of
withholding tax
although a general
acceptance that is not
appropriate during
the exploration stage.
15% withholding tax
payable on interest.
Interest restrictions
apply where debt
equity ratio exceeds
1.5:1.
There is guidance on
what constitutes
foreign debt and
foreign equity within
the law.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 12
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania(note) Uganda
Withholding
tax on
payments to
non-
residents
5.625% withholding
tax on payments to a
non-resident sub-
contractor without a
permanent
establishment in
respect of service fees
for mining operations
This is a final tax.
20% withholding tax
on payments to a
non-resident
person for
management/profess
-ional/training fee.
This is a final tax.
15% withholding tax
on payments to non-
residents in all
circumstances.
Challenged in the
courts under
definition of source
rules.
Withholding tax of
15% or reduced rate
per DTA applies on
payments by resident
persons to a person
outside Uganda.
Under the UK treaty
the rate remains at
15%.
Note15% withholding tax on natural resource payments. Defined as any payment, including a premium or like
amount, for the right to take natural resources from land or the sea or calculated in whole or part by reference to the
quantity or value of natural resources taken from land or the sea.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 13
September 2015Tax overview of the mining sector in East Africa
Kenya TanzaniaNote Uganda
Withholding
tax on
payments to
residents
For resident
persons, withholding
ranges from 3% to 5%
- not a final tax.
5% withholding tax
on technical service
payments to
residents.
Technical services
definition is extended
to include
management,
professional and
consulting services
This is not a final tax.
Withholding tax of
15% on interest and
dividends.
NoteThe tax authority has argued that allowable corporate tax deduction for services is the net amount where the
contract for services includes a gross up for withholding tax.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 14
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Value added
tax
Exemption granted
on taxable goods,
excluding motor
vehicles, imported or
purchased for direct
and exclusive use in
prospecting or
exploration.
Certain
administrative
procedures and
approvals are
required to effect the
VAT exemption.
Consequence for
suppliers is that VAT
on their expenditure
becomes a cost.
VAT registration
available if intention
to trade can be
demonstrated.
Mining companies
qualify for VAT
refunds on a monthly
basis, as more than
50% of turnover will
be zero rated.
Investors in the
mining and
petroleum
exploration sector can
register for VAT
before starting to
make taxable
supplies.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 15
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Value added
tax
There are intricate
rules on applicability
of VAT on imported
services.
Where no taxable
supplies made (e.g.
prospecting stage),
VAT cost on
imported services
maybe recoverable if
a trade is intended.
Domestic sales of
minerals are subject
to 16% VAT, 0% for
export.
Therefore input VAT
in production phase
maybe refundable but
not straightforward
claim.
There is no
requirement to
account for VAT on
imported services,
unless less than 10%
of the mining entitys
supplies are exempt
(considered unlikely).
There is a three year
time limit for
correcting errors.
VAT reliefs are more
limited under new
VAT Act.
VAT registration
facilitates claiming of
input VAT paid on
imported plant,
equipment,
machinery and
supplies incurred
during the
development phase.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 16
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Corporation
tax
The corporation tax
rate for a subsidiary
is 30% and that of a
branch is 37.5%)
The corporation tax
rate for a branch or
local company is 30%
Mining companies are
subject to a Variable
Rate Income Tax.
A specified formula
applied for purposes
of computing the
variable rate income
tax.
Derived rate is
between 25%-45%.
The tax rate obtained
is applied to the
chargeable income to
compute the
corporation tax
payable by the mining
entity.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 17
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Royalties Royalties payable to
government on sale
of minerals have been
on an upward
trajectory
Currently rates range
between 1% and 12%
a) 1% for industrial
minerals such as
gypsum and
limestone
b) 10% for coal,
titanium ores,
niobium and
rare-earth
elements
c) 12% for
diamonds.
Royalty rates are
applied on gross
values. Examples of
royalty rates are:
5%: Diamonds,
Raw gemstones,
Uranium
4%: Metallic
minerals (incl.
copper, gold,
silver & platinum
group)
1%: Cut and
processed Gems
3%: other
minerals
Royalties are payable
on the gross value of
the minerals based on
the prevailing market
price of the minerals.
Examples of royalty
rates are 3% for
precious metals, 5%
for precious stones
and 3% for base
metals and ores.
The Minister has,
with the approval of
the Cabinet, powers to
waive any royalty
payable on any
mineral from a
particular deposit.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 18
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Transfer
pricing
All entities are
required to undertake
transactions with
related parties at
arms length.
The tax authority is
empowered to adjust
the profits of an
entity where
transactions are
deemed not to have
been conducted at
arms length.
All entities are required
to undertake
transactions with
related parties at arms
length.
Entities are required to
maintain proper
transfer pricing
documentation.
Taxpayers are required
to maintain proper
transfer pricing
documentation
containing the
company details and
transaction details,
agreements and the
pricing methodology
used in determining
the arm's-length price.
These provisions are
often applied by the
Uganda tax authorities
where they are of the
view that a non-
resident person may be
transferring profits
from Uganda.
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 19
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Tax filing
and
payments
Corporate tax returns
filed within 6 months
after the last day of
the entitys
accounting period.
Electronic filing has
been introduced for
all tax returns.
Corporate income tax
is payable in
quarterly instalments
and any balance paid
within four months
after the last day of
the entitys
accounting period.
Corporate tax returns
should be filed within
6 months after the
last day of the entitys
accounting period.
Corporate income tax
is payable in quarterly
instalments during
the accounting period
and any remaining
balance paid when
filing the company tax
return.
Currently only VAT
return can be filed
electronically, and
only for companies
with TRA large
taxpayers office
Self assessment
returns are due by the
end of the sixth
month after the end
of the accounting
year. Electronic filing
is done for all tax
returns.
Tax is payable in
instalments based on
estimated profits.
50% is due by the end
of the sixth month of
the accounting period
and the remainder
payment is due by the
end of the 12th
month. Balance paid
with the tax return
PwC
Ongoing considerations
Set up Ongoing Exit
Slide 20
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Tax assessments It is not uncommon for the tax authorities to issue speculative initial
tax assessments. Assessments following a tax audit are generally more
reasonable. Taxpayers can appeal to assessments issued by the tax
authorities.
Local content
requirements
For Kenya there are no local content requirements but mining entities
are encouraged to employ local people.
For Uganda, local content rules apply in respect of goods and services.
For Tanzania, the license requires inclusion of a plan with respect to the
Employment and training of citizens of Tanzania and succession plan
for expatriate employees.
The Tanzanian company is required to give preference to the purchase
of goods and services available in Tanzania provided such goods and
services are available at required time, quality and quantity and arc
offered at competitive prices on delivered basis in Tanzania.
PwC
Common Exit Options
Slide 21
Set up Ongoing Exit
a) Direct disposal
Sale of the shares in the local Kenya
company
September 2015Tax overview of the mining sector in East Africa
Overseas
Parent
Company
Local
Company or
Branch
Local
Company
Intermediate
Overseas
company
b) Indirect disposal
Sale of shares in the overseas company
Disposal
level
Disposal
level
Overseas
Parent
Company
Local mining
territory
Kenya,
Tanzania or
Uganda
Overseas
investor
territory
PwC
Exit considerations
Set up Ongoing Exit
Slide 22
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Direct
disposal
Sale consideration
taxed where 20% or
more of the interest
derives from
immoveable property
(includes mining
rights);
The tax rate applied by
the tax authorities is
30%.
Gain on disposal of
shares subject to
income tax;
The rate of tax is
30%.
Sale consideration
taxed where the
underlying
asset/immovable
property (includes
mining rights) is in
Uganda;
The capital gains tax
rate is 30%.
PwC
Exit considerations
Set up Ongoing Exit
Slide 23
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Indirect
disposal
Sale consideration
taxed where 20% or
more of the interest
derives from
immoveable property
(includes mining
rights);
The tax rate is not set
out in law but rate
applied by the tax
authorities is 30% in
the case of a company
or 37.5% for a branch
Deemed disposal at
market value by
local entity where
underlying
ownership changes
by >50% compared
to the previous two
years;
The rate of tax is
30%
Sale consideration
taxed where the
underlying
asset/immovable
property (includes
mining rights) is in
Uganda;
The capital gains tax
rate is 30%.
PwC
Exit considerations
Set up Ongoing Exit
Slide 24
September 2015Tax overview of the mining sector in East Africa
Kenya Tanzania Uganda
Disposal
points to
note
A licensee is required
to notify the
Commissioner (in
writing) immediately if
there is a change of
10% or more in the
underlying ownership
of the licensee.
Underlying
ownership looks to
the ultimate
shareholder.
Potentially
applicable to share
dealing on stock
exchange.
100% of all the
assets and liabilities
deemed to be sold
and reacquired at
market value.
A mining right,
petroleum right or
petroleum
information is
considered to be
immovable property
for purposes of
disposal.
Local company is made an agent for collection of tax in cases of an indirect
disposal.
PwC
Exit considerations Other matters
Slide 25
Set up Ongoing Exit
Kenya Natural resource income (NRI)
NRI is a tax that is imposed on natural resource & private overriding royalty type
agreements.
Where a transfer of a mining right is made, the purchaser is required to withhold a
percentage of any royalty payments made to the seller.
Where payment is made to a resident, the purchaser should withhold 5% of the gross
payment. For payments to a non-resident, the applicable rate is 20%
September 2015Tax overview of the mining sector in East Africa
PwC
Base Erosion and Profit
Shifting in East Africa
Slide 26
September 2015Tax overview of the mining sector in East Africa
PwC
Implementation of BEPS in East Africa
Slide 27
OECD released its strategy for developing countries engagement in BEPS project which
includes aspects such as :
Participation of developing countries in meetings of key BEPs decision making bodies.
Participation in the works of regional networks of revenue authorities such as ATAF
with the aim of capacity building.
BEPS themed legislative amendments in East Africa Include:
a) More comprehensive PE definition for Kenya.
b) Clarification on taxation of digital services ( VAT Act) in Kenya.
c) Introduction of limitation of benefit clause applicable to double tax treaties in
Kenya.
d) Introduction of detailed transfer pricing rules in Tanzania in 2014.
Revenue authority audits are more focused on the economic value chain and more
scrutiny is expected in transactions such as management fees, royalties, etc.
September 2015Tax overview of the mining sector in East Africa
PwC
Your contacts
Slide 28
Kenya
Steve Okello Osborne Wanyoike
Partner Director
Office: +254 (20) 2855116 Office: +254 (20) 2855133
Email: [email protected] Email: [email protected]
Tanzania
David Tarimo Michael Quinton
Partner Senior Manager
Office: +255 (0) 22 219 2600 Office: +255 (0) 22 219 2612
Email: [email protected] Email: [email protected]
September 2015Tax overview of the mining sector in East Africa
Nicola Corp
Partner
Office: +44 (0)207804 4732
Mobile: +44 (0) 7718 340460
Email: [email protected]
Vijal Shah
Senior Manager
Office: +44 (0) 207 804 9079
Mobile: +44 (0) 7713 789 61
Email: [email protected]
UK
PwC
Your contacts
Slide 29
September 2015Tax overview of the mining sector in East Africa
Uganda
Francis Kamulegeya Plaxeda Wanyoike
Partner Director
Office: +256 312 354425 Office: +256 312 354479
Email: [email protected] Email: [email protected]
Questions?
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