ByHandley M. Mafwenga (PhD)

MINISTRY OF ENERGY AND MINERALS

PROPOSED NEW FISCAL REGIME IN MINERAL SECTOR

Workshop held in Arusha from 16th to 18th December, 20091

General Overview Existing Fiscal Regime Challenges Proposed Fiscal Regime Conclusion

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The fiscal regime applicable to the mining sector in Tanzania are set out in the following; Mining Act of 1998 which is administered by the Minister for Energy and Minerals;the National Investment Promotion and Protection Act of 1997;the Income Tax Act of 1973 and Miscellaneous Amendments, and

Tanzania Mineral Policy, 1997.

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Stability and Neutrality Section 10 of the Mining Act, Cap. 123 guarantees

fiscal stability through Mineral Development Agreements (MDAs). In order to be economically neutral the tax rules must be unchanged for the life of the mining projects.

Fiscal stability avails investors the opportunity for quality strategizing, planning and budgetary as well as a reasonable prediction of returns on investment.

The greater the level of fiscal instability in a country, the greater the investment risk.

Fiscal stability clause provides great degree of confidence to investors.

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Equity and Predictability Fiscal system should be fair and non-discriminatory to

investors; Taxes should be profit-based; The effect of any adjustment should not increase

uncertainties for the investors or the Government; Measures should apply equally to participants in the

mining industry; and Fiscal Regime should be predictable and sustainable

to support the budgetary operation of the Government and real economic growth

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By virtue of Section 82 of the ITA Cap. 332, withholding tax on dividend, interest, natural resource payment, rent or royalty is paid at a rate of 5% for listed company and 10% for any other company.

By virtue of Para 3(3), of the First Schedule to the ITA Cap. 332 repatriated income of domestic permanent establishment of non-resident is taxed at 10%.

By virtue of Section 83 of the ITA Cap. 332 for resident person conducting mining business when paying a service fee to another resident person in respect of management or technical fees is charged at a rate of 5%. In the case of the resident person conducting mining business when paying a service fee with a source in the URT to a non-resident person is withheld at a rate of 15%, in respect of an insurance premium 5%. However, such rates shall apply only if services or contract payments were provided wholly and exclusively for the business.

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There is zero import duty on fuel and remission on excise duty on fuel for companies having MDAs prior to July, 2009;

No ring fencing around the mining sector: losses in one mine can be offset against profits in another;

Corporate Tax is 30% taxable as profit based tax for residents and non-residents; Likewise, a newly listed company with the DSE with at least 35% of its equity ownership issued to public - the rate is reduced to 25% for three consecutive years from the date of listing. However, no mining company that is listed at DSE. For companies not having MDAs under grandfathered regime are subject to Alternative Minimum Tax of 0.3% of turnover of third year of perpetual unrelieved loss.

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Royalty is 5% for diamonds and rough gemstone , 0% for gems and 3% for other minerals. The Royalty is calculated on the Net-back-value basis.

Capital goods are zero rated; Specified goods (including explosives, lubricants, spare parts, vehicles) are capped at 5% after 1 year of commencement of commercial production. Other goods fall under the Common External Tariff (CET).

VAT special relief is given to mining companies, under Item 13 of Third Schedule to the VAT Act Cap. 148, and goods and services acquired locally or imported from outside Tanzania are zero-rated under First Schedule of the VAT Act, otherwise are taxable at a standard rate to enable mining companies reclaim input tax;

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Withholding Taxes have been also stipulated under the Fiscal Terms Clause to the Mining Development Agreements (MDAs), where:

1. Any amount greater than 3% from the gross amount of payments have been exempted. However, when that such gross payment exceeds 2% of operating costs, the amount to be withheld shall not exceed 20%.

2. Interest on loans in foreign currency from 3rd parties – Nil. 3. Interest other than interest on loans from 3rd parties – Nil. 4. Dividends are withheld at a maximum cap - when paid by

the licensees to their non-resident shareholders or on profits remitted to branch of company holding Mining License to a place outside Tanzania;

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100% capital allowance for exploration and development and additional 15% allowance in each tax year on unredeemed qualifying capital expenditure in or in connection with the Mining Area which are unrecovered at the end of the year of income as per Part III of the Second Schedule to the ITA 1973 as grandfathered by ITA Cap. 332 in Section 145;

Unlimited loss carried forward coupled with deduction of unrelieved loss of the year of income from any other business or investment or unrelieved loss of a previous year of income under Set-off approach.

Stamp duty is paid at a rate of 0.3% as compared to 4% for other investors;

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Excise duty on Fuel is charged to mining companies at the rates provided under the Fourth Schedule to the Excise (Management &Tariff) Act, Cap.147 .

Local Government Levy is capped at US$ 200,000 per annum in MDAs. The Local Government Finances Act, 1982 prescribes 0.3% Service Levy on turnover.

“Thin Capitalisation rule” is under Section 12 of the ITA Cap. 332 which allows interest as deductible expense irrespective of whether it is based on 100% debt finance or not; there is no limit on debt equity ratio for tax purposes. No provision to tax disallowed interest as dividends.

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Low level of Corporate tax revenue to Total Revenue Capacity building (lack of skilled personnel required in

mining operations). Poor infrastructure in mining areas. Environmental degradation. Inadequate contribution of the sector to the national

economy in relation to its growth so as to be in line with the projection of 10 per cent in 2025 as stated in the Development Vision 2025

Low capacity of the Government to administer the sector. Low integration with other sectors of the economy. Slow development of small scale mining. Low level of value addition of minerals.

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Exploration expenditures be capitalized and written off immediately. (i.e. 100% write-off);

Capital expenditure including development expenditure are to be depreciated at a rate of 80% in the first year of expenditure (initial allowance) and thereafter the rates applicable under Third Schedule of the ITA will take effect.

Introduce ring fencing within the mining sector. Each mine should be taxed separately.

Withholding Taxes which have been caped under the MDAs will have to continue using the prevailing rates stipulated under the Income Tax Act, Cap. 332.

Import Duty to be engaged under Common External Tariff for all goods starting from commencement of commercial production, since they fall under normal operating costs of mines.

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Local Government Levies is proposed to be levied by virtue of the Local Government Finances Act prevailing rates.

Income tax rate for mining profits is proposed to be taxed at a variable corporate tax rate depending on the profitability based on the formula (to be established after study) provided that the tax rate shall not fall below 30%.

“Thin Capitalisation rule” to be introduced whereby company that has a debt-to-equity ratio in excess of 70 to 30 at any time during the year of income, the amount of interest paid by the company during that year on that part of the debt that exceeds the ratio shall be disallowed as a deduction. The purpose of Thin Capitalization Clause is to disallow the deduction of interest expenses pertaining to debts from related parties when the ratio of debt to equity exceeds a certain prescribed debt/equity ratio.

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Computation of mineral royalties should be based on gross value instead of net back value.

Proposed rates of mineral royalties are as follows:- Uranium - 5%; Raw Gemstones including Diamonds - 5%; Value added gemstones - 1%; Precious metals – gold, silver, and Platinum

Group of Metals (PGM) - 4%; and Other minerals and salt - 3%. 15

The Government’s role is to provide conducive economic environment in order to attract and sustain local and international private investment in the mineral sector. In that regard, the Government will provide a competitive and predictable fiscal regime for the mineral sector.

It is worthwhile to point out from the outset that, the support of all Stakeholders including Government Institutions, the Parliament, Politicians, MEM- employees, Mining Companies, Developing Partners, Non-Governmental Organizations, Religious Institutions and the Public at large in implementing these Strategies will be highly appreciated.

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