Mining fiscal regime

Since time immemorial minerals have been seen to represent wealth - indeed, kings and other rulers used to measure their wealth by reference to silver, gold, copper, iron, etc; and so perhaps, it is not surprising that this sector is an emotive one for governments wishing to ensure substantial returns from the mining sector. But then, how much is a “fair share”?

Following independence, the mining sector was mainly run by the Government with relatively minimal activity until policy revisions in the late 1990’s, which catalysed significant investment into the sector.

Since 2001 however the regulatory environment for mining has seen consistent change with ongoing tightening of the fiscal regime, with some of the most significant changes being made in the past 3 years.

July 2016 saw the introduction of a new income tax regime for the extractive sector. A number of the changes targeted the acceleration of payment of corporate income tax - for example, ring-fencing of operations, tax depreciation over 5 years (instead of the previous immediate outright deduction), certain restrictions on the use of brought forward tax losses (which in certain cases would defer relief for such losses to later periods), and a more restrictive right of deduction for rehabilitation expenditure. In addition, new rules were introduced in relation to the disposal of mining licences pre-production, as well as to so-called “farm-in” arrangements.

Hardly had the sector digested these changes, when the sector was hit by further significant changes in July 2017 – The Written Laws (Miscellaneous Amendments), The Natural Wealth and Resources Contracts (Review and Re-Negotiation of Unconscionable Terms) and The Natural Wealth and Resources (Permanent Sovereignty) Acts of 2017. Amongst other things, these provided for the increase in the royalty rates to 6% on gross value, introduction of 1% inspection fee, Government free carry interest (16% minimum, 50% maximum) and restriction on exportation of raw resources. And this was not the end of the change, as 2018 saw a number of new regulations, including in relation to local content.

As much as these changes were aimed at ensuring equitable returns to the Government and providing clear taxation guidelines specific to the industry, the question is whether they achieve the intended purpose. Clearly, there are a number of positives - not least, the acceleration of corporate income tax payments. On the other hand, some of the changes do potentially create challenges as to the economics of mining projects - in particular for more marginal projects. To compound this, an ongoing concern is the impact of unpaid VAT refund claims, resulting in significant adverse cash flow costs. In addition, significant uncertainty remains on certain issues: for example: what is meant at a practical level by the Government free carry interest? Also, whilst the aspiration in relation to local content is well understood, what if we do not yet have the local muscle to take on some of these projects.

A number of recent studies (including by the Natural Resource Governance Institute, by the Fraser Institute as well as a comparative study by PwC Australia) all seem to indicate that perhaps we might have pushed some of the regulatory reforms too far. Of course, the proof of the pudding will be in the eating, and the hope is that despite these changes, the sector will see significant investment in the near future.

It is not news that we have not seen a large mining project kickoff in the past decade. The patriot in some of us cannot hide the desperation to see things happen, and so we hope that the policy makers do take into consideration the project economics reality when enacting new laws. Even though mineral deposits are immobile and non-perishable, the capital employed in projects is mobile and its mobility greatly depends on the rate of return on investment. In addition, a deposit left unmined is of no value to either the Government and society or the miner who has right of access to it – a large proportion of zero is still a zero. So then it is to our advantage as a country to ensure conducive investment climate which would sustain development of the mines in order to achieve a win-win situation. Accordingly, if the 2019 Budget will see yet more change for the extractive sector, the hope is that such change has been carefully considered - including by ensuring that appropriate stakeholder consultation has taken place in advance.

By Redempta Maira Manager - Tax Services, PwC

The views expressed do not necessarily represent those of PwC. For PwC updates on Tax and other matters do follow@pwc_tz or visit our website www.pwc.co.tz

Article first published in The Citizen (14.05.2019).