Mining: Let’s unlock the sector’s full potential!

“Unlocking Tanzania’s Future Mining Potential” is the theme of this week’s Tanzania Mining & Investment Forum. The macro-economic contribution of the mining sector is already significant.  For example, the Bank of Tanzania’s (BoT) Monthly Economic Review for September 2023 highlighted that the export of non-traditional goods grew by 5.6%, driven by minerals, particularly gold and coal.  In the year to August 2023 gold exports totalled US2.95bn (up from USD2.75bn in the year to August 2022), representing about 39% of the value of goods exported, and primarily generated by large scale mines. Coal exports for the same period were USD227m (up from USD82m in the prior year).

So why the reference to “unlocking Tanzania’s future mining potential”?  Well, partly it is a response to the prospects for exploitation of the so-called green minerals - in particular, various projects in the pipeline related to nickel, graphite, and rare earths.  But equally, significant opportunity remains with gold.  So, the future of the mining sector does indeed seem bright - and not before time as the last large scale mine to commence production was Buzwagi, which opened sixteen years ago in 2007.

Key to unlocking this potential is to have a fiscal regime in place that works both for the investor and for the Government.  Recent years have seen various steps taken to harness more from the sector including the introduction of a sector specific income tax regime in 2016. Among other things this regime accelerates the timing for income tax payments including by more restrictions on deduction of brought forward tax losses (which can offset a maximum of 70% of current year profits). However, the same regime also introduced some challenges, including ring-fencing provisions as well as rules relating to farm in transactions.

The effect of the ring-fencing rule is broadly that losses incurred in one licence area can not be offset against income from another licence area. These provisions have the potential to be a disincentive for exploration as in a scenario where an investor carries out exploration work in a number of areas (say five) and only one proves viable, the investor gets no relief for the losses incurred in the four areas against income earned from the one viable licence area.

A farm-in transaction is an arrangement that allows a person (the farmee) to acquire a mining interest from another person (the farmor) after they conduct exploration on a mining tenement.  The new rules on farm in transactions now include as income for the farmor (transferor) the commitments to future spending by the farmee.  This treatment is a concern on a number of fronts - firstly, the potential for triggering a gain in a scenario where the essence of the transaction is to raise funding for exploration; secondly, there is a practical challenge in arriving at a present value of the future commitment to spend; lastly, there is a disconnect as it appears that whilst a gain on a disposal of an interest in a mineral licence can be taxed on the transferor, the transferee can only claim tax depreciation on the historic costs incurred on the licence and not their acquisition cost.

It has been exciting to hear prospects of new projects, however a major hurdle to the raising of financing to develop these projects is the “change in control” rules - the effect of which can be to deem a disposal where there is a more than 50% change in ultimate shareholding, even if this change is precipitated by a transaction the essence of which is to raise capital to enable project development (for example, a listing on an international stock exchange). 

An ongoing debate relates to the calculation of income.  Firstly, a continuing concern is the disallowance of costs that are a legal obligation and so a necessary business cost - in particular, the disallowance of royalty payments (following an amendment made in July 2023, but which previously were deductible). An additional concern relates to corporate social responsibility (CSR) costs, which the revenue authority views as contributions of a voluntary nature that are not allowable for tax purposes, but which since 2017 have been a legal obligation.

How are economic benefits shared? Without considering turnover based levies (royalty costs (6% maximum), inspection fee (1%) and service levy (0.3%)), profit based payments to the Government (i.e. 30% income tax, 16% Government free carry interest, 10% withholding tax on dividends paid to shareholders) already represent about 47% of the profit before tax. Once the turnover based levies are taken into account, the Government’s take can easily reach or exceed two thirds (66% or more) - making Tanzania a mining jurisdiction with one of the higher overall tax rates, such that only higher margin projects are financially feasible. 

BoT reports indicate that reported gold production by large scale miners in the six months to June 2023 (18,706.4kg) is significantly up on the prior year (16,924.6kg in six months to June 2022), but is lower than ten years ago (20,200.4kg for the six month period to June 2013) albeit current revenues are higher due to a more buoyant gold price.  As we reflect on the theme of “Unlocking Tanzania’s Future Mining Potential”, some quick wins will be to address some of the present roadblocks so as to enable the sector to attain its full potential.

By Redempta Maira - Associate Director, Tax Services, PwC Tanzania