Tax, Tesla and Tanzania’s Mining Sector

Tesla, the electric car manufacturer, had a more than 700% share price increase in 2020 - making its founder Elon Musk (originally from Pretoria, South Africa) the richest person on the planet. Technological developments, whether in relation to the car industry or mobile communications, and the global drive to reduced hydrocarbon use, have profound implications for Tanzania’s mining sector.  

To date Tanzania has been best known for its gold production, in 2020 being the sixth largest producer of gold in Africa (www.gold.org).  However, it is also rich in other minerals for example rare earth metals such as neodymium (Nd) and praseodymium (Pr) which are essential elements in energy technology in this electrified world. Nickel is a key ingredient for electric car vehicles, and the recent agreement signed by the Government in relation to the Kabanga nickel project (to develop the world’s largest battery-grade nickel sulphide deposit) is just one illustration of the potential.

To fully realise its potential the mining sector in Tanzania requires capital - and given the risks associated with these projects and the magnitude of funds required, this will normally be by way of foreign direct investment. Indeed, the new owners of the Kabanga project recently revealed that the previous owners had spent more than $290m on it between 2005 and 2014.

The Government targets that the mining sector should contribute 10% of the GDP by 2025, and the Kabanga announcement is an important development to help move us forward in this direction.  But we will still need more projects to come on stream.

While resources are attractive, they are not a stand-alone factor for attracting investment in the country. Appropriate Government policy is important, and the relevant legislation should be stable, reliable, easy to understand and implement. Among the factors to consider before investing in Tanzania’s mining sector are the significant recent tax and regulatory changes for this sector. 

One example is the requirement for a Government free carried interest (FCI), whereby the Government is entitled to not less than 16% non-dilutable free carried interest (FCI) shares in the capital of a mining company (depending on the type of minerals and the level of investment). Although not a new practice globally, the few jurisdictions that do apply this requirement each have their own expectations as to what this interest comes along with. Among the rights of the Government as a holder of the FCI in Tanzania is an entitlement not only to receive dividends but also to receive a proportionate share from any repayment of equity, shareholder loan or third party loan; but at the same time the FCI holder does not have any obligation to contribute to equity or capital.   

Once production starts, the immediate tax impact is the taxes based on turnover, and then (once the project moves to profit) corporate income tax, and finally imposts at the time of distribution of profits by way of the free carry interest earned by Government as well as withholding tax (10%) on dividends paid to the investors. In terms of taxes on turnover, the royalty rate has increased from 4% to 6% of gross revenue, and on top of this there is a clearance fee of 1% of gross revenue, and local taxes (service levy of 0.3%); so a total of 7.3% of turnover.  

Corporate tax is levied at 30% of taxable profit, and this taxable profit will be recognised at a faster rate than in the past as the deduction for capital expenditure incurred in mining operations is now 20% on a straight-line basis (write off over 5 years) as compared to the full outright deduction in the past. A further measure to accelerate the recognition of profits is a new limitation that restricts the offset of brought forward unrelieved tax losses to a maximum of 70% of taxable profit in a year (with any excess losses carried forward to later years). This means that where a mining company has current year taxable profits (before brought forward losses), tax will be payable on at least 30% of those profits.  

In addition, tax losses from mining operations can only be deducted in calculating the person’s income derived from that specific mining area - i.e. losses from one license area cannot be used to shelter profits derived from another license area of the same person. This does have the potential for practical challenges where you have a mining project that is one economic project but that spans more than one licence area.

Whilst in principle there is an automatic entitlement of Value Added Tax (VAT) refunds for a person whose 50% or more of his turnover is from supplies that are zero rated, in practice most mining companies have not been beneficiaries of this provision in the recent past. Although the Commissioner is required to respond to the application for VAT refunds within 90 days, there have been significant delays in receiving the actual refunds or even obtaining an approval to offset the refund claim against other tax liabilities. A further practical challenge was a contentious 2017 amendment to deny input VAT claims of exporters of “raw” minerals; fortunately, in 2020 this restriction was removed.

A recent development with cost implications are clearance fees regulated by Tanzania Shipping Agencies Corporation (TASAC) payable to the Government by any person importing machineries, equipment, products or extracts related to minerals and/ or in possession of mineral or minerals prior to clearance for domestic use or export.

In recent months the Government has re-emphasised the economic importance of mining for future growth aspirations. The Government has demonstrated its support not only with the recent Kabanga announcement, but in communications on other potential new mining sector investments in the pipeline. Against this background, hopefully 2021 will see more announcements of new mining projects expected to move to development and so help realise the 2025 goal of 10% of GDP.

By Rebecca Nnungu, a Mining Engineering graduate, is an Associate, Tax Services at PwC Tanzania.