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CONTRACTUAL AND FISCAL TERMS APPLIED IN TANZANIA MINING SECTOR

Presented by : Eng .Gilay Charles Shamika,Senior Engineer & GemologistTanzania Minerals Audit Agency (TMAA)

(gcshamika@yahoo.com,gilayshammy@gmail.com)

2DAYS WORKSHOP AT Mount Meru Lodge, Arusha, Tanzania: 15th - 16th JULY, 2014 HOSTED BY GLOBAL ACADEMY FOR MINING,OIL & GAS. GENERAL THEME: DEVELOPMENT OF THE LEGAL AND REGULATORY FRAMEWORKS IN MINING, OIL AND GASGeneral overview of the mining sector in TanzaniaMining industry as a Cross-Cut sectorTimelines events led into current legal, regulatory and fiscal regimeFiscal and contractual terms used in Tanzania Mining Sector General benefits of the Mining Industry in Tanzania PRIMA COBWEB concept as an integral for development of Mining SectorChallengesThe way-forward

OUTLINERegarded to be the countrys first priority and engine to drive the country from developing country to the developed country come 2025.Tanzania National vision 2025, predict the sector will contribute to the tune of 10% of the GDP. The discoveries of natural gas and oil, have increased the courage of the Government to accomplish that vision of 2025Currently the sector contributes 3.3% GDP as of 2013.FDI is on the average of 482 USD Million per year (average from 1997 through 2009)Tanzania ranked 4th among gold producers in Africa and soon it will be ranked among oil/gas producers as of now the discoveries have reached the sum of 46.5 trillion cubic ft. Availability of uranium measured and indicated resources, is another credit to the sector taking consideration of the contentious minerals nature..

GENERAL OVERVIEW OF THE MINING INDUSTRY IN TANZANIAYEAREVENTLate 1980sSector characterised by state control1990sThe importance of restructuring emerges, National investment promotion policy and National promotion and protection Act were enacted.Mid 1990sThe government made economic reforms and mining sector was not exceptional. 1994Mining sector policy framework established with the supreme objective of revising mining laws and restructuring regulatory frameworks, fiscal regime and divesting state-owned mining companies.1997Mining policy of 1997 passedTIMELINE EVENTS LED INTO CURRENT CONTRACTUAL AND FISCAL TERMS IN TANZANIAYEAREVENT 1997Financial law amendment Act 1997Tanzania investment Act,1997 was enacted1998The Mining Act,1998 was enactedAmendments to Foreign exchange Act,19922006The Gvt conducted mining contract review to access the inadequate contribution of mining sector. The mining companies accepted to pay $200,000 annually to local councils.2007Formation of the Presidential Mining Review committee2009Mining policy of 2009; and2010Existing Mining Act,2010TIMELINE EVENTS LED INTO CURRENT CONTRACTUAL AND FISCAL TERMS IN TANZANIA(contd)MINERAL DEPOSITS IN TANZANIA(Countrys Wallet of Minerals)

MINERAL OCCURRENCE AND MAJOR MININGPROJECTS IN TANZANIAThe mining sector in Tanzania is governed by :5 Policies6 Regulations, and18 Acts/lawsOn top of that, the mining sector is divided into two types:MDAs operators/mining companies andNonMDAs (license) operators/mining companies.Debate: Any importance of narrowing to reduce bureaucracy or widen again for more participation?

MINING SECTOR AS A CROSS-CUT SECTORBulyanhulu in Kahama owned by Bulyanhulu Gold Mine Limited. Contract signed on 5th August 1994;Golden Pride in Nzega owned by Resolute Tanzania Limited. Contract signed on 25th June 1997;Geita Gold Mine in Geita owned by AngloGold-Ashanti from South Africa. Contract signed on 24th June 1999;North Mara in Tarime owned by North Mara Mine Limited. Contract was signed on 24th June 1999;Tulawaka in Biharamulo owned by Northern Mining and Pangea Minerals Ltd. Contract signed on 29th December 2003; andBuzwagi in Kahama owned by Pangea Minerals Limited. Contract signed on 17 February 2007.

MDAs WITH EXISTING CONTRACTUAL AND FISCAL REGIMETypes of MDAs :Ad hoc Agreement: singular, specific for a certain mineStandard Model Agreement: Uniform, applied for all minesProforma Agreement: reviewed continually until when seems it is perfect to be applied and used as a model.

For Tanzania Section (10)(1) Confer a power to the Minister to enter into agreement. Mining Act,2010 insists Standard Model Agreement.The mining operators without MDAs, are covered by conditions of the license and existing legislations.

TYPES OF MDAs APPLIED IN MINING WORLDWIDE

CONTRACTUAL TERMS WHICH NEED THOROUGH ATTENTION IN MDAsContractual Terms MeaningEconomic equilibrium clauses ( pay-back clause)These require the government to compensate the investor should the government enact any legislation or take any administrative measures that aggravate the costs of the project.Freezing clauses (not negotiable)These ensure that the existing legal-fiscal regimes at the time of signing contracts do not change over the lifespan of the project and that subsequent legislation does not apply to the relationship between the parties to the agreement. Stabilization clauses:( negotiable/free will clauses)Stabilization clauses act as a contractual insulation against fiscal legal changes during the lifespan of an agreement. As a guarantee to profitability and stability of their projects, investors normally insert a stabilization clause providing that the terms will not be altered unilaterally or terminated by the State. These are normally carried over the entire lifetime of the agreements. Application of stabilization clauses limit powers to seek more benefits from the contracts in the case of anomalies or upward surging of minerals prices.

FISCAL TERMS WHICH NEED THOUROUGH ATTENTION IN MDAsFiscal Terms MeaningUnredeemed Capital Expenditure: If a mining company has incurred capital expenditure that is greater than the amount needed to cancel all of its taxable income for the year on a particular mine, then the balance of capital expenditure not offset for tax in that year is carried forward for offset against the income of the next year. The peculiarity is that the balance of unredeemed capital expenditure is increased at the start of the next year by 15% as if this sum had been spent on additional capital goods even though this has not actually occurred. As a result the date on which the first tax is due from a mining operation can be deferred for a considerable period of time. This additional unredeemed capital expenditure has been cancelled in some recent mining contract renegotiations as the deductions have no economic substance. It seems likely that it was introduced at a time of high inflation to make sure that the real value of the amount expended was offset against income apparently worth more in a later period.Capital Expenditure Ring Fencing: A company is only allowed to deduct the cost of capital expenditure at a particular mine against the income of that mine when calculating its tax bills. As a result it cannot deduct the cost of capital expenditure at another mine that is not yet making money from the income of the mine now generating profits.

FISCAL TERMS WHICH NEED THOUROUGH ATTENTION IN MDAsFiscal Terms MeaningRoyaltyEffectively a sales tax charged on the market value. How this market value is calculated will determine the actual royalty a company pays. Companies might claim to sell gold to their buyers at a lower price (called the reference price) than the price of gold on international commodity exchanges, which means they would pay a lower royalty. It is therefore important for mining agreements to have proper market pricing arrangements in place. Corporate Tax: The tax paid by companies on their taxable profits. Taxable profits are those declared in their accounts (see net profit before tax) but some adjustments are usually made for tax purposes. The most important by far is to add back to that figure for net profit before tax the depreciation charge and to then deduct from the resulting sum the capital allowance claim made for expenditure made on capital goods. Since the expenditure on capital goods often exceeds the depreciation charge it is common for taxable profits to be lower than accounting profits and for the actual tax due to be less than that which is apparently appropriate when multiplying the declared net profit before tax by the published corporation tax rate. Income Tax ,2004 incentives related to Mining Sector in Tanzania: Mining companies to redeem funds dedicated to environmental protection in implementing written conditions set out by the Income Tax commissioner, under Section 15(3).Deduction of withholding tax from the payment made for management and technical services provided by resident companies, under Section 83(1)(a).The amount of tax is 5% stated under paragraph 4(c) of the first table of the Income Tax Act,2004.Deductions for services provided by non-resident companies fall under Section 83(1)(b) and is 15%.

Tax depreciation rate for exploration and mining equipments follows Wear & Tear Deduction Allowances as per Schedule III of the Income Tax Act,2004 100% capital allowance in the year of development expenditure in the computation of that years taxable Income as stated in the Act.

Note: Additional Capital allowance of 15% for MDAs signed before July 1,2001 applies but after July 1,2001 not apply. In 2006 some companies accepted to remove such provision in their MDAs.

Income tax ,2004 incentives related to Mining Sector in Tanzania (contd)Value Added Tax :Persons and institutions clarified in Section 11,Cap 148 Revised Edition of 2006, are entitled in VAT relief. Mining companies are subject to VAT especially on imported goods which do not receive customs duty relief. This implies companies are required to pay VAT and redeem them as per procedures.

Fuel Levy : Only earlier MDAs holders received exemption from fuel levy which exceeds $200,000 per annum, the rest pays through price under Road & Fuel Act, chapter 220 and Gvt Notice of February 5, 1999.

Local Government service levy : Local Government Finances Act,1982 requires payment of 0.3% to Local councils from mining companies. 0.3% of turnover for Non-MDA operators and $200,000 per annum for MDAs operators.

Income Tax,2004 incentives related to Mining Sector in Tanzania (contd)Customs duty: The exemption is offered to contractors and mining companies but depending on the mining stage operationsStamp duty: Duty rates are referred to Stamp duty Act chapter 189.

Excise duty: Exemption is offered to mining companies on imported or domestically purchased oil only for mining operations.

Points to Ponder: Do we still need these incentives for the incoming investors.? Are all incentives or some are loopholes need to be bridged .

Taxation/Fiscal termRates/Description VATVAT relief granted to both import & domestic purchase for MDAs and PL OperatorsCorporate tax30% on taxable profit RoyaltyOn gross value ( 5% for rough Gemstones , Diamond and Uranium, 4% for Gold, Copper, Silver and Platinum group Metals, 3% for building mineral, 1% for Cut &Polished Gems)Mgt fee(Non resident)3% for MDA and 15% for non- MDA operators charged on payment made.Mgt fee ( resident)3% for MDAs and 5% non-MDAs operators charged on payment charged. However for MDAs operator, if mgt fee is greater than 2% of operating cost, the applicable rate shall not exceed 20%.Fuel levyCharged at TZS 200 per litre and claim refund after consumption.SUMMARY OF FISCAL RATES APPLIED IN TANZANIA MINING SECTOR17Taxation/Fiscal termRates/Description Excise duty: Exemption is offered to mining companies on imported or domestically purchased oil only for mining operations.Import duty on capital goods0%Ring fencingMine to mineLocal Government service levy0.3% of turnover for Non-MDA operators and $200,000 per annum for MDAs operators.Import duty5% charged on cost, insurance and freight value after 1yr anniversary.Capital allowanceMining companies are granted 100% capital allowance on prospecting and development capital allowance.WHT on technical services-resident companies3% for MDAs and 5% for non-MDAs operators changed on payment made.WHT on technical services-non resident companies

3% for MDAs and 15% for non-MDAs operators changed on payment made.

SUMMARY OF FISCAL RATES APPLIED IN TANZANIA MINING SECTOR18Benefits2013Gold exports1.79 USD billionTanzanite + Diamond exports50.53 USD millionRoyalty from all large scale mine72.90 USD millionMining contribution to GDP3.3% ( as of 2013) FDI inflows482 USD /year (average from 1997-2009)Mining sector local goods and servicesSpent USD 520.67 million (2012)Job creation and technology transferLocal economic developmentForeign exchange earningsSource: MEM Budget speech 2014/15BENEFITS OF EXTRACTIVE INDUSTRY IN TANZANIAPRIMA is the abbreviation of POLICY, REGULATION, INVESTMENT, MDAs and ACTSGenerally the Mining sector is built on these I called PRIMA or Five Foundation Blocks of Mining sector. Nothing can be said in mining sector which is not inclusive in PRIMAThe experience shows that non-linkage of PRIMA is the source of resource curse or dutch disease.Currently Tanzanian Mining Policy is believed to be the best in Sub-Sahara region. But it lack the connection with the best signed MDAs to the extent that the Government has initiated the negotiations to review and do recommendable reforms bilaterally.That means the Mining sector need comprehensive approach which links all PRIMA and make it like cobweb where any loopholes whether deliberately or incidental created will be captured PRIMA COBWEB!!

PRIMA COBWEB CONCEPT AS AN INTEGRAL OF FUNDAMENTAL DEVELOPMENT OF MINING SECTOR CONTRACTUAL , FISCAL ,LEGAL AND REGULATORY FRAMEWORKS Like a cobweb, where is not easy to find the starting point to untie the cobweb,Prima concept address the same logic, that mining sector is nothing rather than PRIMA comprehensive linkage. PRIMA Cobweb do not provide contractual and fiscal regime loopholes. The linkage provide balance and checks.The policy and Act may be appropriate but if MDAs are inadequate , then the importance of good policy and Acts are irrelevant. Similarly, if MDAs are good but policy and Acts are not, non-MDAs operators, will relax.Prima is the five foundation blocks of mining industry, and the panacea of resource curse or dutch disease.PRIMA COBWEB CONCEPT AS AN INTEGRAL OF FUNDAMENTAL DEVELOPMENT OF MINING SECTOR CONTRACTUAL , FISCAL ,LEGAL AND REGULATORY FRAMEWORKS The challenges or lessons learnt from existing MDAs among others are;Unnecessary incentives which led to the late-reap of benefits from mining sectorConditions and terms used, do not provide room for reforms (lock-in-effect)Non-linkage of PRIMA and different approaches indealing with MDAs operators and Non-MDAs operators.Too much expectations by citizens to benefit from the mining sector caused by lack of knowledge on how mining companies operates intensive capital.

CHALLENGES OF CONTRUCTUAL AND FISCAL REGIME IN MINING SECTOR IN TANZANIAThe way-forward for the lessons learnt in existing MDAsPrima cobweb considerationApplication of the standard model MDAsOngoing negotiations to amend existing MDAs contractual and fiscal loopholesRequirement for free carried interest and state participationMDAs being subject to the periodic review by parties after every five yearsGovernment to strengthen its capacity to negotiate financial terms and conditions of MDAs, and to administer tax system and agreements, to deal with transfer pricing issues, and to audit the results.

THE WAY FORWARDThe way-forward for the lessons learnt in existing MDAsTransparency and accountability in contracts : Tanzania joined EITI on 16thFebruary,2009 to accept the condition of transparency and accountability in running the extractive industry ,and since then TEITI reports on shows that the transparency ,accountability and revenues accrued reports between government and that declared by operators are almost equal with minimal discrepancy.So far 10% of minerals deposit ,is the only one which has been tapped, 90% of known minerals resources are still untouched. This means the country still has potentials to benefit from minerals taking considerations of the above Government efforts to run the sector responsibly.Mining sector is not sustainable by itself, therefore can not bring sustainable development by itself. The mining sector is for feeding traditional economic contributors (engine as advocated by Prof.Muhongo) to make them robust and become sustainable when mining sector reaches it closure time. Therefore the multiplier economic effect from mining sector need to be properly channeled.

THE WAY FORWARD (contd)The way-forward for the lessons learnt in existing MDAs ;Government as a whole has done exemplary review and negotiations are underway to bridge the gaps.It is the duty of public and we academicians, professionals and NGOs to admit the efforts made by the Government and help in one way or another to excel those efforts rather than misleading the public.Lets keep discussing in good faith for our country.

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