CAG slams mining deals, urges rethink of tax code

17Apr 2017
The Guardian Reporter
The Guardian
CAG slams mining deals, urges rethink of tax code
  • The government's chief auditor has stepped up the ante on foreign mining companies following the recent ban on exports of gold and copper concentrates

THE government's chief auditor has called for a review of the current fiscal regime in Tanzania's mining sector, saying gold producers are not paying their fair share of taxes due to unfair contracts, in a move likely to pile fresh pressure on foreign investor companies.

PROF. MUSSA ASSAD

Prof Mussa Assad, the Controller and Auditor General (CAG), said in a new report submitted to President John Magufuli and the National Assembly last week that Tanzania must review contracts and rethink its tax code if it wants to benefit from the extractive industry.

Assad said a partial review of existing mineral development agreements (MDAs) signed between the government and large-scale gold mines conducted by his office established that foreign investor companies use several loopholes in the contracts to dodge taxes.

"The MDAs were found to have unreasonable terms which undermine public interests such as unreasonable conditions for renewal of licenses, protection against future amendments of laws, unreasonable agreements in foreign currency policies, custom arrangements and unreasonable incentives in tax and accounting treatment of capital expenditures," he said.

"The government is advised to use sanctity of fundamental clauses which exist in most MDAs to renegotiate the unfavourable contractual terms."

The CAG said he came to that conclusion after personally studying mining contracts between the country's four biggest gold-producing mines - Geita Gold Mine (owned by Anglogold Ashantia) and three mines owned by Acacia Mining Plc - Buzwagi, Bulyanhulu and North Mara.

"Significant weaknesses were noted in procedures to enter MDAs, such as government relying on prospecting and feasibility reports conducted by the license applicants without having an adequate mechanism to monitor and verify the submitted reports, therefore impairing the government bargaining position," he said.

The scathing comments from the CAG contained in his report on public authorities and other bodies for 2015/16 fiscal year comes hot on the heels of an indefinite ban ordered by President Magufuli on exports of gold and copper concentrate.

Acacia, Tanzania's biggest mining company, has been hardest-hit by the ban on exports of mineral sand, claiming that it is losing more than $1 million (over 2.2 billion shillings) of revenue each day because of the export ban.

Magufuli has already appointed two separate probe teams to conduct parallel investigations into the actual content of hundreds of shipping containers full of mineral sand bound for export that have since been impounded by security forces.

"There is no country being robbed of its mineral wealth like Tanzania," Magufuli said last month during an impromptu visit to the Dar es Salaam port to inspect export-bound containers of gold and copper concentrate owned by Acacia Mining.

"Mining companies should pay more taxes ... I want Tanzanians and the whole world to know the secret hidden inside these containers."

The CAG echoed the president's concerns in his latest report, saying mining companies were also unfairly benefitting from huge tax refunds on top of other contractual loopholes.

"A review of (value added tax) VAT returns of five mining companies (Geita, Bulyanhulu, North Mara, Williamson Diamonds and Pangea Gold Mine) for five years from 2012 to 2016 uncovered significant refunds of VAT to the tune of 1.144 trillion shillings," said Prof Assad in his report.

"The refunds are caused by loopholes provided under Section 55(1) of the VAT Act of 2014 and other prior tax legislation which allowed and still allow zero rating of VAT when goods are exported outside the country."

Since major markets of minerals are overseas, all minerals produced in Tanzania by large-scale mines are exported, thus enjoy zero VAT, noted the CAG.

"The government's motive to zero rate (mineral) exports was aimed at promoting growth of domestic industries, however, the weakness noted is that the (VAT) Act did not set categories of goods and services to enjoy the incentive thus, minerals, which by any means must be sold abroad, their exportation are treated the same as agricultural and industrial products exported," he said.

He advised the government to review the VAT law and make appropriate amendments to eliminate zero rating on mineral exports and conduct talks with mining companies to discuss its effect on the MDAs.

The chairman of the Tanzania Chamber of Energy and Minerals (TCME), Ambassador Ami Mpungwe, could not immediately comment on the CAG's report, saying he needs time to read the report.

OVER-GENEROUS TAX EXEMPTIONS?

"The government is advised to amicably negotiate with mining companies using sanctity of fundamental clause which exists in most MDAs to adjust the tax rates taking into consideration the economic variables of signing the MDAs that have changed," said Assad.

The CAG noted that mining companies were also consistently declaring losses in Tanzania, hence dogding payment of corporate tax and and other tax liabilities.

"In mining operations review of financial statements and final returns of corporate tax relating to Bulyanhulu Gold Mine, North Mara Gold Mine, Williamson Diamonds and Pangea Minerals Ltd for five years from 2012 to 2016, we noted perpetual losses from their operations," he said.

"The losses are mainly attributed to allowing full capital expenditure to be deducted from the revenue generated during the year."

Assad said most mining contracts allow expending capital expenditure at the rate ranging from 80 per cent to 100 per cent during the first year of acquisition starting from the exploration stage to the development stage of the mining activities.

"This treatment plunges revenue to the extent of remaining with losses to infinity," he said.

"The government is advised to renegotiate with mining companies with perpetual losses to allow the government to charge corporate tax at 0.3 per cent on gross turnover."

Assad noted that large-scale mines enjoy low tax rates compared to current applicable rates because they signed most of their MDAs based on the repealed Income Tax Act of 1973, with the contracts never being changed to date due to stability clause despite being based on an outdated law.

"For instance in most MDAs, rates of withholding tax on management fees and technical services range from 3 per cent to 5 per cent which is contrary to Income Tax Act, 2004 which requires withholding tax of 15 per cent on payments made to non-resident technical service providers," he said.

The CAG noted that four major gold mining companies in Tanzania enjoyed exemptions worth 126.7 billion shillings from fuel toll and excise duty for financial years ended December 2015 and 2016 alone.

"The government ... is advised to revise means necessary to supply reliable power to the mining companies which will increase revenue to the government and eliminate giving tax exemption on the fuel," he said.

According to a brief prepared by Policy Forum, a Dar es Salaam-based non-profit organisation, below are some of the generous tax incentives currently being enjoyed by mining companies, which are included in their Tanzania Investment Centre (TIC) certificate of incentives:

• Zero import duty on fuel and on imports of mining-related equipment during prospecting and up to the end of the first year of production after which they pay 5 per cent,

• Exemption from capital gains tax (unlike other companies in Tanzania),

• Special VAT relief, which includes exemption from VAT on imports and local supplies of goods and services to mining companies and their subcontractors,

• The ability to offset against taxable income the cost of all capital equipment (such as machinery or property) incurred in a mining operation,

• A reduced rate of stamp duty, at 0.3 per cent. This is included in several mining agreements signed between the government and the mining companies, even though the rate of stamp duty is set by law at 4 per cent,

• A maximum payment of local government taxes of up to $200,000 a year, which is lower than the 0.3 per cent of turnover required by law,

• Depreciation allowances for depreciable assets (a deduction equal to the amount of total capital expenditure equivalent to 100 per cent depreciation allowance) in the year of expenditure, which also can be carried forward,

• Import and excise duty for mining equipment at 0 per cent during exploration and mine development up to the first anniversary of commercial operation, after which a cap limit of 5 per cent applies.

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