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New dawn for mining sector in Kenya, but there are risks ahead

Saturday July 20 2013
wanyoike

Osborne Wanyoike

Mining in Kenya has been in the news lately, especially the potential for coal and titanium deposits.

Highly publicised transactions involving mining companies have generated significant interest especially among local communities who demand their share of the spoils — or at least a fair hearing, as stipulated in the Constitution.

Around East Africa, Tanzania is best known for its rich mineral resources including gold, uranium and diamonds.

Major multinational corporations conduct exploration and mining activities but whether the government receives an equitable share of the benefits from mining remains unresolved in many minds.

In terms of taxation, countries are now focusing more on indirect taxes like Value Added Tax, Custom duties and Employee taxes.

Direct tax (which is based on the profits of the company) is considered complex in terms of interpretation since it is based on the audited financial statements of the company, which are prepared using historical costs.

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In the extractive industry, taxing the value of minerals extracted or the volume of minerals extracted is gaining currency among tax authorities.
It is harder to evade taxes based on turnover (volume or value) than it is when you rely on taxing profits.

Kenya is said to be an “exploration country” in terms of mining. In other words, Kenya is yet to discover significant deposits of base minerals.
However, due to an upsurge in the demand for minerals by countries like China, investors are seriously considering Kenya as a place to explore and mine minerals. At the same time, a multimillion dollar mining project in Eastern Kenya has a partner from China.

It’s clear that China’s demand for metals continues to have a significant impact on the mining sector. According to the International Monetary Fund, in 2010 China accounted for approximately 40 per cent of the world’s base metals’ consumption.

Even a moderate percentage increase in consumption has a huge impact on global demand and while China’s consumption is significant, it is part of a larger trend among rapidly emerging countries with vast populations like India, Indonesia, Brazil and Nigeria.

Rise of China

China is today’s story but other emerging market nations will help to sustain a demand-led boom over the longer term.

The risks and uncertainties associated with mineral exploration continue to be significant, however. In a survey we published this year, ‘Mine: The growing disconnect,’ PwC found that the mining industry’s headline story over the last five years was about demand.

Now, the focus is shifting and the story over the next five years will be about supply.

There are several reasons for this: Structural changes to cost bases caused by decreasing grades and increasing input costs, changing fiscal regimes and resource nationalism, ongoing disruptions to production, remoteness of certain locations and increasing capital expenditure requirements to bring supply to market.

All of these factors influence supply. Our survey shows that ownership of resources and mining industry fiscal regimes remain high on the agenda for many governments around the world.

Nations are looking at taking a greater share of profits and resources through a range of measures. Ongoing discussions and debates, formal reviews of fiscal regimes or recently enacted changes have been seen in countries like Australia, Chile, Ghana, Peru and South Africa.

In Kenya the draft mining policy seeks to put in place a simple, stable, predictable, efficient and unified regulatory framework.

The policy also aims to stimulate investment in the minerals and mining sector while ensuring that small scale mining companies use well-integrated, efficient and modern technology.

Many of these enterprises will need to be brought into the formal economy so that they contribute fairly to the tax base—and Kenya’s future as a mining economy.

Osborne Wanyoike is a senior manager in tax, PwC and an expert in oil, gas and mining.

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