‘Exploitative’ mining tax incentives return to bite Tanzania’s revenue

Thursday June 22 2017

A miner getting out of a mine in Arusha in 2008. The Mining Act was enacted in 1998. It is this Act that is now being seen as the greatest setback in Tanzania’s quest to enjoy the benefits of its natural resources. FILE PHOTO | NMG

By Allan Olingo

Tanzania’s cocktail of incentives in the mining sector has begun to bite as President John Magufuli’s administration grapples with some of them.

This comes as its fellow Southern Africa Development Corporation (SADC) member, South Africa, last week raised the minimum threshold for black ownership of mining companies to 30 per cent, from 26 per cent.

South Africa Mines Minister Mosebenzi Zwane said companies had 12 months to meet the new threshold, an order the Chamber of Mines, an industry lobby, threatens to challenge in court.

Under the new charter, mining firms must pay 1 per cent of their annual turnover to the Mining Transformation and Development Agency, which helps black communities. Two, prospecting rights must be 50 per cent black-owned while mining rights should be 30 per cent black-owned. Mining firms are required to procure 70 per cent of goods and 80 per cent of services from black-owned companies.

Renegotiating contracts

In the region, Tanzania is trying to renegotiate some of its mineral development agreements with multinational mining companies after an audit commissioned by President Magufuli revealed that the country offered “extremely generous” incentives to these firms.


“I will stop at nothing to undo or reverse these exploitative mineral contracts,” President Magufuli said.


Tanzania's President John Magufuli. PHOTO | THE CITIZEN | NMG

READ: Tanzania may have lost $30b in mining revenue

The Mining Act was enacted in 1998. It is this Act that is now being seen as the greatest setback in the country’s’ quest to enjoy the fruits of its natural resources.

“The Mining Act of 1998 is seen as extremely favourable to foreign mining companies. Its implementation saw several amendments of financial laws, including the Foreign Exchange Act, meant to attract investors but the government ceded too much ground. The presence of these tax incentives has enabled mining companies to effectively escape taxation altogether,” said Mmari Chacha, a Dar-based international energy consultant at Innovate.

In a bid to provide incentives and exemptions for mining companies and their contractors, the changes in the Foreign Exchange Act saw Tanzania offer exemptions to foreign mining companies touching on income tax, value added tax, fuel levy and customs duty.

For example, the Mining Act allowed 100 per cent ownership of minerals and mines to foreign corporations, effectively preventing the government from entering into new joint ventures. On taxation, mining firms enjoyed up to five-year tax holidays, and would pay to the government a royalty fee of three per cent of the value of their mineral output. They were also allowed to repatriate 100 per cent of their profits.

READ: Tanzania rues its advice against local smelters

Tanzania at a disadvantage

These firms also enjoyed some VAT exemptions on imports and capital goods, with the right to deduct 80 per cent of their capital expenditure from the tax payable to the Dar government. They would enjoy fixed and pre-negotiated tax levels for the projects’ lifeline, leaving Tanzania at a disadvantage.

In the past 20 years, Tanzania has only managed to revise specific agreements with select companies, securing fast-tracked payments of corporate tax; local communities earning percentages from mining firms income; and raising the royalty payment from three per cent to four per cent, during President Jakaya Kikwete’s administration.

“Any true change shall only be from amending the laws so as to see Tanzania benefit from these resources,” said opposition legislator Tundu Lissu, who is also president of the Tanganyika Law Society.

READ: Tanzania to introduce clearing fee for mineral exports

Tightening controls

In an investor note, BMI Research, a unit of the Fitch Group, cautions against the country’s growing regulations as a sign that may limit future investment and growth in its mining sector.

“The Tanzania authorities have been tightening controls ... these moves could reduce investor incentives to enter the market as listed companies may be subject to stricter audit procedures that will impact their operating costs.”

Last year, when the Dangote group was facing similar issues with the Magufuli administration, parliament accused the previous regimes of extending generous tax exemptions to foreign firms at the expense of revenues.

“I don’t think we gave the firms any generous incentives. We would not want to compromise such an investment in our country which has been a game changer as it has delivered on pricing to consumers,” Charles Mwijage, the Minister for Industries, Trade and Investments then said.

Kenya promises more incentives

Kenya, which is gearing to start exporting its oil, has hit it big with the mining sector, offering incentives as a means to woo investors. Currently, the incentives include a reduced corporate tax rate of 10 per cent for the first 10 years and 15 per cent for the next 10 years.

In an earlier interview with The EastAfrican, Kenya’s Mining Cabinet Secretary Dan Kazungu promised more incentives.

“We are working with the Kenya Revenue Authority and the Central Bank of Kenya on a relaxed tariff structure for the minerals sector, and especially the importers,” Mr. Kazungu said.

However, Kenya Civil Society Platform on oil and gas coordinator Charles Wanguhu said that the secretive nature of deals signed between the government and companies prospecting for minerals, oil and natural gas could expose the country to major losses in future.

“The government needs to make the contracts open for scrutiny and see the extent to which Kenya will benefit from its resources. There is a need to ascertain whether we are signing good deals,” Mr Wanguhu said.