Monday, August 15, 2011

Weak tax laws cost Tanzania $133m

ARUSHA -Tanzania's old weak taxation laws in the mineral sector resulted into a loss of a total of $132.5m, according to a financial audit carried out recently. 
The taxation laws are in the Tanzania Mining Act of 1998 which has several shortfalls such as denying Members of Parliament access to information that would enable them engage pro-actively with the investor's in the mining sector.

The report seen by East African Business Week says the taxation regime in Tanzania was determined by the 1998 Mining Act, the National Investment Promotion and Protection Act 1990, the Investment Act 1997, the Tax Act of 1973 and its amendment namely Finance Act 1992. It says that these laws pegged royalty rate of only 3% on gold and gemstones and 5% on diamond. 

"The Act also allowed the mining companies to enjoy a lot of advantages such as having a 100% transferability of profits to overseas accounts, paying stamp duty of 0.3 compared to 4% paid by other companies, amongst others at the expense of government revenue," said the report. 

"The weaknesses in the part of government include lack of capacity in the oversight bodies thereby contributing to malpractices in enforcement, corruption, tax evasion and hidden subsidies at the expense of general economy and an audit has come out with a loss of revenues of over $132.5m," says the report that was adopted by the East African Legislative Assembly (EALA) meeting held in Nairobi recently.

The Act envisaged the development of both small and large-scale mining side by side and also redefined various rights and mineral trading rights, according to the report. 

As a result small scale mines belonged to nationals whereas the large scale mines were for international companies. 
The report adds that the Act's main characteristics were to protect investors against nationalization through stabilization of fiscal regime, the ability to transfer and mortgage mineral rights," 
However the project stabilization clauses deterred government from possible review or upward adjustment of terms in mining contracts thereby jeopardizing the guarantee of fiscal stability of long term mining projects.

"Moreover, it was pointed out that stabilisation clauses act as contractual insulation against fiscal legal changes during   the agreement's lifespan thus their application limit Tanzania' s powers to seek more benefits from the contracts in the case of anomalies or upwards surge of precious metals' prices," the report adds. 

"Such clauses have been qualified as freezing as they ensure that the existing legal fiscal regimes at the time of signing contracts do not change over the life of the project and that subsequent legislation does not apply to the relationship between the parties to the agreement," says the report.

It says that the economic equilibrium clauses hampered the economic growth by requiring the government to compensate the investor whenever government enact legislation or take any administrative measures which aggravate the costs of the project, thus restricting the scope of subsequent legislation and mitigated its impacts on existing contracts.

The same Act allowed the repatriation of capital and profit directly related to mining, a 100% foreign ownership of the companies, designation of specific areas for Small - scale mining, possibility of upgrading Mineral Rights.

Although it allowed procurement of locally available goods but it provided generous tax incentives and hidden subsidies in the name of attracting investment and such similar advantages to mining companies at the expense of the government," according to Tanzania's Chairman of the Parliamentary Committee on Public Investments, Zitto Kabwe.

He said that the Act therefore gave the holder of the mine many rights and virtually no obligations whereas it demanded the government many obligations and virtually no rights.

In order to salvage the situation, Tanzania's parliament early last year passed a new mining law that increases the rate of royalty paid on minerals like gold from 3 percent to 4 percent and requires the government to own a stake in future mining projects.
The Mining Act 2010 also requires mining companies to list on the Dar es Salaam Stock Exchange.

As part of the new legislation, Tanzania will not issue new gemstone mining licences to foreign companies. Current agreements with foreign mining companies remain unchanged.

"This bill makes comprehensive provision for prospecting for minerals, mining, processing and dealing in minerals, for the granting, renewal and termination of mineral rights, for payment of royalties, fees and other charges and for any other relevant matters," said part of the legislation.

"The bill is a response to challenges faced and experience gained during 12 years of the implementation of the Mining Act ... that was enacted in the year 1998."

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