Tanzania’s mining renaissance: Prospects and lessons

Senior Manager

Deloitte Consulting Limited

What you need to know:

Tanzania’s mining sector is on such a high tide for two reasons. The first is that the reforms that happened in the last five years have paved the way for trust-building between the government and the private sector.

Since the late nineties, when the country truly first opened its mining industry, there has never been such intense interest and a visible appetite for mining projects. With these dymanics in mind, there is no reason to aim below the 15 percent contribution of mining to GDP in the short to medium term. Six years ago, mining accounted for 5.1 percent of GDP. By 2022, its contribution would be 9.1 percent. Doubling this contribution is not far-fetched. But this high tide is neither infinite nor will it lead to inevitable success. We must ‘take the current when it serves’. We must be intentional, aggressive, and sensitive to the times. One should remember the oil and gas buzz from fifteen years ago to concentrate the minds of policymakers and corporate leaders. So how do we maximise the mining bonanza?

I can say with certainty that one clear area that may cause many of the projects whose Framework Agreements have been signed to not take off is the uncertainty about the VAT refunds that these mining companies are accumulating at the development stage. At best, an unpaid VAT claim becomes an interest-free loan to the government dressed up as a pending refund claim. At worst, it is an extra 18% unplanned, unfactored cost to the project. This, unfortunately, is not even a legal matter because those VAT refunds are clearly due. A statement of intent by the government, especially during this year’s budget, would be to solve this challenge once and for all by either setting a budget aside for immediate VAT refunds or providing direct special relief, such as by way of a government notice, so that mining development projects are not prevented from taking off as a result of uncertain VAT costs. The impact of this cost should not be underestimated.

Talking about change of control risks sounds like a broken record. I won’t belabour the point here. Suffice it to say that the changes made last year recognised that there is indeed a challenge with Section 56 of the Income Tax Law. However, the amendment introduced last year clearly did not meet the intention, at least the intention of mining players in its entirety. It sought to only exempt resident [EB1] entities from non-resident capital gains tax. While the sector is not interested in a blanket exemption for non-resident capital gains tax on overseas disposals, an exemption from such tax on new investment by way of new issue shares for [EB2] new or old shareholders would be welcomed by the mining fraternity. Once again, a positive statement of intent by the government would be to make such an amendment to the Income Tax Law.

One non-tax hurdle to catalysing these mining projects is the complexity that can be brought about by local content regulations. The general thrust of local content rules is not only positive but also necessary. As much as possible, Tanzanians must be able to benefit, in a sustainable way that goes beyond tax revenues, from the exploitation of their resources. At the moment, any purchase that is above USD 100,000 requires the Mining Commission’s approval. It therefore means that if you have Sh500,000,000 to spend, you could have thousands of approvals to secure before the project is complete. This is not only cumbersome, but red tape does exponentially increase costs. It may therefore be prudent, especially for items for which there are no clear local alternatives, for the regulators to facilitate the procurement of equipment and services that are necessary for these projects to take off. One would hope that this would be led by the regulators themselves.

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Tanzania’s mining renaissance: Prospects and lessons

What you need to know:

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