Taxation of extractive industry

In our previous recent articles we have been looking at the new income tax regime for the extractive industry as introduced in the Finance Act, 2016. We noted that the Income Tax Act, 2004 has been amended to incorporate two new divisions for mining and petroleum respectively.  

The changes introduced cover ring fencing of mineral and petroleum operations; granting of depreciation allowances; realization (disposal) of mineral and petroleum rights; treatment of unrelieved tax losses; treatment of joint mineral and petroleum rights; treatment of bonus payments; provisions for rehabilitation and decommissioning expenditure etc. Today’s article focuses on other taxes applicable to the extractive industry.

Value-added tax (VAT)

The VAT Act, 2014 replaced the VAT Act, cap.148 of 1997. The VAT Act, 2014 became operational from 1st July 2015. Overall the main objectives of the VAT Act, 2014 are to broaden the tax base through removal of exemptions for various supplies and introduction of VAT on some supplies; introduction of the destination principle i.e. imposition of VAT on the value added of all taxable products consumed domestically in line with international trends on imposition of VAT as well as to remove the powers of the Minister for Finance to grant VAT exemptions etc.

Applicability and payment of VAT

VAT is charged on taxable supplies and on taxable imports to mainland Tanzania. The standard VAT rate is 18 per cent. Export of goods and services are zero rated i.e. charged at 0 per cent. Registration threshold is an annual taxable turnover of Tshs.100m. However the Commissioner has power to register intending traders who wish to be registered for VAT. 

Thus for instance companies in the extractive industry with no turnover but wish to recover input tax incurred during start up can apply for VAT registration. 

Effectively from July 1, 2016, the due date for filing VAT returns and payment of VAT has been changed to the 20th day of the month following the end of tax period. Previously the due date for filing VAT returns was the last working day of the month following the end of tax period.

VAT exemptions for companies in extractive industry

• Under the VAT Act, 2014 VAT exemptions for the extractive sector applies on import of goods by a registered and licensed explorer or prospector for the exclusive use in oil, gas or mineral exploration or prospecting activities to the extent that those goods are eligible for relief from customs duties under the East African Customs Management Act, 2004.

• Exemptions from VAT also applies to importation of  CNG plants, equipment, natural gas pipes, transportation and distribution pipes, CNG storage cascades, CNG special transportation vehicles, natural gas metering equipment, CNG refueling of filling, gas receiving units, flare gas system, condensate tanks and leading facility, system piping and pipe rack, condensate stabilizer by a natural gas distributor.

• Further, concluded binding agreements (MDAs and PSAs) before commencement of the VAT Act 2014 relating to exploration and prospecting of minerals, gas or oil shall continue to be governed by the provisions of the repealed VAT Act, 1997 in relation to VAT relief provided for in the agreements.

Mr Makundi is a partner with Auditax International