Taxation of extractive industries in East and Central Africa. Are these in harmony?

Transcription

1 Taxation of extractive industries in East and Central Africa Are these in harmony?

2 Panel Moderator Panel Max Mangoro Silke Mattern Albena Todorova Partner EY Zimbabwe Partner EY Tanzania Partner EY Mozambique Nelson Mwila Tax Principal EY Zambia Page 2

3 Mining sector The facts Mining industry is unique and not easily comparable with other generic economic sectors Resources are owned by the state but mostly extracted by private sector High risk as there is no guarantee of discovery or mine profitability Development is capital intensive with long lead times Mineral prices and exchange rates are highly volatile Mining can be long lived Page 3

4 A competitive world Countries must compete for highly mobile international exploration and development investment capital. Explorers are attracted by potential prospects. Mine developers are attracted by profitability: Mining companies by stability (political, social and fiscal) Page 4

5 The need for a competitive and stable fiscal regime A competitive and attractive mining fiscal regime is key for investment and mining recovery This has been the case for many countries that have witnessed mining sector growth over the past two decades According to the United Nations (UN) survey of mining companies (2005), 60% of the top 10 decision criteria a prospective mining investor considers before undertaking a mining project (investment) are tax related Page 5

6 Top 10 Factors considered by investors Top 10 factors considered by investors Related to tax? 1. Geological potential for target mineral No 2. Profitability of potential operations Yes 3. Security of tenure and permitting No 4. Ability to repatriate profits Yes 5. Ability to predetermine tax liability Yes 6. Stability of tax regime Yes 7. Consistency of minerals policies Yes 8. Realistic foreign exchange controls No 9. Stability of exploration terms and conditions Yes 10. Ability to predetermine environmental obligations No Page 6

7 Natural resources taxation At the first ATRN (African Tax Administration Forum) International tax workshop held at Victoria Falls in September 2013, the International Monetary Fund (IMF); African Regional Technical Assistance Centre (Afritac) East representatives said that governments shares of mining income should be: 40% to 60% in mining 65% to 85% in petroleum And that shares below this range should be cause for concern and regret: In 2013, Zimbabwe miners contributed 13% to fiscus, which was 17% of mining income. (source Reserve Bank of Zimbabwe (RBZ), Communications Zone (COMZ) Page 7

8 Discussion Page 8

9 The extractive industry tax life cycle The extractive industry as a whole has a life cycle that is subject to different taxes. Exploration Development and production Close down Page 9

10 Incentives and challenges Page 10

11 Multiple taxes and tax rates Rate (%) Tax head Tanzania Zambia Zimbabwe Mozambique Royalties 3, 5, 15 6 and 9 1 to to 8 Corporate tax and Withholding tax 5, 10, &15 VAT Customs duty to 20 0 to 60 Capital gains tax 30 1, 5, 20 PAYE 0 to 30 0 to 35 0 to 50 Windfall taxes - Yes APT ( sml) - MRTT 10 MRRT 20 Page 11

12 Need for fiscal stability Example: royalty In the past five years, many countries in the region have adopted low and stable mining royalty regimes. This has enabled countries such as Mozambique, Zambia, Democratic Republic of Congo (DRC) and Tanzania more than double their Foreign Direct Investment (FDI) in the mining sector. Zimbabwe has been different, as rates changed five times, with for gold and platinum going up by more than 100% and 200% respectively Mid Platinum Gold Page 12

13 Tanzania mining tax incentives Capital expenditure incurred exclusively for mining operations is deductible at a rate of 100%/150% (in year cost incurred) There are fiscal stability clauses in mineral development agreements (MDAs) There is ring fencing per mining concession 3 (MDAs) or 5% witholding tax (WHT) for local service suppliers Page 13

14 Challenges in Tanzanian mining regime MDAs are not always upheld by revenue authority MDAs have no real fiscal stability in newer agreements Agreed royalty rates (gold) were renegotiated VAT refund claims Fuel levy Significant administrative burden of reporting Capital gains tax (CGT) on indirect share transfers Page 14

15 Mozambique incentives to mining sector Customs duties exemption: VAT Customs duties exemption on the importation of class K goods, as well as other tools and machinery listed in the legislation, to be applied in the mining operations Exemption from VAT on services related to drilling, exploration and construction of infrastructure within the mining activity in the research and exploration phase Page 15

16 Mozambique tax challenges New legislation with no regulations as yet Developing industry knowledge by tax authorities Tax authority systems not yet adapted to new legislation requirements (ring fencing) VAT burden and refund challenges Taxation on group restructuring and transfer of mining rights Page 16

17 Zambia tax incentives No dividend withholding tax by a company carrying on mining operations Losses are carried forward for a period not exceeding 10 years; however, losses to be set off in a charge year is limited to 50% of the income from the mining operation There are rebates on specific imported materials and consumables Page 17

18 Challenges from the Zambia mining tax regime 2015 experienced two mining tax regimes, namely: 0% corporation income tax rate from 1 January to 30 June % royalty for underground mining and 20% for open cast mining From 1 July 2015, this regime was reversed as follows: 30% corporation income tax rate was reinstated 6% royalty for underground mining and 9% for open cast mining Unpredictable copper prices Page 18

19 Zimbabwe mining tax incentives Capital expenditure incurred exclusively for mining operations is deductible at a rate of 100% (spread over four years for special mining leases) Mining companies enjoy indefinite carry forward of their tax losses. Rebates on specific imported materials and consumables Exemption on interest payable to nonresidents Interest payable to nonresidents is exempt from tax Page 19

20 Challenges from the Zimbabwe mining tax regime High and unpredictable royalty tax burden Non - tax deductibility of royalty Apparent lack of coordination between government departments and agencies when levying charges and fees to mining companies High Environment Management Agency s charges High - ground and related mining fees and charges Non - uniformity of rural district charges Page 20

21 Resource nationalism update Resource nationalism has taken the following forms: Mandated beneficiation State ownership or participation Taxes or royalties and windfall profits taxes Mining reform Import/export restriction Transparency Retreating resource nationalism: returning focus to investment attraction Page 21

22 Trends and external factors affecting mining and metals companies External pressures such as resource nationalism, tax controversy and globalization are all affecting mining. Tax is changing from being largely compliance driven to a more commercial and strategic focus. Globalization has had a dramatic effect on business models. Tax administrations around the world have become more aggressive and assertive. Increased pressure and external factors affecting mining and metals companies The high pace of legislative change has created more risk and uncertainty. A new breed of tax activism has emerged. Growing disclosure and transparency requirements Expansion in emerging markets is creating tax risk and uncertainty. Page 22

23 The pendulum of risk has swung Economic uncertainty Volatile markets Massive capital outlays Squeezed margins Suboptimal returns Impairments Weaker prices Cost inflation Cost overruns More conservative approach to risk, including tax risk, by mining and metals companies Would you describe the focus on tax planning and reporting as aggressive, assertive, conservative or passive? Page 23 Africa Tax Conference 2015

24 Greater engagement with the board Presentations to the board include: Tax exposures Effective tax rate Interaction with tax authorities audits, claims and disputes Transactions Changes in tax interpretations or laws in jurisdictions where they have operations Tax provisions Page 24

25 Main challenges facing the tax function What are the main challenges facing tax functions? Page 25

26 Growing wave of mining tax controversy The world s tax administrations are joining forces at a startling speed, and concepts and processes are being shared. 72% of tax directors at mining and metals companies report a substantial increase in controversy with authorities. Question: if controversy has increased, what areas have tax authorities considered or reviewed? increases the more you have the me they want. Survey respondent Page 26

27 What are companies focusing on: set KPIs KPI s for senior tax personnel are aligned to business strategy, with a focus on the importance of risk mitigation and increasing cash flow. Question: what are the key performance indicators for tax function personnel within organizations? Effective tax rate / minimizing tax burden 43% 72% Timely compliance 28% 38% Risk mitigation 5% 25% Page 27

28 Aligning the tax agenda with the business agenda Question: what are the top considerations in tax planning? Page 28

29 Conclusions Page 29

30 Conclusions Most of the tax heads in the Southern African Development Community countries are similar; the major differences are on the rates of the taxes Royalties are the most common form of taxation Tax administrations collaborate with other tax administrations with developed skills Transfer pricing and tax avoidance are the flavors of the moment Countries have the same transparency requirements; for example, Tanzania, Zambia and Mozambique, who are already Extractive Industries Transparency Initiative (EITI) compliant Countries that have adopted low and stable mining royalty regimes have attracted more FDI Page 30

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