TAX NEWS - June 2010

Expert faults ring fencing tax policy on mining firms

Enforcement of ring fencing taxation policy on mining companies in Tanzania will be difficult, an expert has said.

Finance and Economic Affairs minister Mustafa Mkulo had said while presenting budget estimates for the financial year 2010/11 that the government was introducing ring fencing taxation on each mine, to avoid the tendency of loss transferring form one mine to another for those companies with multiple mines.

But the PriceWaterhouseCoopers (PWC) Tax Partner, Mr Richard Marshall, thinks that ring fencing will likely trigger a number of complications.

"How will shared deductible expenses, for example, be allocated? In addition, what  exactly is a "mine" because mining  companies may have several pits  within one mining area, or which in  isolation are not economic to run?" he wonders.

Speaking in a post-budget review in Dar es Salaam last week, Mr Marshall said the move by the government was unnecessary and complex.  He said it was likely to discourage further exploration by mining companies.

The change in the mining fiscal regime has become a constant phenomenon in Tanzania, and other stakeholders are of the view that the constant change risks undermining the country's competitiveness as an investment destination especially in these tight financial times.

The changes also make it difficult to rely on government agreements, stakeholders say. The Mining Bill 2010 passed recently by the Parliament also instituted some notable changes in the mining sector. Some of these changes include the state participation in mining ownership on a 'free carry' basis, mandatory listing with the local bourse and reserving certain mining activities to Tanzanians.

On the other aspects of taxes on the 2010/11 budget, Mr Marshall noted the withholding tax at two per cent, which has been extended to cover payments by all taxpayers as a good move by the government as it will encourage voluntary registration for the Taxpayer Identification Number (TIN) and capture the income that currently falls outside the tax net.

Nevertheless, he said the new arrangement would also increase the administrative burden for taxpayers.  

Mr Marshall argued that from the economic efficiency perspective, a moderate Value Added Tax (VAT) rate with a broad consumption base and few exemptions is always preferred to a high rate with many exemptions.     

"To all intents and purposes, exempting an item will only be  advantageous to a purchaser if no  VAT costs are incurred in the  production of that item," he argued, noting further:

"Where VAT has been incurred then it cannot be recovered and is often passed to the consumer, making the item more expensive." 

Consistent with the government giving priority to agriculture under the 'Kilimo Kwanza' initiative, minister Mkulo announced several tax changes to assist the sector. These range from exemptions to zero-rating and special reliefs.

New exemptions that have been introduced include transportation of some agricultural products from farms to the location of processing. The products concerned are sugar cane, sisal and tea plantations.

The Finance and Economic Affairs minister Mr Mustafa Mkulo made it clear that the exemptions will apply to organised farming only.

However, Mr Marshall said while the amendment is meant to reduce the VAT burden on agricultural companies, exempting transportation will have a minimal effect as transporters will now not be able to claim the VAT on their inputs such as repairs and spare parts.

As a result, he said, they will simply add the charge to the farming entity. "A better approach would have been to zero-rate this supply," he suggested.