Mining taxation: Let’s mirror Zambia

By Stivin Elias

Tanzania and Zambia share a lot in common - not least a common border, and shared connecting infrastructure including the Tazara railway line and Tazama pipeline. There are also several similarities between our political history both past and present - and most recently a determination to ensure our economies are conducive to inbound investment.

Between 2017 and 2020 I was on secondment to PwC Zambia, and since my return I continue to take a strong interest in developments on the taxation side - particularly on the mining side, being an important sector for both countries. So is there anything we can learn from Zambia? I would like to suggest so - including as regards USD accounting for VAT, USD accounting for income tax, and tax deductibility of royalty and Corporate Social Responsibility (CSR) expenses.

USD accounting is of importance for mining companies as this is their normal operating currency. In the context of VAT, and as exporters, mining companies will always be in a VAT refund position - and given the invariable delays in reviewing and processing refunds, there is a financial exposure not just in terms of funding cost but also in terms of risk should the foreign currency rate depreciate. An interesting initiative taken in Zambia in 2023 (effective from 2024) was to amend the Value Added Tax (VAT) Act so as to enable mining companies that generate at least 75% of their gross income from mining operations in foreign currencies to maintain their VAT-related financial records in US dollars.

Similarly for income tax, the concern is to ensure that significant capital investment much of which will not be offset against income for several years will not have its value eroded as a tax deduction as a consequence of currency depreciation. With this in mind, in Zambia, a mining company is permitted to keep its accounts in US dollars, provided that the Commissioner General is satisfied that at least 75% of the company's gross income from mining operations is in foreign currencies. This entitlement has existed since 1994.

The inclusion of these provisions in both the VAT and Income Tax Acts in Zambia is critical for mining companies to shield them from any adverse impact of local currency depreciation.

A further benefit of extending the treatment from income tax to also cover VAT is that it allows for a smoother process of reconciling transactions for corporate income tax and VAT purposes.

The experience of royalty deductibility is another interesting one. In mining jurisdictions the normal practice is to recognise this as a normal business expense.

However, in 2018 (effective from 2019) Zambia decided to make it non-deductible. Following this very controversial move, it was subsequently reversed in 2022 and royalties continue to be deductible to align with international best practice. On the other hand, in 2023, Tanzania (through the Laws Revision (Miscellaneous Amendments) Act 2023) made an amendment to expressly disallow royalty costs; in effect seeking to tread the path that Zambia ultimately decided was unwise.

Why is the disallowance of royalty costs so contentious? Well, it raises several concerns including (i) conceptual logic (ii) inconsistency with international best practice and (iii) economic impact (viability of projects) and (iv) transparency of the tax regime.

Royalty is a mandatory contribution imposed under the Mining Act, 2010 and the historic treatment in Tanzania is that this is a valid business cost and deductible in determining taxable profit. The economic reality of the disallowance is the same as if the royalty had remained deductible but the royalty rate had been increased by 43%.

The mining industry also faces a challenge with respect to the deductibility of CSR costs. From the industry perspective such costs for the local community are seen as part and parcel of the “licence to operate” and therefore a required business cost.

However the Tanzania Revenue Authority (TRA) treated such costs as donations and therefore subject to the restrictions set out in the section dealing with “gifts to public and charitable institutions” including a general cap of a maximum deduction of two percent of taxable income, and with effect from July 2023 the express exclusion of the mining sector from access to this relief at all.

With effect from July 2023 there is a legal obligation for mining companies to incur CSR costs, but the TRA position remained that such costs are to be treated essentially as donations (i.e. voluntary gifts).

In contrast, in Zambia there is no mandatory imposition of CSR costs, and in any case the deduction provisions in relation to donations are more generous as the limit in this case is 15 percent of taxable income (and provided that the payment is made to an approved public benefit organisation).

It is hoped that the upcoming national budget will introduce essential fiscal changes aimed at fostering a favourable taxation climate within the mining industry. Stakeholders will be watching keenly to see what changes will be made - not least as regards the allowance of royalty costs as a deductible expense.

Stivin Elias Tax Services manager with PwC Tanzania