Tax Regimes in the Mining Sector

Tax regimes in the

mining sector

Kenya, Uganda, Tanzania

www.pwc.co.uk

24 September

2015

PwC

Overview of mining lifecycle

Entry Ongoing Exit

Key issues:

Setting up legal entity to

acquire mining rights

Branch vs Subsidiary

(local company)

considerations

Acquisition of mining

rights

Key issues:

Deductibility of

prospecting and

extraction expenditure

Recoverability of tax

losses

Funding- debt vs equity

Royalty payments to

government

Withholding taxes on

services obtained

Tax filing obligations

Key issues:

Disposal may be direct

or indirect

Direct disposal involves

sale of the mine asset

Indirect disposal

involves transfer of

shares in a company

holding a minining right

Different tax rules apply

for each disposal

Winding up and

deregistration

Slide 1September 2015

Tax overview of the mining sector in East Africa

PwC

Mining landscape

Slide 2

September 2015Tax overview of the mining sector in East Africa

PwC

Kenya

In summary

Slide 3

Kenya remains relatively unexplored attractive target

Kenya Government is overhauling mining laws to encourage

investment.

Theres increasing interest from the Kenya government, foreign

investors and other stakeholders.

2014 saw a complete rewrite of the tax schedule on mining in

the Income Tax Act.

There has been a recent trend by the government to increase the

royalty rates on minerals

New Mining Act passed on 16 September 2015 (Awaiting

presidential assent). Key measures relate to reducing mining

licencing requirements, better framework for dispute

resolutions and clarity on the level of government control on

the mining sector.


PwC

Tanzania

In summary

Slide 4

Mining in Tanzania is somewhat more developed with mining

contributing circa 4% of GDP and it is Africas 4th largest miner

of gold.

There was an increase in royalty rates and change to the royalty

base in 2010.

Mining Development Agreements (MDA) include guarantee of

fiscal stability.

MDAs are only issued for investments of > $100m.


PwC

Uganda

In summary

Slide 5

Ugandas mining industry remains relatively unexploited

despite the existence of significant commercially viable

reserves.

World Bank funded survey in 2014 found western and central

regions to be most mineral rich.

Variety of prospective and exploration licences governed by

Mining Investment Code.

No separate tax mining code for Uganda but as recently as July

2015, mining has come within the petroleum tax code.


PwC

Entry considerations

Set up Ongoing Exit

Slide 6


Kenya Tanzania Uganda

Choice of

legal entity

Foreign investors may set up local branches of a foreign company or register

a local company.

Dependent on investor specific circumstances.

Minimal tax considerations between branches and companies.

Common

entry

options

Mining licence right obtained directly from the government

Purchase shares in a company holding a mining right.

Taxes on

entry

No VAT on purchase

of shares.

Stamp duty is

payable but the

amounts are

minimal.

No VAT on purchase

of shares.

1% stamp duty on

purchase of shares

Minimal stamp duty

on issuance of shares.

No VAT on purchase

of shares.

Stamp duty is

chargeable at 1% on a

purchase of shares.

0.5% stamp duty on

company formation,

capital-raising

activities.

PwC

Ongoing considerations

Set up Ongoing Exit

Slide 7



Expenditure Expenditure on costs

of acquiring an

interest, prospecting

information, farm out

agreement or in

undertaking

operations authorised

under a prospecting

right are allowable.

100% capital

allowances on

prospecting

expenditure in the

year in which the

expenditure is

incurred.

100% deduction for

exploration and

development

extended to

equipment used for

prospecting and

exploration of

minerals or

petroleum.

Deduction for

provision for future

environmental

expenditure.

All expenditure of a

capital nature

incurred in

searching for,

discovering, testing

and winning access

to mineral deposits

is tax deductible.

PwC


Set up Ongoing Exit

Slide 8



Expenditure Capital expenditure

incurred on

operations is

deductible upon

commencement of

production at a rate of

20% over a 5 year

period.

PwC


Set up Ongoing Exit

Slide 9



Ring fencing

of mining

areas

Mining areas are ring

fenced i.e.

Expenditure incurred

in a particular licence

area can only be

offset against income

derived from that

licence area.

A licence area is

defined as the area

that is the subject of

a mining right.

Ring-fencing rules

apply to separate

mining areas

Expenditure incurred

in a particular licence

area can only be

offset against income

derived from that

licence area.

Historically, mining

areas were not ring

fenced but recent

inclusion in

petroleum code calls

this into question.

PwC


Set up Ongoing Exit

Slide 10



Losses Can be carried forward indefinitely based on the licence area (in Kenya and

Tanzania) and generally for Uganda.

PwC


Set up Ongoing Exit

Slide 11



Financing At the early stages before production, equity financing may be better than

using debt.

15% Withholding tax

is payable on interest.

Interest restricted

where debt equity

ratio exceeds 2:1.

Deemed interest on

related party interest-

free loans provided is

subject to 15%

withholding tax.

10% withholding tax

payable on interest.

Interest restrictions

apply where the debt

equity ratio exceeds

3:7.

Risk of assessment of

deemed interest on

interest free loans

and potential

application of

withholding tax

although a general

acceptance that is not

appropriate during

the exploration stage.

15% withholding tax

payable on interest.

Interest restrictions

apply where debt

equity ratio exceeds

1.5:1.

There is guidance on

what constitutes

foreign debt and

foreign equity within

the law.

PwC


Set up Ongoing Exit

Slide 12


Kenya Tanzania(note) Uganda

Withholding

tax on

payments to

non-

residents

5.625% withholding

tax on payments to a

non-resident sub-

contractor without a

permanent

establishment in

respect of service fees

for mining operations

This is a final tax.

20% withholding tax

on payments to a

non-resident

person for

management/profess

-ional/training fee.

This is a final tax.

15% withholding tax

on payments to non-

residents in all

circumstances.

Challenged in the

courts under

definition of source

rules.

Withholding tax of

15% or reduced rate

per DTA applies on

payments by resident

persons to a person

outside Uganda.

Under the UK treaty

the rate remains at

15%.

Note15% withholding tax on natural resource payments. Defined as any payment, including a premium or like

amount, for the right to take natural resources from land or the sea or calculated in whole or part by reference to the

quantity or value of natural resources taken from land or the sea.

PwC


Set up Ongoing Exit

Slide 13


Kenya TanzaniaNote Uganda

Withholding

tax on

payments to

residents

For resident

persons, withholding

ranges from 3% to 5%

- not a final tax.

5% withholding tax

on technical service

payments to

residents.

Technical services

definition is extended

to include

management,

professional and

consulting services

This is not a final tax.

Withholding tax of

15% on interest and

dividends.

NoteThe tax authority has argued that allowable corporate tax deduction for services is the net amount where the

contract for services includes a gross up for withholding tax.

PwC


Set up Ongoing Exit

Slide 14



Value added

tax

Exemption granted

on taxable goods,

excluding motor

vehicles, imported or

purchased for direct

and exclusive use in

prospecting or

exploration.

Certain

administrative

procedures and

approvals are

required to effect the

VAT exemption.

Consequence for

suppliers is that VAT

on their expenditure

becomes a cost.

VAT registration

available if intention

to trade can be

demonstrated.

Mining companies

qualify for VAT

refunds on a monthly

basis, as more than

50% of turnover will

be zero rated.

Investors in the

mining and

petroleum

exploration sector can

register for VAT

before starting to

make taxable

supplies.

PwC


Set up Ongoing Exit

Slide 15



Value added

tax

There are intricate

rules on applicability

of VAT on imported

services.

Where no taxable

supplies made (e.g.

prospecting stage),

VAT cost on

imported services

maybe recoverable if

a trade is intended.

Domestic sales of

minerals are subject

to 16% VAT, 0% for

export.

Therefore input VAT

in production phase

maybe refundable but

not straightforward

claim.

There is no

requirement to

account for VAT on

imported services,

unless less than 10%

of the mining entitys

supplies are exempt

(considered unlikely).

There is a three year

time limit for

correcting errors.

VAT reliefs are more

limited under new

VAT Act.

VAT registration

facilitates claiming of

input VAT paid on

imported plant,

equipment,

machinery and

supplies incurred

during the

development phase.

PwC


Set up Ongoing Exit

Slide 16



Corporation

tax

The corporation tax

rate for a subsidiary

is 30% and that of a

branch is 37.5%)

The corporation tax

rate for a branch or

local company is 30%

Mining companies are

subject to a Variable

Rate Income Tax.

A specified formula

applied for purposes

of computing the

variable rate income

tax.

Derived rate is

between 25%-45%.

The tax rate obtained

is applied to the

chargeable income to

compute the

corporation tax

payable by the mining

entity.

PwC


Set up Ongoing Exit

Slide 17



Royalties Royalties payable to

government on sale

of minerals have been

on an upward

trajectory

Currently rates range

between 1% and 12%

a) 1% for industrial

minerals such as

gypsum and

limestone

b) 10% for coal,

titanium ores,

niobium and

rare-earth

elements

c) 12% for

diamonds.

Royalty rates are

applied on gross

values. Examples of

royalty rates are:

5%: Diamonds,

Raw gemstones,

Uranium

4%: Metallic

minerals (incl.

copper, gold,

silver & platinum

group)

1%: Cut and

processed Gems

3%: other

minerals

Royalties are payable

on the gross value of

the minerals based on

the prevailing market

price of the minerals.

Examples of royalty

rates are 3% for

precious metals, 5%

for precious stones

and 3% for base

metals and ores.

The Minister has,

with the approval of

the Cabinet, powers to

waive any royalty

payable on any

mineral from a

particular deposit.

PwC


Set up Ongoing Exit

Slide 18



Transfer

pricing

All entities are

required to undertake

transactions with

related parties at

arms length.

The tax authority is

empowered to adjust

the profits of an

entity where

transactions are

deemed not to have

been conducted at

arms length.

All entities are required

to undertake

transactions with

related parties at arms

length.

Entities are required to

maintain proper

transfer pricing

documentation.

Taxpayers are required

to maintain proper

transfer pricing

documentation

containing the

company details and

transaction details,

agreements and the

pricing methodology

used in determining

the arm's-length price.

These provisions are

often applied by the

Uganda tax authorities

where they are of the

view that a non-

resident person may be

transferring profits

from Uganda.

PwC


Set up Ongoing Exit

Slide 19



Tax filing

and

payments

Corporate tax returns

filed within 6 months

after the last day of

the entitys

accounting period.

Electronic filing has

been introduced for

all tax returns.

Corporate income tax

is payable in

quarterly instalments

and any balance paid

within four months

after the last day of

the entitys

accounting period.

Corporate tax returns

should be filed within

6 months after the

last day of the entitys

accounting period.

Corporate income tax

is payable in quarterly

instalments during

the accounting period

and any remaining

balance paid when

filing the company tax

return.

Currently only VAT

return can be filed

electronically, and

only for companies

with TRA large

taxpayers office

Self assessment

returns are due by the

end of the sixth

month after the end

of the accounting

year. Electronic filing

is done for all tax

returns.

Tax is payable in

instalments based on

estimated profits.

50% is due by the end

of the sixth month of

the accounting period

and the remainder

payment is due by the

end of the 12th

month. Balance paid

with the tax return

PwC


Set up Ongoing Exit

Slide 20



Tax assessments It is not uncommon for the tax authorities to issue speculative initial

tax assessments. Assessments following a tax audit are generally more

reasonable. Taxpayers can appeal to assessments issued by the tax

authorities.

Local content

requirements

For Kenya there are no local content requirements but mining entities

are encouraged to employ local people.

For Uganda, local content rules apply in respect of goods and services.

For Tanzania, the license requires inclusion of a plan with respect to the

Employment and training of citizens of Tanzania and succession plan

for expatriate employees.

The Tanzanian company is required to give preference to the purchase

of goods and services available in Tanzania provided such goods and

services are available at required time, quality and quantity and arc

offered at competitive prices on delivered basis in Tanzania.

PwC

Common Exit Options

Slide 21

Set up Ongoing Exit

a) Direct disposal

Sale of the shares in the local Kenya

company


Overseas

Parent

Company

Local

Company or

Branch

Local

Company

Intermediate

Overseas

company

b) Indirect disposal

Sale of shares in the overseas company

Disposal

level

Disposal

level

Overseas

Parent

Company

Local mining

territory

Kenya,

Tanzania or

Uganda

Overseas

investor

territory

PwC

Exit considerations

Set up Ongoing Exit

Slide 22



Direct

disposal

Sale consideration

taxed where 20% or

more of the interest

derives from

immoveable property

(includes mining

rights);

The tax rate applied by

the tax authorities is

30%.

Gain on disposal of

shares subject to

income tax;

The rate of tax is

30%.

Sale consideration

taxed where the

underlying

asset/immovable

property (includes

mining rights) is in

Uganda;

The capital gains tax

rate is 30%.

PwC

Exit considerations

Set up Ongoing Exit

Slide 23



Indirect

disposal

Sale consideration

taxed where 20% or

more of the interest

derives from

immoveable property

(includes mining

rights);

The tax rate is not set

out in law but rate

applied by the tax

authorities is 30% in

the case of a company

or 37.5% for a branch

Deemed disposal at

market value by

local entity where

underlying

ownership changes

by >50% compared

to the previous two

years;

The rate of tax is

30%

Sale consideration

taxed where the

underlying

asset/immovable

property (includes

mining rights) is in

Uganda;

The capital gains tax

rate is 30%.

PwC

Exit considerations

Set up Ongoing Exit

Slide 24



Disposal

points to

note

A licensee is required

to notify the

Commissioner (in

writing) immediately if

there is a change of

10% or more in the

underlying ownership

of the licensee.

Underlying

ownership looks to

the ultimate

shareholder.

Potentially

applicable to share

dealing on stock

exchange.

100% of all the

assets and liabilities

deemed to be sold

and reacquired at

market value.

A mining right,

petroleum right or

petroleum

information is

considered to be

immovable property

for purposes of

disposal.

Local company is made an agent for collection of tax in cases of an indirect

disposal.

PwC

Exit considerations Other matters

Slide 25

Set up Ongoing Exit

Kenya Natural resource income (NRI)

NRI is a tax that is imposed on natural resource & private overriding royalty type

agreements.

Where a transfer of a mining right is made, the purchaser is required to withhold a

percentage of any royalty payments made to the seller.

Where payment is made to a resident, the purchaser should withhold 5% of the gross

payment. For payments to a non-resident, the applicable rate is 20%


PwC

Base Erosion and Profit

Shifting in East Africa

Slide 26


PwC

Implementation of BEPS in East Africa

Slide 27

OECD released its strategy for developing countries engagement in BEPS project which

includes aspects such as :

Participation of developing countries in meetings of key BEPs decision making bodies.

Participation in the works of regional networks of revenue authorities such as ATAF

with the aim of capacity building.

BEPS themed legislative amendments in East Africa Include:

a) More comprehensive PE definition for Kenya.

b) Clarification on taxation of digital services ( VAT Act) in Kenya.

c) Introduction of limitation of benefit clause applicable to double tax treaties in

Kenya.

d) Introduction of detailed transfer pricing rules in Tanzania in 2014.

Revenue authority audits are more focused on the economic value chain and more

scrutiny is expected in transactions such as management fees, royalties, etc.


PwC

Your contacts

Slide 28

Kenya

Steve Okello Osborne Wanyoike

Partner Director

Office: +254 (20) 2855116 Office: +254 (20) 2855133

Email: [email protected] Email: [email protected]

Tanzania

David Tarimo Michael Quinton

Partner Senior Manager

Office: +255 (0) 22 219 2600 Office: +255 (0) 22 219 2612



Nicola Corp

Partner

Office: +44 (0)207804 4732

Mobile: +44 (0) 7718 340460

Email: [email protected]

Vijal Shah

Senior Manager

Office: +44 (0) 207 804 9079

Mobile: +44 (0) 7713 789 61

Email: [email protected]

UK

PwC

Your contacts

Slide 29


Uganda

Francis Kamulegeya Plaxeda Wanyoike

Partner Director

Office: +256 312 354425 Office: +256 312 354479


Questions?

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Tax Regimes in the Mining Sector

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