MINING COMPANIES SIGNIFICANT CONTRIBUTORS TO ECONOMY, OPERATE TRANSPARENTLY.

 Balozi Ami Mpungwe

MINING COMPANIES SIGNIFICANT CONTRIBUTORS TO ECONOMY, OPERATE TRANSPARENTLY

TANZANIA CHAMBER OF MINERALS AND ENERGY PRESS STATEMENT

MINING COMPANIES SIGNIFICANT CONTRIBUTORS TO ECONOMY, OPERATE TRANSPARENTLY Recently, the mining sector has seen negative media reports in relation to the way in which it operates. The Tanzania Chamber of Minerals and Energy (TCME) represents member companies involved in the mining sector, from explorers to large scale producers as well as medium and small scale miners. 

Businesses that support the mining sector also form part of the membership. This sector is a significant contributor to Tanzania’s economy and the statistics below show the tangible fiscal and social benefits that accrue to the Tanzanian economy which in turn enables the Tanzanian Government to deliver on important development projects. 

  Mining Benefits to Tanzania Key statistics:  Investment into the mining sector from 1997 - 2015: USD 4.5 billion.  Revenue generated over the same period: USD 16.5 billion  GDP contribution: 3.3% (2013), Vs Vision 2025 of 10% contribution.  43% of total exports in 2013 (BOT Annual Report 2012/13).  48.2% Gross Value Added (% of revenue retained in country) i.e utilized for local procurement, taxes, training, infrastructure, local salaries and others.  Large Scale Mining employs directly 20,000 and another 200,000 induced (1:10) Chart showing distribution of revenue generated by member companies for the period 1997-2015 The revenue generated by our members amounted to USD 16,499,378,727 for the period 1997 to 2015Description Amount spent (US$) % of Revenue Local Procurement 4,812,639,755 29.2 Community Spend 50,813,229 0.3 Training Spend 40,946,264 0.2 Local Salaries 1,146,813,407 7.0 Infrastructure Spend 58,095,698 0.4 Royalty & Other Taxes to Govt 1,827,814,617 11.1 TOTAL 7,937,122,971 48.2 The above chart and accompanying table indicates that the Gross Value Added (GVA) in the Tanzanian economy adds up to 48.1% (that is the amount of all payments made by the companies in-country as a percentage of revenue generated by the companies. The statistics provide to a large extent the vast tangible incremental fiscal and social benefits that accrue to the Tanzanian economy. The government benefits directly from royalty payments of 4% or 5% depending on minerals produced which is charged on gross turnover (not on profit).

 Local withholding taxes, corporation tax charged at 30% on profits, employment taxes and customs duties are other sources of Government revenue as shown on the chart. In addition to direct taxation, the development of the mining industry has had a massive impact on many other sectors. As a result of mines that were constructed, rural communities have had access to power and water supplies where there were none previously, thus enabling improvement of the quality of life of rural communities that prior to the arrival of the investors, might have seemed unattainable in rural Tanzania, mobile phone networks have reached communities previously isolated from modern communication. Other benefits include improvements and rehabilitation of local schools the equipping and supply of dispensaries and encouraging local businesses to flourish; these are all standard activities on the part of the mining companies in an effort to foster a positive relationship with the community around the mine area. 

It is noteworthy to point out that that these benefits flow to the communities without cost or charge, and are not a compulsory requirement of the Government but cost the companies millions of dollars. These costs cannot be reported as tax credits, but are funding tangible contributions to national development. In addition, railways have benefited by the freighting of supplies, trucking companies have expanded, to meet the demands of the mines, hotels in Dar es Salaam, Mwanza, Geita etc. have seen a significant increase in occupancy rates due to the mining employees and international visitors. Even tourism has reaped a benefit by the many mining related people visiting Tanzania’s world class national parks. New roads have been constructed or existing roads upgraded, not at the cost of the taxpayer, but the mining companies themselves

 These are all very real and tangible benefits to Tanzanian citizens that the critics of the industry choose to ignore or overlook. These benefits increase with every additional mine that comes on stream in Tanzania. We need to continue leveraging the untapped potential linkages with other sectors of the economy, such as roads, ports, railways; manufacturing, including beer production; agro and food processing; energy; technology and knowledge transfer, tourism etc. Future of the Industry The future of the mining industry is at a watershed marred with great uncertainty unless urgent strategic interventions are made in the macro-economic and sectorial environment that would enable Tanzania to reclaim its competitiveness and attractiveness as an investment destination of choice that it once was, not too long ago. In early 2000s, Tanzania opened at least one gold mine every year until about year 2005. 

That was the time Government of Tanzania embarked on deliberate measures to attract mining investments which resulted in massive injection of USD 4.5 bn of Foreign Direct Investment in the Mining Sector alone. This investment over that period created value and significantly contributed to Tanzania’s economic growth and poverty reduction. We are yet to see the momentum of opening new large scale gold and other mines and exploration work has significantly waned. This investment has gone to other countries in Africa instead – in the last 8 years, Burkina Faso for instance has seen six new large scale mines open and exploration has continued to identify further investment options.

 Declining exploration and mining projects calls for an urgent need of a turn-around that would result into massive inflow to revamp exploration and mining capital that would uplift and sustain the investment momentum. Otherwise, under the current circumstances, medium to long term outlook, one should not be considered unpatriotic to say, Tanzania’s 2025 Vision of achieving 10% GDP growth from the mining sector is far-fetched if such strategic corrective interventions are not made, sooner rather than later.Transparency of the Mining Sector We also address media reports on a recent decision of the Tax Appeals Tribunal in relation to one member of the TCME - Acacia Mining plc (Acacia).

 The TCME wishes to inform the general public that it fully supports and re-iterates Acacia’s view that the allegations directed against our member are utterly baseless. Having scrutinized the article published in the media, there are essentially two major areas which require clarification: 1. Dividend Payments The books of accounts of the mining companies are the most intensely and persistently audited than any other companies or industries in Tanzania. All of the large scale mining members are listed on various stock exchanges such as New York Stock Exchange, Toronto Stock Exchange, London Stock Exchange, Johannesburg Stock Exchange, Australia Stock Exchange etc., and are therefore subjected to rigorous scrutiny and strict disclosure requirements based on best international practice of corporate governance. In addition to the world class international external Auditors including the likes of PwC, EY, Deloitte and KPMG etc. the accounts and supporting tax records are also regularly and routinely audited by Tanzania Revenue Authority (TRA), Controller and Auditor General (CAG), Ministry of Energy and Minerals through Tanzania Minerals Audit Agency (TMAA), Tanzania Extractive Industries Transparency Initiative (TEITI) etc. In spite of all these audits, none of our members has over the years been brought to book or found guilty of the allegations that are regularly raised against our individual member companies and the industry as a whole. 

Instead, our individual member companies have won accolades from Ministry of Finance through TRA for being most tax compliant entities in the sector. It has been asserted that Acaciahas been paying dividends to its offshore shareholders in London despite the fact that its Tanzania mines (North Mara Gold Mine, Bulyanhulu Gold Mine and Buzwagi Gold Mine) have been consistently incurring losses. We find it prudent to address this matter from a professional point of view. 

b For the period under review on the subject matter, all Acacia operating entities in Tanzania declared accounting profits. However under the Tanzanian income tax law and the terms of the Mine Development Agreements, until the initial investment has been recouped the entities are not in a position to pay any corporation tax (Tax on profits). It is worth noting that Acacia alone has to date invested USD 3.8billion into building and developing four (4) modern large scale mines, one of which (Tulawaka) has been handed over to the Government and is now operated by STAMICO. As per usual practice any initial investment has to be recouped before the company pays corporate tax - in effect any profits are offset against the capital investment resulting into taxable losses. The financial results of Acacia and its Tanzania subsidiaries are available to the general public through its audited financial statements, which can be found on its website. Dividend payments are declared in those accounts and the payment of dividends are not entirely dependent on profits. Dividends can be paid based on retained earnings, capital reduction, free cash flows, and available cash reserves. In the year 2010, when African Barrick Gold plc (Now Acacia) was created as a separate entity and it raised funds through the issue of 107 million new ordinary shares. Part of these proceeds have been used to invest further in Acacia’s mines and exploration and part retained as reserves for other uses including the payment of dividends. 

         These funds did not have their origin in Tanzania and they were therefore not subject to any form of Tax in Tanzania. In the United Kingdom, and in many other countries, it is legal and accepted practice to pay dividends from capital reserves. Consequently it is entirely incorrect to assert as reported in some of the media coverage, that dividend payments by a company can only be made if there is enough profit. 2. Tax Residency and Allegation on Permanent Establishment Following changes in the mining legislation and in response to a Government request, Acacia as a gesture of goodwill, agreed to cross list on the Dar Es Salaam Stock Exchange (DSE) in December 2011. As a pre-requisite for cross listing, Acacia was required to obtain certificate of compliance from the Business Registration and Licensing Authority (BRELA). Following the registration the Tanzania Revenue Authority then forcefully registered Acacia for VAT and TIN on an assumption that the company is resident in Tanzania for Tax purposes. Acacia is registered as a foreign company under the laws of Tanzania and holds certificate of compliance No. 75382 in accordance with Part xii of Company’s Act. The company was required to obtain the certificate of compliance in order to offer shares to Tanzanian Investors under private placement at the time of its initial public offering on the London Stock Exchange. 

In essence the certificate of compliance confirms that the laws under which the foreign company is incorporated are, for all company law intents and purposes equivalent to company law in Tanzania. The certificate is NOT, in itself representative of the conduct of business within Tanzania. It also has to be noted that a number of other foreign companies have completed cross listing process for purposes of listing shares on the DSE. All such companies are recognized publically as being foreign companies and NOT Tanzanian Companies for Tax purposes. 

Acacia should not be an exception to this. Further, since the company’s subsidiaries in Tanzania (Bulyanhulu Gold Mine, North Mara Gold Mine and Buzwagi) uses Acacia name to identify their existence in Tanzania, it has been asserted that based on the use of parent company’s name, Acacia is assumed to have tax residence in Tanzania and therefore subjected to Tanzanian Income Tax and hence withholding tax on dividends. It has to be noted that the North Mara Gold Mine LTD, Bulyanhulu Gold Mine LTD and Buzwagi Gold Mine (Pangea Minerals LTD) are individual legal entities incorporated in Tanzania and registered as required by the law. These three individual companies are separately registered with TRA for VAT and TIN and pay taxes and royalties within Tanzania. 

However for branding purposes the three individual companies as a group use the holding company’s name. This does not mean that Acacia has tax residence in Tanzania. Using abrand name to assert tax residency can be very destructive and threating to future investments in Tanzania. The assumptions might imply that all multinational companies with branches in Tanzania and/or which use parent company’s name to operate locally to have tax residency in Tanzania and any form of dividends paid to shareholders overseas corresponding to Tanzania operations to be subject to tax in Tanzania regardless of taxes already paid in their jurisdictions.

Acacia is a significant contributor to the Tanzanian mining sector. In the last six years alone, Acacia companies have paid over US$750 million of taxes and royalties in Tanzania, nearly double the amount that shareholders have received in dividends. It invested US$65 million into community development projects and currently supports over 45,000 jobs in the country. In addition to taxes and royalties that Acacia companies are legally required to pay, it has agreed to contribute more through a corporate tax pre-payment agreement, a voluntary increase in local service levy and a voluntary increase in the royalty rate. It does so in an open and transparent way and makes this information available to the Government, stakeholders and the public on an on-going basis.

 Latest news from one of the newspapers claims that one manufacturing company, TBL, paid more taxes in 2015 than all major mining companies in Tanzania combined. It is our view that one needs to compare apples for apples but in this case, one is attempting to compare two completely different industries. The TBL as a company in the beverage industry has a different cost base, just as its products are also different. In this regard, the initial investment for a beer factory is much smaller compared to Mining and it is also one-off, save for maintenance, upgrade and expansion costs. Mining’s risk profile and investment begins at the exploratory phase and requires heavy initial and progressive investments through mining development. 

Commodity prices are also extremely volatile and the industry does not have any control or room for manoeuvre. One also needs to look at the multiplier effect brought in by the Mining Industry and its economic benefits in general rather than a limited focus on taxes. Tanzania Chamber of Minerals and Energy was established in 1994. The main role of the Chamber as a focal point for mining sector investors is to represent the common interests of stakeholders in the minerals industry and dealing with issues affecting the mining industry in general and its members in particular. 

The Chamber exists to ensure that promulgation of policy, legal, regulatory, and fiscal frameworks take into account the interest of the members in collaboration with the government. Issued by Amb. Ami Mpungwe (rtd), Chairman Tanzania Chamber of Minerals and Energy For Enquiry: Mr. Emmanuel Jengo Executive Secretary – Tanzania Chamber of Minerals and Energy Telephone: - +255 22 2667594 E-mail:- immaj@chamberofmines.org