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Tax regimes in the


mining sector
Kenya, Uganda, Tanzania
24 September
2015

Overview of mining lifecycle


Entry

Key issues:
Setting up legal entity to
acquire mining rights
Branch vs Subsidiary
(local company)
considerations
Acquisition of mining
rights

Ongoing

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

Tax overview of the mining sector in East Africa


PwC

Exit

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
September 2015
Slide 1

Mining landscape

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 2

Kenya
In summary
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.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 3

Tanzania
In summary
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.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 4

Uganda
In summary
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.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 5

Set up

Ongoing

Exit

Entry considerations
Kenya
Choice of
legal entity

Tanzania

Uganda

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.

No VAT on purchase
of shares.

No VAT on purchase
of shares.

Stamp duty is
payable but the
amounts are
minimal.

1% stamp duty on
purchase of shares

Stamp duty is
chargeable at 1% on a
purchase of shares.

Minimal stamp duty


on issuance of shares.

Tax overview of the mining sector in East Africa


PwC

0.5% stamp duty on


company formation,
capital-raising
activities.
September 2015
Slide 6

Set up

Ongoing

Exit

Ongoing considerations
Kenya
Expenditure

Tanzania

Expenditure on costs
of acquiring an
interest, prospecting
information, farm out
agreement or in
undertaking
operations authorised
under a prospecting
right are allowable.

100% deduction for


exploration and
development
extended to
equipment used for
prospecting and
exploration of
minerals or
petroleum.

100% capital
allowances on
prospecting
expenditure in the
year in which the
expenditure is
incurred.

Deduction for
provision for future
environmental
expenditure.

Tax overview of the mining sector in East Africa


PwC

Uganda

All expenditure of a
capital nature
incurred in
searching for,
discovering, testing
and winning access
to mineral deposits
is tax deductible.

September 2015
Slide 7

Set up

Ongoing

Exit

Ongoing considerations
Kenya
Expenditure

Tanzania

Uganda

Capital expenditure
incurred on
operations is
deductible upon
commencement of
production at a rate of
20% over a 5 year
period.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 8

Set up

Ongoing

Exit

Ongoing considerations
Kenya
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.

Tax overview of the mining sector in East Africa


PwC

Tanzania
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.

Uganda

Historically, mining
areas were not ring
fenced but recent
inclusion in
petroleum code calls
this into question.

September 2015
Slide 9

Set up

Ongoing

Exit

Ongoing considerations
Kenya
Losses

Tanzania

Uganda

Can be carried forward indefinitely based on the licence area (in Kenya and
Tanzania) and generally for Uganda.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 10

Set up

Ongoing

Exit

Ongoing considerations
Kenya
Financing

Tanzania

Uganda

At the early stages before production, equity financing may be better than
using debt.

15% Withholding tax


is payable on interest.

10% withholding tax


payable on interest.

15% withholding tax


payable on interest.

Interest restricted
where debt equity
ratio exceeds 2:1.

Interest restrictions
apply where the debt
equity ratio exceeds
3:7.

Interest restrictions
apply where debt
equity ratio exceeds
1.5:1.

Deemed interest on

related party interestfree loans provided is


subject to 15%
withholding tax.

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.

There is guidance on
what constitutes
foreign debt and
foreign equity within
the law.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 11

Set up

Ongoing

Exit

Ongoing considerations
Tanzania(note)

Kenya
Withholding
tax on
payments to
nonresidents

5.625% withholding
tax on payments to a
non-resident subcontractor without a
permanent
establishment in
respect of service fees
for mining operations
This is a final tax.

15% withholding tax


on payments to nonresidents in all
circumstances.
Challenged in the
courts under
definition of source
rules.

Uganda

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%.

20% withholding tax


on payments to a
non-resident
person for
management/profess
-ional/training fee.
This is a final tax.

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.
Tax overview of the mining sector in East Africa
PwC

September 2015
Slide 12

Set up

Ongoing

Exit

Ongoing considerations
Kenya
Withholding
tax on
payments to
residents

TanzaniaNote

For resident

persons, withholding
ranges from 3% to 5%
- not a final tax.

5% withholding tax
on technical service
payments to
residents.

Uganda

Withholding tax of
15% on interest and
dividends.

Technical services
definition is extended
to include
management,
professional and
consulting services
This is not a final tax.

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.
Tax overview of the mining sector in East Africa
PwC

September 2015
Slide 13

Set up

Ongoing

Exit

Ongoing considerations
Kenya
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.

Tax overview of the mining sector in East Africa


PwC

Tanzania

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.

Uganda

Investors in the
mining and
petroleum
exploration sector can
register for VAT
before starting to
make taxable
supplies.

September 2015
Slide 14

Set up

Ongoing

Exit

Ongoing considerations
Kenya
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.

Tax overview of the mining sector in East Africa


PwC

Tanzania
There is no
requirement to
account for VAT on
imported services,
unless less than 10%
of the mining entitys
supplies are exempt
(considered unlikely).

Uganda

VAT registration
facilitates claiming of
input VAT paid on
imported plant,
equipment,
machinery and
supplies incurred
during the
development phase.

There is a three year


time limit for
correcting errors.
VAT reliefs are more
limited under new
VAT Act.

September 2015
Slide 15

Set up

Ongoing

Exit

Ongoing considerations
Kenya
Corporation
tax

The corporation tax


rate for a subsidiary
is 30% and that of a
branch is 37.5%)

Tanzania

The corporation tax


rate for a branch or
local company is 30%

Uganda

Tax overview of the mining sector in East Africa


PwC

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.

September 2015
Slide 16

Set up

Ongoing

Exit

Ongoing considerations
Kenya
Royalties

Tanzania

Royalties payable to
Royalty rates are
government on sale
applied on gross
of minerals have been
values. Examples of
on an upward
royalty rates are:
trajectory
5%: Diamonds,
Currently rates range
Raw gemstones,
between 1% and 12%
Uranium
a) 1% for industrial
4%: Metallic
minerals such as
minerals (incl.
gypsum and
copper, gold,
limestone
silver & platinum
b) 10% for coal,
group)
titanium ores,
1%: Cut and
niobium and
processed Gems
rare-earth
3%: other
elements
minerals
c) 12% for
diamonds.

Tax overview of the mining sector in East Africa


PwC

Uganda

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.

September 2015
Slide 17

Set up

Ongoing

Exit

Ongoing considerations
Kenya
Transfer
pricing

Tanzania

Uganda

All entities are


All entities are required Taxpayers are required
required to undertake
to undertake
to maintain proper
transactions with
transactions with
transfer pricing
related parties at
related parties at arms
documentation
arms length.
length.
containing the
company details and
The tax authority is
Entities are required to
transaction details,
empowered to adjust
maintain proper
agreements and the
the profits of an
transfer pricing
pricing methodology
entity where
used in determining
documentation.
transactions are
the arm's-length price.
deemed not to have
These provisions are
been conducted at
often applied by the
arms length.
Uganda tax authorities
where they are of the
view that a nonresident person may be
transferring profits
from Uganda.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 18

Set up

Ongoing

Exit

Ongoing considerations
Kenya
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.

Tax overview of the mining sector in East Africa


PwC

Tanzania

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

Uganda
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

September 2015
Slide 19

Set up

Ongoing

Exit

Ongoing considerations
Kenya

Tanzania

Uganda

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.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 20

Set up

Ongoing

Exit

Common Exit Options


a) Direct disposal

b) Indirect disposal

Sale of the shares in the local Kenya


company

Sale of shares in the overseas company

Overseas
Parent
Company

Overseas
Parent
Company

Overseas
investor
territory

Local mining
territory
Kenya,
Tanzania or
Uganda

Disposal
level

Local
Company
Disposal
level

Tax overview of the mining sector in East Africa


PwC

Intermediate
Overseas
company

Local
Company or
Branch

September 2015
Slide 21

Set up

Ongoing

Exit

Exit considerations
Kenya
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%.

Tax overview of the mining sector in East Africa


PwC

Tanzania

Gain on disposal of
shares subject to
income tax;

The rate of tax is


30%.

Uganda

Sale consideration
taxed where the
underlying
asset/immovable
property (includes
mining rights) is in
Uganda;

The capital gains tax


rate is 30%.

September 2015
Slide 22

Set up

Ongoing

Exit

Exit considerations
Kenya
Indirect
disposal

Tanzania

Uganda

Sale consideration
taxed where 20% or
more of the interest
derives from
immoveable property
(includes mining
rights);

Deemed disposal at
market value by
local entity where
underlying
ownership changes
by >50% compared
to the previous two
years;

Sale consideration
taxed where the
underlying
asset/immovable
property (includes
mining rights) is in
Uganda;

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

The rate of tax is


30%

The capital gains tax


rate is 30%.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 23

Set up

Ongoing

Exit

Exit considerations
Kenya
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.

Tanzania

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.

Uganda

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.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 24

Set up

Ongoing

Exit

Exit considerations Other matters


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%

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 25

Base Erosion and Profit


Shifting in East Africa

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 26

Implementation of BEPS in East Africa


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.

Tax overview of the mining sector in East Africa


PwC

September 2015
Slide 27

Your contacts
UK
Nicola Corp
Partner
Office: +44 (0)207804 4732
Mobile: +44 (0) 7718 340460
Email: nicola.corp@uk.pwc.com
Kenya
Steve Okello
Partner
Office: +254 (20) 2855116
Email: steve.x.okello@ke.pwc.com

Vijal Shah
Senior Manager
Office: +44 (0) 207 804 9079
Mobile: +44 (0) 7713 789 61
Email: vijal.shah@uk.pwc.com

Osborne Wanyoike
Director
Office: +254 (20) 2855133
Email: osborne.wanyoike@ke.pwc.com

Tanzania
David Tarimo
Partner
Office: +255 (0) 22 219 2600
Email: david.tarimo@tz.pwc.com
Tax overview of the mining sector in East Africa
PwC

Michael Quinton
Senior Manager
Office: +255 (0) 22 219 2612
Email: michael.quinton@tz.pwc.com
September 2015
Slide 28

Your contacts
Uganda
Francis Kamulegeya
Partner
Office: +256 312 354425
Email: francis.kamulegeya@ug.pwc.com

Tax overview of the mining sector in East Africa


PwC

Plaxeda Wanyoike
Director
Office: +256 312 354479
Email: plaxeda.namirimu@ug.pwc.com

September 2015
Slide 29

Questions?

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information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the
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