Mining companies operating in Tanzania had expected that the government would introduce major tax reforms in the lucrative mining sector with the presentation of the country's annual budget. Instead, Minister of Finance Mustafa Mkulo gave the miners temporary relief when he presented the US$6 billion budget last week. 

Sweeping changes in the country's tax regimes, including the removal of exemptions from the mining sector, would only be effected on July 1 after passing through parliament - thereby giving the miners more time to contemplate how such reforms would affect them.

Of urgent note on the minister's agenda, however, was the need to tackle mining companies that escaped paying the country's mandatory 30% corporate tax by continuously declaring losses. Mkulo announced that the government was introducing a 0.3% Alternative Minimum Tax (AMT) of the turnover on companies making losses for three consecutive years. 

The east African country would amend the Income Tax Act to reverse a growing tendency in which some companies declared losses annually to avoid paying corporate tax, as it took steps to deal with the generous investment incentives enjoyed by miners, in a move aimed at ensuring that the country earned at least 10% from the country's total annual mineral production.

Such corporate entities make commercial profits, however when incorporating tax adjustments they record losses on account of generous investment incentives that are provided in the legislation including accelerated capital deductions and investment allowances, Mkulo said in a budget report. 

Mining companies operating in Tanzania have been enjoying a wide range of incentives and tax breaks, attracting up to $2.5 billion of investment in the sector since 1998, making Tanzania the third leading gold producer in Africa after Ghana and South Africa.

A study on gold mining operations published in March by the country's civil society revealed that the government had lost an estimated US$400 million over the past 10 years due to low royalties, unpaid corporation taxes and tax evasion.  

The study, A Golden Opportunity - How Tanzania is failing to benefit from gold mining, revealed that over the past five years, Tanzania exported gold worth more than US$2.5 billion, but only received US$21.7 million a year in royalties and taxes while the expectation was to get US$100 million annually.

Gold miners pay a 3% royalty on profit while diamond and tanzanite miners are levied 5%. Companies, including Barrick Gold Corporation, the world's largest producer of the precious metal, Australian-based Resolute Mining Ltd, AngloGold Ashanti , Tanzanite One Ltd, the only miner of the rare blue gem, operate in Tanzania. 

Late last year, President Jakaya Kikwete set up a committee to review the mining industry with the mandate of gathering views from both inside and outside the country over legal provisions that needed to be changed so that the mining sector could become more beneficial to the country. The committee was also charged with the duty to review all mining contracts, analyse the taxation system employed in the mining industry and review the system for supervision of major mining activities by the government.

In its recommendations made public early last month, the committee - which was chaired by retired Judge Mark Bomani - proposed a 40 to 70% increase in royalties paid by the mining companies in the country. It also recommended that royalties levied in gold, copper and silver be increased to 5% from the current 3%. It also called for a 2% increase on royalties on uncut diamonds to 7%. 

The committee also recommended that the current ‘net-back value' taxation system be changed to ‘gross value' as is practised in Ghana and Zambia to ensure that the country benefits from the mining industry. Early this year, Zambia - Africa's biggest copper producer - increased the effective tax rate on miners to 47% from 31% by introducing a range of measures, including windfall and variable-profit taxes.

Tanzania's Chamber of Mines has warned that taxation of the mining industry will reduce the country's competitiveness in attracting foreign mining companies.