The mining sector in Tanzania has a long history starting from the pre-colonial era when the country’s mineral resources were mined and exported to foreign markets. From a regulatory and legislative perspective, Tanzania's mining sector had significant legal changes when the Mining Act of 2010 was enacted and repealed the Mining Act of 1998. The Mining Act introduced new concepts and revolutionised the mining sector, despite having its challenges... Seven years later, there were considerable amendments to the Mining Act that introduced further compliance mechanisms aimed at ensuring adequate returns to the Tanzania economy.
At the same time, additional legislation that directly apply to the mining sector were introduced, namely the Natural Wealth and Resources (Permanent Sovereignty) Act, the Natural Wealth and Resources Contracts (Review And Re-Negotiation Of Unconscionable Terms) Act (the Unconscionable Terms Act), and the Mining (Local Content) Regulations.
The changes to the MA introduced in 2017 and the three legislation brought mixed reactions from key players in the mining sector, some praising the changes because they focus on elevating the Government and Tanzanians' participation in such projects whilst for others it appeared as interfering with the overall management and equity holding of mining companies and their service providers. Accordingly, despite the uncertainty brought by the changes, we have seen significant interest and investments returning to the mining sector. We note that there is a mutual understanding by all players in the sector that mining should benefit all parties involved, including the Government.
Highlights of the Key Challenges: Mining Companies in the Preparatory and Financing Stages
There are ongoing challenges for companies in the preparatory and initial stages of setting up mining facilities, and others in the negotiation and financing. We highlight below the challenges that appear to re-occur across mining companies/investors and service providers:
- Tax: The leading challenge relates to the conflicting interpretation of the tax legislation between the tax collector and the mining company, particularly regarding; the treatment of shareholder loans and verification of such loans e.g. shareholder loans being treated as a capital contribution rather than loans warranting repayment, when does duty to withhold and remit tax on interest commence etc., imposition and payment of withholding tax and charging of VAT to foreign service providers and whether it can be grossed up, timely payment of VAT claims and refunds where significant VAT refunds could significantly contribute to the mining operations, CGT payment (or non-payment) and transfer pricing on structural re-organisations onshore and offshore, exemptions and tax benefits vs the right of the Government to acquire more equity, and whether allowed or how it is taxable.
- Framework and other agreements: The timeline for negotiations and the signature of framework agreements and any amendments thereto. This phase takes considerable time to finalise, as these are sensitive negotiations aimed at governing long-term mining operations and collaboration through joint ventures between the Government and the mining company. However, it is critical to understand that financiers of mining projects want assurance that the framework agreement is signed, and the mining or special mining license issued to the mining company before finance can be unlocked.
- Sanctity of contracts: There is a hidden risk that comes to the surface during the financing stage, i.e. the sanctity of the framework agreement, the shareholder agreement (due to the joint venture arrangement between the Government and the mining company), the joint financial model, and all other underlying agreements with the Government concerning the mining project is ‘threatened’ because of the applicability of the Unconscionable Terms Act. It is worth looking into the Unconscionable Terms Act and considering balancing the review of unconscionable terms and protecting the sanctity and long-term commitment of the contracts signed by the mining company and the Government after long negotiations where both parties have agreed that the terms are fair and will bring both parties to the desired outcome for their mutual benefit. Currently, this legislation doesn’t put the heavily negotiated contracts to rest because such contracts can at any time be scrutinised and this affects the risk profile of financiers and leads to delays, and potentially onerous conditions in financing.
- Merger approval: Another factor that brings a challenge is the merger approvals for re-organisations implemented within and outside of Tanzania following the proposed structuring under the framework agreements. There is no doubt that the parties to such re-structuring have met the merger notification thresholds hence warranting the merger approval but if the re-structuring is undertaken following these contracts with the Government, shouldn’t such re-organisation be spared of filing a merger notification to the Fair Competition Commission? It is worth considering whether a waiver should be granted to avoid delay in implementation and payment of high regulatory fees for the merger notifications.
Highlights of the Key Challenges: Mining Companies in the Production Phase
- Tax compliance: As mentioned previously - issues relating to the conflicting interpretation of tax legislations between the mining companies and the revenue authority i.e. on VAT, and withholding tax etc.
- Mining local content compliance: Mainly the filing of returns and requirement to seek approval for sole sourcing and procurement throughout the stages of procurement i.e. pre-bid, bid, before award and on the award which creates delays in the procurement process and added administrative layer.
- Compensation and relocation issues: These bring up prolonged challenges with previous occupiers of land even after compensation is paid and alternative relocation is offered. It is noted that there is a lack of adequate and prompt support from the authorities when such issues arise to hinder expansion or production operations.
- Multiple regulatory compliance: There are multiple regulatory compliance obligations across various authorities, where most of them requiring payments of fees for licences and permits. There are efforts by the Government to reduce the multiple compliance obligations, but these are still applicable and create repetitive challenges to ensure compliance throughout even when such authorities have no relevance or direct input to the mining operations.
- Labour and employment issues: These remain as a riddle and a material challenge, especially in cases where an employee is not performing and is outright irresponsible but replacement of such employee(s) with efficient and reliable personnel is a challenging task due to complicated disciplinary procedures. It is understood that these were meant to protect the tenure of employees but in practice, they are a hindrance in holding unaccountable, dishonest, and non-performing employees because they know, with almost all certainty that successful removal without penalties, even if done to the highest level of compliance of the disciplinary procedures may easily backfire on the employer and takes considerable costs to defend such justified removal. Both the labour laws and the institutions enforcing the legislation have to focus on ensuring accountability, dedication, and responsibility of the employee whilst protecting the tenure of the employee from abusive or arbitrary removal, without the employer requiring to incur significant costs and risk penalties from justified termination simply because one aspect of the procedure was not strictly followed.
Highlights of the Key Challenges: New Investments in Mining
Fraud, ignorance of the law, lack of oversight and misallocated investment: These can easily be solved by those seeking to invest in the mining sector by procuring legal support from experienced and trusted advisers before investing in any project, particularly in primary mining licence investments without any oversight or awareness that such licences cannot be co-owned or solely owned by non-Tanzanians. It appears to be a repetitive problem that has led to a lot of investors being ‘taken for a ride’ with limited chances of recourse, including recovery of their investments.
Other incidences of repetitive fraud relate to the purchase of gold where potential foreign buyers are lured by the availability of significant gold for sale with pictures and at times real access to ‘samples’ of such gold and this has left such buyers in a state of loss upon realising that no such gold exists or ever existed. It is important to undertake legal due diligence on the sellers and it is best if the purchases are done at the designated trade houses including packaging and escort for the product in the presence of the buyer and the relevant authorities. It is important to note that, there are no tonnes of ‘gold’ idly laying around in warehouses waiting for a buyer or that there is a truck full of gold expected from a neighbouring country but it is restricted at the border until some ‘official’ fees are paid in cash or in a personal bank account.
Our mining team advises on significant mining projects in Tanzania including new entities looking to survey, learn, and research the mining sector. We step in and do most of the groundwork to ensure that the investor obtains the legal, tax, regulatory, and practical advice for operating a mine in Tanzania. If you have any questions about mining projects in Tanzania, please contact Amalia Lui.
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Read the original publication at Clyde & Co.