(PDF) Barrick Tz 2016.pdf

Tanzania Attiya Waris* Mining Taxation in Tanzania: The African Barrick Gold Cases This article considers the changes made 955 billion, in 2008 and an average of USD 370 million, to Tanzanian mining law in relation to the or about TZS 811 billion, in the three years from 2006 to issues that were highlighted in three recent 2008.6 cases involving the mining subsidiaries of In addition, an analysis undertaken by the non-govern- African Barrick Gold, which concerned various mental organization, Uwazi, based on figures derived from tax issues. It then discusses how the cases the Tanzanian Revenue Authority (TRA), revealed that the elaborated on the tax law in question. revenue losses from incentives and exemptions amounted to TZS 752 billion in 2008-2009 and TZS 695 billion in 1. Introduction 2009-2010.7 According to this analysis, the principal ben- In 2011, the International Monetary Fund (IMF) noted eficiaries of these incentives and exemptions were those that gold exports from Tanzania had grown from around holding certificates with the Tanzania Investment Centre USD 500 million to USD 1.5 billion over the previous and the Zanzibar Investment Promotion Authority, which five years due to rising gold prices, but that the revenue together accounted for approximately 45% of the exemp- of the Tanzanian government from these activities had tions and incentives granted in the period 2008-2009 to remained constant at approximately USD 100 million a 2009-2010. The exemptions and incentives had primarily year. This was largely due to the corporate income tax hol- been granted to transnational corporations.8 Mining com- idays granted to mining companies. And, indeed, “none panies accounted for a further 7.5% of the beneficiaries. of the existing gold projects [had] paid material income Altogether these companies account for around 52% of tax to date”.1 The IMF also noted that, as a consequence of the incentives and exemptions provided. This amounted these tax holiday incentives, there was no likelihood of any to an average of about TZS 381 billion in the period 2008- increase in government mining revenue in the near future. 2009 to 2009-2010. The Bomani Commission has also estimated that the Further, in 2010, the Tanzania Minerals Audit Agency Tanzanian government lost revenue of TZS 39.8 billion (TMAA) audited 12 mining companies and raised a in 2006-2007 and TZS 59 billion in 2007-2008, simply number of audit queries regarding the financial claims of as a result of the fuel levy exemptions granted to the six these companies. The TMAA reported that companies large mining companies.2 As of late 2011, mining com- had over-claimed their capital allowances and operating panies were making claims to the government in respect expenditure. The following Table sets out the unresolved of refunds totalling USD 274 million relating to their fuel queries. levy exemptions for the period since 2002.3 Finally, in the financial year 2010-2011, mining companies in Tanzania It was as a result of the data set out in the Table that Tan- received exemptions from customs and excise duties that zania revised its mining legislation in 2010. The TRA also were equivalent to TZS 109 million.4 adopted a more proactive role in auditing mining com- panies. Consequently, in February 2016, three cases were A report for the African Development Bank (AfDB) noted decided concerning various issues of tax law with regard that exemptions and incentives accounted for up to 6% of to one multinational enterprise (MNE), African Barrick GDP in Tanzania or TZS 1.8 trillion (approximately USD Gold, which operated in Tanzania. 1.23 billion) in 2008.5 The East African Community (EAC) secretariat, in considering exemptions on import duties This article approaches the various issues raised by setting alone, also estimated that revenue losses from tax exemp- out Tanzania’ s fiscal framework as established by the 2010 tions amounted to USD 435.9 million, or around TZS mining regime in section 2. It then analyses the three cases that are the first attempt to implement the mining fiscal regime from 2010 onwards in section 3. Finally, having * Senior Lecturer, Law School, University of Nairobi and Researcher, analysed the related cases, the article is concluded in Global Policy Centre, Institute of Austrian and International Tax, Wirtschaftsuniversität Wien (Vienna University of Economics and section 4. Business, WU). The author can be contacted at

. 1. IMF, Staff Report for the 2011 Article IV Consultation and Second Review under the Policy Support Instrument, p. 17 (IMF 21 Apr. 2011). 2. Policy Forum, How Much Revenue Are We Losing?, Policy Brief (Mar. 2009). 3. D. Malingha Doya, Tanzania May Abolish Tax Refund for Miners to Boost Revenue (Bloomberg 25 Oct. 2011), available at www.bloomberg.com. 6. EAC, Trade Report (EAC 2009). 4. Controller and Auditor General Report 2011, pp. 50-51. 7. Uwazi, Tanzania’ s Tax Exemptions: Are They Too High and Making Us Too 5. AfDB, Domestic Resource Mobilisation for Poverty Reduction in East Africa: Dependent on Foreign Aid?, Policy Brief p. 3 (TZ.12/2010E). Tanzania Case Study, p. 20 (AfDB Nov. 2010). 8. Id., at p. 5. 742 BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 © IBFD Mining Taxation in Tanzania: The African Barrick Gold Cases Table: TMAA unresolved queries regarding mining mining companies, despite the growth in exports. As a companies in Tanzania result, Tanzania introduced the new Mining Act (2010)13 Wrongly claimed hedge financial USD 183.6 million that replaced the former Mining Act (1998), under which liability and losses mining agreements were negotiated and implemented. Over-claimed capital allowance USD 179.3 million However, the Mining Act (2010) only applies to newly registered companies and not those already in Tanzania Unsupported capital and operating USD 141.2 million expenditure before 2010. Consequently, the following two mining tax regimes currently apply in Tanzania: (1) the taxation Disallowable items USD 53.8 million of mining companies under the Mining Act (1998) that and TZS 1.7 billion are still in Tanzania; and (2) the regime regarding com- Wrongly claimed and premature capital USD 44.5 million panies registered in Tanzania after 2010 that fall within deduction the Mining Act (2010). Understated mineral sales USD 12.4 million and TZS 3 billion 2.2. Mining agreements Payments for technical services of which USD 50.9 million withholding tax was not withheld and TZS 1.5 billion With regard to the regime applying in respect of the Mining Act (1998), the original mining agreements continue to Management fees for which USD 23.1 million withholding tax was not withheld apply and, in accordance with the law, mining companies with such agreements benefit from the exemptions. These Overstated payroll costs USD 9.9 million can be summarized as follows.14 First, there is zero import Underpayment of Skills Development USD 1.7 million duty on fuel, compared to the standard current levy of TZS Levy 200 per litre, and on the import of mining-related equip- Unpaid royalties USD 0.2 million ment during the prospecting period and up to the end and TZS 466 of the first year of production. Consequently, such com- million panies pay import duty at a rate of 5%. Second, there is an Unpaid Pay As You Earn (PAYE) TZS 911 million exemption from capital gains tax, which does not apply to Unpaid annual rent for granted mineral USD 0.5 million other companies in Tanzania. Third, there is special relief rights from VAT, which includes an exemption from VAT on TOTAL USD 705.8 million imports and local supplies of goods and services to mining companies and their subcontractors. Fourth, there is the 2. The Current Mining Tax Regime in Tanzania ability to offset against taxable income the cost of all capital 2.1. Background equipment, such as machinery and property, incurred in mining operations. In this regard, it should be noted that The mining tax regime was inherited from Tanzania’ s colo- non-mining companies are entitled to a 100% deprecia- nial past and remained in force until independence when tion allowance for only the first five years of operation. Tanzania opted for a socialist system and all of its mines Fifth, there is a reduced rate of stamp duty of 0.3%. This were nationalized. This was a time in which mining was is included in several mining agreements signed between not regarded as profitable and many mines were closing the government and mining companies, even though the down. Reforms were initiated from the mid-1990s to rate of stamp duty is set by law at 4%.15 Sixth and finally, encourage private-sector investments, mainly through there is a maximum limit to the payment of local govern- foreign direct investment (FDI). Policy measures included ment taxes of USD 200,000 a year, which is less than the the development of a mining policy in 1997, the enactment 0.3% of turnover required by law.16 of the Mining Act (1998),9 which repealed the Mining Act (1979),10 and the addition of section 10, which provided In addition, Tanzania grants a special VAT relief, which for Mineral Development Agreements to ensure fiscal sta- includes an exemption from VAT on imports and local bility. In addition, the Investment Policy and Investments supplies of goods and services to mining companies and Act (1997)11 provided, inter alia, insurance for investors their subcontractors. Tanzanian mining companies are through the Multilateral Investment Guarantee Agency specifically exempt from capital gains tax in contrast to (MIGA) of the World Bank. The Financial Laws Miscella- other companies and sectors. neous Amendments Act (1997)12 granted various exemp- tions and incentives for investors in relation to income tax, customs and excise duties, value added taxes, and local government taxes. However, scrutiny of the mining sector in Tanzania dem- 13. TZ: Mining Act, 2010. onstrated that it remained unprofitable for the state and 14. Tax Justice Network (TJN), Tax Competition in East Africa: A race to the that there was still minimal or no collection of tax from bottom? Tax Incentives and Revenue Losses in Tanzania, ActionAid Inter- national and Policy Forum (TJN 2012). 15. J.M. Otto, Mining Taxation in Developing Countries, Study prepared for United Nations Conference on Trade and Development (UNCTAD) 9. TZ: Mining Act, 1998. (UNCTAD Nov. 2000), available at www.congomines.org/system/attach- 10. TZ: Mining Act, 1979. ments/assets/000/000/649/original/Otto-UNCTAD-paper-2000-Min- 11. TZ: Investment Policy and Investments Act, 1997. ing-Taxation-in-Developing-Countries.pdf?1430929506. 12. TZ: Financial Laws Miscellaneous Amendments Act, 1997. 16. TJN, supra n. 14, at p. 7. © IBFD BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 743 Attiya Waris 2.3. The Mining Act (2010) ordinary Tanzanian citizens receive anything from such multi-million dollar deals.19 There are no special tax incentives in the tax laws for the processing of natural resources. However, both National 2.4. General anti-avoidance rules: The separate-entity Petroleum Policy and Mineral Policy Tanzania seek to principle and cross-border taxation promote value addition. As a result, value addition has been introduced into the Mining Act (2010) by reducing Tanzania has a general anti-avoidance rule (GAAR), which the royalties paid in respect of gems, which are defined in is contained in section 35 of the Tanzanian Income Tax the Mining Act (2010) as “cut and polished or engraved Act (ITA) (1973).20 Section 35 of the ITA (1973) reads as gemstone”, from 5% to 1%. There are, however, no special follows: tax incentives to develop industry serving the extraction (1) Notwithstanding anything in this Act, where the Commis- industry. sioner is of the opinion that an arrangement is a tax avoid- ance arrangement, he may by notice in writing make such The standard rate of corporate income tax in Tanzania is adjustments as regards a person’ s or persons’ liability to tax 30%. Dividends paid by a Tanzanian unlisted company are (or lack thereof) as the Commissioner thinks appropriate to also subject to withholding tax at the rate of 10% levied counteract any avoidance or reduction of liability to tax that on the gross amount. This is the final tax. Interest paid to might result if the adjustments were not made. a non-resident company is subject to a final withholding (2) A notice issued under subsection (1) shall specify the arrange- ment and the adjustments. tax of 10% on the gross amount. Royalties are subject to a (3) For the purposes of this section, “tax avoidance arrangement” final withholding tax of 15% on the gross amount. Other means any arrangement - payments made to non-resident service suppliers, includ- (a) one of the main purposes of which is the avoidance or ing management fees, are subject to a final withholding tax reduction of liability to tax of any person for any year of of 15% on the gross amount. income; (b) one of the main purposes of which is prevention or For example, the VAT regime in Tanzania is a single rate obstruction in collecting tax; or one, with a standard rate of 18%. Tanzania exports virtually (c) where the main benefit that might be expected to accrue from the arrangement in the three years following com- all the minerals that are mined in the country. As exports pletion of the arrangement is - are zero-rated under the VAT regime, mining firms claim (i) an avoidance or reduction of liability to tax of any refunds of almost all of the VAT they pay in respect of person for any year of income; or mining operations. In its VAT and customs-duty regimes, (ii) prevention or obstruction in collecting tax, but Tanzania also includes some tax exemptions with regard excludes an arrangement where it may reasonably be considered that the arrangement would not result to import duties and relief from VAT in respect of explo- directly or indirectly in a misuse of the provisions of ration companies. this Act or an abuse having regard to the provisions of this Act, other than this section, read as a whole. Tanzania has attempted to resolve this situation by stipu- lating that companies which realize losses for three consec- utive years are liable to an alternative minimum tax (AMT) at a rate of 0.3% of turnover. The payment due is computed from the third year of the realization of the tax losses. Cur- 19. Tundu Lissu, “Conducive Environment” for Whose Development?: Globali- rently, there is ongoing work in developing a special regime sation, National Economy and the Politics of Plunder in Tanzania’ s Mining Industry, unpublished paper, pp. 16-17 (Nov 2006). with regard to taxation of the extraction industry. The pro- 20. It should also be noted that TZ: Income Tax Act (ITA) 1973, sec. 27 reads posal includes the introduction of an additional profits tax as follows: (APT).17 There is also a maximum payment of local gov- (1) Where the Commissioner is of the opinion that the main purpose or one of the main purposes for which any transaction was effected ernment taxes of up to USD 200,000 a year, which is less (whether before or after the enactment of this Act) was the avoid- than the 0.3% of turnover required by law.18 ance or reduction of liability to tax for any year of income, or the prevention or obstruction of the collection of the tax due, or that the Under both of these regimes, mining companies have the main benefit which might have been expected to accrue from the exclusive ownership of their operations and the minerals transaction in the three years immediately following the completion thereof was the avoidance or reduction of liability to, tax, or the pre- recovered, and they have the power to dispose of them vention or obstruction of the collection of the tax due, he may, if he as they wish, including transferring rights to other com- determines it to be just and reasonable, direct that such adjustments panies without incurring capital gains tax. This means shall be made as respects liability to tax as he considers appropriate to counteract the avoidance or reduction of liability to tax or the pre- that the practice of buying and selling mining operations vention or obstruction of the collection of tax due which could oth- can be very profitable. In 2003, for example, the Austra- erwise be effected by the transaction. lian company, East African Gold Mines, realized USD 252 Transactions designed to avoid liability to tax (2) Without prejudice to the generality of the powers conferred by sub- million on an original investment of USD 90 million by section (1) of this section, those powers shall extend- selling a Tanzanian gold mine to the Canadian company, (a) to the charging to tax of or collection of tax from, persons who, Placer Dome, which was later purchased by African but for the adjustments, would not be charged to the same or to any extent; Barrick Gold. Neither the government of Tanzania nor (b) to the charging of a greater amount of tax than would be charged but for the adjustments; (c) to the taking of steps for the recovery of the tax due as if the transaction had not been effected. (3) Any direction of the Commissioner under this section shall specify the transaction or transactions giving rise to the direction and the 17. Id., at p. 16. adjustments in respect of liability to, or payment of, tax which the 18. Id., at p. 7. Commissioner considers appropriate. 744 BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 © IBFD Mining Taxation in Tanzania: The African Barrick Gold Cases This provision permits the courts to look through superfi- 3. The African Barrick Gold Cases cial companies and transactions to assess their true nature 3.1. The background and to impose an appropriate tax liability. This would necessarily imply an overruling of the key decisions with Between February and March 2016, three tax-related dis- regard to the evasion-avoidance debate. Tanzania does putes were decided by a tribunal and courts in Tanzania. have transfer pricing rules and a Large Taxpayer Unit that One decision was given by the Tax Revenue Appeals Tri- specializes in transfer pricing. The worldwide practice bunal (TRAT) and two by the Court of Appeal (CA) with in respect of the threshold for determination of related regard to companies that were all related. The two cases parties is set at 10%. However, the threshold for determin- before the CA were substantively dealt with by the same ing related parties in Tanzania is set higher at 50% of equity judges,22 and each involved the Commissioner General or voting rights. (CG) of the TRA and two out of three of the global sub- sidiaries of African Barrick Gold, i.e. Bulyanhulu Gold With regard to the determination of an arm’ s length Mine Ltd23 and North Mara Gold Mine Ltd.24 The case that price, the guidelines developed by the TRA prescribe the came before the TRAT involved African Barrick Gold Plc following steps: (1) an analysis of transactions and func- (ABG).25 Another issue, which was also decided by the CA tions, i.e. details of the functions performed, the risks at the same time, related to the case of Geita Gold Mining assumed and the assets employed; (2) the characteriza- Ltd (2015),26 which was a wholly owned subsidiary of the tion of the entity, with the most common characteriza- South African registered Anglo Gold Ashanti. tions being manufacturing (i.e. fully fledged, licensed, contract or toll), distribution (i.e. fully fledged or limited An analysis of these three cases taken together is important risk) and service provider; (3) the identification of com- for various reasons. First, all of the companies were sub- parable transactions; (4) the selection of the tested party, sidiaries of the global mining company, African Barrick in which case the TRA does not accept foreign-tested Gold PLC (Canada). Second, the decisions were all given parties where information is neither sufficient nor ver- within the same two-month period. Third, all of the deci- ifiable; (5) the selection and application of transfer sions refer to separate actions, which were subject to the pricing methodologies; and (6) the identification of a rules of interpretation. Fourth, despite the separate-entity profit-level indicator, with regard to which due consid- principle, the almost simultaneous release of the decisions eration must be given to the choice of profit-level indi- makes it possible to indicate several of the practices prev- cator, which measures the relationship between profits alent within a company in a specific time period. Fifth, and sales, costs, costs incurred or assets employed. Tan- as the mining companies were incorporated before 2010, zania has not developed special practices to address the they fall within the scope of pre-2010 mining develop- challenges of the extraction industry. ment agreements, whereas the registration of the holding company, i.e. the coordinating entity, took place after 2010. Tanzania does have thin capitalization rules based This permits a comparison across the different regimes. on the debt to equity ratio approach. The maximum Sixth, these are the first cases to be decided since the enact- accepted debt:equity ratio is 7:3. Any interest that is not ment of the Mining Act (2010). Seventh and finally, the tax deductible is permanently disallowed. Tanzania also decisions make it possible to reflect on the revised laws has a special income-splitting rule, which permits the and to consider the additional revision that may still making of adjust ments by the TRA where income may be required under domestic Tanzanian law. Also, given be allocated to another person in the form of various the cross-border nature of the ownership of the entities payments.21 involved, this could have potential effects on the global discussions regarding the review of international tax law and could feed into both the processes of the United Nations Committee of Experts on International Coopera- tion in Tax Matters as well as the discussion on the OECD/ G20 Base Erosion and Profit Shifting (BEPS) initiative. 21. In this context, it should be noted that Section 34 of the ITA (1973) reads as follows: Sections 3.2. and 3.3. examine the facts of the three cases (1) Where a person attempts to split income with another person, the Commissioner may, by notice in writing, and analyse the legal issues that were considered in the (a) adjust amounts to be included or deducted in calculating the cases. The three cases are used to set out practices of income of each person; or African Barrick Gold so as to comprehend the challenges (b) re-characterise the source and type of any income, loss, amount or payment, to prevent any reduction in tax payable as a result in understanding, interpreting and applying the current of the splitting of income. mining tax laws in Tanzania. The particular challenges that (2) Subject to the provisions of subsection (3), a reference in subsection (1) to a person attempting to split income includes a reference to a transfer, either directly or indirectly, between the person and an asso- 22. Judges Massati, Mugasha and Othman presided over one of the cases, ciate of the person of- while Judges Massati, Mugasha and Oriyo presided over the other. (a) amounts to be derived or expenditure to be incurred; or 23. TZ: CA, Feb. 2016, Bulyanhulu Gold Mine Ltd v. CG (TRA), Court of (b) an asset with the result that the transferee receives or enjoys Appeal Consolidated Civil Appeal Nos. 89 and 90 of 2015 (unreported). amounts derived from owning the asset. 24. TZ: CA, Feb. 2016, North Mara Gold Mine Ltd v. CG (TRA), Court of (3) Subsection (2) applies only where the reason or one of the reasons for Appeal Civil Appeal No. 78 of 2015. the transfer is to lower the tax payable by the person or the associate. 25. TZ: TRAT, Mar. 2016, African Barrick Gold Plc v. CG (TRA), Tax Revenue (4) In determining under subsection (2) whether a person is seeking to Appeals Tribunal, Tax Appeal No. 16 of 2015. split income, the Commissioner shall consider the market value of 26. TZ: CA, 3 June 2015, Geita Gold Mining Ltd v. CG (TRA), Court of Appeal any payment made for the transfer. Civil Appeal No. 141 of 2015 (unreported). © IBFD BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 745 Attiya Waris the judges encountered in the decision-making process purchase of an aircraft, insurance premiums for political and the solutions that they arrived at, which is an inter- risk losses that could derive from foreign exchange fluc- action in domestic mining tax law, as well the challenges tuations, expenditure in respect of community develop- faced in obtaining additional information are noted. The ment. The specific question raised was what were allow- analysis is, however, limited to the case law so as to be able able capital expenditure and expenditure deductions in to consider the elaboration that has been provided to the respect of environmental restoration. The case was finally Mining Act (2010) as well as making it possible to explore decided in February 2016.31 the challenges encountered by the judiciary in coming to a decision and to point out the additional potential reforms 3.2.3. North Mara Gold Mine Ltd (2016) that may be necessary to ease the burden for all of the North Mara Gold Mine Ltd was a limited liability company, stakeholders in the judicial process. which was also fully owned by African Barrick Gold Plc. It instituted a suit appealing against the decision of the 3.2. The cases and the facts TRAT as to whether unassembled trucks were liable for 3.2.1. African Barrick Gold (ABG) Plc (2016) duty under Tanzanian customs law. The case was finally decided in February 2016.32 In 2010, in order to comply with the requirement of cross- listing across stock exchanges,27 ABG, which was already 3.3. The precedents set by the three cases listed on the London Stock Exchange, filed a certificate of compliance in Tanzania with the Tanzanian Business Re- 3.3.1. In general gistration and Licensing Agency (BRELA). Two years later, While the cases clearly, from a factual perspective, deal in 2012, the CG TRA issued a notice of enquiry into ABG’ s not only with different types of taxes but also consider dif- tax affairs under section 138 of the Income Tax Act (ITA) ferent issues as to whether tax is due, the cases all share a (2004).28 The TRA immediately registered the company common thread, i.e. the application of the rules of inter- with a Tax Identification Number (TIN) and VAT Regis- pretation. Specifically, all three cases elaborated on the tration Number (VRN). The TRA then assessed ABG on rules of interpretation that were used and why these rules the grounds that it was a resident company in Tanzania and were used. This makes it possible to construct an idea of was carrying on business and earning income from man- the direction in which the interpretation of fiscal laws is agement services provided to its three Tanzanian subsid- taking in Tanzania. iaries as well as several other companies. As a profit-mak- ing resident company, the dividends paid between 2010 However, the author intends to move the discussion one and 2013 to foreign shareholders directly related to the step forward by “lifting the corporate veil” to establish if business and the income generated in Tanzania by ABG the removal of the separate-entity principle reveals any were subject to tax in Tanzania. form of concerted effort to set up a scheme to evade tax or engage in aggressive tax planning through an analysis of The CG TRA also issued a notice requiring that ABG the corporate structure in the context of the specific issues file statutory returns as required by the law, pay USD that were decided in the three cases in question. These 81,843,127 in withholding tax on the dividends paid out in additional issues include the determination of residence, the four-year period 2010-2013, and pay additional with- what is allowable expenditure and, finally, what exemp- holding tax in respect of the non-resident services pro- tions remain in force. vided, pay-as-you-earn (PAYE), stamp duty levy and stamp duty. After the decision of the TRA, subsequent negotia- 3.3.2. Elaboration on the rules of interpretation tions reduced the amount of tax due to USD 41,250,426. The rules of interpretation as used adopted a step-by-step However, ABG was still dissatisfied with the outcome approach, which is particularly useful as this settled and and appealed the decision of the TRA to the Tax Revenue confirmed the approach that the judiciary intended. There Appeals Board (TRAB). The decision of the TRAB was were several rules that were elaborated on and which are to dismiss the case and to confirm the decision of the CG discussed subsequently. TRA.29 ABG then appealed the case to the TRAT. The case was finally decided in March 2016.30 First, both decisions of the CA began with the clear confir- mation of the constitutionally enshrined principle that no 3.2.2. Bulyanhulu Gold Mine Ltd (2016) tax can be levied without the authority of the law, in citing both the Constitution of the Republic of Tanzania33 and Bulyanhulu Gold Mine Ltd operated under a special the work of the Tanzanian scholar Luoga Makinyika.34 In mining licence under a mining development agreement both cases, the CA also added that tax statutes are a der- and was a wholly owned subsidiary of ABG, now Acacia. ogation from personal rights and property interests, and The case related to the allowance in respect of expenditure that ambiguity must be resolved against the background between 2000 and 2006 on capital assets with regard to the 27. TZ: Capital Markets and Securities (Foreign Companies Eligibility and 31. Bulyanhulu Gold Mine Ltd (2016), supra n. 23. Cross-Listing Requirements) Regulations GN No. 164 of 2003, Reg. 7. 32. North Mara Gold Mine Ltd (2016), supra n. 24. 28. TZ: Income Tax Act (ITA), 2004. 33. TZ: Constitution of the Republic of Tanzania, art. 138. 29. TZ: TRAB, 15 May 2011, Tax Appeal No. 22 of 2011. 34. Luoga Makinyika, A Sourcebook Of Income Tax Law In Tanzania (Dar es 30. African Barrick Gold (ABG) Plc (2016), supra n. 25. Salaam U. Press 2000). 746 BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 © IBFD Mining Taxation in Tanzania: The African Barrick Gold Cases of imposition of tax as decided by the US Supreme Court results. It can also be seen that the separate-entity approach (SC) in Billings v. United States (2014).35 was disregarded in assessing the three cases together so as to consider all of the transactions under scrutiny in these Second, with regard to the issue of construction and inter- cases in that they involved companies that formed part of pretation, at first glance the three cases adopted a similar the same holding company group, both domestically and approach. In particular, the TRAT stated that, despite in Tanzania, and that were also part of an MNE globally. the fact that purposive interpretation was not willingly adopted in tax decisions, the principle established by the 3.3.3. Application of the rules of interpretation UK House of Lords (HL) in Duke of Westminster (1936)36 allowed taxpayers to minimize their liabilities as long as 3.3.3.1. Initial remarks their actions fell within the clear letter of the law. The two The rules of interpretation were applied in four different decisions of the CA similarly followed the same argument, ways in the three cases in question, i.e.: (1) in defining resi- in adding to the decision of the Tax Court (TC) in Kilman dence under income tax law; (2) in allowing or disallowing v. Winkworth (1933),37 as well as the decisions in Cape expenditure under income tax; (3) with regard to contri- Brandy Syndicate v. IRC,38 which also followed the strict butions to community development; and (4) in obtaining interpretational rule set out in the Duke of Westminster. a customs duties exemption. It is now considered how the Third, in varying from the principle in Duke of Westmin- CA and the TRAT used each of these rules of interpre- ster, the two decisions of the CA added that the Court had tation (see sections 3.3.3.2., 3.3.3.3., 3.3.3.4. and. 3.3.3.5., also examined additional rules of interpretation, includ- respectively). ing the need to consider the statute as a whole and that the law or regulation should be read in its context. Both 3.3.3.2. Definition of residence for tax purposes decisions of the CA also noted that the literal rule could The entire case before the TRAT in African Barrick Gold be departed from when it resulted in a manifest absurdity (ABG) Plc hinged on the question of whether the ABG was or an unfair and inequitable result and cited both AG v. resident in Tanzania for tax purposes. In this respect, the Hallet (1857)39 and Grey v. Oersib (1857),40 alluding to the following two main issues were discussed: (1) the defini- use of the second rule of legal interpretation, i.e. the golden tion of the words “incorporated or formed”; and (2) the rule. In North Mara Gold Mine Ltd, the CA also added that requirements for cross-registration on the stock exchange. interpretation must harmonize with the intention of the law and must not be contrary to the constitution, thereby First, an analysis of section 66(4)(a) of the ITA (2004) casts dealing with the issue in a wider scope than the particular light on the meaning of the term “incorporated or formed”. act in question.41 This rule of harmonization and applic- For ABG, it was argued that “incorporated and formed” ation of the golden rule agrees with the use by the TRAT had the same meaning, i.e. the bringing of a company into of the variation to the principle to Duke of Westminster as existence. It was noted that the words “incorporate” and set out in McGuckian (1997).42 “form” were used interchangeably43 and that, under section 435 of the Companies Act, a certificate of compliance was The TRAT also stated that the principle set out in the evidence of a registered foreign company. However, the Duke of Westminster had been varied when the UK HL TRAB decided in favour of the TRA, which had argued went a step further in McGuckian, in stating that, while that MacArthur & Baker International (2000) had settled the taxpayer was entitled to the literal interpretation of the fact that the words “incorporated”, “registered” and the law regardless of the purpose of the statute, a court “established” meant the same thing.44 The TRAT agreed had to undertake a step-by-step analysis of the potential with this approach and stated that the word “formed” could schemes, in treating each as a distinct transaction. If the be construed as “registered”, which included the issuing of arrangement was genuine, the court was not entitled to go a certificate of compliance. The TRAT also added that, in beyond the form of the individual transactions, but where this case, the date of registration was the date of the issuing a scheme was intended to be considered as a whole, the of the certificate in 2010. court would be permitted to consider the composite trans- action and decide here in favour of application of the pur- Second, counsel for ABG pointed out that the registra- posive method of interpretation. tion was only carried out for cross-registration purposes to permit Tanzanians to purchase shares in ABG, which, It is in light of the rules of interpretation as elaborated on in turn, required the issuing of a certificate of compliance. in the three cases in question that a definite trend can be The TRA countered this by stating that this was a mis- seen in applying a purposive approach and in varying the reading of Regulation 7 of the Capital Markets and Secu- literal rule in cases of absurdity, unfairness and inequitable rities (Foreign Companies Eligibility and Cross-Listing Requirements) Regulations, which required every foreign company not only to register but also to “establish a place 35. US: SC, 24 Feb. 1914, Billings v. United States, 232 US 261 (1914). of business”. The TRAT concurred with the TRA that the 36. UK: HL, 1936, IRC v. Duke of Westminster, [1936 ] AC1 (HL). 37. UK: TC, 1933, Kilman v. Winkworth, 1933 17 TC 569. setting up of the place of residence was part of the creation 38. UK: KB, 1921, Cape Brandy Syndicate v. IRC, 1921 1 KB 64. 39. UK: H& N, 1857, AG v. Hallet, 2 H & N 368. 40. UK: HL, 1857, Grey v. Oersib, (1857) 6 HL Cas 61. 41. North Mara Gold Mine Ltd (2016), supra n. 24, at 18. 43. TZ: Companies Act, sec. 3(1). 42. UK: HL, 12 June 1997, Commissioner of Inland Revenue v. McGuckian, 44. TZ: CA, 2000, Commissioner General v. MacArthur & Baker International, 1997, 1 W.L.R. (2000) EA 33. © IBFD BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 747 Attiya Waris of a residence, which added to the fact that the company the grounds that the application of the paragraph 8(2), part was now incorporated. This also meant that, as a result, all 11 of the second schedule to the ITA (1973), which states companies listed on stock exchanges globally that oper- that machinery brought into use without being purchased ated in Tanzania would now have to register on the Dar should be deemed to be purchased or sold at market price. es Salaam Stock Exchange, thereby making them resident With regard to the fourth and fifth grounds for interpret- and liable to tax in Tanzania. ing qualifying capital expenditure, the meaning of the Third and finally, in deciding on residence based on the term “wholly and exclusively” was explored and applied issue of management and control and whether tax was in respect of section 16(1) and (2) and paragraphs 16, 17 therefore due in Tanzania on dividends, it was argued that and 18 of Part III of the second schedule of the ITA (1973). ABG Tanzania had been established merely for coordina- The decision of the CA was that, while the expenditure tion purposes and that the company had no real decision- was allowable, it was for the taxpayer to demonstrate use making function. The vice-president (Corporate Affairs) “wholly and exclusively” in respect of which the taxpayer of the group, who was a Tanzanian national living in Tan- had not provided evidence. The expenditure was, there- zania, held a ceremonial title in respect of which there was fore, disallowed. no remuneration as evidenced by the fact that the vice- Section 16(1) and (2) of the ITA (1973), in defining insur- president was an employee of one of the Tanzanian sub- ance premiums, sets out the following three conditions sidiaries. The vice-president was also assisted by 140 em- that are necessary for expenditure to be allowed. First, the ployees in respect of the coordination, in respect of which expenditure must have been paid. Second, the expenditure no one received additional pay. The CG countered this must be paid by a resident company and not its holding argument by stating that ABG was undertaking manage- company. Third, necessity was not a condition precedent ment and coordination and that the vice-president had to allowing deductions. 140 employees working under him to do this. It was also noted that the board of ABG met every four years in Tanza- The CA also stated that the rules of interpretation required nia and that one of its vice-presidents (Corporate Affairs) that all of the sections be read and interpreted widely was based in Tanzania and had a large workforce under and that the sections set out that the expenditure must him, thereby amounting to residence. The TRAT agreed be wholly and exclusively used in producing income and that, while occasional meetings and the presence of a resi- necessarily incurred to gain or produce income. Conse- dent board member alone did not amount to management, quently, the test required wholeness, exclusivity, necessity in this particular case, the additional fact that all of the and reasonableness. The CA, therefore, stated that inter- global income of ABG was derived from mining activities pretation required consideration of the entire picture and in Tanzania alone deemed the company to be resident in the true intention of parliament in applying the purposive Tanzania for tax purposes. test linking section 16(1) and (2) with the second sched- ule, Part III of the ITA (1973). As the holding company 3.3.3.3. Definition of “wholly and exclusively” regarding had made the payment, the expenditure failed the test of expenditure “wholly and exclusively” as well as that of necessity. Similar to what was stated by the TRAT in defining resi- A final ground in Bulyanhulu Gold Mine Ltd involved dence and the terms it included (see section 3.3.3.2.), before the fact that the company undertook transactions in US the CA in Bulyanhulu Gold Mine Ltd the words “wholly” dollars and refunds were made in local currency, i.e. Tanza- and “exclusively” were argued to be the same. However, in nian shillings. As the payment of VAT was an expenditure reality, the CA held that, based on the textbook of Luoga “wholly and exclusively” for the production of income, and Makinyika, “wholly” was defined as completely and “exclu- interest was paid in respect of delays in making refunds, the sively” as being for a specific purpose.45 In addition, Luoga taxpayer could not set off VAT refunds against shortfalls Makinyika’ s view that there are seven rules giving guid- in other payments of tax. In this case, the CA interpreted ance as to whether expenditure falls within this category the ITA (1973) as a whole but did not consider any other was adapted to include capacity, commercial expendi- statute, such as the VAT Act, and stated that this argument ture, reasonableness, business purpose, and whether it was illogical, especially as the schemes of management for may have incidental benefit in the future for a third party.46 the two statutes were separate. This provides an interest- In relation to the first ground, where expenditure on an ing approach, as in other countries, such as Zambia, there aircraft, used wholly and exclusively, that had been pur- have been attempts to use input VAT to offset shortfalls in chased for USD 1 was disallowed by the TRAT based on payments of income tax following assessment. the failure to provide evidence of purchase, the CA allowed However, if the CA had been given access to the details of the claim to be deducted based on market value using the the transaction, it might have applied the provision of the rule that interpretation of the entire ITA (2004) should be Tanzanian GAAR in section 35 of the ITA (1973) to this considered, especially in relation to interpretation and the provision to ascertain whether this was a scheme for the methods in calculating chargeable income.47 This was on avoidance of tax, as its argument on the rules of interpreta- tion was to include the Act as a whole in line with the deci- sion of the TRAT. However, it is unclear why the CA did 45. Luoga Makinyika, supra n. 34, at chap. 1. not have access to this additional information or, indeed, 46. Bulyanhulu Gold Mine Ltd (2016), supra n. 23, at 12. if it was requested at all. In addition, as the TRAT case 47. EA: CA, 1972, Income Tax v. Holdings Ltd, 1972 1 EA 128 (CAN). 748 BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 © IBFD Mining Taxation in Tanzania: The African Barrick Gold Cases considered in this article was being decided at the same lay with the taxpayer. However, where expenditure was not time as the cases before the CA, the existence of a sepa- in dispute, as it is settled law, as with the case of contribu- rate entity was never questioned and, as a result, there was tions to community development (see section 3.3.3.4.), the no reflection in the TRAT case as to whether the GAAR taxpayer was not asked to prove expenditure. should have been applied. 3.3.5. The GAAR and tax evasion schemes 3.3.3.4. Contributions to community development ABG had issued dividends annually, while its Tanza- Under section 16(1) and (2) of the ITA (1973), charitable nian subsidiaries were all declaring losses. The CG noted contributions are allowable up to 2% of profits or gains. An that the declaration and payment of dividends by ABG earlier decision had stated that this was allowable gener- to shareholders when its only subsidiaries were realizing ally and was a requirement under the Mining Act (2010) losses was tax evasion. The TRAB noted the same, and with regard to mining licences. the TRAP added that, to date (i.e. 2016), ABG continued to have only Tanzanian subsidiaries. However, the TRAB Although the company in question had not realized any added that the absence of proof of tax evasion did not in profits, the CA decided that, as the words in the section itself mean that there was a scheme for tax evasion in place included profits and gains, this could be regarded as an as there was no evidence to this effect. ABG stated that the allowable deduction from profits and gains if interpreted dividends were paid out as part of a reduction in capital widely rather than narrowly. As no argument was advanced and the proceeds of its initial public offering (IPO), which to counter this, the issue was decided in favour of the tax- the TRAT considered sceptically, stating that proceeds of payer, and the payment was deemed to be an allowable this nature were capital and not profit and that a reduc- deduction for tax purposes. tion in capital should never be regarded as a dividend. The TRAT then concluded that, as an implausible argu- 3.3.3.5. Dismantled machinery and customs duties ment was being advanced, it appeared that the appellant In North Mara Gold Mine Ltd, the CA held that the rules of intended to evade tax. interpretation in relation to customs duties were deemed to be well settled and were stated to use the first two rules In this context, it should be noted that ABG (UK) was of interpretation, as customs officials could not decide on 90% owned by Barrick Gold international, which was a the basis of the first rule alone. As a result, the CA decided Canadian company listed on both the New York Stock that, as the machinery in question was whole and was to Exchange and the Toronto Stock Exchange, until 2014 be reassembled and used wholly, it was taxable at a rate when a divesting of shares resulted in a reduced share- of 10%. This decision was also replicated in Geita Gold holding of 63.9%. African Barrick Gold Ltd (ABG Ltd), Mining Ltd, which related to the same tax on the same type a UK registered company, was also listed on the London of machinery. Stock Exchange and was a constituent of the FTSE 250, under Barrick Gold International, and wholly owned one 3.3.4. The burden of proof management company and three mining companies in Tanzania. Following the change in regulations in Tan- Both the tribunal and one court of appeal case consid- zania in March 2010, ABG Ltd also applied for listing in ered the burden of proof. In the tribunal, the burden of 2012 and was listed on the Dar es Salaam Stock Exchange. proof in Tanzanian law lay with the appellant as set out in More recently, in 2014, ABG Ltd acquired mining fields in previously decided Tanzanian cases. However, the appel- Burkina Faso and Mali, but these were still in the process lant could not provide such proof on the grounds of the of exploration. In November of 2014, ABG Ltd changed its separate-entity principle, arguing that it had no details of name to Acacia Ltd. ABG Ltd wholly owned ABG (Tanza- ABG’ s finances and that this could only be obtained from nia) Ltd, now Acacia, Bulyanhulu Gold Mining Ltd, North African Barrick Gold (UK) (ABG (UK)). Information that Mara Gold Mining Ltd and Pangea Minerals Ltd, i.e. the was not forthcoming despite its importance to the TRAT Tulawaka and Bunzwagi gold mines. The position is set included details of how the dividends were calculated as out in Figures 1 and 2. well as how ABG could operate without any costs and what the share of costs was in respect of the coordination that On 11 March 2014, Barrick Gold Canada divested itself were undertaken by ABG. Despite the maintenance of the of 41 million shares in Acacia Gold, thereby reducing its separate-entity principle by ABG, the court felt that the interest in Acacia Gold to 63.90%.48 information at its disposal was adequate, and it was able Figures 1 and 2 are fairly limited in their scope as they to decide based on the evidence available. depict the data that is available publicly in the annual The burden of proof similarly lay with the appellant in reports of the companies online. It is, therefore, unclear Bulyanhulu Gold Mine Ltd in respect of the following two who the other investors are in the holding company, ABG, separate instances: (1) insurance premium payments; and and to whom the dividends were paid. It is also unclear (2) rehabilitation expenses. In both cases, the expenses whether there is any Tanzanian ownership in the com- were considered to be allowable. However, with regard panies. to the premiums, the amounts were incurred by another entity, whereas in respect of the rehabilitation process, the 48. For additional information regarding this, see Barrick Gold Canada Year- expenditure could not be proved and the burden of proof End Report (2014), p. 26, available at www.barrick.com/files/annual- report/Barrick-Annual-Report-2014.pdf. © IBFD BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 749 Attiya Waris 35 Figure 1: The shareholdings of Barrick Gold Canada Barrick Gold (Canada) Barrick Gold (Canada) 50% 60% 75% 90% 95% 100% ownership Super Pit Pueblo Viejo Turquoise ownership Porgera Pascua Lama Gold Mine (Dominican Ridge (US) (since 2014 (Papua (Chile) (Australia) Republic) 64%) New Cowal (Australia) Zaldivar Africa Barrick Guinea) Hemlo (Canada) Copper Gold UK Valdero (Chile) (now Acacia (Argentina) Round UK) Lagunas Norte Mountain Pierina (Peru) (US) Jabal Sayid (Saudi Arabia) Bald Mountain (US) Cortez (US) Golden Sunlight (US) Goldstrike (US) Source: the author, as adapted from the Barrick Gold Canada Year-End Report (2014). 36 Source: the author, as adapted from the Barrick Gold Canada Figure 2: The shareholdings of ABG (UK) Year-End Report (2014). African Barrick Gold (UK) On 11 March 2014, Barrick Gold Canada divested itself of 41 million shares in Acacia Gold, thereby reducing its interest in Acacia Gold to 63.90%. For additional 100% information regarding African this, see Barrick Gold Canada Barrick Year-End Gold Report (2014), p. 26, (Tanzania) available at www.barrick.com/files/annual-report/Barrick- Annual-Report-2014.pdf. 100% 100% Figure 2: The 100%(UK) shareholdings of ABG Pangea Bulyanhulu Minerals North Mara Gold Mine (Tanzania) (Tanzania) (Tanzania) Source: the author, as adapted from ABG (UK) Year-End Report (2014). However,Source: if Tanzaniathe had author, as adapted invoked its GAAR, this could from ABGof(UK) benefit Year-End the holding company isReport that there is a potential have changed the rulings so as to permit the interpreta- that the failure to demonstrate use “wholly and exclusively” (2014). tion of all of the transactions together. What is interesting by a particular mining subsidiary is impossible, as the sub- here is that, based on the limited information available sidiaries may well have shared equipment and expertise, from these three cases for purposes of the GAAR and by as was the case of the vice-president and the coordinat- disregarding the separate-entity principle, there is expen- ing staff. Allowing such information to become available Figures 1 and 2 are fairly limited toin diture that is recorded at nominal prices, for example the the TRA their may,scope therefore,as havethey prevented the issue from purchase of the aircraft, which permits an unusual reduc- arising. tion in depict taxable profits. theIndata addition, what would that be to the is available publicly in the annual 750 reports of the companies online. It is, therefore, unclear who BULLETIN FOR INTERNATIONAL TAXATION DECEMBER 2016 © IBFD the other investors are in the holding company, ABG, and to Mining Taxation in Tanzania: The African Barrick Gold Cases 4. Conclusions different countries as they affect each other is important. For instance, with regard to the issue of The various African Barrick Gold cases are dividends declared while not realizing profits as well particularly important, if not seminal, in adding as spending on community development, it could be to the jurisprudence in respect of taxation on the made clearer for purposes of future assessments as to African continent. It makes it possible to recognize what are the areas of activity that are not profit. This the limitations of African developing countries and would also permit the TRA to request information perhaps all developing countries that serve as source from the right countries and ensure that fewer states in levying taxes domestically on foreign-owned disputes arise. companies, particularly in the mining industry. Despite the fact that the cases do not make specific Third and finally, and perhaps most importantly, reference to changes or reforms in tax law that may these cases elaborated together definitely on what are be required, there were clear obstacles in the tax the rules of interpretation in respect of tax statutes. system, which limit the effect of these decisions. This is a strict interpretation, with purposefulness where necessary, and not only with regard to First, a lacuna in legislation is the absence of access legislation, but also in respect of the regulations in to information in respect of the Canadian and UK relation to income tax, VAT and customs duties. It accounts with regard to expenditure deductions and also clearly permits a holistic approach where all exemptions and how these were treated, which could of the ITA (2004) is considered in deciding on a have resolved the issues raised with regard to the particular provision. It would, therefore, be hoped burden of proof. Such deductions may be completely that this principle could be extended in future cases benign, but they remain unclear from a Tanzanian to reflect on the Tanzanian GAAR as contained in perspective. section 35 of the ITA (2004). Second, an understanding of the beneficial ownership links between the subsidiaries in the IBFD, IBFD, Your YourPortal PortaltotoCross-Border Cross-BorderTax Expertise Tax Expertise www.ibfd.org Covering over 50 countries, Global Transfer Pricing Explorer Plus is a practical guide that will assist you in making carefully considered choices for your complex transfer pricing decisions. It provides a step-by-step approach to support your strategy and includes practical examples, cases and diagrams to assist you in applying the information in practice. Chapters cover comparability analyses, transfer pricing methods, documentation requirements, compliance, transfer pricing audits, penalties, advance pricing agreements and Global Transfer litigation. Very specific issues are also included, such as intangibles, services, cost contribution arrangements, business Pricing Explorer Plus restructuring, intra-group financing and the intricate role of transfer pricing in indirect taxes. Unravelling transfer pricing intricacies To see the full collection content and tools, to take a free 7-day trial or to order, please visit www.ibfd.org. Contact us IBFD Head Office P.O. Box 20237 Tel.: +31-20-554 0100 (GMT+1) Online: www.ibfd.org Rietlandpark 301 1000 HE Amsterdam, Customer Support:

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