NAVIGATING TAX COMPLIANCE AND DISPUTE RESOLUTION IN THE EXTRACTIVE SECTOR

Abstract

The common types of fiscal regimes are: Concessionary systems where ownership vests with the investor. This used to be most common in the mining sector. In this regime the investor is responsible for the financing of the mining project, but often after obtaining Government commitment to support the development through extensive tax incentives and which are freely given. The Government incurs heavy costs in the form of tax expenditures but without equity entitlement. In return, the Government is to receive royalties and corporate taxes. Experience shows that the attendant agreements which govern the relations between the Government and the investor may be cockeyed and cause Governments to be on perennial loss position. In Tanzania, the example are the Mining Development Agreements (MDAs) previously used. They contained unrestricted loss carryovers, expensing of royalties, rights to offset expenditure from loss making mining operations against profitable operations (cf. ringfencing), 100% deductibility of capital expenditure (including capitalized exploration expenditure), royalties calculated on netback value, right to export raw minerals without beneficiation, retention of earnings from mineral sales abroad (cf. capital repatriation), choice of source of procurement (cf. local content rules), unregulated transfer pricing/base erosion/profit shifting, and many other inimical practices. This type of regime does not respect the rule on permanent sovereinty over natural resources and has lead to unending conflicts between investors and national governments. Today modified concessionary systems are in use whereby resident joint ventures between the Government and investors are preferred and which ensure that the two sides are equity holders and the mineral rights are jointly owned through the JVC arrangement. Safeguards are in place to ensure that profitability of mining operations is not syphoned off through transfer pricing, base erosion and profit shifting, unmitigated capital repatriation, lifetime tax incentives, mineral beneficiation within the country, local content requirements, and other safeguards. The concession no longer means total ownership by investors with total discretion over the minerals and profits.