Former Commissioner of Minerals defends large scale mining sector

Dr Dallali Peter Kafumu

Former Commissioner for Minerals Dr Dallali Peter Kafumu has strongly defended large-scale mining in the country, saying the sector has contributed a lot in terms of taxes and job creation.
Himself a former director of mines between 2007 and 2011 when he joined politics, Dr Kafumu filed a written reaction to The Guardian this week following a story published by this newspaper last Saturday, in which apart from defending the sector, he also claimed that the Tanzania Minerals Auditing Agency (TMAA) assumed an activist role in releasing unverified tax data sets and indicating that the miners evaded taxes.
According to Dr Kafumu, one may also assume that last week’s TMAA press conference was a campaign to substantiate its tax audits and assessment work … that it was taking steps in line with mandates of the TRA … the only legal entity mandated by the 2004 Income Tax Act to manage taxes in the country.
In his harsh reaction, Dr Kafumu stated that the data released by TMAA were misleading, adding that in reality, large-scale mining dominated by foreign investors had contributed more than what is currently being reported.
But apart from dismissing the TMAA data, Dr Kafumu couldn’t give actual data on how much was paid in terms of taxes during the period under review (2009-2012).
“It is a fact that large-scale gold mining and businesses worldwide are not only expensive but also complex in nature. A smart writer would need to research more before writing such a news report. Rather than rely on an unverified cluster of datasets from a single source to write a one sided story, more balancing information was needed,” Dr Kafumu wrote.
Though it isn’t clear whether he reacted as an expert, lawmaker, consultant or former Commissioner for Minerals, it is a fact that large-scale gold mining and businesses worldwide are not only expensive but also complex in nature.
Dr Kafumu added, “It is incomprehensible for the Staff Writers to assume that the US$7bn gross revenue is all gross profit and that corporate tax is charged from gross profit.”
But, in last week’s article, The Guardian stated clearly that the $7 billion was total exports for years, meaning this wasn’t the gross profit as claimed by one of the country’s best experts in mining.
The export figures are available from the Central Bank of Tanzania (BOT), which is one of the country’s respected institutions.
According to Dr Kafumu, about 60 percent of gross revenues in large scale mining go to operational cost.
If this is true, then $4.2 billion out of a total export earnings of $7 billion was the operational cost -- or in simple language -- the cost of production.
But, according to Dr Kafumu, operational costs in mining do not include taxes.
“It is also a fact about 20% of the revenue is used to pay for other imposts like royalties; fees; and loan repayments and other taxes like withholding, skills development levy, PAYE, service levy etc. Corporate tax is only calculated from the remaining taxable profits and not from gross revenue. In other words, after deducting all costs including operating costs and other charges that are charged from gross revenue, it is then corporate tax can be charged.”
Dr Kafumu further added, “The corporate tax may be low or high depending on the age of the mine and level of profitability of such a mine.”
“To understand what a profitable mine over the life of the mine worldwide would offer, let us assume that the total US$7bn export values were indeed gross revenues from very profitable mines and 60% of this revenue, which is US$4.2bn would be spend as operation costs. About 20% that is US$1.4bn would be spent as other imposts like royalties, other taxes, fees and loan repayments all charged on gross revenue.
The operating costs and others impost charges will all total into US$5.8bn and deducting from the total revenue we obtain a profit of US$1.4bn. Calculating 30% of profit as corporate tax we obtain US$420m.” Dr Kafumu wrote.
“Assuming the TMAA datasets was good quality, but still the difference between US$303m and US$420m is not significant. And this difference may be due to the fact that Tanzania's mines are at their infancy and profit is just beginning to trickle…At the height of profitability a US$7bn revenue may fetch up to close to half a billion; that is US$500m of corporate taxes. Getting only US$303m as corporate taxes as reported is not be alarming as portrayed by the news report.”
But even if this was reality, to Dr Kafumu, the difference of $197 million is nothing to worry about.
Last Saturday, The Guardian reported that major foreign gold mining companies earned gross revenues amounting to $6.967bn (Sh11.495 trillion) between 2009 and 2012, according to the current exchange rate of Sh1,650 against the US dollar, but paid the Tanzanian government corporate tax amounting to only $280million (Sh473.8billion) over that period.
Corporation tax is charged on gross profit of any company doing business in Tanzania under the current law, under which the Tanzania Revenue Authority (TRA) takes 30 percent of the posted profit.
Corporation Income Tax is levied on corporation taxable profit for all companies registered or carrying business in Tanzania. The applicable corporation income tax rate is 30 percent usually paid in two stages. The provisional tax is paid based on taxpayer’s own estimates at the beginning of the business year; and final tax is paid after the official assessment of the total income in the respective year of income.
According to Income Tax Act in arriving at taxable gains or profits a deduction is allowed for all expenditure incurred in such year of income wholly and exclusively for the production of such income.
According to the Act, annual wear and tear deductions are also allowed for machinery owned and used for the business. The linear method of depreciation is used and the following rates are applicable. 37.5 percent for class one machineries, which includes tractors, combine harvesters, heavy earth moving equipment and such other heavy self propelling machines of a similar nature. 25 percent for class two machinery which is other self-propelling vehicles including aircraft. 12.5 percent for all other machinery including ships.
Quoting data released by TMAA, the Guardian reported that Geita Gold Mine was the leading gold mine, which contributed about Sh299.4bn, followed by Resolute Tanzania Ltd which paid a handsome Sh97bn/-. Tulawaka gold mine, owned by African Barrick Gold, came third and paid Sh77.4bn/- during the same period.
Although African Barrick Gold is the largest gold producer in the country, its contribution in corporation tax remains abysmal because the company continues to declare losses at its North Mara, Bulyanhulu and Buzwagi mines. Using data from TMAA and BOT, the Guardian reported that the total taxes paid (corporate tax, royalties, withholding tax, fuel levy and local government levy) were $477 million, in which corporate tax was $280 million between 2009 and 2012.
This amount didn’t include Pay-As-You-Earn and skills development levies.
At the previous rate of 3 per cent in royalties, it means the government has earned a total of $174.17 million over the past four years in royalties from gold earnings of $6.967 billion.
Royalties are calculated on gross earnings regardless whether the mine has posted profit or not.
BOT data – reliably obtained by the Guardian -- show that in 2009 Tanzania’s gold exports rose to $1.076 billion in 2009, up from $932.4 million in 2008 when gold prices per troy ounce reached $972million.
In 2010, the value of gold exports rose by 31 percent, reaching $1.365 billion, thanks to world’s gold prices that reached $1,112 per troy ounce.
Data from the Tanzania Central Bank further shows that in 2011 gold exports rose by 47 percent, reaching $2.226bn/-, when the price per troy ounce also rose to a record $1,568.
In 2012, gold exports rose to $2.300bn as the price per troy ounce surged to $1,700.
Over the same period, production cost per ounce ranged between $650 and $890 per ounce -- depending on the type of the mine as well as the ore grade available.
But the gold prices ironically surged, raising the value of Tanzania’s export earnings, but the country’s corporate tax remained unconvincing as some of the largest gold mines continued to post losses.