FISCAL REGIMES OF TANZANIA THE 5 TH EAST AFRICA OIL AND GAS SUMMIT - - PowerPoint PPT Presentation

FISCAL REGIMES OF TANZANIA

THE 5TH EAST AFRICA OIL AND GAS SUMMIT 31st March 2016 Raphael B.T. Mgaya Email: consult@mgaya.lawyer mgaya@jurisolution.co.tz

OUTLINE

• 1. Introduction
• 2. Elements of Fiscal

Regimes

• 3. Relevant laws
• 4. MPSA 2013

AN OVERVIEW

Constitution Laws

Regulations

Contract

OVERVIEW

• The Constitution of the URT has no

specific provision on hydrocarbon resources.

.

• The Petroleum Act, 2015 vests

the ownership of petroleum in the URT into the Government

.

• Tanzania currently follows a

production sharing system

FISCAL REGIMES OF TANZANIA

Royalty

Reckoned on gross production On a sliding scale

• 12.5% (onshore/shelf areas)
• 7.5% (offshore)

Royalty rate(%) X Production(bbl) X oil price( $/bbl)

Royalty

FISCAL REGIMES OF TANZANIA

Cost Recovery

Exploration Appraisal Development

Contractual System

Risks to the contractor

FISCAL REGIMES OF TANZANIA

Cost Recovery

Recoverable costs Non-recoverable costs Audit and cost control

ANNEX D

FISCAL REGIMES OF TANZANIA

Cost Recovery

• Cost recovery limit
• 50% of annual production
• Cost gas/cost oil
• Net of royalty
• The same both onshore and
• ffshore

High technology and huge financial expenditure

FISCAL REGIMES OF TANZANIA

Profit Sharing Profit oil/Gas shared Sliding Scale based on tranches of daily production Being commercial terms, are negotiable The Model Contract provides benchmarks which are not binding

FISCAL REGIMES OF TANZANIA

Barrel of Oil

Royalty 12.5%

Cost Oil 43.75% Profit Oil 43.75%

FISCAL REGIMES OF TANZANIA

Profit Oil Sharing Tranches (Onshore)

Tranches of Daily Production (BOPD) NOC Share Contractor Share 0-12,499 70% 30% 12,500-24,999 75% 25% 25,000-49,999 80% 20% 50,000-99,999 85% 15% 100,000- and above 90% 10%

FISCAL REGIMES OF TANZANIA

Profit Gas Sharing Tranches (Onshore)

Tranches of Daily Production (MMSCFD) NOC Share Contractor Share 0-19.99 60% 40% 20-39.99 65% 35% 40-59.99 70% 30% 60-79.99 75% 25% 80- above 80% 20%

FISCAL REGIMES OF TANZANIA

State participation

No less than 25% participating interest (S.45 (5)) unless NOC decides otherwise. Model Contract sets out modalities of participation NOC may elect to participate after a commercial discovery

FISCAL REGIMES OF TANZANIA

Rationale

Assertion of sovereignty Policy control Transfer of technology Local employment

• pportunity

Higher share of revenue

FISCAL REGIMES OF TANZANIA

State Participation

Paid up equity on commercial terms Paid up equity on concessional terms Carried interest with repayment Tax swapped for equity Free equity Equity in exchange for non-cash contribution

FISCAL REGIMES OF TANZANIA Bonuses

Upfront payments to the Government Introduced initially my the Model Contract (MPSA 2013) Art. 11 (c). Transposed into the Petroleum Act 2015 (S. 115 &116)

Signature bonus >= $2.5mil Production bonus >=$5mil

Not recoverable but deductible for tax purposes Negotiable

FISCAL REGIMES OF TANZANIA

Domestic Market Obligation (DMO)

Licence holder and Contractor

• bliged to satisfy domestic market on

pro rata basis with other Contractors (S. 98 (1)) Industry practice- the gas/oil supplied to meet DMO has prices much less than the market price.

FISCAL REGIMES OF TANZANIA

Domestic Market Obligation (DMO) DMO not to exceed the share of profit oil

• r gas of a licence holder and contractor.

Ensure security of supply Natural gas price shall be determined based on the strategic nature of the project (S.99)

FISCAL REGIMES OF TANZANIA

Income tax Resident company is taxed at 30%

• n its worldwide income

A Non resident is taxed 30% on its Tanzanian sourced income A New company is taxed at 30% if is listed on the DSE at 30% of its shares is held by general public

FISCAL REGIMES OF TANZANIA

Income Tax

Payable on Corporate profits by all companies in Tanzania Progressive, since it is targeted on profit Back-loaded, therefore takes into account:

• Fluctuations in oil prices
• Volatility of revenues
• Cost overruns

FISCAL REGIMES OF TANZANIA

Income tax

Alternative minimum tax (AMT) is 0.3% of gross turnover Based on taxable income Taxable income determined on the basis of audited financial statements

Taxable Income Gross Revenue less tax- deductible expenses under the Income Tax 2004

FISCAL REGIMES OF TANZANIA

Annual Fees (S. 114)

Amount to be prescribed in the regulations Annual fees

• acreage rentals
• training fees (USD 400,000)
• research fees

FISCAL REGIMES OF TANZANIA

Second extension period USD 200 per sq. km First Extension period USD 100 per sq. km

Rental Fees under the MPSA 2013

Initial Period USD 50 per sq.km

FISCAL REGIMES OF TANZANIA

Ring Fencing

Contract expenses-ring fenced within the contract area Contract expenses must have been incurred prior to the commencement of production Activities in different contract areas are treated as separate operations and are taxed separately Corporate 1 July 2013 corporate tax and losses are ring fenced within a contract area References: Sect 20, FA 2013, Sect 118 PA 2015, Sect 19 ITA 2004, Art 12(c) MPSA 2013.

FISCAL REGIMES OF TANZANIA

Capital Gain Tax

 Applies in

• M &A transactions
• Realization of investment

assets Capital losses are deductible from Capital gain in the same investment and not ordinary income

FISCAL REGIMES OF TANZANIA

Income Tax Transfer Pricing Regulations,

2014

Applies to controlled

transactions

Modeled on the OECD Model Contains strict provisions on reporting The TP guidelines provide guidance on arm’s length prices determination

FISCAL REGIMES OF TANZANIA

Capital allowances ϴDepreciable assets includes plants, equipment and licenses ϴAll are depreciated at 20% ϴEquipment costs are 100% deductible on year of they are incurred ϴLosses are carried forward

FISCAL REGIMES OF TANZANIA

Farm-out and Farm-in

For the first USD 100mil: 1% For the next USD 100mil: 1.5% For every dollar thereafter:2%

Withholding Tax

5% from Payment of resident providers technical

• r management services

Dividend 10%, but 5% for DSE listed Companies

• r 25% shares owned by resident.

FISCAL REGIMES OF TANZANIA

Interest Royalty

Interest paid to non resident is taxed 10% Royalty paid to non resident is taxed 15% Branch remittance tax 10% Oil and gas exploration and production companies are relieved from VAT

FISCAL REGIMES OF TANZANIA

Indirect Taxes Selling Shares

Transfer of shares subject to CGT (30%)  Since July 2012, indirect share transfer maybe taxed  Change of owner ship by 50% s treated as a realization of asset/liabilities.

FISCAL REGIMES OF TANZANIA

Pass through tax-applies at every transaction point Rate 18%of all taxable goods and services All suppliers of goods and services with turnover at least 40mil must be registered for VAT purposes

FISCAL REGIMES OF TANZANIA

VAT

Exported goods are zero-rated Certain export services are taxable e.g. services to an affiliate Oil and Gas (E &P) companies are exempted. VAT Registered companies may recover VAT as input tax by offsetting on output tax

FISCAL REGIMES OF TANZANIA

Import Duties

Imported goods and services subject to customs import duties (0-25%) Oil and Gas E & P companies are exempted

Export Duties

No charges on exports except raw cashew nuts, raw hides and skin Excise duty 10% on charges & fees raised by financial institutions for services rendered

FISCAL REGIMES OF TANZANIA

Stamp Duty Lease agreement Transfer of property (1%) PAYE Resident: Min.12%, Max. 30% Nonresident: 15% employ. Income, 20% total income Skill Development Levy All employers with >=4 employees (5% of gross wage bill)

FISCAL REGIMES OF TANZANIA

Worker’s Compensation Effective since July 2014 Applicable to private sector employer Rate 1% of annual wage bill Payable to Workers Compensation Fund as per the Workers Compensation Act, 2008 Pension Schemes Contribution Mandatory for all employees including the expatriates

FISCAL REGIMES OF TANZANIA

Pension Schemes Contribution

Examples NSSF, PPF, GEPF, LAPF etc Employee contributes 10%, Employer 10% e.g. NSSF. Services Levy Payable to municipal council quarterly Rate 0.3% of the turnover or sales Double Tax Treaties With Canada, Denmark, Finland, India, Italy, Norway, South Africa, Sweden and Zambia