Much like a marathon where runners face unique challenges during their course, companies in the mining exploration/prospective and development stages are encountering significant challenges due to the Tanzania Revenue Authority’s (TRA) recent position regarding VAT refunds.
The TRA has been rejecting VAT refund applications on the grounds that these companies (in the exploration and or mining development stage) have not yet started making taxable supplies. Consequently, the input VAT becomes a substantial cost for these companies, worsening cash flow challenges in a sector already burdened by heavy capital investment requirements.
Just as a marathon in which runners must conserve energy to complete the race, companies need to manage their finances effectively to sustain long-term operations. Drawing on best practices from other mining jurisdictions, there is a strong case for the importance of VAT refunds in promoting investment in the extractive sector especially in the exploration/prospective stage.
VAT, like a toll fee on a marathon course, is a consumption tax which is ultimately borne by the final consumer. However, in the extractive industries, businesses incur input VAT on goods and services purchased during the exploration and development phases of their operations. The refund of this input VAT is crucial because, at these stages, companies are not yet generating revenues (there is no sale). Thus, denying these refunds is akin to placing an unexpected hill on a runner’s path, shifting the tax burden to the companies themselves, contrary to the fundamental principles of VAT.
Many countries, recognising the unique nature of the extractive sector, have designed their VAT systems to accommodate the long lead times and capital-intensive nature of these industries. Some best practices, such as those in Zambia, United Kingdom (UK) and Australia, allow VAT refunds to companies in the extractive sector even during the exploration phase. This approach acknowledges that while taxable supplies may not yet be made, the input VAT is directly related to future taxable activities. These jurisdictions appreciate and recognise that the refunds are vital for attracting investors which will lead to higher tax revenues in the future without taking into account the multiplier impact of the investment at all stages.
During the development stage, the time when a mine is constructed so as to start production, the cost is significant and denying refund of input VAT is effectively taking away 18% of the total investment fund from being invested in the construction of the mine. In some cases, this can be a deal breaker and can lead to a decision not to build the mine once modelled into financial models.
The recent Finance Act 2024 amendment requires that if the specified commencement date passes before commencing supplies, the intending trader must notify the Commissioner within 90 days, providing reasons for the delay. Failure to do so, will result in deemed deregistration. Whilst this change positively impacts compliance, transparency and tax administration, it raises a question—much like a marathon organiser provides hydration stations to support athletes throughout the race—about whether notifying the Commissioner will extend the specified commencement date for making taxable supplies. To avoid confusion, the VAT legislation could be amended, as done in Zambia and provide certainty on the timeline for the business to start generating taxable supplies in order to qualify for input VAT credit and refund (where applicable). We believe clarification will also specify different timelines for the extractive sector given its uniqueness.
The TRA’s rejection of VAT refund claims for companies in the extractive sector has several negative implications as the capital-intensive nature of the extractive sector means that companies already face substantial financial outlays before generating revenue. The inability to reclaim input VAT exacerbates these cash flow challenges, potentially delaying project timelines or leading to underinvestment. The current approach by the TRA may deter both local and foreign investment in Tanzania’s extractive sector, as investors may view the country as having a less favourable tax regime compared to other jurisdictions.
To align with international best practices and foster a more favourable investment climate, several recommendations are proposed even though the VAT legislation is clear regarding (i) the conditions for registering as an intending trader with the purpose of making taxable supplies and (ii) the allowability to claim input VAT “for the purpose of making taxable supplies,”. The issue is mainly interpretational as the TRA interprets this as “starting to make taxable supplies from then,” and therefore a recommendation is for the TRA to consider revising its decisions and revisiting VAT policies to allow for the refund of input VAT incurred during the exploration and development phases in the extractive sector. Alternatively, the TRA could introduce a system where VAT on certain capital goods is deferred until taxable supplies are made. This would alleviate immediate cash flow pressures while still ensuring that VAT is collected once the company begins to generate revenue. Regular dialogue between the TRA and stakeholders in the extractive sector is also essential to understand the unique challenges faced by these companies.
In conclusion, the TRA’s current approach to VAT refund rejections in the extractive sector is at odds with both the principles of VAT and the practices observed in other jurisdictions with significant extractive industries. By reconsidering this stance and adopting more supportive policies, the TRA and Tanzania as a country can create a more conducive environment for investment in its extractive sector, ultimately benefiting the economy as a whole, much like a marathon that ends in a triumph for both the runners and the spectators.
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