An analysis of Acacia Mining’s operations in Tanzania indicates that the Tanzania Revenue Authority (TRA) may have a weak case for its claim of 10 percent tax due on US$444 million in dividend payments made between 2010 and 2014. In a March 31st judgement, the Tax Appeals Tribunal had declared that Acacia Mining was involved in a “sophisticated scheme of tax evasion”, evidenced by the parent company issuing dividends, but the firms only three operating mines, all in Tanzania, declaring losses.
Open Oil produced a comprehensive financial model of the Bulyanhulu mine, as well as a review of project economics for the companies’ other projects in Tanzania. Their analysis indicates that at best just US$191 million of the US$444 million is subject to taxation. The balance of US$253 million paid in 2010 was a return of capital to shareholders who tried to buy shares at flotation that year of African Barrick Gold, as Acacia Mining was previously known. Open Oil is an analysis and open data publishing company based in Berlin.
TRA’s case hinges on whether Acacia PLC has “permanent establishment” in Tanzania, or not. Acacia argues that Acacia PLC, and its subsidiaries in Tanzania are separate entities with tax obligations in their respective countries of registration. If the case goes to international arbitration and a ruling is made in Tanzania’s favour, it will have profound implications for large foreign investors across sectors.
Acacia Mining, and other large mining firms operating in Tanzania has been consistently criticised for not paying corporate income tax in Tanzania. Under the MDAs in operation, no payments are due until all costs have been recovered, as well as a 15 percent additional capital allowance. Thus far, only Geita Gold Mine is paying corporate income tax. Earlier this year, Acacia Mining agreed to make advance corporate income tax payments now, which it expects will only fall due in about three years. This profitability projection matches the findings of Open Oil’s model.
The legacy of such MDAs has soured relations with mining companies. The first effective renegotiation of terms was the Mining Act of 2010. Amongst other things, this raised the rate of royalty on Gold from 3 to 4 percent, and levied it on the ultimate sales price. Pressure from government led to mines accepting this rate, an effective renegotiation of existing MDAs.
In September 2014, TRA sought consultants to advise it on renegotiation of existing MDAs and Production Sharing Agreements. A strong reaction from companies saw that stopped. If widely understood, Open Oil’s analysis could underpin demands for further renegotiation, even if their findings support Acacia Mining’s current case on taxation of dividends paid in London. Whether such an approach based on rigorous modelling will lead to better results in future deals remains to be seen.
Open Oil’s financial model for Bulyanhulu can be downloaded at http://openoil.net/wp/wp-content/uploads/2014/09/OO_Bulyanhulu_Model_1606101.zip