By Mr. Raphael Mgaya, Advocate, Ministry of Energy and Minerals, Tanzania.
Fiscal regimes refer to laws and regulations governing taxation of a particular industry. The designing of a good fiscal regime for petroleum industry is challenging due to the high capital expenses involved, exhaustibility of petroleum resources and the volatility of revenues.
The petroleum fiscal regimes are embodied within the hierarchy of laws namely, the Constitution, legislations, regulations and contracts, with the Constitution being the most superios in the hierarchy and contract being the least superior. The main elements of the oil and gas fiscal regimes in Tanzania are: royalty, cost recovery, profit sharing, state participation, bonuses, statutory taxes and fees. These elements are briefly discussed below:
Royalty: This is a payment given to the resource owner. This is required under Section 113 of the Petroleum Act, 2015 (PA). Royalty is on sliding scale depending on the area where the hydrocarbon is being exploited with the rate being 12.5% onshore and shelf areas and 7.5% in the offshore areas. Royalty is charged on gross revenue.
Cost recovery: The PSA Contractor recovers the costs from the Cost Oil/Cost Gas. The cost recovery limit is 50% of the annual production net of royalty both onshore and offshore.
The recoverable and non-recoverable costs are itemized under Annex D of each production sharing agreement (PSA) and the Model Production Sharing Agreement (MPSA), 2013. Annex D is used for the purposes of audit and control of costs. Some costs are not recoverable under the PSA such as financing charges, bonuses, costs related to arbitration, costs that were incurred prior to signing PSA, costs incurred due to gross negligence or willful misconduct of the Contractor/Licence holder.
Profit Sharing: Profit oil and profit gas is the amount of oil or gas remaining after royalty and cost recovery has been deducted. This amount is shared between the national oil company (NOC), the Tanzania Petroleum Development Corporation (on behalf of government) and the Contractor on pre-agreed proportions.
The profit sharing is on the sliding scale with the share of the government increasing with increase in the size of production tranches. The MPSA 2013 contains benchmarks for profit sharing which are not binding (See figures below)
| 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% |
| 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% |
Fig. 1 Profit Oil Sharing Tranches (Onshore), MPSA 2013
Fig. 2 Profit Gas Sharing Tranches (Onshore), MPSA 2013
State participation: The state may elect to participate through the NOC upon commercial discovery. The State participation is not less than 25% (Section 45 of the PA). The MPSA 2013 sets out the modus operandi on State participation.
The state participation has a long history. The state participation in the petroleum commercial activities is crucial for the reasons that it enables the State to assert its sovereignty over the strategic resources, promote transfer of technology to locals, promote employment of locals and increases the revenues flow to the State.
The State participation can be financed through many different ways such as paid up equity on commercial terms; paid up equity on concessionary terms; carried interest with repayment; tax swapped for equity; free equity; and equity in exchange for non cash contribution. In Tanzania, paid up equity on commercial terms and the carried interests with repayment are the most common.
Bonuses: These are upfront payments to State. Bonuses are front-end loaded taxes they are considered as regressive from the point of view of the investor. Bonuses were initially introduced by Article 11 (c) of the MPSA 2013. The same is provided in PA under Section 115 and Section 116. The signature bonus rate is not less than $2.5million and production bonus is not less than $5million. Bonuses are not recoverable under the PSA but they are deductible for tax purposes.
Domestic Market Obligation (DMO): Licence holder and Contractor are obliged to satisfy domestic market on pro rata basis with other Contractors (PA, Section 98 (1)). Both the Natural Gas Policy 2013 and the PA require that the natural gas price for supply in the domestic market should be determined based on the strategic nature of the project (PA, Section 99).
Corporate Income: Resident Company is taxed at 30% on its worldwide income. A non-resident is taxed 30% on its Tanzanian sourced income. A new company is taxed at 25% if is listed on the Dar es Salaam Stock Exchange (DSE) and at least 30% of its shares is held by general public.
Annual Fees: The PA states that the amount of fees is to be prescribed in the regulations. The fees includes: Annual fees, Acreage rentals, and training fees which is currently is USD 400,000 as per the MPSA, 2013, and research fees. The actual training fees differ from PSA to PSA depending on the rate agreed at the entering into the PSA. The new rental fees as proposed by the new MPSA 2013 are: Initial period: USD 50 per sq.km; First extension USD 100 per sq.km; and Second extension USD 200 per sq.km.
Ring fencing: Contract expenses are ring fenced within the Contract Area. The recoverable 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 as per Section 20 of the Finance Act 2013, Section 118 PA 2015, Section 19 of Income Tax Act, 2004, Article 12(c) MPSA 2013.
Capital Gain Tax: This applies in case of corporate reorganization and acquisition of assets. Transfer of shares subject to Capital Gain Tax at the rate of 30% of turnover. Since July 2012, indirect share transfer maybe taxed. The change of owner ship by 50% is treated under the Income Tax as a realization of asset/liabilities.
Farm-out/Farm-in Fees: The MPSA 2013 introduces special fees for Farm-out and Farm-in arrangement: For the first USD 100mil: 1%; for the next USD 100mil: 1.5%; and for every dollar thereafter: 2%. This is not applicable to the existing PSAs. It applies to future PSAs which will be signed on the basis of the MPSA 2013.
Withholding Tax: This is the amount of a service or goods provider’s pay withheld by the taxable entity and sent directly to the government as partial payment of income tax. The rate is 5% from payment of resident providers of technical or management services. Dividend is taxed 10%, but 5% for companies listed at DSE or in case 25% shares owned by residents.
Value Added Tax (VAT): VAT is a pass through tax that applies at every transaction point. The rate is 18% of all taxable goods and services. All suppliers of goods and services with turnover at least TZS 40 million must be registered for VAT purposes. The oil and gas exploration companies are exempted from the VAT to extent provided in their respective PSAs.
Other Taxes and Fees:
Goods imported or exported in connection with oil and gas exploration activities are exempted from import and export duties. Stamp duties is payable in case of transfer of property or in case of assignment of rights under lease agreement at the rate of 1% of the turnover. Currently, the PAYE is payable at the rate ranging from 12% to 30% of the basic salary for resident employees and for non-resident employee the rate is between 15% employment income and 20% on the total income.
The new rates of PAYE will be effective from 1 July 2016 where the minimum rate will be 9%. All employers with at least 4 employees are obliged to pay 5% of gross wage bill as a skill development levy chargeable under Section 14 (2) of the VETA Act. Worker’s Compensation fund became effective since July 2014. All private sector employers have to contribute to the Fund a rate 1% of annual wage bill as per the Workers’ Compensation Act, 2008.
The employers also have to make contribution to pension funds of the employee’s choice. Service levy is also payable by companies at the rate of 0.3% to the municipal authorities of turnover or sales as per the Local Government Finance Act, 1982.
Generally, there are several tax reliefs that are provided to oil and gas companies. These include the capital allowances and other reliefs provided under tax laws and bilateral agreements. So far the United Republic of Tanzania has entered into double taxation treaties with various countries including Canada, Denmark, Finland, India, Italy, Norway, South Africa, Sweden and Zambia.
The author is an Advocate of the High Court. He holds an LLB (Hons), LLM (Int’l law), LLM (Oil and Gas law); MBA (Corporate Management). He can be reached through: raphael.mgaya@gmail.com or consult@mgaya.lawyer
