Using tax policy to encourage

investment in the mining and

petroleum industry
UCMP Retreat with H.E
The President of Uganda


10 December 2013
PwC
Agenda
Characteristics of the mining and petroleum industries
The top 10 key issues for investors
The role of taxation
The need for a change in tax policy
Our proposals and recommendations

2
December 2013 Taxation issues for the mining and petroleum industries in Uganda
PwC
The unique characteristics of the mining and
petroleum industries
1. High risk
2. Price taker
3. Cyclical profits
4. Finite life
5. Capital intensive
6. Remote locations
7. Restoration and reclamation
8. Reliance on subcontractors


Taxation issues for the mining and petroleum industries in Uganda
3
December 2013
PwC
The life cycle of a mining project
Taxation issues for the mining and petroleum industries in Uganda
4
December 2013
PwC
The top ten criteria investors consider in deciding
on mining and petroleum projects
1. Geological potential for target mineral/petroleum
2. Profitability of potential operations
3. Security of tenure and permitting
4. Ability to repatriate profits
5. Consistency of minerals/petroleum policies
6. Realistic foreign exchange controls
7. Stability of exploration terms and conditions
8. Ability to pre-determine environmental obligations
9. Ability to pre-determine tax liability
10. Stability of tax regime
Taxation issues for the mining and petroleum industries in Uganda
5
December 2013
Source: UN Survey of Mining Companies Prof Otto 2005
PwC
Tax policy issues for the government to consider
with respect to the mining / petroleum industries
What is the right tax policy that will ensure the greatest possible
benefit for the State while at the same time encouraging investment
in the sectors?
How should the government balance the need for raising tax in the
short term and the desire to promote investment and development
in the sectors in the long term?
How can the government achieve its objective of obtaining an
appropriate share of income and to foster development, while at the
same time allowing the investor to get an adequate return on their
investment?
What is the right tax policy for the mining and petroleum industries
in Uganda that will ensure that the countrys mining and petroleum
industries are competitive by global standards?


Taxation issues for the mining and petroleum industries in Uganda
6
December 2013
PwC
Tax policy plays a key role in investment and
growth of the mining & petroleum industries
It determines whether a mining/petroleum project is financially
attractive and economically feasible
Should not simply be a tool for maximising fiscal revenue but a tool
for encouraging investment, development and innovation
It must be clear, transparent and predictable to enable investors
accurately assess viability of investments
Should not aim to maximise revenue in the short run at the expense
of long term development of the sector
Should encourage exploration and development activities in the
sector as well as efficient exploitation of the resource
Policy should be neutral and progressive without front loading tax
costs on investors during the early phase of the mining project
Taxation issues for the mining and petroleum industries in Uganda
7
December 2013
PwC
How the government currently uses tax policy to
encourage investment in power, energy and roads
Taxation issues for the mining and petroleum industries in Uganda
8
December 2013
Type of expenditure Roads, bridges,
hydro power sector
Mining and
petroleum
industries
Feasibility studies and
consultancy services
Exempt from VAT Not exempt from
VAT
Importation of specialised
vehicles plant and machinery
Exempt from VAT Not exempt from
VAT
Specialist consultancy
services and engineering
designs provided by non
residents
Exempt from VAT Not exempt from
VAT
Civil works Exempt from VAT Not exempt from
VAT
PwC
Recent changes in the VAT laws have increased the
cost of exploration / project development by 18%
9
December 2013 Taxation issues for the mining and petroleum industries in Uganda
The abolition of the investment trader status means that mining
companies have to pay VAT during their investment phase
Mining companies are no longer allowed to register for VAT until
they start production -> meaning VAT is now a tax on investment
VAT paid by mining companies during the early phase of exploration,
appraisal and development of the project is now a tax on investment
The cost of exploration, appraising and developing a mining or
petroleum project in Uganda have increased by up to 18%!
Government is taxing investment upfront before profits are
earned at the expense of the future development of the mining and
petroleum industries for the long term



PwC
Our proposals and recommendations for
Governments consideration
Allow mining and petroleum companies to register for VAT during
the exploration, appraisal and development phases of a project
Amend the tax laws to ensure that VAT on imported services used in
the exploration, appraisal and development phases of the project is
not a tax on the investment being made
Reduce the rate of withholding tax on imported services for mining
and petroleum industries to a rate of 6%
Allow mining companies to claim tax relief for the costs they incur in
developing physical infrastructure in areas where they operate
Set up a Joint Industry and Government workgroup to discuss and
debate tax policy issues relating to the industry before any changes
are made in the tax laws

Taxation issues for the mining and petroleum industries in Uganda
10
December 2013
PwC
Experiences from other countries with respect to
the VAT treatment of Mining companies
11
20 December 2011 Taxation of the Petroleum Value Chain
Country Mining company
allowed to register for
VAT before production
Importation of
services for use in
mining operations
Importation of
plant, machinery
and goods
Kenya No, but they are exempt
from paying VAT on inputs
VAT exempt VAT exempt and
remission
Ghana Yes therefore can recover
the VAT paid
VAT paid but fully
recovered
VAT exempt
Botswana Yes therefore can recover
the VAT paid
No VAT charged if
services are for use in
business activities
VAT paid on
importation but can
be claimed back as a
credit
South Africa Yes therefore can recover
the VAT paid
Tanzania Yes therefore can recover
input VAT
VAT paid but fully
recovered
Special relief for
VAT during
exploration
Uganda No therefore VAT paid is
tax on investment
VAT paid as a tax on
investment
Some exempt
PwC
In conclusion
We need a regulatory, licensing and tax regime
that recognizes the unique characteristics of the
mining and petroleum industries
Front loaded taxes such as VAT on plant, machinery,
goods and services used in the exploration, development
and production of minerals has greatly increased the cost
of extracting minerals/petroleum in Uganda
The mining and petroleum industry needs (and
deserves) VAT incentives similar to those enjoyed
by other long term capital intensive sectors such
as the road construction and hydro power
projects if our countrys full extractive industrys
potential is to be realised.
Taxation issues for the mining and petroleum industries in Uganda
12
December 2013