Ethiopia can be considered to have an attractive tax regime for mining and petroleum operations. The government has set up a series of incentives in mining and petroleum operations which benefit from a lower rate of tax than other businesses. To be beneficiary in mining and petroleum, you shall know Ethiopian tax proclamations. Here are the right tax issues on mining and petroleum operations according to the Federal Income Tax Proclamation No. 979/2016 Article 36-44. it guide you to develop more positive relationship with Ethiopian Revenues and Customs Authority on mining and petroleum operations.
Taxation of Licensees and Contractors
“Licensee” means a person who has been granted a mining right. The business income tax rate applicable to a licensee or contractor is 25%. A licensee effecting payment to a non- resident - contractor shall withhold and transfer to the tax authority 10% of the payment. In calculating the tax payable, deduction shall be allowed for cost of mobilization and demobilization.
Limitation of Deductions Relating to Mining or Petroleum Operations
A deduction for expenditure to the extent incurred by a licensee in undertaking mining operations in a licence area during a tax year shall be allowed only against the business income derived by the licensee from the mining operations in the licence area during the year. If a licensee has a loss in respect of mining operations in a licence area for a tax year, the amount of the loss shall be carried forward and allowed as a deduction against the business income of the licensee derived from mining operations in the licence area in the next following tax year of the licensee.
The amount of a loss of a licensee for a tax year that is not deducted shall be carried forward by the licensee to the next following tax year and deductible from the gross income of the licensee in that year until the loss is fully deducted provided. However, that the licensee can’t carry forward a loss sustained in a tax years from the end of the tax year in which the loss was sustained. A licensee has a loss in relation to mining operations in a licence area for a tax year if the total deductions of the licensee in respect of mining operations undertaken by the licensee in the licence area during the year exceed the total amount of business income derived from such operations in the area for the year.
“Exploration expenditure” means capital expenditure incurred by a licensee or contractor in undertaking exploration operations, other than expenditure incurred in acquiring a depreciable asset, and includes the following:
a) Expenditure incurred in acquiring:
an interest in an exploration right from the government or under a farm-out agreement;
exploration information from the government or under a farm-out agreement;
b) Social infrastructure expenditure incurred in relation to exploration operations under a mining exploration right or petroleum agreement.
Exploration expenditure incurred by a licensee or contractor shall be treated as a business intangible with a useful life of one year. The depreciation rate for a depreciable asset that has its first use in exploration operations shall be 100%.
“Development expenditure” means capital expenditure incurred by a licensee or contractor in undertaking development operations, other than expenditure incurred in acquiring a depreciable asset, and includes the following:
a) Expenditure whenever incurred in acquiring:
an interest in a mining right or petroleum agreement, other than an interest; or
mining or petroleum information, other than information;
b) Social infrastructure expenditure incurred relation to development operations under a mining right or petroleum agreement;
Development expenditure of a licensee or contractor shall be treated as a business intangible with a useful life of four years. If a licensee or contractor incurs development expenditure before the commencement of commercial production shall apply on the basis that the expenditure was incurred at the time of commencement of commercial production. If a depreciable asset for use in development operations is acquired or constructed by a licensee or contractor before the commencement of commercial production shall apply to the asset on the basis that it was acquired or constructed at the time of commencement of commercial production.
The amount of the deduction allowed for development expenditure or the depreciation deduction allowed for a depreciable asset for the tax year in which the commencement of commercial production occurs shall be computed according to the following formula:
A x B/C
A: is the amount of the expenditure or the cost of the asset;
B: is the number of days in the period beginning on the date of commencement of commercial production and ending on the last day of the tax year in which commercial production commenced; and
C: is the number of days in the tax year in which commercial production commenced.
If, other than under a farm-out agreement, a licensee disposes of an interest in a mining right or a contractor disposes of an interest in a petroleum agreement, any gain arising on the disposal is reduced by any development expenditure incurred by the licensee or contractor that has not been deducted or otherwise recouped by the licensee or contractor at the time of the disposal. “Commencement of commercial production” means the first day of the period of 30 consecutive days during which the average level of production on the 25 highest production days in the 30-days period reaches a production level as determined by the Ministry of Mines, Petroleum and Natural Gas to be commercial production.
“Approved rehabilitation plan” means a plan for rehabilitation of a mine or petroleum site approved by the Ministry of Mines, Petroleum and Natural Gas, including rehabilitation obligations specified in a mining right or petroleum agreement. “Rehabilitation fund” means a fund or account required to be established under a mining right or petroleum agreement to provide for the future payment of remedial work to the licence area covered by the mining right or contract area under the petroleum agreement and is managed jointly by the Ministry of Mines, Petroleum and Natural Gas and the licensee or contractor.
A contribution made by a licensee or contractor to a rehabilitation fund in accordance with an approved rehabilitation plan in relation to mining or petroleum operations shall be allowed as a deduction in the tax year in which the contribution was made. An expenditure incurred by a licensee or contractor in carrying out work required by an approved rehabilitation plan in respect of the mining or petroleum operations of the licensee or contractor shall be allowed as a deduction for the tax year in which the expenditure is incurred provided that the work is not paid for, directly or indirectly, from money made available out of a rehabilitation fund.
An amount accumulated in a rehabilitation fund, or an amount withdrawn from a rehabilitation fund to meet expenditure incurred under an approved rehabilitation plan, shall be exempt income. An amount withdrawn from a rehabilitation fund and returned to the licensee or contractor is business income of the licensee or contractor for the tax year in which the amount was returned. Any surplus in a rehabilitation fund of a licensee or contractor at the time of completion of rehabilitation is business income of the licensee or contractor for the tax year in which rehabilitation is completed.
Deduction allowed for reinvestment
A licensee or contractor may deduct up to 5% from his gross income in each tax year for any investment expenditure incurred by the licensee or contractor towards investment in development projects authorized by the licensing authority. The amount deducted by a licensee or contractor in a tax year shall form part of the taxable income of the licensee or contractor of the next following tax year, unless it is invested at the end of that year.
Farm-outs shall apply if the following conditions are satisfied:
a) A licensee or contractor (referred to as the “transferor”) has entered into an agreement (referred to as a “farm-out agreement”) with a person (referred to as the “transferee”) for the transfer of part of the interest of the transferor in a mining right or petroleum agreement;
b) The consideration given by the transferee for the transferred interest wholly or partly includes the transferee agreeing to incur expenditure, or undertaking some or all of the work commitments of the transferor, in respect of the part of the interest retained by the transferor.
If farm-out applies the value of any work undertaken by the transferee in relation to the part of the interest retained by the transferor shall not be included in:
The consideration received by the transferor for the transferred interest; or
The business income of the transferor.
The following applies to any amount in money received or receivable by the transferor for the transferred interest:
a) The amount in money on the basis that it is a recoupment by the transferor of any deductions allowed for expenditure incurred by the transferor in respect of the transferred interest shall apply;
b) If the amount in money exceeds the amount of deducted expenditure , the excess shall be treated as consideration received for the transferred interest.
Indirect Transfers of Mining or Petroleum Rights
If there is a 10% or more change in the underlying ownership of a licensee or contractor, the licensee or contractor shall immediately notify the Authority, in writing, of the change. If the person directly or indirectly disposing of the membership interest, the licensee or contractor shall be liable, as agent for the non-resident, for any tax payable by the non-resident person in respect of the disposal. Any tax paid by a licensee or contractor on behalf of a non-resident shall be credited against the tax liability of the non-resident. The membership interest in a body shall be treated as a business asset.
All mining and petroleum resources are public property which has a significant contribution to the tax development of the country. In addition, to the government revenue, the benefits from a large scale mining and petroleum sector include export earnings, employment and so on. Therefore, applying the above issues shall be useful for all mining and petroleum operations within the territory of Ethiopia.