Recent improvement on Mining Income Tax Payment Law of Ethiopia
Just like any other business activity income acquired from Mining Business activity, whether it is Large Scale or small scale, is subjected to taxation as per the Ethiopian Mining Income Tax Proclamation No. 53/1993, as amended by Proclamation No. 23/1996. According to this proclamation, a holder of Large Scale or Small Scale mining license shall pay 35% income tax on the taxable income.
Calculation of the Taxable income
This taxable income will be calculated by subtracting from gross income for the accounting year in question all allowable revenue expenditure, depreciation, reinvestment deduction and permitted losses.
The Gross income mentioned includes all revenue actually received from mining operations, provided that such revenue resulted from a transaction with a person who was not an affiliate. But if any revenue was received from an affiliate, the licensing Authority may adjust such amount to reflect the proper revenue that would have been received based on market prices for similar arms-length transactions.
The costs shall be determined after all the capital expenditure, pre-production costs and revenue expenditure are entered in the books of account of the licensee for the actual amount of such expenditure,
But if the licensee has received a contribution to capital in the form of physical assets, services or expenditure, such contributions will be valued, at the market value of the assets or services on the date contributed.
It is important to keep note that the value of such assets and services and the amount of such expenditure contributed be will treated as capital expenditure or pre-production costs, as the case may be, and hence shall be depreciated in accordance with the proclamation
Revenue expenditure will be comprised of all costs and expenses incurred after the date of commencement of production which are not capital expenditure. It includes;
- Cost of geological and geophysical surveys and studies and related services;
- cost of production, including extraction, storage, treatment, transport and sale of minerals;
- cost of restoration of land within a license area and an area covered by a lease, including the cost of filling, closing or blocking generally rendering safe all installations used in mining operations;
- general administrative expenses and management and professional commissions and service, lease licensing and other fees incurred within and outside of Ethiopia for mining operations, provided that the amounts expended were for services actually rendered or property actually provided and correspond to amounts normally paid by other persons in similar transactions;
- interest payments on loans used exclusively to finance mining operations, excluding those to prospect and explore, provided that the interest rate is fixed on a reasonable commercial basis and reflects that which would normally be paid by another person for similar financing and that the loan has been approved by the Licensing Authority;
- All fees, rentals, royalties and other taxes paid to the Government, except taxes payable pursuant to this Proclamation.
Depreciation and Reinvestment Deduction
All capital expenditure and pre-production costs will be depreciated. The depreciation of expenditures and costs for any accounting year shall be calculated on a straight-line basis over a useful life of four consecutive years.
The licensee is entitled to deduct an amount equal to 5% of gross income for each accounting year. But this amount has to be reinvested in other mining operations, or in other investments within Ethiopia approved by the Licensing Authority.
Any financial loss, resulting from the mining operations of a licensee in an accounting year will be carried forward and deducted from gross income in the ten accounting years which follow the year in which the loss is incurred.
Taxes on Services, Leases and Licenses
The licensee who contracts for services, the lease of movables or the licensing of intellectual property from a person who is not a resident of Ethiopia or who is temporarily present in Ethiopia, is required to pay the taxes on behalf of such person.
These taxes have to be paid quarterly, within 20 days after the end of the period to which the payment relates. Expenditure paid in such cases will be at the rate of 10% on the amount paid, less all charges for mobilization and demobilization.
Transfer of Interest and Dividend Tax
If any licensee transfers or assigns wholly or partially any interest in a license, the consideration he receives for such transfer or assignment will be considered as taxable income to the extent that such consideration exceeds the amount of his unrecovered expenditure in that part of the interest transferred.
Tax is payable on dividends declared and distributed from taxable income after deduction of income tax. This tax is imposed at a rate of 10%. The licensee shall retain the tax and pay within 60 days after the distribution of such dividends.
Recent Developments on Mining Income Tax in Ethiopia
Though still the currently law regarding taxation of mining is the above stated proclamation, currently an amendment on the Mining Proclamation to reduce tax is underway. Accordingly the Ministry Of Mines has submitted a draft amendment on the mining proclamation of Ethiopia to the Ethiopian House of People’s Representatives which proposes the reduction of tax from 35 to 25 percent.
As it is known, the currently applicable Income Tax Proclamation sets a rate of 30 % for all businesses except mining. However it sets a 35% income tax rate for mining sectors.
The Ministry while explaining the need to reduce this rate stated that, the taxation system should encourage investors since the country is endowed with numerous minerals but these minerals’ contribution to the country is still very minimal. The Ministry further emphasizes on this issue stating that the contribution of the mining sector to the country’s GDP, in the year 201o/2011 and 2011/2012 was only 1.5%.
This amendment is expected to encourage growth in this sector and increase the revenue from the export market to 277million dollars. The house has passed the proposed amendment to Natural resources and Environmental protection affairs standing committee.
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Note: This guide provides vital information on Ethiopian Mining Income Tax law and practice and is not intended to substitute professional advice given with full knowledge of the specific circumstances of each case and proficiency in the law of Ethiopia such as might be provided by a tax Attorney or tax lawyer in Ethiopia. Such information about tax in Ethiopia can be available from an Ethiopian Investment Lawyer, Ethiopian Tax lawyer, Ethiopian Employment Lawyer, Ethiopian Labour Relationships Lawyer … etc.