All that glitters

One corporation's tax tussle with Tanzania holds many lessons for African countries that continue to struggle with the inequitable share of proceeds from their extractive sectors.

Image credit Shahir Chundra via Wikimedia Commons.

Tanzania’s largest mines are located in the area that surrounds Lake Victoria, about a thousand kilometers from Dar es Salaam. Its significant gas reserves are located offshore, in the southern regions of Lindi and Mtwara. The country’s extractives sector employs about a million people, and produces a broad range of precious metals, including Tanzanite, a unique and rare gemstone found nowhere else in the world. The mining sector has, over the last three years, attracted significant media attention due to a protracted taxation dispute between the government of Tanzania and Barrick Gold, the Canadian multi-national mining company, which holds majority shares in three of the four largest gold mines.

Tanzania liberalized its mining sector in the 1990s, after more than two decades of a socialist experiment. In this period, state-owned enterprises (SOEs) had exclusive extraction rights but struggled with inefficiency due to limited capacity and a politicized mandate. Therefore, liberalization was driven by the imperative for attracting new investment and maximizing benefits—especially tax-based, from the sector. This reform effort focused on attracting medium to large scale corporations, as obvious custodians of the required knowledge and financial muscle, and underplayed the role and contribution of small scale miners. The change in policy presented an opportunity to established firms such as Barrick Gold, which entered the country in 1999. A presidential investigation committee report released in 2007 revealed that the 1990s reform had resulted into a notable expansion of the sector, but its contribution to the national economy, from 1.7% in 1997, to 3.8% in 2007, was not commensurate with the size of the investment, and called for further reform.

Tanzania’s tax dispute with Barrick, which began in early 2017, and is now seen as the most bold example of the country’s desire to reform the extractives sector, can be interpreted as a continuation of the 1990s and 2000s reform efforts. The tax dispute flared when Barrick’s subsidiary, Acacia Mining, now a defunct entity, was investigated by public authorities and accused of under-declaring the composition and value of semi-processed mineral ores. These ores—commonly known as concentrates—originated from two of the company’s three mines, and were exported abroad for further processing. Tanzanian authorities claimed, as a result of their investigation, that Acacia owed the country a significant amount of money in taxes, and subsequently served the company with the now infamous $190 billion tax bill.

In response, Acacia rejected all allegations of tax misconduct. Meanwhile, the Tanzanian authorities refused to engage the subsidiary in resolving the dispute on the ground of non-registration in the country (even though Acacia continued to operate). It took the intervention of Barrick, the parent company, in June 2017, to break the impasse, and agree on a negotiation process.

As Tanzanian authorities prepared to negotiate with Barrick, they hurriedly overhauled the legal regime governing the mining industry in July 2017, and introduced three key laws that collectively allowed for renegotiation of extractive contracts, restricted international arbitration as well as export of mineral concentrates, and provided for local value addition. These changes revealed the depth of resource nationalism underpinning the drive for reform, and were criticized by opposition parties because of their potential for scaring investors away.

In July 2019, Barrick disclosed that an agreement had been reached for resolving the dispute with Tanzanian authorities. The proposed resolution included buying Acacia out, a payment of $300 million to settle all disputes, granting of 16% of shares to the government for free, and equal sharing of economic benefits. Also, the agreement revealed that Tanzanian authorities had agreed to international arbitration, and a selective lifting of a ban on the export of concentrates. These exemptions effectively contravened the laws passed in 2017.

Tanzania received $100 million in May 2020, as the first tranche of the $300 million that Barrick owes Tanzanian authorities. The rest—$200 million—will be paid over the next five years, in installments of $40 million per year. Tanzania’s agreement with Barrick has the potential for maximizing extractives revenues, but the outcome will depend on the government’s ability to limit and audit costs, and carefully weigh decisions for injection of new capital. The first payment of $40 million in dividends in October 2020 by a joint venture company— Twiga Mineral’s Corporation—suggests Tanzanian authorities were able to avoid past cost monitoring mistakes. Nevertheless, it remains difficult to undertake a comprehensive assessment of the terms and implications of the final agreement because none of the parties have disclosed it.

There are many countries in Africa that struggle with the similar problem of inequitable share of proceeds from their extractives sectors. Tanzania’s experience provides three key lessons:  First, countries that are keen to reform their extractive sectors ought to invest in quality historical data, and effective cost audits. Tanzania has good auditing capacity, but lacks comprehensive production data, and this aspect limited its achievements in negotiations with Barrick.

Second, authorities need to ensure the reform effort does not deviate from feasible and standard industry requirements. Tanzania’s initial attempts to restrict international arbitration appear to have been misguided. Multi-national corporations require access to international arbitration as a key pre-requisite for investment due to, often, their lack of trust in local judicial systems. Tanzanian authorities amended the country’s arbitration law in February 2020, but the usefulness of the changes remain unclear, because they have not been tested.

Third, negative publicity from international media is likely to affect the inflow of investments into the extractives sector, and the country in general. There has to be a strong case for reform, and potential for success in order to make the associated cost justifiable.

Tanzania has made significant progress in reforming its extractives sector, but the government’s approach remains top-down and opaque. The country’s extractive sector’s transparency agenda lacks resources and effective leadership, a situation that raises questions as to whether authorities can sustain the imperative for reform, without meaningful external pressure.

Further Reading