Ethiopia continues attracting new investments in mining, and by 2030 the Ethiopian Government has planned to increase its current foreign exchange earnings from the export of minerals from USD265 million to USD17 billion. With this in mind, the government has, among other measures, issued mining licenses for six large-scale mining companies, namely Akobo Mining, Kurmuk Gold Mining, Into Mining, Oromia Mining, Ali Hamil Khadim, Crypto Mining and Chemicals, and Bhumi Mining. The government is further planning to engage other licenses to interested investors who intend to join the mining industry.
Mining companies that are interested in investing in Ethiopia would want to understand the investment policy and laws of the country, including tax laws and regulations, duty-free incentives, and tax holidays if any. This article seeks to provide a brief overview of the mining income tax regime in Ethiopia, which is one of the most important matters in mining operation—excluding topics related to tax holidays and duty-free incentives.
A typical life-cycle in mining and petroleum businesses passes through three stages—pre-mining, mining, and post-mining. This has led policymakers in different jurisdictions to follow a different approach in taxing the extractives industry compared to other sectors and Ethiopia is not an exception.
The pre-mining stage comprises operations such as reconnaissance, exploration, and development. During this stage, mining companies will spend millions of dollars on capital goods and other expenditures which is necessary for attaining their objective; nonetheless, mining companies are not allowed to claim depreciation nor can they deduct such expenses at this pre-mining stage.
Rather, they are required to register their costs into one pool and carry them forward until they succeed, hopefully, in their endeavor and start commercial operation. It should, however, be noted that this does not mean that a mining company that is engaged in the mining business is not required to report its expenditure to the tax authority. Each year, a company that is in pre-mining operations shall submit its duly prepared financial report to the Ministry of Revenue.
According to the Ethiopian Income Tax Proclamation No. 979/2016 (“Proclamation”), any expenditure incurred during the pre-mining stage will be capitalized by the time the company starts commercial operation over the site over which the expenditure is incurred.
Such expenditure will be capitalized and then deducted in two different ways. First, as per the Income Tax Proclamation, exploration expenditure, other than expenditure on depreciable assets, is regarded as a business intangible with a useful life of one year, and is depreciated at the rate of 100Pct.
Secondly, development expenditure—save for expenditure that fall under exploration expenditure, any expenditure incurred by a licensee in undertaking development operations, other than expenditure incurred in acquiring a depreciable asset—will be treated as a business intangible with a useful life of four years. Accordingly, the rate of depreciation for capitalized expenditure incurred during development is 25Pct per annum.
Once the licensee starts commercial mining, it will be subject to 25Pct business profit tax but will be entitled to expenditure deduction to the extent the licensee incurred expenses in carrying out mining operations in the area where the license is granted. The licensee can also claim depreciation over depreciable business assets and other intangibles.
Here, it is worth pointing out that in the extractives industry, due to the ring-fencing approach, deduction is not allowed with respect to business income derived by the licensee from mining operations in an area that is not covered by the mining license.
Moreover, a loss incurred in respect of mining operations in the license area for a tax year will be carried forward, and such loss can only be deducted against the business income of the licensed area where the loss is incurred. Pursuant to the Income Tax Proclamation, a loss incurred in a mining operation can be carried forward for ten years.
Further, during the commercial mining stage, a licensee is obliged to contribute to the Rehabilitation/ Reclamation Fund. The Rehabilitation Fund is a fund or a bank account where the licensee shall regularly deposit a certain sum of money into the account as it is determined in the approved plan, and its purpose is maintaining a reserve fund that can be used to restore the environment. Most of the Rehabilitation Fund is likely to be used to finance post-mining operations, i.e., to restore the environment after closure.
Apart from the above, in Ethiopia, a licensee is obliged to immediately notify the Ministry of Revenue, in writing, of a change in the underlying ownership of a license if there is a 10Pct or more change in ownership interest in the mining company.
10th Year • Feb 2022 • No. 104