TANZANIA: Most governments in Africa are seeking to impose a windfall tax on companies or individuals who make unexpected profits in specific industries.
This type of tax is typically imposed when a company or individual receives a sudden and substantial increase in profits due to external factors such as changes in market conditions, government policies, or natural events.
Governments often use windfall taxes as a way to capture profits that they deem excessive or unearned. This is designed to prevent windfall gains from distorting markets, ensure fairness in the distribution of wealth, and generate additional revenue for government coffers.
Banks in the United Kingdom were subjected to windfall taxes by the Conservative government in 1981, because they were deemed to have made excess profits from the rapid rise in interest rates at that time.
These taxes are a common target for oil and gas companies. US President Joe Biden threatened to seek a windfall profits tax on oil and gas companies in October 2022 due to their reported high profits. Last February, the Big Oil Windfall Profits Tax Act was introduced in the US.
The current Global Financial Integrity report shows, Tanzania loses 1.5 billion dollars (4tri/-) annually.
The IMF observed that once gold exports rose from 500 million dollars (1.4bn/-) in 2007 to 1.5 billion dollars (4.0tri/-) in 2011, government revenue remained flat at about 100 million dollars (272bn/-).
Globally, over 6.0 trillion US dollars in windfall profits have been earned by 722 of the world’s biggest corporations between 2021 and 2022, according to the 2024 Forbes Global 2000 list.
Silas Olang, a Tanzania Energy Transition advisor at Natural Resource Governance Institute (Africa) suggested introducing this tax in Tanzania.
“Usually, distribution is achieved through the tax system and regular fees. But when the prices of their products rise in the world market, companies get additional profit that does not correspond to the increase in investment, so the government should charge it to get the right dividend.
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“Currently, this tax is very important especially in the sector of minerals (critical minerals) whose prices are high due to its demand being greater than its supply, and thus there is an additional profit,” he said.
November last year, Tanzania’s Acting Mineral Commissioner Ally Semanje announced the 441 exploration licenses for critical minerals as well as 46 mining licenses for joint ventures.
A senior geologist who is currently working with the Ministry of Minerals said windfall taxes can be imposed specifically on oil and gas sector.
“I am not sure about minerals yet, but I am certain about energy. Minerals have a very significant political dimension,” he said.
Before agreements, he said, an investor has to develop his Internal Rate of Return (IRR) policy that will set those prices to protect his capital. The discussion between the government and investors will be based on this policy to agree or disagree.
“Also, all Production Sharing Agreement (PSA) contracts have set the conditions for the protection of their capital. When the prices go down, we give them tax relief but when the prices go up, the government gets nothing, so it is absolutely true that the windfall tax is very important because there is no balance,” he said.
Secondly, the world market price rises more often than it falls. Hence, they benefit more from the price increase.
Prof Abel Kinyondo, an economist, exposes loopholes that will still lead to the country’s loss of taxes, making it necessary to introduce a windfall tax.
“Firstly, it is the case of illicit financial flow (IFF). This is how companies illegally, earned, transferred or utilised money or capital by reducing their revenue or rising costs that will affect the national cake,” Prof Kinyondo said during the media training under Policy Forum recently.
Additionally, Prof Kinyondo mentioned the challenge of tax justice, saying international companies have unnecessary tax incentives compared to local businesses.
Prof Kinyondo, asked about the number Tanzanians who have inherited their technology to further expand the domestic market under the arrangement of the tax relief for investors under the EPZA [Export Processing Zone Authority].
The challenges of tax system include lack of accountability to political leaders who are responsible to oversee the IFF, tax justice and effective fiscal policy.
Another external challenge is lack of free flow of information between source countries, intermediate countries (tax haven countries) and resident countries (origin of companies).