Eritrea, officially the State of Eritrea, is a country in the Horn of Africa. It is bordered to the northeast and east by the Red Sea, Sudan to the west, Ethiopia to the south/south west, and Djibouti to the south/south east.
Overview of Eritrea
The nation has a total area of approximately 118,000 square kilometres and a total population of approximately 4 million people.
Eritrea’s capital, Asmara, is home to over 600,000 inhabitants, and sits at an elevation of 2,300m. The city is located at the tip of an escarpment that is both the north-western edge of the Eritrean highlands, and the Great Rift Valley in neighbouring Ethiopia.
The site was chosen for its salubrious highland climate, reliable water supply and ideal geographic location in the centre of Eritrea. Asmara’s architecture has been strongly influenced by a large Italian presence in the city in the late 1800’s – early 1900’s.
Asmara has perhaps one of the most concentrated and intact assemblage of Modernist architecture anywhere in the world.
Economy and Mining in Eritrea
Eritrea’s economy is growing strongly and has recently experienced better growth than all other countries in sub-Sahara Africa driven by strong mineral exports, agricultural output and infrastructure development.
With a developed mining code, mineral exports represents an attractive way for international investment in the country.
Eritrea is a stable mining jurisdiction, demonstrated by the success of the Bisha, Zara and Asmara mines. Eritrea has an extensive amount of resources in addition to potash such as copper, gold, granite and marble.
Eritrea has well developed transportation infrastructure and has continued asphalting new roads, and improving its port facilities over the past decade. A coastal highway of more than 500 km connects Massawa with Assab, providing access along the entire Red Sea coastline of Eritrea.
Eritrea can be easily accessed by an Eritrean Airlines and a number of international airlines from various regional and international air travel hubs.
Eritrean Mining Tax Regime supports:
- Capital investments via low import duties (0.5%)
- Generation of cash to service debt through favourable Tax Depreciation rules and use of tax losses for up to 10 years
- Potential tax deductions allowable for reinvestment within Eritrea.
Taxes in Eritrea are generally regulated by the Income Tax Proclamations 62/1994, 64/1994 and 116/2001 with Mining Operations specifically governed by Proclamation No. 69/1995 (Proclamation to Provide for Payment of Tax on Income from Mining Operations). However, applicable matters not provided for in the mining proclamation (69/1995) will be governed by the other existing tax laws.
This information below provides a summary of Proclamation No. 69/1995 (62/1994, 64/1994 and 116/2001 which affect interest on loans, off shore service tax and rolling over of losses, respectively) highlighting beneficial positions relating to the Colluli Project in Eritrea.
Income tax, in accordance with Proclamation 69/1995 is calculated at a rate of 38% of taxable profit.
Other taxes exist in the form of Import Duties, Withholding Tax and Service Tax. These can affect the financial outcomes of a Mining License holder and are described below.
Danakali view: The basis for taxation in Eritrea has been stable for many years. Simple, stable tax conditions are considered positive attributes for calculation of future project cash flows.
Taxable Income Under the Mining Tax Regime
Taxable Income in Eritrea is computed on a historical accrual accounting basis by subtracting from gross income all allowable revenue expenditure, depreciations of PPE, pre-production and development costs (after deducting pre-commissioning income, if any) at the rate of 25% per annum, reinvestment deduction and permitted losses.
Eritrean accounting years end on 31 December.
Danakali view: The basis for taxation in Eritrea follows a hybrid of IFRS and Mining Proclamation number 69/1995.
This includes all revenue received from operations. Revenue must be derived on an arm’s length basis.
Allowable Revenue Expenditure
Non-Capital expenditure costs including:
- Exploration and study costs at depreciation rate of 25% per annum; if it is incurred before commencement of mining, however exploration and study costs incurred post commencement of mining are expensed in the period they are incurred.
- Costs of production and sales;
- Cost of land restoration within the mining lease (Rehabilitation);
- General administrative expenses including management and professional services, lease licensing and other fees incurred within and outside of Eritrea for mining operations,
- Interest on loans used exclusively to finance mining operations provided the loans are from a recognised financial institution;
- Fees, rentals, royalties and other taxes paid to the Government, except taxes payable under Proclamation 69/1995.
All capital expenditure and pre-production costs, recorded at historical cost, are allowable for tax depreciation.
Tax depreciation commences when assets are ready for use and is calculated on a straight-line method over four consecutive years where no residual value is left at the end of the fourth year.
Danakali view: Beneficial tax depreciation supports the generation of sufficient after-tax cash flows in the early years of a project to service debt. Tax depreciation, as defined above, compliments our modular approach to project development.
A deduction equal to 5% of gross income is allowable for each accounting year.
This amount is to be reinvested in other mining operations, or in other investments within Eritrea approved by the Eritrean Licensing Authority. Any part of such amount not reinvested by the end of the second accounting year following the deduction is included in the gross income of that second accounting year.
Danakali view: Although this deduction would not apply to Colluli’s first module, as the project develops further investments could be discussed with the Licensing Authority to ascertain how deductions can be obtained and if these conditions complement our strategy and risk appetite.
Tax losses from mining operations in an accounting year can be carried forward and deducted from gross income in the following ten accounting years. This is however applicable if the direct or indirect ownership of the share capital or voting rights in the company does not change by more than 25%.
Tax losses for Colluli could arise from a combination of sunk exploration costs amortised at the rate of 25% per annum and accelerated tax depreciation (as explained above).
Danakali view: 10 years is sufficient to recover any tax losses arising in the first few years of production, if any.
Our development path is to produce a premium Potash product at a low cost. Our expectation is that this will provide positive financial outcomes as supported by our prefeasibility study completed in 2015.
Other Taxes Applicable to Holders on Mining Licences
Customs Duties and Taxes
Under Proclamation No. 69/1995, holders of a mining license and their contractors only pay 0.5% duty on all imports into Eritrea of equipment, machinery, vehicles and spare parts necessary for mining operations.
Exports of minerals by the operation are free of all duties and taxes.
Danakali view: Import duties are ordinarily governed under Eritrean Customs Tariff Regulation No. 52/2001 (Sch F). The benefits of holding a mining license could be significant. An example of a saving is with 4×4 vehicles where an Eritrean Business would normally pay 35% duties to import a Land Rover but in accordance with Proclamation No.69/1995 this is capped to 0.5%.
There are no minimum taxes applicable under Proclamation No. 69/1995. Municipality taxes are exempt for holders of a Mining License.
Danakali view: Minimum taxes are not uncommon in Mining Tax Regimes. The absence of minimum taxes supports the generation of sufficient after-tax cash flows in the early years of a project to service debt.
Withholding Tax and Service Tax
As with many service tax arrangements (i.e. Australian GST), service receivers are responsible for the collection of tax on behalf of the Tax Authority. Similarly service receivers in Eritrea are mandated to collect from non-resident service providers. In this case the withholding taxes are borne by the service receiver. Resident service providers directly pay with-holding tax due from them.
A holder of a Mining License is obliged either to bear or collect from service providers and pay quarterly a 10% Withholding Tax on behalf of any non-resident person or corporate on the gross value for any services, leases or license of intellectual property provided to the Licensee.
Income from on shore services rendered to a person or body in Eritrea is subject to a Service Tax (5% or 10% depending on type of service). Income from off shore services rendered to a person or body in Eritrea is not subject to service tax. If, however, the service provider is non-resident but being temporarily in Eritrea to render service, the Licensee is obliged to bear and pay the Service Tax on the gross value for any services. Resident service providers are mandated to collect service taxes from service receivers and will include service taxes as part of their charges to the Licensee.
“On shore” services are services rendered by being physically in Eritrea whereas “off shore” services are services rendered without physically coming to Eritrea.
Withholding and Service Taxes are not applicable to the acquisition of equipment, freight and mobilisation costs or dividends.
Both taxes are allowable for Income Tax.
Danakali view: Our development path seeks to maximise the use of in-country service providers which will optimise liabilities for Withholding and Service Taxes.