In the following paragraphs, we do not have the pretention to review the legal meaning of the Ordinance-Act No 10/001 dated August 20, 2010 related to the institution of VAT which has replaced the Revenue Tax (ICA). We shall rather focus on analysing whether the Ordinance-Act mentioned above is applicable to eligible mining companies under the Mining Code enacted by the Act No 007/2002 dated July 11, 2002 related to the Mining Code.
Scope of application of the Ordinance-Act establishing VAT
The institution of VAT by Ordinance-Act No 10/001 dated August 20, 2010 implemented by Decree No 011/42 dated November 22, 2011 has raised debates and, in particular, regarding its implementation in the mining sector which is governed by a specific fiscal and customs regime.
It stands out from the substance of Ordinance-Act No 10/001 dated August 20, 2010 related to the institution of VAT that individuals and legal persons are liable for said VAT including the State, the Provinces, and Statutory bodies that independently conduct economic operations, on a regular or occasional basis.
It is worth specifying that such natural or legal persons are liable for VAT only if they generate annual revenues that are equal or superior to 80,000,000 Congolese Francs. Members of a liberal profession are liable for VAT irrespective of their annual income, while individuals bound by an employment contract (wage earners) or by any other legal relationship creating a subordination link, are not VAT liable.
Giving the size of investments that mining companies require, such companies have an annual income much more superior than the threshold set by the Ordinance-Act No 10/001.
To achieve their objectives, mining companies carry out activities, which fall under Ordinance-Act No 10/001 such as, without this list being limitative, any operations effected against payment as well as any economic activities including production, import, export, services, distribution, and agricultural, forestry, agro-industrial, artisanal activities and professions as well.
VAT and Stability of the Tax and Customs Regime under the Mining Code
In 2002, however, to secure the stability of mining investments in DRC, we note that the lawmaker has established a new incentive legislation known as “Mining Code”, with fast and transparent procedures for granting mining rights, which are supported by special tax, customs and change regimes that are not governing by ordinary law.
To this regard, we have to recall that the Mining Code provides that mining companies are governed by a special tax and customs regime which can be amended only in accordance with the conditions provided for in the Mining Code, in article 276 which stipulates: “The State guarantees that the provisions of the Mining Code can only be modified if, and only if, this Code itself is the subject of a legislative amendment adopted by Parliament …”.
According to this provision, two cumulative conditions must be met in order to amend the stability of the tax, customs and change regimes under the Mining Code, namely: The amendment must necessarily pertain to the Mining Code itself and not to a particular provision of the Mining Code (1) and the amendment must be adopted by the Parliament (2). The amendment brought by Ordinance-Law promulgated by the President of Republic, though examined, to enforce article 129 of the Constitution, based on Act No 10/012 dated 23 June 2010 related to the ratification whereby the Parliament empowered the Government, for a six-month period, to take measures relative to law to urgently implement its programme.
As the Mining Code constitutes an inseparable whole, the lawmaker feared that amending only one aspect of the Code, namely the tax and customs regimes, risked creating an imbalance in terms of the rights and obligations of the parties, thus, undermining the overall substance of the Code.
Today, the fact is that the current Mining Code has not been subjected to any amendment at the Parliament. Being an act resulting from ordinary law, Ordinance-Act No 10/001 may not amend any provision of the Mining Code.
In addition, should the Mining Code be amended by an Act passed by the Parliament to change the tax and customs provisions replacing ICA by VAT, such amendment would become effective only ten (10) years following their enactment and, this, in accordance with article 276 of the Mining Code. To be VAT liable, mining companies holding Exploitation Permits, Tailings Exploitation Permits and Small Scale Mines Exploitation Permits granted and valid at the time of the promulgation of the amendment of the Mining Code will be effective ten years after the conversion of the Exploration Permit into Small Scale Mines Exploration Permit as noted by Emery Mukendi Wafwana in his book “DRC Mining Law”, Volume I, Management Principles in the mining sector. It is within the effort to guarantee and stabilize private investments and to promote the mining industry that the Mining Code has set up its own stability. The recognition of the stability clause (from a contractual origin) in the provisions of the Mining Code aimed at attracting investors to mining agreements duly signed and approved by Presidential Decree to waive such stability in compliance with article 346 of the Mining Code so that the provisions of the new Act be applied to their projects. At last, this legal provision on the stability of the tax regime also aimed at rendering DRC mining sector as more competitive as other potentially mineral-rich countries.
Is the VAT Ordinance-Act a favourable posterior act?
In addition, article 222 of the Mining Code provides that if an ordinary law is passed or enacted, in the National Territory subsequent to the date of the entry into force of the Mining Code, provides for more favourable tax and customs provisions than those mentioned in the Mining Code, such new provisions will immediately be applicable as of the date of their entry into force.
Therefore, it would be advisable to check whether Ordinance-Law No 10/001 of 20 August 2010, which is an Act passed and enacted subsequent to the Mining Code, is a more favourable law to mining companies. In this regard, article 259 of the Mining Code on the income tax provides for:
“The holder is liable for domestic income tax on sales made and services rendered on the National Territory.
The sales of products to a processing entity located on the National Territory are expressly exempted.
The Other sales of products within the National Territory constitute the tax base and the applicable rate is 10%.
Services rendered by the holder are taxable at the rate set under common law.
The holder shall bear the income tax at the preferential rate of 5% when the holder is benefiting from the provision of services linked to the corporate objective of the holder.
The acquisition by the holder of such goods as are produced locally is taxable at the rate of 3% for goods related to the mining activity.”
s examined, the Mining Code fully exempts from payment of income tax all sales of products made to a processing entity located on the National Territory while the VAT Ordinance-Law renders all such sales taxable at the rate of 16%.
While the Mining Code renders the sales of other local products taxable at the rate of 10% and subjects the holder to income tax at the preferential rate of 5% for services connected to the corporate objective of the holder, VAT Ordinance-Law sets this rate indistinctly at 16%.
Consequently, the VAT Ordinance-Law is not a favourable to mining projects in the DRC
To sum up, the objectives concerning VAT and those on the stabilised tax and customs regime set in the Mining Code are clearly different. Consequently, the general application of VAT by the Tax Authorities may prevent the results sought by the reform in the mining sector.
On the other hand, the strict compliance by a State with the legislation is a guarantee for the security of private investments, in particular in the mining sector, which is the corner-stone of DRC economy. Hence, as long as the Mining Code is not amended in its intrinsic provisions, the VAT Ordinance-Law shall not be applicable to the mining sector, as especially the same will not be a favourable Act.
If, however, with the new parliament and the bill to amend the Mining Code, the tax provisions of the Mining Code are amended in order to render VAT legally applicable; VAT will be applicable to the mining sector only ten (10) years following the promulgation of the Act amending the Mining Code for holders of exploitation mining rights (Exploitation Permits, Small-Scale Mines Exploitation Permits and Tailings Exploitation Permits) and ten (10) years following the granting of Exploitation Permits for holders of valid and existing exploration permits at the date of the legislative amendment.