11
Subsector Analysis: Tanzania
Solar Power Purchase Agreements (PPA) with private off-takers in Tanzania - an analysis of the regulatory and legal framework for Special Purpose Companies (SPC)
Imprint
Publisher
Federal Ministry for Economic Affairs and Energy (BMWi)
Public Relations
D-11019 Berlin, Germany
www.bmwi.de
Text and editing
Wichard von Harrach, Neo Energies GmbH
Viviana Klein, Neo Energies GmbH
Markus Schwaninger, Deutsche Gesellschaft für Internationale
Zusammenarbeit (GIZ) GmbH
Status
November 2015
Pictures and illustrations
Neo Energies GmbH
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1 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
Table of Content
List of Figures ...................................................................................................................................................................................... 3
List of Tables ........................................................................................................................................................................................... 3
Currency ............................................................................................................................................................................................... 3
Measurement ........................................................................................................................................................................................ 3
List of Acronyms .................................................................................................................................................................................. 4
Executive Summary .............................................................................................................................................................................. 6
1. Introduction ................................................................................................................................................................................... 9
2. Policy and regulatory framework for an off-grid SPC ............................................................................................................ 12
2.1 Definitions related to permits and licenses needed for SPCs to implement an SPP ..................................................................... 12
2.2 Requirements and timelines of the SPP licensing process ............................................................................................................ 13
2.2.1 Very Small Power Projects (VSPP) exemptions for projects ≤ 100 kW .............................................................................. 13
2.2.2 Small Power Projects (SPP) development steps for projects > 100 kW ............................................................................... 14
3. Legal framework to establish and register an SPC ................................................................................................................. 22
3.1 Business registration and immigration issues ............................................................................................................................... 22
3.2 Auditing requirements .................................................................................................................................................................. 23
3.3 VAT, customs and excise duties on RE technology import .......................................................................................................... 24
3.4 Domestic tax framework .............................................................................................................................................................. 25 3.4.1 Direct taxes ........................................................................................................................................................................... 25
3.4.2 Indirect taxes: VAT on sale of electricity to private off-takers ............................................................................................ 26
3.4.3 Indirect levies: EWURA and REA levies on sale of electricity to private off-takers ........................................................... 26
3.5 General tax incentives .................................................................................................................................................................. 27
3.6 Exchange control and repatriation of funds .................................................................................................................................. 27
3.7 Investor Protection ........................................................................................................................................................................ 28
4. Key legal aspects of a Site Agreement and Power Purchase Agreement ................................................................................ 29
4.1 General aspects and definitions .................................................................................................................................................... 30
4.2 Aspects of a Site Agreement......................................................................................................................................................... 31
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 2
4.3 Aspects of a Power Purchase Agreement ..................................................................................................................................... 33
5. Conclusion .............................................................................................................................................................................. 37
References .......................................................................................................................................................................................... 38
Appendix ............................................................................................................................................................................................ 42
Annex 1: List of interviewees ......................................................................................................................................................... 42
Annex 2: List of institutions in Tanzania’s energy sector ........................................................................................................... 42
Annex 3: List of TIC incentives for foreign investors .................................................................................................................. 43
Annex 4: Land process for non-Tanzanian companies .............................................................................................................. 43
Annex 5: Steps of the EIA Procedure ........................................................................................................................................... 44
Annex 6: Further taxation provisions: deadlines, penalties and taxation risks ....................................................................... 44
3 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
List of Figures
Figure 1: Schematic development process and costs for Small Power Projects (SPPs) in Tanzania (steps can
vary in order or taken simultaneously) .......................................................................................................................................... 6 Figure 2: The set-up of the business model with a PPA as power supply contract ................................................................................. 10 Figure 3: The four SPP types in Tanzania .............................................................................................................................................. 11 Figure 4: Development process for SPP developers selling to private off-takers ................................................................................... 13 Figure 5: Corporation rate and capital deductions in Tanzania .............................................................................................................. 25
List of Tables
Table 1: Duties and taxes in Tanzania – an overview ................................................................................................................. 8 Table 2: Licensing and retail tariff approval requirements depending on project size and off-taker peak load...................................... 20 Table 3: Overview of duties, levies and taxes ........................................................................................................................................ 22 Table 4: Overview of the costs and length to attain a resident permit .................................................................................................... 23
Currency
1 USD = TZS 2,150
Measurement
W Watt Wp Watt peak Wh Watt hour
kW Kilowatt kWp Kilowatt peak kWh Kilowatt hour
MW Megawatt MWp Megawatt peak MWh Megawatt hour
GW
Gigawatt
GWp Gigawatt peak GWh Gigawatt hour
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 4
List of Acronyms
BOT
BRELA
CAPEX
CoC
DRN
DNO
EAC
EPC
EPP
EIA
EMA
EWURA
FDI
FIT
FOB
GDP
GIZ
IPP
kVA
MDG
MEM
MIGA
NEMC
Bank of Tanzania
Business Registration and Licensing Agency
Capital Expenditures
Certificate of Conformity
Debt Record Number
Distribution Network Operator
East African Community
Engineering, Procurement, Construction
Emergency Power Producer
Environmental Impact Assessment
Environmental Management Act
Energy and Water Utility Regulatory Authority
Foreign Direct Investment
Feed-in Tariff
Free on Board
Gross Domestic Product
Deutsche Gesellschaft für Internationale Zusammenarbeit GmbH
Independent Power Producer
Kilo Volt Ampere
Millennium Development Goal
Ministry of Energy and Minerals
Multilateral Investment Guarantee Agency
National Environmental Management Council
5 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
NSSF
OPEX
PPA
PV
PVoC
RE
REA
SME
SPC
SPP
SPPA
TANAPA
TANESCO
TAREA
TBS
TIC
TRA
TZS
USD
VAT
ZECO
National Social Security Fund
Operational Expenditures
Power Purchase Agreement
Photovoltaic
Pre-Export Verification of Conformity
Renewable Energies
Rural Energy Agency
Small- and Medium-Sized Enterprise
Special Purpose Company
Small Power Project
Standardized Power Purchase Agreement
Tanzanian Parks Authority
Tanzania Electric Supply Company Limited
Tanzania Renewable Energy Association
Tanzania Bureau of Standards
Tanzania Investment Centre
Tanzania Revenue Authority
Tanzanian Shilling
US Dollar
Value Added Tax
Zanzibar Electricity Corporation
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 6
Executive Summary
Solar PV technologies can be an attractive option for commercial, agricultural and industrial enterprises operating in Tanzania’s off-
grid regions that are currently obtaining the bulk of their energy supply from expensive diesel generation. A possible business model
in such a context is to set up a locally registered special purpose company (SPC) that builds, owns and operates a solar PV power
plant located at the premises of an off-taker, and sells electricity under a bilateral Power Purchase agreement (PPA).
Typical off-takers in Tanzania’s off-grid regions can be mobile phone towers (usually 5-40 kW peak power demand per mobile phone
tower), agro-processing companies and farms (load varies depending on size and typical water pumping requirements), lodges
(usually 100 kW up to 1 MW), mining sites (typically > 1 MW) and other commercial or industrial operations. The Small-Power
Project (SPP) framework sets out the individual development steps for developers aiming to sell electricity to a private off-taker and
points out the necessary permits and licenses to be attained. The development process is rather complex as Figure 1 illustrates.
However, depending on the project size and peak load of the off-taker, exceptions are possible.
While Figure 1 illustrates the entire process in a comprehensive manner, the SPP framework is subject to a number of exceptions
which can significantly reduce the costs and duration of the procedure.
Figure 1: Schematic development process and costs for Small Power Projects (SPPs) in Tanzania (steps can vary in order or
taken simultaneously)
7 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
For projects ≤ 100 kW:
Very Small Power Producer (VSPP) projects defined as < 100 kW neither require an environmental impact assessment (EIA)1,
nor an electricity generation license and tariff approval by the regulatory authority EWURA.
For projects ≤ 1 MW:
Projects of a size ≤ 1 MW do not require an electricity generation license, but a simple registration with the regulatory authority
EWURA is sufficient.
For off-takers with a peak load ≥ 250 kVA:
If an SPP developer reaches an agreement with an ‘eligible customer’, defined as having a peak load of 250 kVA or higher, to
sell electricity to that entity under a PPA, such agreement is exempted from the requirement of tariff approval by EWURA.
EWURA must simply be informed about the PPA.
Besides the aforementioned exceptions, developers have to go through the normal SPP development process, which some observers
regard as the most complete and streamlined on the African continent.
While difficult to estimate, experiences underpin that the process can last up to a year overall; with projects below 100 kW on
the lower and projects above 1 MW on the higher end. This duration estimate entails the simultaneous processing of particularly time-
intensive development steps such as the EIA, building permit and EWURA generation license. Fees and licensing costs typically
range between 5,000 and 40,000 USD, depending on the project size. Further costs can arise from potential external advisory
services. Development costs can be minimized by relying on the technical and human resources of the industrial off-taker. The single
development steps, responsible authorities and estimated length and costs of the process are indicated in Figure 1.
In order to receive a ‘green light' from the regulatory authority EWURA, at least the following documents have to be submitted:
documentation evidencing ownership of land and/ or right to use land for the SPP project;
receipts of payments of land rents and other statutory fees, and changes of land use if any;
certificate of incorporation, business license, VAT certificate
proof of authorization of development of the site, including building permit,
business and financing plan;
description of generation plant and site details;
architectural/engineering drawings and calculations;
certified copy of the environmental clearance.
One essential pre-requisite to sell electricity in Tanzania under the SPP framework necessitates business registration. Businesses that
are majority-owned (> 50%) by foreign shareholders (individuals or companies) with an investment sum greater than 300,000 USD
can register through the one-stop shop at Tanzania Investment Center (TIC). The following pre-requisites apply:
min./ max. number of shareholders : 2/50
minimum share capital: TZS 20,000 (~ 9 USD)
at least two directors and a company secretary
shareholders may be individuals or corporate bodies, and non-residents may hold any or all of the company’s shares
shares must be denominated in Tanzanian shillings and shares without par value are not permitted
no prescribed ratio between share capital (equity) and borrowings
The most important pillars of the registration and licensing process are:
clearance of the proposed company name at BRELA
business registration and license with TIC
registration with TRA for tax issues
registration with the National Social Security Fund (NSSF) for social security benefits
residence and work permits
1 Exceptions might apply to installations located in National Parks or National Reserve Areas. Generally, an opinion from NEMC should be sought.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 8
According to a TIC indication, the registration procedure costs 436,200 TZS (~ 203 USD) and takes between 9 and 17 days.
Upon registration, a SPC for solar supply in Tanzania is subject to the following tax and customs requirements: Tanzania has
liberated its exchange control regime. Foreign investors are guaranteed unconditional transferability of proceeds in the event of
a sale or liquidation of the company or any interest attributable to its investment through any authorized dealer bank in freely
convertible currency. Dividends, loan repayments and cash (other than TZS) earned on the sale of an asset, may be transferred out of
the country, subject to compliance with certain procedural formalities. Investments in Tanzania are further guaranteed against
nationalization and expropriation.
Table 1: Duties and taxes in Tanzania – an overview
Duties and taxes Rates
Customs and excise
duty
10% for semi-finished goods; 25% for final goods.
solar energy system parts are exempted from EAC customs duty and excise duty.
use “solar” on all products and documents.
VAT on equipment 18 % rate
PV and solar thermal equipment supplies are exempted from VAT.
potential reintroduction discussed
VAT on power selling 18 % rate if:
sales exceed 40 million TZS in a 12 months period OR
10 million TZS in 3 serial months
Corporate income tax 30% rate
100% tax depreciation allowance in the first year of operation of solar projects
individual income tax also applies!
Social security and
pension payments
20% of employees’ salary split equally between employer and employee
Capital gains tax 30% tax rate on the disposal of business assets
Withholding tax 10% rate
Tanzania operates bilateral double taxation agreements with the UK, Zambia, Sweden, Norway,
Denmark, Finland, Italy, South Africa, India and Canada.
9 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
1. Introduction
Tanzania has an interesting market for off-grid renewable energy (RE) solutions. The country’s high GDP growth rates of
6-7 % per annum over the last years are in contrast to an electrification rate of only around 21 %, falling below 7 % in rural areas
(Lazimah, 2014). Particularly solar photovoltaic (PV) technologies, benefiting from their flexibility and modularity as well as an
extensive solar irradiation in most of Tanzania’s off-grid regions, can be an attractive option for commercial and industrial customers
operating in remote areas where the national grid does not reach. The majority of these firms rely on diesel-powered generators
(continuous power mode; operating 24/7) for their own power supply, expecting that they will not get connected to the national grid
in the near future (Bauner et al., 2012, p.8). Benefiting from drastic cost reductions in the last years, solar PV represents a competitive
and reliable alternative, and entails an interesting market potential for PV companies with expertise in substituting diesel with solar
generation in off-grid areas.
A possible business setup in such a context is the bundling of solar-power supply activities within a locally registered special purpose
company (SPC)2 that owns and operates a solar PV power plant located at the premises of an electricity off-taker and that supplies the
off-taker as an Independent Power Producer (IPP), thus, allowing the off-taker to reduce costs for diesel. The off-taker can be mobile
phone towers (usually 5-40 kW peak power demand per mobile phone tower)3, agro-processing companies (load varies depending on
size and characteristic water pumping requirements), lodges (usually 100 kW up to 1 MW), mining sites (typically > 1 MW) and
other commercial or industrial activities.4
The SPC and the electricity off-taker engage in a site agreement and bilateral power purchase agreement (PPA) which regulates
ownership issues and the terms and conditions on which electricity is sold and bought respectively. The arrangement offers a number
of advantages to both SPC and off-taker:
The industrial off-taker does not need to invest or take any non-core business risks involved in the project.
The industrial off-taker can delegate the construction and operation of the solar PV plant to the SPC and thereby reduce its
operational burden.
The industrial customer may save on his operational expenditures (OPEX) by purchasing solar-generated electricity at a lower
price.
The SPC applies a different investment horizon making the project viable.
The SPC bundles relevant competence in the solar PV sector. If several projects can be bundled, the SPV has better utilization of
operating personnel and, thus, lower transaction costs.
2 A SPC is a discrete business created around a specific project in a legal form to permit lending and equity investments, disconnected from other obligations
or activities of a company (Justice, 2009). 3 It is estimated that there are over a thousand off-grid telephone towers in Tanzania which each on average consume around 1,500 litres of diesel fuel per
month (around 40 kW peak demand and 21 kW average power demand). Technologies exist for reducing diesel demand by over 90% in typical installations
(Bauner et al., 2012, p.44; GSMA, 2012). 4 The individual creditworthiness with banks and investors must be assessed on a case-by-case basis.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 10
Figure 2: The set-up of the business model with a PPA as power supply contract
Source: adapted from Bundesverband Solarwirtschaft e.V.
Over the last years, Tanzania’s regulatory and legal framework has been adjusted to create opportunities for the private sector to
engage in electricity generation and distribution in a sector that has been traditionally dominated by the state-owned, vertically
integrated utility Tanzania National Electric Supply Company (TANESCO).5 The Tanzanian government established a Small Power
Projects (SPP) framework in 2009, including a Standardized Power Purchase Agreement (SPPA) and non-technology specific feed-in
tariff (FIT) based on avoided costs for selling electricity to TANESCO or a TANESCO-owned mini-grid run by diesel generators, as
well as provisions for direct sale to retail customers through a privately owned mini-grid.6 The latest version of the SPP framework
(effective since April 2015), which this document is based upon, is “designed to respond to challenges identified during the
implementation of the First Generation Framework” (EWURA 2015a). However, the SPP framework continues to remain vague on
some important regulatory and legal provisions for SPCs to implement an SPP and provide electricity directly to a single industrial
off-taker under a bilaterally negotiated PPA, especially regarding the off-taker not being connected to the national grid. Such legal
uncertainty hinders effective market development in this segment, as a clear regulatory framework is central to ensuring the long-term
stability of projects from a revenue and operation perspective and hence to attracting private investments into Tanzania’s RE sector.
Considering these conditions, the following analysis shall provide the reader with an overview of some of the key legal, regulatory
and commercial requirements concerning the establishment of an SPC for solar energy supply to off-grid industrial
consumers in Tanzania under the SPP framework.7 Based on desk research of legal and policy documents and secondary literature
as well as interviews with relevant public and private stakeholders, the analysis includes the following aspects: Chapter 2 gives an
overview of the legal and regulatory requirements and steps for the establishment of a private electricity generation facility in
Tanzania under the SPP regulatory framework.
5 An overview of the most relevant authorities in the Tanzanian energy sector can be found in Annex 2. 6 Some SPPs selling electricity directly to rural households have been established in the last years. Examples include the 150 kW LUMAMA micro-
hydropower project that provides electricity for about 300 residential and small commercial customers in Mawengi village near Njombe, or the Mwenga 4
MW hydropower project selling electricity both to 4,000 private households and the national grid (Greacen, 2013). 7 Note that the report applies to mainland Tanzania. Special provisions apply to the islands of Zanzibar which are beyond the scope of this study.
11 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
Figure 3: The four SPP types in Tanzania
Location of Generation
Connected
to Isolated
Mini-grid
Connected
to Main
Grid
Nature of
Customers
Selling
Retail to
End
Customer8
Case 1
Case 3
Selling
Wholesale
to Utility
Case 2 Case 4
Source: adapted from Greacen et al., 2014
Chapter 3 explains the legal framework to establish and register an SPC for off-grid solar energy supply in Tanzania, informing,
amongst others, on auditing requirements, tax provisions and provisions for money transfer abroad. Chapter 4 depicts key legal
aspects of a PPA. Items such as the security of ownership, insolvency laws, payment and billing regulations and the liability for
defects and damages are discussed, and recommendations for the successful implementation of such a contract are developed
subsequently. Chapter 5 summarizes the outcomes from the chapters before and concludes with some questions for further
consideration. Multiple relevant policy documents and charts can be found in the Appendix. The analysis shall enable solar PV
companies to judge strategic perspectives, chances and risks for establishing new business models, to learn from existing cases and
experiences and to understand the legal, regulatory and administrative requirements to successfully tap Tanzania’s off-grid market.
8 An End Customer can be individual households, commercial or industrial electricity consumers. In this study, the focus is on creditworthy customers, i.e. commercial and industrial electricity consumers.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 12
2. Policy and regulatory framework for an off-
grid SPC
This chapter describes the policy and regulatory framework for an SPC to implement an SPP, as defined in the Tanzanian regulation,
to generate and supply solar power to commercial and industrial off-takers in off-grid regions. There are no laws or regulations in
Tanzania that prescribe who may become an electricity buyer. Off-takers in off-grid regions such as lodges, mining companies or
mobile phone tower operators are thus allowed to buy electricity from any licensed generator and distributor (Interview with Norton
Rose).
For the purpose of this study, it is assumed that the SPC is a private limited liability company, majority-owned (min. 51%) by foreign
shareholders (individuals or companies) and the total investment sum is greater than 300,000 USD. These assumptions are of
importance for the subsequent analysis, as companies fulfilling these criteria fall under the Tanzania Investment Act 1997 and
accordingly within the remit of the Tanzania Investment Centre (TIC). The latter acts as the Tanzanian government’s one-stop
facilitation center to coordinate, encourage and promote foreign investment into the country (TIC, n.d.). Accordingly, the TIC is
involved in multiple of the development steps SPCs need to pass.
2.1 Definitions related to permits and licenses needed for SPCs to implement an SPP
Tanzania’s energy sector is mainly regulated by the National Energy Policy (NEP) which was adopted in 2003 and is currently under
review (Ministry of Energy and Minerals, 2003). The NEP promoted greater private sector participation in Tanzania’s energy sector
which was facilitated through the adoption of the Electricity Act in 2008. It is the legal basis for the licensing of private actors
engaging in generation, transmission, transformation, distribution, supply and use of electric energy by the Energy and Water Utility
Regulatory Authority (EWURA) (Parliament of the United Republic of Tanzania, 2008). EWURA established the SPP framework9
with the intention to introduce a pragmatic and streamlined approach for private developers of small-scale RE power projects up to
10 MW that feed electricity into the national grid or a TANESCO-owned mini-grid, or alternatively sell electricity directly to retail
customers through their own mini-grid.
The rules define renewable energy as “energy which comes from natural resources such as sunlight, wind, water, tides, biomass, and
geothermal heat” (EWURA, 2015b / Cap. 321). Importantly, the SPP framework also allows the construction of new hybrid systems,
on the condition that the “electric energy derived from the SPP facility is produced using no more than 25% from fossil fuel or some
other non-renewable source on an annual average basis” (EWURA, 2015b / Cap. 414). This limiting condition only applies to new
generation projects where no generation source pre-existed and hence not to projects where present diesel usage is replaced with solar
PV.
The maximum threshold of 10 MW implies that the RE generation system can be larger than 10 MW as long as no more than 10
MW is exported to the national grid (EWURA, 2015b / Cap. 321). A developer aiming to export more than 10 MW has to negotiate
on an individual case-by-case basis with the regulator EWURA and the public utility TANESCO (in case it is intended to sell to the
national grid), though the licensing provisions of the 2008 Electricity Act continue to apply (ibid.; Greacen et al., 2014, p.32).
The SPP legislation defines the individual development steps for SPP developers and points out the necessary permits and licenses to
be attained. Importantly, for developers not selling to TANESCO, but providing electricity to off-grid retail customers, the
development process is facilitated: Neither a Letter of Intent from the utility-company, nor the negotiation of a standardized
power purchase agreement (SPPA) is necessary (Interview with EWURA representative).
9 The 2009 SPP Guidelines were renewed with the Electricity (Development of Small Power Projects) Rules from 2015, on which the subsequent analysis is based.
13 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
2.2 Requirements and timelines of the SPP licensing process
Figure 4 provides a schematic overview of the entire development process for SPPs selling electricity directly to a single private off-
taker. As per statement below, exceptions from single steps apply depending on the project kind and size as well as peak load of
the off-taker, which in turn facilitates the development process. Since later steps require the previous conclusion of earlier
development requirements, they are typically presented sequentially (Greacen, 2011). Some steps can however be initiated
simultaneously (Greacen, 2011). In this context, developers should consult with the respective authorities on a case-by-case basis.
Source: adapted from EWURA, 2015b
2.2.1 Very Small Power Projects (VSPP) exemptions for projects ≤ 100 kW
Importantly, regulatory exemptions apply to Very Small Power Projects (VSPPs) (EWURA 2015b, Para. 38 (1)) which the SPP
Framework defines as “an electricity generator with an installed capacity of 100 kW or less that either sells power at wholesale to a
distribution network operator (DNO) or at retail directly to a Customer or Customers 10
” (EWURA, 2015b / Cap. 285; Para. 38(1)).
The legal text remains vague to what extent this exception refers to all development steps, or only to EWURA tariff approval11
and
licensing (Steps E and F in Figure 4). Experts assume that VSPPs are further exempted from the need for an Environmental Impact
Assessment (EIA) although exceptions might apply to installations in National Parks and Nature Conservancy Areas (Interview with
Africa Conservation Director).
The SPP framework recommends VSPPs to fulfil the provisions of the SPP rules in order to minimize risks of competing claims on
resources (Para. 38(2)), as well as raise the creditworthiness of the project in the view of banks and investors. It is recommended to
address the statutory authorities for clarification. The VSPP provisions significantly facilitate the development process for the
majority of off-grid projects, for instance regarding electricity provision to mobile phone towers (see Box 1).
10 ’Customer’ means the end user and the term shall include eligible customers (EWURA 2015b / Cap. 131). An end use customer can be individual households, commercial or industrial electricity consumers. In this study, the focus is on creditworthy customers, i.e. commercial and industrial electricity
consumers. 11 In case a VSPP sells to households, EWURA may review the VSPP’s retail tariff upon receipt of a petition signed by 15% of the households in the area served by the VSPP (EWURA, 2015b, Para. 41(1)).
F. EWURA license
E. EWURA tariff approval
D. Building permit
C. Environmental Impact Assessment
B. Business license and tax registration
A. Land title or lease
Figure 4: Development process for SPP developers selling to private off-takers
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 14
2.2.2 Small Power Projects (SPP) development steps for projects > 100 kW
For projects > 100 kW, the regular SPP development steps A-F as shown in Figure 4 apply. In the following, requirements A-F
are explained in greater detail:
A. Land title deed or lease
According to the Land Act of 1999, all land shall continue to be public land and remain vested in the President as trustee for and on
behalf of all the citizens of Tanzania (Parliament of the United Republic of Tanzania, 1999, Para. 3(1a)). For the purpose of this
analysis it is assumed that the land on which the solar PV plant will be located is already held under a granted right of occupancy or
leased by the commercial or industrial off-taker which facilitates the process (see Annex 4 for a description of the land process for
non-Tanzanian companies). In this case the SPP developer must hold either (EWURA, 2010):
a document executed by the title holder of the land upon which the SPP shall be located granting the SPP developer permission
to generate electricity on the land; or
a letter or agreement by the title holder to lease/rent12 the land upon which the SPP shall be located.
Depending on the geographical location of the off-taker, the process might involve diverse stakeholders, although the exact format
and process of approval is not clarified. If inside a National Park or Nature Conservancy Area, in case of a lodge for instance, the
Tanzanian Parks Authority (TANAPA) must approve the project; if on private or community land, the land owner needs to consent
(Interview with Africa Conservation Director).
Legal advisers recommend that for risk minimization purposes the agreement with respect to the project site should be in form of a
lease agreement hence it can be registered against the right of occupancy with the Ministry of Lands. By doing so, the operator will
be informed in the event of any transfer/sale with respect to the right of occupancy and the transfer/sale would require the operator’s
12 Holders of registered granted rights of occupancy may lease that right of occupancy or part of it to any person for a definite or indefinite period, provided
that the maximum term must be at least ten days less than the term of the granted right of occupancy (USAID, n.d., p.9). The land rent is charged per square metres and differs depending on the location of the land; see: http://www.tic.co.tz/media/GN.%20LAND%20RENTS%20REVIEW%202012.pdf
Box 1: Case study: solar supply to mobile phone tower
Assumptions:
Mobile phone tower with one 30 kVA diesel genset
Intended solar PV project size: 10 kWp
Located close to off-grid village; excess power shall be supplied to village
Development process:
The consent of the land owners is needed for the land right. A leasing agreement with the off-taker should be implemented
for risk minimization.
A building permit will not be necessary in the case of very small installations; a consultation with an accredited
architect/engineer is recommended for that matter.
The SPC must register a business in Tanzania. The business license, tax registration, social security and immigration issues
can be handled in cooperation with TIC.
An EIA will not be necessary unless the project will be set up within a National Park or Nature Conservancy Area; a short
project brief to the National Environmental Management Council (NEMC) for an opinion should be submitted.
The project is exempted from EWURA generation license and tariff approval (for both selling to mobile phone tower and
to end customers in the village). A simple project registration with the authority is sufficient.
Estimated fees and license costs: minimal (excluding external advisory service costs)
15 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
approval before becoming effective. Overall, land law is a complex and politically laden issue in Tanzania which is why developers
are recommended to seek advice from a professional lawyer.
B. Business licence and tax registration
SPP developers need to be registered entities in Tanzania which entails that the SPC establishes and registers under Tanzanian law.
The detailed requirements, length and costs of of this process are described in Chapter 3.
C. Environmental Impact Assessment (EIA)
The EIA is the process pursuant to which a development proposal and its effects on the environment and human life is evaluated. An
EIA is conducted under the provisions of the 2004 Environmental Management Act (EMA) (Parliament of the United Republic of
Tanzania, 2004) and the 2005 Environmental Impact Assessment and Audit Regulations (NEMC, 2005), and is managed by the
National Environmental Management Council (NEMC) (NEMC, 2014). According to Schedule 1 of the Environmental Impact
Assessment and Audit Regulations, an EIA is mandatory for production and distribution of electricity, for hydro power projects and
for large scale renewable energy projects, as well as all thermal power development (i.e. coal, nuclear) (NEMC, 2005).
However, not all SPP projects require a full EIA. To determine whether a full EIA is necessary, the developer shall approach the
NEMC and/or District Environmental Offices for an opinion (ibid.). Herein, the SPP developer must register the project13
and submit
a project brief to NEMC which, after a maximum time period of 45 days, will give a response. Three alternative outcomes are
possible. First, the project brief is deemed sufficient which is usually the case for VSPP < 100 kW or rooftop projects unless they are
situated in Natural Conservancy Areas. Second, a preliminary EIA can be requested, or third, NEMC can demand a full EIA in case
“that the project shall have a significant impact on the environment and the project report discloses no sufficient mitigation measures”
(NEMC, 2005, Para. 11(1)). Both a preliminary and a full EIA must be carried out by a certified and listed consultant (NEMC,
2005, Para. 14)14
. While not fixed, the costs of the service consist of professional fees, travel costs for the consultants’ site visit and
other reimbursables, and an amount to at least 5,000 USD, irrespective of the project size (Interview with Environmental
Consultant)15
. In addition, NEMC charges around 2,000 USD for the verification of the EIA upon its submission. If the study is
completed satisfactorily and environmental impacts are shown to be able to be mitigated, the NEMC will forward the study to the
Minister responsible for Environment under the Vice President’s Office for final approval. The detailed steps of the procedure are
depicted in Annex 5.
Official sources estimate the process to require about 150 days (NEMC, 2005), but developers’ experience shows that it can last up to
one year. Therefore indicative discussions with NEMC and the contracting of the consultants should be initiated at an early stage in
the project development due to the long duration of the process. Upon the issuance of the certificate the operator can be asked to
prepare an annual environmental report as well as any other reports requested by NEMC and the government (NEMC, 2005, Form
No. 3).
D. Building permit
The construction of any major installation in Tanzania, as it will be the case for most SPPs, is regulated by the Town and Country
Planning Act 1956 (Parliament of the United Republic of Tanzania, 1956) and thus must be allowed by the relevant authorities. A
foreign investor can conduct the application for a building permit hand in hand with the TIC that describes the detailed procedure and
provides the necessary application documents on its webpage.16
The documents required for obtaining a building permit are the
following (World Bank, 2014):
architectural/engineering drawings and calculations, including site layout and location plans, elevations, sections of the building
including storm water drainage, fire protection, driveways and parking. All drawings must be signed by a registered professional
architect and all the detailed structural, electrical, plumbing and engineering installations by a registered professional engineer;
title deed showing ownership;
receipts of payments of land rents/leases and other statutory fees, and changes of land use if any.
13 The registration costs currently amount to 70,000 TZS (~ 33USD). 14 An updated list of certified environmental consultants can be found under:
http://www.nemc.or.tz/index.php?option=com_content&view=article&id=107&Itemid=225 15 Resources can be saved by partially relying on studies conducted by the off-taker for previous projects. 16 See: http://www.tic.co.tz/procedure/ 311/166?l=en.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 16
The actual building permit is issued by the Council in the municipality or city where the construction will take place. While TIC
assumes a maximum processing time of 42 days, a study of the World Bank finds that the acquisition of a building permit in
Tanzania takes on average 90 days (World Bank, 2014). Other sources report that the procedure can take up to one year due to the
high number of requests (Kironde, 2009). Experts recommend a strong coordination with the Council and the municipal or city
architect17
to manage the process.
The registration fee can range between 100,000 TZS (~ 47USD) and 2,000,000 TZS (~ 930 USD) depending on the project value of
the envisaged construction (TIC, 2014). Substantive costs are raised depending on the density and size of the area for where the
building permit is requested.18
Note that a building permit might not be required for smaller rooftop PV installations. It is
recommended to consult an accredited architect for this matter.
E. EWURA tariff aproval
The tariff approval process differs depending on whether the SPP is connected to the main grid or sells directly to retail customers.
For the purpose of this study the provisions for SPP developers selling directly to one end customer are of interest (EWURA, 2015,
Para. 29-32).
Generally, SPPs are allowed to propose their own tariffs to sell electricity to end customers19
but are subject to EWURA
approval. The SPP developer submits an application to EWURA for the approval of a “tariff that, at a maximum, shall be limited to
the sum of operating costs, depreciation on capital, whether supplied by the operator or others, debt payments, reserves to deal with
emergency repairs and replacements, taxes, plus a reasonable return on capital provided by the operator that reflects the risks faced by
the operator” (EWURA, 2015, Para. 29(1)). The SPP developer may decide whether its proposed tariff is (EWURA, 2015, Para
31(1)):
a conventional „per kWh‟ charge;
a fixed monthly charge; or
a combination of the above.
EWURA encourages developers to submit proposed tariffs for consideration as data entered into a simple standardized cashflow
spreadsheet.20
EWURA will use this in making its determination of whether a SPP-proposed tariff “reflects prudently incurred costs
and a reasonable level of efficiency” (EWURA, 2015, Para. 31(4)). The vagueness in the wording underpins that retail tariffs may at
times be higher than the national tariff that TANESCO charges if based on a reasonable calculation by the SPP developer
(Greacen, 2013).
Importantly, no EWURA tariff approval is necessary in the case of electricity sale to ‘eligible customers’ that the former SPP
rules of 2014 defined as “any customer with a peak load of 250 kVA or higher” (EWURA 2014), but which the current SPP rules
as of 2015 do not define any more21
. Notwithstanding this lack of clarity, the rules state that any SPP developer selling to an eligible
customer shall only provide the authority with a copy of the PPA and the agreed-upon tariff (EWURA, 2015, Para. 30(2)), which
facilitates the procedure decisively. The provisions entailed in such a bilateral PPA between the SPC and the off-taker are elaborated
in Chapter 4.
17 Any change in project design needs approval by the municipal or city architect which in turn can take another month. The architect may visit the project site
at any time. 18 Cost details can be found under: http://www.tic.co.tz/procedure/311/166/step/1018?l=en. 19 An end customer can be individual households, commercial or industrial electricity consumers. 20 An example can be found under: http://tinyurl.com/rea-spp. 21 It is assumed by experts that the definition was lost in the drafting work, but would still be eligible under the 2015 SPP rules.
17 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
Box 2: Case study: solar supply to an off-grid farm in Tanzania
Assumptions:
Farm located in off-grid area
2 diesel gensets: each 100 kVA
Peak load: < 250 kVA (main electrical load is water pumping)
Planned PV project size: 120 kWp
Development process:
If the entire area of operation is titled for agricultural usage a land title change with the Ministry of Lands is necessary.
Where the farm additionally operates a factory the respective land can likely be also used for electricity generation. The
relevant authorities should nevertheless be informed.
A building permit can be applied for via TIC. An accredited local architect/engineer is required for that matter.
The SPC must register a business in Tanzania. The business license, tax registration, social security and immigration
issues can be handled in cooperation with TIC.
The developer must submit a project brief to NEMC stipulating the details of the installation. A project brief is likely to
be sufficient for a rooftop installation. Otherwise, a preliminary or full EIA must be implemented by a certified
environmental consultant. Prior studies conducted by the off-taker can likely serve as a basis.
The project is exempted from an EWURA generation license since the installed capacity is less than 1 MW. A simple
project registration with the authority is sufficient.
An EWURA tariff approval is necessary (as peak load of off-taker < 250 kVA). The SPP developer and off-taker can
agree on a tariff setting, subject to the authority’s approval.
Estimated fees and license costs: 3,000-4,000 USD (excluding external advisory service costs)
EIA site verification (if required): 2,500 USD (4.2 Mio TZS + 70,000 TZS application cost) + 10,000-12,000 USD
environmental consultant (excluded above),
Building permit fee: 500-1,000 USD + 60-100 USD/hour certified architect/engineer (excluded above)
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 18
F. Securing a license from EWURA
According to the Electricity Act 2008, it is not allowed to engage in the generation or distribution of electricity in Tanzania without an
EWURA license (Parliament of the United Republic of Tanzania, 2008, Para. 8(2)). The licencing requirements for the provision of
electricity supply and distribution are specified in the Electricity Act 2008. SPPs with a capacity less than 1 MW in rural areas22
are exempted from obtaining a license, and only need to register with EWURA for information purposes (Parliament of the United
Republic of Tanzania, 2008, Para. 18(4)).
SPPs generating and providing more than 1 MW to an industrial off-taker need to apply for a generation license. While there
is no legal clarity to date, experts assume that generation licenses are provided on a project (rather than developer) basis (Interview
with Greacen). Developers are recommended to consult with EWURA on that matter. Besides a general application form23
, the
following documents are required in the applicaton process (EWURA, 2014, Para. 32(2a)):
business plan;
certified copy of evidence of approval of rights to resource, if applicable (only for hydro projects);
certified copy of title deed, lease agreement or any other documentation evidencing ownership of land and right to use the land
for the SPP;
22 While the legal text mentions “rural areas” experts assume that the exemption also applies to projects in non-rural areas. 23 The form can be downloaded from: http://www.ewura.com/pdf/licensing-application-form/Application-for-Licence-Form-100.pdf
Box 3: Case study: solar supply to an off-grid lodge in Tanzania
Assumptions:
Lodge located in a National Park
2 diesel gensets: 2x200 kVA
Peak load: > 250 kVA
Planned PV project size: 240 kWp
Development process:
Consent of land owners and TANAPA (it can be assumed that the lodge operators have already established close
relations with the authority) needed for land rights. A leasing agreement with the off-taker should be implemented for
risk minimization.
A building permit is mostly not necessary in the case of a rooftop installation; a consultation with an accredited
architect is recommended for that matter.
The SPC must register a business in Tanzania. The business license, tax registration, social security and immigration
issues can be handled in cooperation with TIC.
A preliminary or full EIA must be implemented by a certified environmental consultant. Special consideration must be
given to the location of the installation within a protected National Park.
The project is exempted from EWURA generation license and tariff approval (as peak load of off-taker > 250 kVA) (as
explained before). A simple project registration with the authority is sufficient. SPC and off-taker can come to a
bilateral agreement on the tariff setting and inform the authority accordingly.
Estimated fees and license costs: 3,000-4,000 USD (excluding external advisory service costs)
EIA site verification: 2,500 USD (4.2 Mio TZS + 70,000 TZS application cost) + 8,000-10,000 USD environmental
consultant (excluded above),
Building permit fee (if required): 500-1,000 USD + 60-100 USD/hour certified architect/engineer (excluded above)
19 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
certified copy of proof of authorization of development of the site, including building permit, if necessary;
financing plan for the generation activity;
description of the generation plant and site details;
certified copy of the environmental clearance as required in the Environmental Management Act;
application fee determined by EWURA (100,000 TZS (~47 USD))
The license application will be published in at least two Tanzanian newspapers, and the public will be invited to submit comments
thereon within 21 days (Para. 33). Subsequently, EWURA decides upon granting the license within 45 days (Para. 34), however only
following a successful technical assessment by EWURA that the SPP can safely and reliably generate electricity, which means just
before24
the SPP’s commercial operation date (Greacen et al., 2014, p.110). The decision on the license term remains at the discretion
of EWURA, but it is usually set in accordance with the term of the SPPA which can be a maximum of 25 years (EWURA, 2014, Para
21(2))25
. A license renewal is possible following a written request at least six months prior to license expiration (Para. 37(1/2); 40). A
license transfer to another person or entity is generally possible (Para. 38), but requires an official notification and the written
approval of EWURA following a public consultation. Similarly in the event that the licensee seeks to contract out or lease the
operation of the licensed facility or part thereof, it shall notify EWURA in writing (EWURA, n.d.). An SPP is requested to forward its
annual report to EWURA not later than ninety days after the end of the SPP’s financial year (EWURA, 2014, para. 63(2)).
Developers’ experience underpins that the overall licensing process can take almost a year which is why developers are recommended
to start the process as early as possible. The SPP Framework stipulates the possibility of obtaining a provisional EWURA license to
enable the project developer to carry out assessments, studies and certain activities within three years leading up to an application for
a final license (EWURA, 2014, Para. 28-31). This is usually a faster process and is recommended to developers to progress on other
development steps. Regarding the license fees, the SPP guidelines remain vague and there is no schedule of license fees published.
According to EWURA representatives, the initial license fee currently amounts to 5,000 USD independently of the project size,
followed by an annual charge of 1,000 USD. License renewal costs 2,000 USD (Interview with EWURA representative).
Box 4 indicates the development procedure for a project ranging from 1 to 10 MWp, such as a project for selling electricity to a
mining company.
24 A provisional license can be obtained as described below. 25 Since no SPPA applies in the case at hand, EWURA will likely base its decision on the lifetime of the envisaged project, i.e. 15-20 years (Interview with EWURA representative).
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 20
For a summary, Table 2 gives an overview of the licensing and tariff approval requirements depending on the project size and the
peak load of the off-taker.
Table 2: Licensing and retail tariff approval requirements depending on project size and off-taker peak load
Size of project Typical Example Peak load of
off-taker
EWURA
generation license
EWURA tariff approval
< 100 kW (VSPP) Mobile phone tower
(see Box 1)
No influence in
this case
Exempted; only
registration with
EWURA
Exempted26
> 100 kW – 999 kW Farm
(see Box 2)
< 250 kVA Exempted; only
registration with
EWURA
Regulated by EWURA based on
reasonable return
> 100 kW – 999 kW Lodge (see Box 3) > 250 kVA Exempted; only
registration with
EWURA
EWURA only informed but no approval
required; bilateral agreement between SPP
and off-taker
> 1 MW – 10 MW Copper Mine
(see Box 4)
> 250 kVA Generation license
required
EWURA only informed but no approval
required; bilateral agreement between SPP
and off-taker
Source: own compilation
26 In case a VSPP sells to households, EWURA may review the VSPP’s retail tariff upon receipt of a petition signed by 15% of the households in the area served by the VSPP (EWURA, 2015, Para. 41(1)).
Box 4: Case study: solar supply to an off-grid mining company in Tanzania
Assumptions:
Mining operation located in off-grid area
3 diesel gensets: each 800 kVA
Planned PV project size: 1.5 MWp
Development process:
If the area of operation is already zoned industrial, the mining company’s land rights are likely to cover the SPP
operations as well. The relevant authorities should nevertheless be informed, and a leasing agreement with the off-taker
should be implemented for risk minimization.
A building permit can be applied for via TIC. An accredited local architect is required for that matter.
The SPC must register a business in Tanzania. The business license, tax registration, social security and immigration
issues can be handled in cooperation with TIC.
A preliminary or full EIA must be implemented by a certified environmental consultant. Prior studies conducted by the
off-taker can likely serve as a basis.
The project requires an EWURA generation license. In order to speed up the process, the SPP developer can apply for a
provisional license to carry out studies.
EWURA tariff approval is not necessary (as peak load of off-taker > 250 kVA). SPC and off-taker can come to a
bilateral agreement but have to inform the authority accordingly.
Estimated fees and license costs: 10,000-12,000 USD (excluding external advisory service costs)
EIA site verification: 2,500 USD (4.2 Mio TZS + 70,000 TZS application cost) + 10,000-12,000 USD environmental
consultant (excluded above),
Building permit fee: 1,500-2,000 USD + 60-100 USD/hour certified architect/engineer (excluded above)
EWURA license: 5,000 USD initial license fee + 70 USD with application
21 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
This chapter has analysed the SPP development steps for the generation of electricity from solar PV and sale to private off-takers in
off-grid regions. While it is not specifically stated in the SPP framework and no concrete examples exist to date, experts assume that
the rules apply without difference to a leasing model whereby the off-taker has equity in the SPC and leases parts of its equipment.
The four case studies in boxes 1-4 have underpinned that different steps are required depending on the project kind and size, and the
peak load of the off-taker. This in turn also leads to different estimations regarding the costs and duration of the development process.
In all cases, significant cost savings can be made by relying on the technical and human resources of the industrial off-taker. The
feasibility of such burden-sharing must be assessed on a case-to-case basis.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 22
3. Legal framework to establish and register an
SPC
Any corporate entity aiming to sell electricity in Tanzania as
a SPP requires a permission to conduct business in Tanzania.
Accordingly, this chapter describes the legal framework to
establish and register an SPC as a private limited liability
company by shares. As stated above, it is assumed that the
SPC is to a majority under foreign ownership with a project
investment/value worth at least 300,000 USD.
3.1 Business registration and immigration issues
As an SPC, the project company has no assets other than the
PV project. The SPC will be established as a private
company limited by shares.
Tanzania’s legal system is mainly based on English common
law. The registration of a company in Tanzania is governed
by the Companies Act, Cap. 212 (Parliament of the United
Republic of Tanzania, 2002) and Business Names
Registration Act, Cap. 213. In terms of the set-up of the
private company, the minimum number of shareholders or
members is two (Parliament of the United Republic of
Tanzania, 2002, Para. 3(I)), the maximum number is 50, and
the minimum share capital is TZS 20,000 (~ 9 USD). A
limited liability company must have at least two directors
and a company secretary. Shareholders may be individuals
or corporate bodies, and non-residents may hold any or
all of the company’s shares. Shares must be denominated
in Tanzanian shillings and shares without par value are not
permitted. There is no prescribed ratio between share capital
(equity) and borrowings (Dindi, n.d.). There is no
requirement for directors and shareholders to be residents in
Tanzania. However, if all shareholders are non-residents, a
Tanzanian resident must be appointed to be the company’s
local representative (Dindi, n.d.). Restrictions on transfer of
shares are specified in the company’s constitutive
documents.
In line with the Tanzania Investment Act 1997, the procedure
for business registration is facilitated for foreign investors,
and the SPC can apply for incentives (for list of incentives see Annex 3), and can create a company through the ‘one stop shop’ at
TIC (Para. 2(2b))27
. Amongst the steps are the application for clearance of the proposed company name at the Business Registration
27 The detailed procedure and required accompanying documents can be found under: http://www.tic.co.tz/procedure/275/181?l=en.
Table 3: Overview of duties, levies and taxes
Duties and
taxes
Rates
On import & development:
Customs and
excise duty
10% for semi-finished goods; 25% for
final goods.
solar energy system parts are exempted
from EAC customs duty and excise duty.
use “solar” on all products and
documents.
VAT on
equipment
18 % rate
PV and solar thermal equipment supplies
are exempted from VAT.
potential reintroduction discussed
Day-to-day business:
VAT on power
selling
18 % rate if:
sales exceed 40 million TZS in a 12
months period OR
10 million TZS in 3 serial months
EWURA &
REA levies
1% EWURA + 3x REA levy on gross
revenue
both can be passed on via electricity bill
Corporate
income tax
30% rate
100% tax depreciation allowance in the
first year of operation of solar projects
individual income tax also applies!
Social security
and pension
payments
20% of employees’ salary split equally
between employer and employee
Withholding tax 10% rate
Tanzania operates bilateral double
taxation agreements with the UK,
Zambia, Sweden, Norway, Denmark,
Finland, Italy, South Africa, India and
Canada.
When liquidating the company:
Capital gains tax 30% tax rate on the disposal of business
assets
Source: own compilation
23 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
and Licencing Agency (BRELA), registration with the Tanzania Revenue Authority (TRA) for tax issues and the National Social
Security Fund (NSSF) for social security benefits. According to the TIC, the overall procedure costs 436,200 TZS (~ 203 USD)
entailing registration fee, filing fee and stamp duty, and takes between 9 and 17 days.
As regards to immigration issues which fall under the Immigration Act 1995 and Immigration Regulation 2012, any foreigner
intending to reside in Tanzania for investment, business, employment or any other legal activity may be issued a residence
permit. In addition, the 1999 National Employment Promotion Service Act requires that any foreigner who wants to work in Tanzania
must also obtain a work permit. These two requirements can be coupled in the application to TIC which facilitates investors in
obtaining resident permits Class A for foreign directors of a company and resident permit Class B for foreign nationals willing to
work in Tanzania as employees in specified companies. The details of the procedure are described in Table 2 below (TIC, 2013,
p.70).
Table 4: Overview of the costs and length to attain a resident permit
Type Cost Estimated
duration
Detailed information
Resident permit Class A 3,000 USD
+10% (for members of a
declared profession)
15 days http://www.tic.co.tz/procedure/256/137?l=en
Resident permit Class B 2,000 USD 14 days http://www.tic.co.tz/procedure/257/138?l=en
Source: own compilation
Importantly, the process for employees can be decisively facilitated, as an investor who applies for a work permit through TIC is
allowed to bring five qualified expatriates whom the company intends to employ. It is possible to apply for more, as long as each
applicant shows the relevant qualifications and experience (TIC, 2013, p.71). A Certificate of Temporary Assignment (CTA) is
sufficient for temporary stays for business purposes. Current visa requirements and visa types can be checked on the webpage of the
Tanzanian Immigration Services Department.28
3.2 Auditing requirements
The accounting framework is based on the Tanzania Companies Act 2002, Cap 212. The National Board of Accountants and Auditors
(NBAA) has adopted International Financial Reporting Standards (IFRS). The IFRS apply to small- and medium-sized enterprises
(SMEs) defined as private or public entities with less than 100 employees and capital investments of less than TZS 800 million (~
372,093 USD) (Deloitte, 2014; NBAA, 2014).
Private companies are required to file annual financial statements and a director’s report with the Registrar of Companies. Penalties
for late filing are often levied. Accounting records should be kept in English (or Swahili) and at the registered office or an office
nominated by the directors. These records should be preserved for at least six years under the Companies Act and five years under the
Income Tax Act 2004. There are no special requirements for foreign controlled companies.
Under the Companies Act, an annual audit by an approved NBBA auditor is required to be performed, and the NBAA has also
pronounced that the audit should be conducted in accordance with International Standards on Auditing.
28 See: http://immigration.go.tz/module1.php?id=14.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 24
3.3 VAT, customs and excise duties on RE technology import
An 18% value-added tax (VAT) rate is levied on all goods and services imported into the country unless such goods or services are
specifically exempted (see below). Importers who are registered for VAT can claim as an input the amount of VAT paid on imported
goods or services (Dindi, n.d.; Juma, 2013).
Regarding customs rules, there are generally no major restrictions on the importation of project equipment. It can be imported subject
to payment of applicable duties and taxes that have to be paid before the goods will be released from customs' control. As a member
of the East African Community (EAC) Tanzania is subject to the community's Common External Tariff. The rates applicable with
effect from 1st January 2005 are (Dindi, n.d.):
0% for raw materials, capital goods, pharmaceuticals, hand hoes and agricultural implements,
10% for semi-finished goods,
25% for final consumer goods or finished commercial goods.
According to the EAC's current exemption regime for custom duties and the 2006 amendments to the VAT Act 1997, imported solar
energy system components are exempted from customs duty and VAT in Tanzania (EAC, 2004; Parliament of the United
Republic of Tanzania, 2005). The excerpt below states the following items as exempted (Parliament of the United Republic of
Tanzania, 2005):
Despite being listed in the excerpt, AC inverters are not exempted from duty and tax, if they were not destined for rural
electrification. Since off-grid supply is concerned for the purposes of this analysis, however, it can be assumed that the exemption
regime also applies to inverters (Interview with TAREA representative). Importers are advised to apply for the exemption before the
goods arrive. It takes about 2-4 weeks to get an exemption certificate. Imported goods cannot leave the harbor without that document.
In case of delay, high storage fees apply at the harbor. Importers’ experience underpins that it is of high importance to use the notion
of ‘solar’ on all products and documents (e.g. packing list, commercial invoice, bill of lading, insurance) in order to benefit from
the exemption rules (Bennu Solar, 2014).
Based on the VAT Tax Act of 1997, PV and solar thermal equipment has been exempted from VAT (KPMG, 2012). The list of items
is illustrated above. All imported goods regardless of their value are required to be inspected at a fee of 0.6% on Free on Board (FOB)
value (Juma, 2013). Generally, imported supplies are subject the Pre-Export Verification of Conformity (PVoC) to Standards
Programme implemented by the Tanzania Bureau of Standards (TBS) in order to pass a conformity assessment and verification
procedure. Importers must obtain a Certificate of Conformity (CoC) issued by an authorized PVoC Agent29
prior to shipment;
otherwise their supplies will be rejected at the port (TBS, 2014). Investors can negotiate exemptions for this requirement with
TIC in the TIC Incentive List in Annex 3, e). Further information on the PVoC procedure can be found on the TBS webpage.30
29 The TBS has certified three inspection companies: SGS, INTERTEK and Bureau Veritas. 30 See: http://www.tbs.go.tz/index.php/services/category/pre-shipment_verification_of_conformity.
VAT Act of 1997 (2006 revised)
[…]
23. Photovoltaic and Solar Thermal
Solar energy system components including panels/modules solar charge controllers, solar inverter, solar batteries, solar pumps,
solar refrigerators, solar lights, vacuum tube solar collectors, plastic solar collector, linear aclnators for tracking system,
concentrating solar collectors, fresnel lenses, solar cookers, solar water heaters, solar water distillation units, solar cooling system
components and crop dryers.
[…]
25 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
3.4 Domestic tax framework
Taxation issues in Tanzania fall within the responsibility of the Tanzania Revenue Authority (TRA). In the following, the most
important tax requirements for SPC selling electricity under the SPP framework in Tanzania are explained . Annex 7 contains an
overview of potential taxation penalties and risks.
3.4.1 Direct taxes
Income tax is levied on both individuals and companies as corporate tax under the Income Tax Act 11 of 2004. Tax is charged on the
taxable income accruing worldwide of all residents and on that which accrues in or is derived from Tanzania of non-residents.
A. Corporate income tax:
An entity is deemed ‘resident’ if it was incorporated or formed under the laws of the United Republic of Tanzania, or if the
management and control of its affairs was exercised in Tanzania, at any time during the year of income. Hence, registered SPCs
selling electricity in Tanzania are deemed ‘resident’ and will be subject to 30% corporation tax paid from their corporate profits, as
shown in Figure 4 (KPMG, 2014, p.2).
Tax deductions on fixed asset capital expenditure are available. The Tanzanian Government has introduced a 100% tax depreciation
allowance in the first year of operation of solar projects, meaning that a company may subtract the costs of the solar PV
installation from its total profit, and is only taxed for the difference (Bauner et al., 2012, p.19). These capital tax deductions which are
also displayed in Figure 4 (PWC, 2013a) make it possible to claim tax breaks that help to lower the overall tax liability for that
particular fiscal year.
Source: PWC, 2013a
All companies whether resident or non-resident are required by the Income Tax laws to file an estimate of income within three
months after the start of its accounting year. The firm is supposed to pay tax based on four instalments. Six months after the
Figure 5: Corporation rate and capital deductions in Tanzania
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 26
accounting period, the firm must file a final tax return to TRA (Juma, 2013). Expenditure, to be allowable for offset against revenue,
must be “wholly and exclusively incurred in the production of those revenues” (Income Tax Act, 2002, Para. 11). Expenditure may
be added back by the TRA, if it is considered to be excessive or is unsupported by adequate documentary evidence.
B. Capital gains tax:
Taxes are imposed on the gain realised from the sale of shares held in a Tanzanian company, the gain is charged as income in the year
in which it was realised. In addition, where the ownership of an entity changes by more than 50% within a 3-year time frame, a
disposal and reacquisition of assets is deemed to have occurred and a capital gains tax of 30% is imposed. The imputed disposal is
proportionate to the percentage change in ownership (KPMG, 2014).
C. Income tax for individuals:
Employers are required to deduct income tax from their employees’ income. The income tax rate is progressive and marginal rates
range from 14% to 30%. Non-residents with income derived from Tanzania are required to file their taxes with the TRA. In
addition, non-resident employees of a resident Tanzanian employer are subject to withholding tax at a rate of 15%.
D. Social security and pension payments:
Employers are required to contribute a sum equal to 10% of their employees’ salary towards one of the registered social security and
pension funds on behalf of their employees. In addition, employees must make a 10% contribution of their salary to the same fund. In
practice this is usually deducted by the employer and paid together with the employers’ contribution.
E. Withholding tax:
Withholding tax should be deducted at source. Details follow in Section 3.6.
3.4.2 Indirect taxes: VAT on sale of electricity to private off-takers
VAT is a consumption tax charged by VAT registered traders on all taxable goods and services. The supply of any form of power,
heat or ventilation shall be regarded as a supply of goods. Any person, who runs a taxable business and whose value of taxable
supplies exceeds, or is likely to exceed 40 million TZS (~ 18,600 USD) in a 12-month period or 10 million TZS (~ 4,650 USD) in
any three consecutive months must register for VAT within thirty days. The standard rate of VAT in Tanzania is 18 %.
Application for VAT registration is done by filling the application form online or manually, and TRA will inspect the business site
before approving any registration. Once registered, the taxpayer is required to submit monthly VAT returns either with payment,
repayment or a nil return to the month following the month of business (Juma, 2013).
3.4.3 Indirect levies: EWURA and REA levies on sale of electricity to private off-takers
Besides 18% VAT, there are EWURA and REA levies imposed on the supply of electricity in the country regulated by the EWURA
Act 2001 Cap. 414 and the Rural Energy Act 2005 respectively. According to Para. 43 (2) of the EWURA Act, EWURA can “require
regulated suppliers31
to pay annual levies to the Authority calculated as percentage of the revenues of regulated suppliers from the
supply of regulated goods and services” which according to Para. 43(3) “shall not exceed one percent of the gross operating
revenues”. Currently, a 1% monthly levy is imposed on TANESCO supply which is passed onto the electricity customers. As the
percentage must not be different within the same regulated sector (Para. 43(4)) the same levy applies to private suppliers which in
turn can pass on the charge to their customers via the monthly electricity bill. According to EWURA’s (fees and levies collection
procedure) Rules 2010, the levy can be made to EWURA by way of cash, cheque, bank draft, bank’s payment of direct transfer to
EWURA’s bank account, as directed by the regulatory authority (Para. 5(1)).
Concerning the REA charge, Para. 19(3d) in the Rural Energy Act 2005 prescribes that an REA levy of up to five percent can be
imposed “on the generation of electricity in specified isolated systems, including systems for private consumption” to be deposited in
31 The EWURA Act defines a ‘regulated supplier’ as “any person engaging in activities in or in connection with a regulated sector”. Since there is no explicit
definition in the legal text it is not clear whether operators of SPP < 1 MW without a generation license fall within the remit of the definition and are accordingly subject to the levy. It is recommended to consult with the authority on that matter.
27 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
the Rural Energy Fund at the end of each month. The current REA levy stands at 3% which, combined with the EWURA levy, is
passed onto the electricity customer via the monthly electricity bill.
3.5 General tax incentives
General tax incentives are available to companies that either register with the TIC or invest or conduct business within an Export
Processing Zone (EPZ). The TIC may grant investors satisfying its investment criteria a limited package of tax incentives, whilst
EPZs are regions throughout Tanzania that aim to attract investors through tax breaks and other incentives. Tax incentives within
EPZs include a 10-year exemption form corporation tax and interest, the remission of customs duties, VAT and other taxes on raw
materials and goods produced in EPZs, and an exemption from local government taxes and levies on products produced in EPZs.
3.6 Exchange control and repatriation of funds
Tanzania has liberated its exchange control regime. Under Paragraph 21 of the Investment Act 1997, investors are guaranteed
unconditional transferability of proceeds in the event of a sale or liquidation of the company or any interest attributable to its
investment through any authorised dealer bank in freely convertible currency. Dividends, loan repayments and cash (other than
Tanzanian Shillings) earned on the sale of an asset, may be transferred out of the country, subject to compliance with certain
procedural formalities applicable to capital account and current account transactions, as summarized below.
Current account transactions:
As a general rule, banks and financial institutions are allowed to (i) provide Tanzanian residents with access to foreign currency
facilities regarding all current account payments and, (ii) transfer currency outside of Tanzania without restriction.
Full documentation relating to any outgoing transfer of currency from Tanzania must be retained by the locally-licensed
commercial bank that is affecting the transfer, and may be requested for review by the Bank of Tanzania (BoT).
Capital account transactions:
Any foreign loan, overdraft, financial facility, deferred payment or guarantee by residents, individuals or companies, the term of
which exceeds 365 days, must submit a copy of the executed agreement, disbursement and debt servicing schedules to BoT for
registration. The process is normally handled by the locally-licensed commercial bank that is affecting the payment. BoT then
verifies whether:
a. the interest rate reflects the prevailing market conditions or the relevant borrowing currency;
b. the repayment period is tied to the ability of the project to generate sufficient funds to service the loans in a progressive
manner; and
c. the approved loans do not include conditions precedent that require opening foreign currency accounts with banks not
registered in Tanzania.
Following such assessment by BoT, the loan is issued with a debt record number (DRN). The DRN may then be used to make
loan repayments to a bank account outside of Tanzania.
Income tax is chargeable on remittances of investment returns and interest payable on loans. If a creditor is not a resident in
Tanzania, the payment of income tax is normally done in a form of withholding tax. Withholding taxes, at various rates, depending on
the type of payment transfer and the residency status of the recipient, are applicable (PWC, 2013a). Currently, the withholding tax
rate for non-residents is 10 % (Dindi, n.d.).
The withholding tax is likely to lead to a double taxation situation where the non-resident person is liable to Tanzanian tax and is also
liable to comparable foreign tax in his country of residence on the same income. Relieved from double taxation are residents in
countries with which Tanzania operates a bilateral double taxation agreement, amongst them the UK, Zambia, Sweden, Norway,
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 28
Denmark, Finland, Italy, South Africa, India and Canada. Tanzania is also in the process of negotiating treaties with several other
countries including Belgium, Burundi, Iran, Lebanon, Malaysia, Mauritius, Pakistan and Rwanda. There is currently no double
taxation agreement under way between Germany and Tanzania. Consequently, in order to obtain the benefits available to
countries with double tax treaties, the SPC should carefully consider the country of residence of the non-resident shareholders.
3.7 Investor Protection
Investments in Tanzania are guaranteed against nationalization and expropriation. The Government of Tanzania may expropriate
property only for the purpose of national interest and after due process, but has not done so since 1985. In such a case the Tanzanian
Investment Law guarantees:
payment of fair, adequate and prompt compensation;
right of access to the Court or right to arbitration for the determination of the investor’s interest or right and the amount of
compensation;
any compensation payable under this section shall be paid promptly and authorization for its repatriation in convertible currency,
where applicable, shall be issued.
Tanzania is a member of both the International Centre for the Settlement of Investment Disputes and Multilateral Investment
Guarantee Agency (MIGA). Any disputes arising between the Government and investors are to be settled amicably through
negotiations or may be submitted for arbitration before invoking the above international institutions (US Department of State, 2011).
29 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
4. Key legal aspects of a Site Agreement and
Power Purchase Agreement
This chapter summarizes the key items to be addressed when setting up a Power Purchase Agreement (PPA) for a PV plant with an
industrial off-taker. In a bilateral contract, parties may, to a large extent, agree and regulate the transaction according to their
commercial agreement. In general, an agreement about the sale of electricity in the Tanzanian context is possible in many different
forms. The examples and discussions below shall provide the reader with ideas how to structure a PPA; however, solutions are not
restricted to the given examples. It is further recommended to analyse which parts of the “model PPA for solar power generation”
(EWURA, 2015c) and “Standardized Power Purchase Agreements for purchase of electricity from a generation facility connected to
an isolated mini-grid” (EWURA, 2015d), both provided by EWURA regulating the purchase of power by TANESCO, can be applied.
Tanzania has the freedom of contract for bilateral agreements between two parties. The outset interests of the parties are seemingly
complementary and a mutual interest is apparent. On the one hand, the off-taker aims to source electricity at a competitive rate,
cheaper than his current electricity supply from diesel generators. He prefers to focus on his core business which in most cases does
not include energy generation. Nevertheless, electricity could be a major source of challenges and account for a large share of his
overall operating expenses. For the off-taker, the agreement will need to give enough flexibility in case of any needed adoptions.
The energy supplier and provider of the PPA (the SPC) on the other hand needs to oversee the potential risks as well as mitigate and
evaluate these. This evaluation will yield a certain return expectation. When negotiating contracts, the SPC aims to fix the parameters
to ensure that the targeted returns are achievable to satisfy the investors. This implies that flexibility, especially on the duration of the
contracts, is not appreciated.
For a PPA, there are a multitude of price, quantity and quality options and combinations of the same, which need to be agreed on.
Quantity options could be important as to agree on a guaranteed amount of produced electricity while quality may mean that the
technical specifications are detailed enough. Sufficient international technical standards have been developed and can be used as
reference in order to keep the PPA fairly light in terms of quality aspects. Thus, this aspect will not be further elaborated here.
For the price aspects, many different versions including caps, floors, fixed and variable components do exist in theory. Experience
shows that the parties should aim to look at an ‘all-in’ price component and include an indexation and herewith reduce the options.
While the price is what the off-taker is most interested in - the indexation could be the interesting price component of discussion.
Given the price development in Tanzania, an indexation (i.e. to the national inflation rate or to the US/European price indices) could
be negotiated.
For the quantity of options, it is proposed not to engage in difficult forecasting agreements but use the principle below. The following
guiding principles for a SPC are recommended to be considered when designing a PPA or structuring negotiations:
1) Long durations of contracts
The parties should accord on the fact that PV installations are infrastructure investments. In addition, the parties should conceptualize
structure and agreements which would allow investors and banks to consider financing. The direct correlation between the duration of
the contracts, prices and returns needs to be addressed from the outset between the parties. In this triangle the two negotiating parties
need to find an agreement. The shorter the overall contract duration, the smaller the area of potential agreement (room for
negotiation) will be. Thus, as a primary guiding principle, long durations of contracts are recommended. Long duration means 8-10
years, ideally 10-15 years. However, when dealing with off-grid off-takers, long contract duration has proven to be very difficult to
agree on.
2) ‘Priority for solar’ / ‘Take or pay’
To reduce risks, the principle of ‘Priority for solar’ and ‘Take or pay’ is usually recommended. ‘Take or pay’ means that electricity
generated at any time is used by the off-taker, unless otherwise agreed. If it cannot be used (e.g. since the electricity demand is lower
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 30
than what is produced by the solar system), the off-taker would still need to pay. The aim of such an arrangement is to reduce the
selling risk and thus take out one area of uncertainty which is usually a prerequisite for investors. Nevertheless it would be part of the
design phase to size the ‘right’ system for the demand of the off-taker in order to maximize the benefit for both parties. For PV-Diesel
systems that do not use batteries and require hybrid controllers32
, the parties will need to agree on the technical design to achieve a
compromise. This will include the configuration setting of the control unit which determines from which source the electricity will be
taken.
The ‘Priority for solar’ principle includes that the agreement reflects that both parties aim to create a win-win situation and have equal
interests in most areas. One party aims to produce electricity and the other one wants to buy the same since it is cheaper than the
current electricity supply through diesel gensets. In the light of principle two, we thus propose to allow for grace periods in case of
unintended default, i.e. technical problems. For example, this could be a breakdown of the generator or machinery. Both parties have
an interest to restart the machines in order to resume production. The parties should not waste time in calculating and proving their
claims towards each other, since intends and interests are directed in the same ways.
3) Minimum complexity
It is important to reduce complexity while maintaining an international standard in order to be able to exit and sell the asset.
4.1 General aspects and definitions
One of the main areas of concern during the initial start of discussions with the OFF-TAKER is to discuss and agree as early as
possible on the cornerstones. For the DEVELOPER there are certain minimum requirements in order to protect the initial
development phase. It is recommended to use a “SITE AGREEMENT” which fixes the main responsibilities very early. In case a
SITE AGREEMENT which can be part of a MEMORANDUM OF UNDERSTANDING (MoU) is signed, the parties are in principle
very close to signing a PPA. The alternative is to directly sign a PPA, which then should include a long paragraph on the
responsibilities during the preparation or development phase. Especially in small projects, a SITE AGREEMENT may not be needed.
The DEVELOPER incorporates an SPC, called OPERATOR, for a specific project. All project rights and licenses will be held by the
OPERATOR who has the single purpose to operate the PV SYSTEM33
in a site and/or the roof areas (the “SITE” or “ROOFTOP”)
and to sell the produced electricity to the OFF-TAKER. The main shareholder of the SPC is the INVESTOR or several investors. It is
assumed that also the DEVELOPER has a minority share in the SPC. Alternatively, the DEVELOPER could get refunded for
developing the projects by the INVESTOR. We assume that the SITE is owned by the future OFF-TAKER who is a company
operating a facility/factory with electricity requirements for a volume of at least the total electricity production of the PV SYSTEM
and who aims to complement the current electricity supply (in this case from a diesel generator) with electricity supplied by a PV
SYTEM.
In the example presented here, the OPERATOR will sign (i) a contract with the off-taker with respect to the right of use of the SITE
(“SITE AGREEMENT”) and (ii) another contract with the OFF-TAKER concerning the purchase of the electricity produced by the
PV SYSTEM by the OFF-TAKER (“POWER PURCHASE AGREEMENT” or “PPA”).
In the following, the key aspects relating to the SITE AGREEMENT and the PPA are outlined.
32 A hybrid controller is often referred as Fuel Save Controller. It is offered by several companies. A hybrid controller automatically regulates the PV power according to load of diesel gensets. By doing so it protects from reverse power and running the diesel gensets below their minimum partial load. In this setting,
the diesel genset still runs 24/7 but at lower capacity. The objective is to save fuel and optimize economics rather than to achieve a maximum PV penetration
which can only be achieved using batteries. 33 If the PV SYSTEM is a PV-battery hybrid system, the wording should be adjusted accordingly.
31 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
4.2 Aspects of a Site Agreement
Rights of use: The OFF-TAKER grants to the OPERATOR the rights to use the SITE
and/or the ROOFTOP to install and operate the PV SYSTEM under
several conditions precedent.
Conditions precedent: Except for some specific rights useful in the preparation phase, the
granting of the rights of use on the SITE and the consequent obligation of
the OPERATOR to pay the rental fees should usually be subject to the
following conditions precedent being fulfilled within a specific deadline:
obtainment of all permits to build and operate the PV SYSTEM (the
“PERMITS”); and
obtainment of the financing required for the OPERATOR to build
the PV SYSTEM (the “FINANCIAL CLOSING”).
Obligations of the OFF-TAKER
for the preparation phase
The OFF-TAKER should:
grant any consent and allow the carrying out of all surveys and
controls by the OPERATOR and/or competent authorities, which
could be necessary and/or convenient for the issuance of all
PERMITS for the PV SYSTEM and
allow the OPERATOR to (i) enter all necessary premises on which it
is planned to install the PV SYSTEM, (ii) execute surveys and
checks on the SITE and (iii) execute preparatory works on the SITE.
support the OPERATOR in any other reasonable way and the
DEVELOPER for the early development phase, if the SITE
AGREEMENT is signed at that early phase (which would be
advisable) - during the phase of development of the PV SYSTEM,
including the cooperation required for the OPERATOR to create,
notarise and register (according to the applicable law) unilaterally
any necessary easements for the cable and the interconnection
infrastructure.
Connection infrastructure and
generators
The OFF-TAKER should undertake to cooperate in good faith with the
OPERATOR with respect to the realization of the interconnection
facilities between the PV SYSTEM and the OFF-TAKER’s factory.
The parties should agree that diesel generators in place are technically
adequate to allow the operation of the PV SYSTEM by the OPERATOR.
Ownership of the PV SYSTEM The parties should agree that the OPERATOR will maintain ownership of
the PV SYSTEM also after installation. Furthermore, an official land
search can be conducted on the property to prove title and that there are
no third party interests related to the property.
Registration at Registrar of Titles The SITE AGREEMENT being a long term lease agreement, the parties
undertake to register it with the Registrar of Titles. The SITE
AGREEMENT shall be formalized in a way that it is not only valid
according to the applicable law but also secured with respect to eventual
third party rights.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 32
Duration of the right of use and
OPERATOR´s right of
withdrawal
The duration of the SITE AGREEMENT should be at least 8-10 years,
ideally 10-15 years, depending on the project and on what can be
negotiated between the parties. The OPERATOR is entitled to withdraw
from the SITE AGREEMENT if the PPA is terminated for any reason
prior to its expiration.
Exclusion of any withdrawal
rights for the OFF-TAKER
The parties should agree that, owing to the perspective OPERATOR’s
investments in the PV SYSTEM, the OFF-TAKER is not entitled to
withdraw from the SITE AGREEMENT before the end of the term
agreed thereof. This is a fundamental bankability requirement for the
financing of the PV SYSTEM.
OFF-TAKER’s representation
and warranties
Owing to the perspective OPERATOR’s investment in the PV SYSTEM,
the OFF-TAKER should declare and warrant that:
the OFF-TAKER is the sole and legal owner of the SITE and/or of
the building(s) on which the ROOFTOP is located, also having full
and exclusive factual availability of the SITE and/or of the
ROOFTOP;
the OFF-TAKER is not in the process of being liquidated, dissolved
or wound-up;
the SITE and/or the building(s) on which the ROOFTOP is located
are clear of objects, as well as of constraints, easements, mortgages,
or limitations of a public or private nature, third party rights (private
or public), preemptive or option rights vis-à-vis third parties, which
would prejudice the rights of use of the OPERATOR;
the SITE and/or the building(s) on which the ROOFTOP is located
are not subject to expropriation and/or eviction procedures;
the building(s) on which the ROOFTOP is located are adequate
from the point of view of the static - for the installation and the
operation of the PV SYSTEM for the agreed duration of the SITE
AGREEMENT;
no dispute or civil, arbitration, environmental, administrative, penal
and/or fiscal proceedings are pending or threatened in relation to the
SITE and/or to the building(s) on which the ROOFTOP is located.
Maintenance and security
services in case of a PV
SYSTEM system being located
on a ROOFTOP
The OFF-TAKER should maintain the buildings on which the ROOFTOP
is located in a suitable condition and guarantee security services, free of
charge, to avoid that no unauthorized third parties get access to these
buildings.
Insurances The subscription of specific insurances may be agreed upon between
OPERATOR and OFF-TAKER under conditions to be negotiated on a
case-by- case basis.
33 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
4.3 Aspects of a Power Purchase Agreement
The purchase of power in Tanzania will be pursuant to a PPA. While standardized PPA agreements for transactions with the utility
TANESCO exist (EUWRA, 2015d), there is no standard PPA for power projects with retail off-grid customers. The PPA, therefore,
will need to be negotiated on an individual basis, with the understanding that there is an intention on the part of the buyer to ensure
that the parties have rights and obligations which are consistent with international standards. The PPA would principally set out: (a)
the capacity and output of electricity of the SPC; (b) the terms relating to control, operation and dispatch of the power generating
station; interconnection and transmission facilities; (c) metering systems; and (d) compensation, payment and billing which are set
after negotiations to project costs and estimated shared project costs.
The agreements relating to the purchase and sale of electricity must be approved by EWURA prior to entry. Otherwise the same will
be void under the law, unless the agreement relates to:
the sale of electricity to eligible customers (i.e. off-taker with peak load > 250 kVA); or
VSPP with a size < 100 kW;
standardized PPA for SPP concluded with DNO (i.e. TANESCO).
The following issues and recommendations ought to be addressed in the PPA:
Insolvency of the OFF-TAKER
The OFF-TAKERs should – in the case of insolvency – give his/her
consent to any of the following measures in advance among which the
OPERATOR is free to opt at his/her own discretion:
the OPERATOR dismantles the PV SYSTEM to use its parts
somewhere else at his/her own discretion;
the OPERATOR supplies all the electricity produced by the PV
SYSTEM to the Tanzanian Network Operator (i.e. TANESCO or its
successor) or to any operator of local mini-grids.
Step-in rights of the financing
banks if bank financing is
considered.
Arbitration clause (difficult to
negotiate but eventually very
useful)
Step-In Rights of the banks should be agreed upon in the SITE
AGREEMENT or in a separate agreement to be attached to the SITE
AGREEMENT.
An arbitration clause is useful and a good measure for risk mitigation. It
is well considered by financing institutions and investors but often not
accepted by the local OFF-TAKER.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 34
Electricity sale and purchase The OPERATOR supplies the entire electricity produced by the PV
SYSTEM to the OFF-TAKER who purchases it. The OFF-TAKER’s
facility is denoted as a Must Take Facility which entails that the OFF-
TAKER must purchase all of the net electric energy output. Subject to
such necessary directions or protocols as may be issued by the OFF-
TAKER for the protection of its electric system and in particular subject
to the technical constrains of a PV SYSTEM connected to a diesel genset
using a hybrid controller, the OFF-TAKER may take sometimes less
electricity than the electricity that could have been produced by the PV
SYSTEM. This situation can occur when the hybrid controller regulates
the output of the PV SYSTEM in order to ensure grid stability and protect
the diesel genset from reverse current and from running below minimum
partial load. Although the OFF-TAKER shall generally pay only for the
electricity he takes, the OFF-TAKER and the OPERATOR can agree in
the PPA on different remuneration options.
Any environmental attributes recognized under any international, national
or other laws or regulations, associated with the ownership or generation
of power from the PV SYSTEM, including but not limited to carbon
credits or attributes created pursuant to the Kyoto Protocol or any
successor laws, shall remain the property, and under the control, of the
OPERATOR.
Tariff The Tariff and its indexation should be clearly inserted. EWURA’s tariff
guidelines are depicted in chapter 2.1 (F).
Conditions precedent: The parties’ sale and purchase obligations should be subject to the
following conditions precedent:
all PERMITS have been granted;
the OPERATOR undertaking a due diligence in respect of the OFF-
TAKER and the property on which the PV SYSTEM shall be located
and the results of such due diligence being satisfactory to the
OPERATOR;
FINANCIAL CLOSING has been completed;
a bank guarantee on the OFF-TAKER’s payments reasonably
acceptable to the OPERATOR has been provided;
the PV SYSTEM has entered into operation according to technical
specifications that have been previously agreed upon.
Duration of the PPA The duration of the PPA should be for a period of at least 8-10 years,
ideally 10-15 years, depending on the project and on what can be
negotiated between the parties.
Metering The parties should agree to install an electric metering device (the
“METER”) protected against external interference to be used to measure
the electricity delivered by the OPERATOR to the OFF-TAKER.
35 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
Billing and payments: simple
procedure recommended
The OPERATOR should issue a monthly invoice to the OFF-TAKER for
the immediately preceding month (the “MONTHLY INVOICE”) within
the first seven business days of the following month.
The OFF-TAKER should pay the amount due under the MONTHLY
INVOICE within seven business days from the receipt of such invoice, on
the account that will be designated by the OPERATOR. In case of
payment delays, the OFF-TAKER should be automatically charged
interests at the rate of PLR (primary lending rate of the Tanzanian
national bank) plus 650 basis points on the amount of the outstanding
payment, calculated on a day to day basis for each day of the delay,
compounded on monthly rests. The recovery thereof should be without
prejudice to other rights of the OPERATOR.
It is recommended that all amounts due under the PPA should be paid in
the currency of the United States of America (“USD”) to avoid exchange
risks and to achieve more convenient conditions for the financing.
Bank guarantee (recommended but
difficult to negotiate)
The OFF-TAKER should provide at FINANCIAL CLOSING a guarantee
by means of an irrevocable and unconditional bank guarantee, payable on
first demand, to be issued by an international credit institute acceptable to
the OPERATOR, securing all payment obligations of the OFF-TAKER
and all existing and contingent claims to be made by the OPERATOR to
the OFF-TAKER under the PPA and up to a specific aggregated amount
in USD. Such a guarantee is very useful for risk mitigation, but it will be
difficult to negotiate with the OFF-TAKER.
Exclusion of any withdrawal and/or
termination rights for the OFF-
TAKER
The PARTIES should agree that, the OFF-TAKER is not entitled to
withdraw from or terminate the PPA before the end of the term agreed
upon. This clause on the exclusion of any withdrawal and / or termination
rights for the OFF-TAKER is a fundamental bankability requirement for
the financing of the PV SYSTEM. It is particularly important in the case
that the national grid arrives at the OFF-TAKER’s facilities in the course
of the contract implementation, with the national utility offering
electricity at lower cost. Perspective OPERATORs are recommended to
carefully familiarize themselves with national grid planning prior to their
engagement.
Limitation of liability A limitation of liability should definitely be inserted to limit risks. A
limitation that could be in the interest of the OPERATOR is that in no
event the combined liabilities of the OPERATOR towards the OFF-
TAKER for defects and damages to equipment and persons and for loss
of profits should exceed the amount of the tariffs already paid to the
OPERATOR. In any case, the OPERATOR will not be held liable for any
defects that are caused by natural wear and tear, incorrect use, or any
other circumstances beyond immediate control by the operator34
.
34
Under Tanzanian law, limitations of liability and exclusion clauses are interpreted strictly against the party relying on them. This means that if the clause is
ambiguous and/or does not expressly limit or exclude liability for a particular loss or breach of contract, it will be taken not to cover that loss or breach.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 36
Guarantor’s obligations: difficult to
negotiate but eventually very useful
If it is negotiated that a further company steps in as guarantor for the
OFF-TAKER (e.g. the mother company), such guarantor should
guarantee (by signing a guarantee agreement) to the OPERATOR to pay
without delay – for the event that the OFF-TAKER is in breach of its
obligations under the PPA– any amount which the OPERATOR may
request on the basis of its rights arising from the PPA up to a precise
amount in USD.
Excuse from performance of
OPERATOR`s obligation to supply /
grace periods
The following cases of interruption of the electricity supply obligation
from the PV SYSTEM are agreed:
Force Majeure Event;
regular maintenance;
measures taken to ensure the safe use of the PV SYSTEM and
minimize risk of damage to property; or
compliance with the directions of any government order, the effect of
which is to close all or any part of the PV SYSTEM.
Some general rules of Tanzanian Law on interruption of electricity supply
may have to be taken into account when detailed contractual clauses on
interruption of electricity supply are inserted35
.
The OPERATOR aims to produce electricity and the OFF-TAKER wants
to buy the same. In the light of these aligned interests, the PPA should
entail - for the case of unintended default (i.e. technical problems) -
specific clauses for grace periods to be agreed on case to case basis.
35
According to applicable Tanzanian Law, following general rules have to be taken into account when the OPERATOR interrupts the electricity supply:
1. The interruption should be as brief as possible; affect the fewest number of customer’s possible; and minimize suspension of supply to priority
customers in accordance with the producer’s contingency plans; 2. The OPERATOR has the power to disconnect the supply of electricity to a customer who: (a) unlawfully connected to the electricity systems; or (b) is
in breach of his contractual obligation in respect of electricity supply;
3. The EWURA Act 2001 requires that the electricity producer reconnects a customer’s electricity service upon full payment of a past due account and reconnection fees. In case of ongoing dispute in relation to payment obligations, customers have been given the option to refer to EWURA for an
authoritative decision;
4. In non-emergency situations, the OPERATOR has the obligation to provide advance notice of the suspension of electricity to its customers and provide a non-binding estimate of the expected length of the interruption.
37 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
5. Conclusion
Industries and lodges operating in Tanzania’s off-grid regions raise interesting business opportunities for companies specialized on
RE development, especially solar PV supply and operation. The business model of an SPC - building, owning and operating a solar
plant, and selling power to a creditworthy off-taker under a bilateral PPA - has recently received increased attention. It allows the off-
taker to hedge or even reduce costs by substituting solar power for electricity generated from diesel generators without the
requirement of large upfront capital expenditure (CAPEX). While Tanzania’s energy sector used to be nationalized and dominated by
the public utility TANESCO, the legal and regulatory framework for the private development of RE technologies has become more
favourable over the last years. A streamlined framework reducing negotiation costs and lead times has enabled private sector actors to
engage in private on- and off-grid electricity generation and distribution.
The study has provided an overview of the regulatory, legal and commercial aspects of establishing an SPC for off-grid solar power
supply to commercial and industrial off-takers in Tanzania. The Tanzanian SPP rules and complementary policies have provided a
legal and regulatory framework for solar suppliers on the following issues:
streamlined permitting and licensing process for SPP developers depicting individual steps and relevant authorities
TIC as a one-stop shop for foreign investors regarding land rights, business registration and licensing, immigration issues and
building permits
exceptions for very small power projects (VSPP) ≤ 100 kW: generally no EIA (exceptions apply to National Parks where
NEMC has to be consulted), no EWURA electricity generation license and tariff approval required
EWURA licensing exceptions for projects ≤ 1 MW: no EWURA electricity generation license needed
financial incentives for solar suppliers: customs duty, excise duty and VAT exemption of solar equipment and 100 % tax
depreciation allowance for income tax in the first year of operation of solar projects
facilitated financial reporting standards for SPCs
It must be noted that SPCs majority-owned by German nationals would currently be subject to a double taxation situation due to 10 %
withholding tax in Tanzania.
At the same time, a number of gaps and divergences in actual implementation practice remain, which at times necessitate case-by-
case negotiations and clarifications with the relevant authorities. These are some of the issues which project developers becoming
active in Tanzania’s off-grid solar market must keep an eye on and might even need to seek professional legal advice for. In addition,
international solar companies are recommended to work in close cooperation with local partners such as local renewable energy
companies, civil society organizations or academic institutes that have greater leverage vis-à-vis decision-makers and better context
knowledge. Of course, this also includes collaboration at arm’s length with the off-taker that might even be able to contribute in-
house technical or human resources to the development process.
Despite uncertainties remaining, the analysis underpins that Tanzania is on a promising path. The general awareness of the
commercial viability of RE has increased over the last years, and policy-makers appear open-minded to further expand and
professionalize the existing frameworks. This particularly applies to the country's rural areas, where the national grid operator will not
be able to provide power supply for the foreseeable future.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 38
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SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 42
Appendix
Annex 1: List of interviewees
Name Position Institution
Eng. Ng'anzi Jumaa Kiboko Principal Commercial Officer -
Electricity
EWURA
Simon Evarist Chief Electrical Inspector EWURA
Ephata Ole-Lolubo Principal Economist EWURA
Anastas Mbwala Managing Director EWURA
Angela Mdolwa Lawyer Norton Rose
Adam Lovett Lawyer Norton Rose
Eng. Matthew Matimbwi Executive Secretary TAREA
Chris Greacen Consultant World Bank
Matthew A. Brown Africa Conservation Director The Nature Conservancy
Clive Jones Managing Director Power Providers Company Ltd.
William Mwegoha Associated Consultant WWS Consulting Ltd.
Annex 2: List of institutions in Tanzania’s energy sector
A wide range of stakeholders from all societal sectors carry out important functions in the Tanzanian energy sector – ranging from
policy-making, agenda-setting, regulating to operation and financing of energy projects. The key actors include:
The Ministry of Energy and Minerals (MEM) is responsible for formulating energy policy and overseeing the energy and
mineral sectors. MEM has established a Public Private Partnership (PPP) bench in 2013 that is particularly reponsible for
partnerships with the private sector in the energy sector. It will identify partnership opportunities in the energy sector revolving
around gas, coal, hydro and RE technologies and coordinate closely with the PPP Coordination Unit in their development and
implementation.
The independent Energy and Water Utilities Regulatory Authority (EWURA) was established in 2006 under the Energy and
Water Utilities Regulatory Authority Act. It has the mandate to promote effective competition, economic efficiency, consumer
interests and financial viability of suppliers within the electricity and petroleum as well as water sectors. Among EWURA’s
functions are the following: issuing, renewing and cancelling licenses, establishing regulatory standards for goods and services
and regulating rates and charges.
The state-owned, monopolistic energy utility Tanzania Electric Supply Company Limited (TANESCO) operates in a
vertically integrated structure carrying out generation, transmission, distribution and supply of energy. TANESCO buys the
electricity generated by private generators under a power purchase agreement (PPA). With the institution of the SPP framework
TANESCO established an SPP cell dealing exclusively with the processing of standardized PPAs and grid interconnection under
the SPP programme in order to speed up the implementation process.
The Rural Energy Agency (REA) promotes, stimulates, facilitates and improves modern energy access for productive uses in
rural areas. It fosters private sector investments for rural electrification by giving guidance to potential investors and offering co-
financing with the Rural Electrification Fund (REF) and donor-supported programmes.
43 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
Tanzania Renewable Energy Association (TAREA) was registered in 2001 and is the largest member-based, non-
governmental organization promoting the sustainable development of RE in Tanzania. TAREA cooperates with important
enterprises in Tanzania as well as (inter-)national organizations and engages in education and research activities, information and
knowledge sharing, networking and membership services related to RE. It currently has over 360 national and international
members.
Independent Power Producers (IPP) of which seven have been registered and in total sell 317 MW to TANESCO under a
PPA. The IPPs are: Songas (189MW), IPTL (100MW), Symbion (225MW), Aggreko (100MW), TPC (17MW), Mwenga
(4MW) and TANWAT (2.7MW).
Annex 3: List of TIC incentives for foreign investors
Under the Investment Act, 1997 large investors are eligible to receive a certificate of incentives providing them with a package of tax,
immigration, guarantee, and land advantages. The minimum investment to qualify for and obtain a Certificate of Incentives is
US$100,000 for projects that are wholly owned by Tanzanian citizens and US$300,000 for projects that are wholly owned by foreign
investors or in case of a joint venture (Dindi, n.d.). The incentives available to holders of certificates of incentives include the
following, with the most relevant ones marked in bold:
(a) zero percent (0%) import duty on project capital goods, computers and computer accessories, raw materials and replacement
parts for agriculture, animal husbandry and fishing, human and livestock pharmaceuticals and medicaments, motor vehicle and
inputs for manufacturing pharmaceutical products.
(b) ten percent (10%) import duty for semi-processed inputs and spare parts other than for motor vehicles.
(c) fifteen percent (15%) import duty for fully processed inputs and motor vehicle spares.
(d) twenty five percent (25%) import duty for final consumer goods.
(e) abolition of the mandatory pre-shipment inspection on imported raw materials that have zero rate of import duty.
(f) pay and refund scheme for excise duty paid on fuel purchased by eligible companies.
(g) 50% allowance of capital expenditure for all classes of assets for the first year.
(h) VAT exemption on ground transport run by tour operators, milk packaging materials, computers, printers and accessories,
hospital equipment and drugs used by victims of HIV/Malaria and TB and locally produced yarn.
(i) deferment of VAT payment on project capital assets (deferment is done in a form of special reliefs under Value Added Tax Act,
1997).
(j) import duty drawback on raw materials used to produce goods for exports and deemed exports.
(k) locally procured building materials are deemed to be capital and therefore subject to VAT deferment.
(l) zero-rated VAT on exports.
(m) straight line depreciation allowance on capital goods.
(n) indefinite carry forward of losses against future profits.
(o) corporate tax rate of 30% and withholding tax rates on dividends of 10% and 0% on loan interest in both priority and
lead sectors.
(p) right to transfer outside the country 100% of foreign exchange earned, profits and capital.
(q) easiness in obtaining other permits such as residence/work permits, industrial license, trading license, and other
Annex 4: Land process for non-Tanzanian companies
The law does not allow individual Tanzanians to sell land to foreigners. Foreigners can only lease land in Tanzania through the TIC.
The TIC has designated specific plots of land (a land bank) to be made available to foreign investors. According to the Land Act, a
non-Tanzanian Company may acquire an interest in land in a number of ways, including:
1. the case that the company holds a Tanzanian Investment Certificate issued by the TIC, a derivative right, and the holder of the
right of occupancy would be the TIC36
;
36
See http://www.tic.co.tz/procedure/286/165?l=en.
SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA 44
2. by leasing the property in question from the holder of the right of occupancy on terms no better than those contained in, and for a
period not exceeding the term of the right of occupancy (a Sub-Lease); or
3. by the creation of a way leave over property granting a right to enter the property for the purpose of executing works, building
and maintaining installations and structures and in setting all such works, installations and structures on the servient land and to
pass and repass along that way leave in connection with purposes of those organisations, authorities or bodies.
Annex 5: Steps of the EIA Procedure
Procedure Activity Time Limit
Registration Register the proposed project with NEMC by submitting an
application for the EIA certificate (‘Preliminary Environmental
Assessment Registration Form’). The application fee is 20,000
TZS (~ 9 USD).
Screening Return two copies of a duly filled registration form attached
with a project brief for screening to NEMC. The contents of the
project brief should be as directed in the EIA and Audit
Regulations, 2005. Pay registration fee of 50,000 TZS (~ 23
USD) upon submission of the Project Brief.
To be approved by the Council within
45 days from the date of submission of
the brief as per Regulation 10(1).
Scoping Contract an EIA consultant to prepare a scoping report and TOR
for conducting the EIA, and submit them to NEMC for review
and approval before the commencement of the EIA study.
The approval of the TOR should be
done by NEMC within 14 days as per
Regulation 13(2).
Environmental
Impact Assess-
ment (EIA)
Conduct EIA study (by the consultant) according to the
approved TOR.
EIA Review Submit an EIA Report to NEMC for review by a cross-sectoral
Technical Advisory Committee (TAC). The review process
costs around 2,000 USD.
The Council shall within 60 days carry
out its review as per section 87(1) of
the EMA.
Facilitation Facilitate the review process by paying the review costs to
NEMC as required.
Incorporate TAC
comments
Make corrections and improvements of the draft EIA according
to the comments raised by the TAC
Approval of EIA Submit the improved and final version of the EIA to NEMC for
final scrutiny and preparation of recommendation to the
Minister for EIA Certificate Issuance consideration
The Minister may approve or
disapprove of the EIA within 30 days
as per Section 92(1) of the EMA.
Source: adapted from NEMC, 2014
Annex 6: Further taxation provisions: deadlines, penalties and taxation risks
There are strict deadlines for filing the various returns required under both the direct and indirect tax regimes with the Tanzania
Revenue Authority (TRA). Interest and penalties are imposed if these deadlines are not complied with.37
Tax-related documentation must be retained for the last five years from the end of the income tax assessment to which tax may be
relevant. Although the TRA generally follows the “pay now, fight later” doctrine in its dealing with taxpayers, there is a Tax Tribunal
Appeals procedure. The period of limitations, beyond which a tax claim may not be pursued, is six years (subject to extension) in
cases of fraud or mistakes as well as in cases where it is just and equitable (Statute of Limitations Cap. 89, Act 10 of 1971). The TRA
service charter sets out the rights and obligations of the taxpayer entity in its dealings with the TRA (TRA, 2013).
37The rates can be found under: https://www.pwc.com/tz/en/pdf/tanzania_tax_datacard_2013_2014.pdf
45 SOLAR POWER PURCHASE AGREEMENTS WITH PRIVATE OFF-TAKERS IN TANZANIA
Some taxation risks must be borne in mind:
Transfer pricing: Transactions with associated companies (related parties), in terms of the Income Tax Act 2004, whether resident or
non-resident, may trigger transfer pricing issues, if transactions are deemed not to be at arm’s length by TRA. The transfer pricing
rules are largely untested and there is a lack of guidance from TRA, as to how the rules may be applied in practice. However, TRA
has indicated that it will apply the OECD transfer pricing guidelines for arm’s length transactions. Based on practical experience,
transactions considered to be most at risk are intra-group management fees and interest-free funding. (Income Tax Act 2004, para.
33).
Thin capitalisation: There are provisions for deferral for tax purposes (not disallowance), where a resident entity is owned by at least
25% by a non-resident. In such cases, any interest incurred is restricted in such a way to require the debt: equity ratio of the entity not
to exceed 70:30. However, any disallowed interest may be carried forward to the following year(s) to offset future taxable income,
where the same rules continue to apply (Income Tax Act 2004, para. 12).
Tax anti-avoidance measures: There are provisions to prevent income-splitting, as well as other general tax anti-avoidance measures
(Income Tax Act, 2004, para. 34 and 35).
4646
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