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Tax Bill throws up royalty surprises as Davis Tax Committee mulls broader mining reforms

KPMG tax head Muhammad Saloojee

KPMG tax head Muhammad Saloojee talks to Mining Weekly Online’s Martin Creamer. Photographs: Duane Daws. Video and Video Editing: Nicholas Boyd.

KPMG tax head Muhammad Saloojee

Photo by Duane Daws

18th July 2016

By: Martin Creamer

Creamer Media Editor

  

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JOHANNESBURG (miningweekly.com) – The Taxation Laws Amendment Bill released on July 8 contains two surprise amendments to mineral royalty taxation on the eve of the Davis Tax Committee’s next mining tax report, which is expected to provide the royalty regime with much needed certainty.

The two amendments proposed in the Bill, which has caught the mining industry off guard, could reverse hard-fought symmetry regarding timing of submission of income tax and mineral royalty returns, and introduces new complexity in royalty estimations.

One of the Bill’s proposed amendments cuts the submission of mineral royalty returns back to six months post year-end, down from the current 12-month submission timeframe, which was purposefully aligned to the submission date for income tax returns. This will impact the process and timing of both mining royalty returns and income tax returns due to the integral link between the two regimes.

Mining entities will now be hard pressed to finalise their income tax returns also within the six-month period in order to obtain certainty that the mining royalties calculated are correct.

Any changes which may be made to the income tax return after the royalty return has been submitted could impact the correctness of the royalty return and could put a taxpayer in a default position, which could trigger penalties and interest.

In the second amendment proposed in the Bill, taxpayers can be called upon to justify royalty return estimates, and the commissioner for the South African Revenue Service (Sars) is empowered to increase the estimate to an amount which the commissioner considers reasonable.

KPMG corporate tax head Muhammad Saloojee this week urged the mining industry to make “very hard submissions” against the two proposed amendments, which he described as “disheartening”. (Also watch the attached Creamer Media video).

“Instead of bringing further alignment, the Bill is bringing back old problems, highlighting the dichotomy between doing the right thing versus what is ultimately a tool to collect revenue more quickly,” Saloojee added in an interview with Creamer Media’s Mining Weekly Online.

According to Saloojee, the very fact that the Davis Tax Committee has recognised the need for legislative clarity on several aspects dealing with mineral royalties, means the timing of the proposed amendments could be seen as inopportune.

“Granting powers to the commissioner to make its own estimate for provisional royalty payments at a time when the industry is keenly waiting for further and clear guidelines from the Davis Tax Committee will not be seen positively by the industry.

“Clarity must first be obtained on the various interpretational issues impacting mineral royalties before the commissioner is empowered to make its own provisional estimates. Otherwise, taxpayers may see the commissioner’s increased powers merely as a tool to exploit the current uncertainties,” Saloojee warned. 

He highlighted the need for mineral royalty tax clarity as well as certainty around the practical application of the legislative framework that governs the calculation and imposition of mineral royalty tax.

Practical experience of mineral royalty legislation over the last six years has thrown up interpretation issues that need to be made clear in the second draft of the mining tax report due to be issued by the Davis Tax Committee shortly.

At a session with the Davis Tax Committee on May 13 – which was attended by Sars, the National Treasury, mining industry bodies, mining company tax teams as well as tax advisers – key areas of concern were raised around the application of several legislative provisions of the Mineral and Petroleum Resources Royalty Act, 28 of 2008 (Royalty Act), the Mineral and Petroleum Resources Royalty (Admin) Act, 29 of 2008, and the Mineral and Petroleum Resources Development Act, 28 of 2002.

Recognised by all was the important role mineral royalties play in taxing the value of minerals mined on the basis of the minerals belonging to the people of South Africa, and depletion needing to be matched by compensation.

Built in is a system that taxes output, which means that even if a mining concern generates zero profit, it is still taxed as long as it has generated income from the extraction of minerals.

When times are good, a royalty of up to 7% on gross sales can be charged for unrefined minerals and 5% on gross sales for refined minerals; and when times are bad and profitability is absent, mining companies must still pay a royalty of 0.5%, since the mineral royalty formula has a 0.5% floor. 

However, certain fundamental principles on which the Royalty Act was based are seen to be in need of urgent legislative clarification owing to some inconsistent interpretation and application by Sars.

As the Royalty Act was broadly not intended to tax value-add pursuant to local beneficiation, some novel concepts were introduced into the legislation, which seeks to determine the price of the minerals at its 'condition specified' or so-called 'first saleable point'.

On the other hand, all costs – both direct and indirect – incurred to win, recover or develop the mineral to the condition specified or the ‘first saleable point’, are allowable as a deduction in the royalty tax formula. This includes capital expenditure (capex) even if such capex is not fully redeemed and can be carried forward to subsequent years of assessment – similar to the application for income tax purposes.

But inconsistencies and interpretational issues have arisen, which has led to the Davis Tax Committee being asked to consider a number of suggestions for its second and what is likely to be its final report on mining taxation. Some of the suggestions made to the Davis Tax Committee include:

• SARS issuing in final the explanatory memorandum to the Royalty Bill, 2008.

• Reviewing the 'first saleable point' for certain minerals and the possibility of updating the Schedules to the Royalty Act which set out the various 'condition specified'.

• Granting royalty payment relief to companies making losses and for a mechanism that could allow such companies the ability to make ‘catch-up’ payments in subsequent years of assessment through a royalty formula adjustment.

• Considering practical ways to allow for the exclusion of transport, insurance and handling costs incurred in the disposal of a mineral resource on the grounds that gross sales inevitably contain an element of reimbursement.

• Considering recognising the 'taxable income' concept rather than the current reference in the mineral royalty formula to ‘gross sales’ and earnings before interest and tax, or Ebit. 

• Clarity on the way gross sales should be adjusted – up and down – when minerals are transferred “outside of their condition specified”.

• Clarity or guidelines on the deductibility of direct and indirect costs, including some contentious costs such as head office expenditure and mine rehabilitation costs.

•  Legislation to cater for the situation where royalty refunds are processed post the filing period and the need to reopen both royalty and prior year income tax returns, so as to avoid understatement penalties from being levied.

“While the Davis Tax Committee continues its work on mining tax reforms, piecemeal legislation such as proposed to the royalty tax regime in the Bill, must be carefully considered, and where there is a dichotomy of purpose, this must be pointed out to the legislature. Otherwise the reforms which the Davis Tax Committee is working on in the mining industry will be all that harder to achieve,” said Saloojee in his interview with Creamer Media’s Mining Weekly Online. (Also view attached video).

Edited by Creamer Media Reporter

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