Industry still not clear about mining tax direction after Mangaung conference

15th February 2013

By: Leandi Kolver

Creamer Media Deputy Editor


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Mining is a capital-intensive, long-term and high-risk business and international research shows that, after geology, policy certainty and predict-ability are the most important issues for mining companies planning any investment, says law firm Webber Wentzel head of African mining and energy projects Peter Leon.

For this reason, the uncertainty regarding possible higher taxes for the mining industry must be cleared up as soon as possible by the ruling party and government, he says.

The African National Congress’s (ANC’s) fifty-third National Conference Resolutions document, which was published on the party’s website on January 31, states: “The State must capture an equitable share of minerals resource rents through the tax system and deploy them in the interests of long-term economic growth, development and transformation.”

Meanwhile, Finance Minister Pravin Gordhan said last month, at the World Economic Forum in Davos, Switzerland, that he had no immediate plans to change the mining tax system, but added that “government would keep the matter under review and when . . . appropriate, it would see how the regime needed to change”.

KPMG head of energy and natural resources tax Andries Myburgh points out that Gordhan’s statement did provide the mining industry with some comfort, as it was made clear that a thorough consul- tation process would be followed before additional taxes were implemented.

However, there is still no clarity on exactly which tax measures are being considered – whether government is considering the implementation of only a resource rent tax or is looking at other measures as well, he says.

Potential investors in the South African mining industry would like to have certainty about whether taxes will be implemented in the future and, if implemented, what those taxes will be, Myburgh tells Mining Weekly.

Leon adds that the current situation creates uncertainty, especially for greenfield projects, as companies know that additional taxes might be imposed in future, but do not know what those taxes will be. Therefore, the potential effect of these taxes on a company’s return on investment cannot be calculated.

Myburgh says the current income tax system is quite favourable for mining companies as capital expenditure can be claimed as an immediate tax deduction and he emphasises the importance of unambiguous tax legislation.

“If tax legislation is unclear, it simply adds to the uncertainty of what a company’s actual return on investment will be. Any new tax legislation should be made as unambiguous as possible,” he adds.

One way to establish predictability is to include fiscal stability clauses in tax legislation, Myburgh states.

“Some fiscal stability clauses are included in the current Mineral and Petroleum Resources Royalty Act, which means that government and the taxpayer enter into a fiscal stability agreement that stipulates how the taxpayer will be taxed.

“These clauses provide certainty for the investor with regard to the taxes he or she would have to pay when he or she enters into an agreement with government,” Myburgh explains

“While South Africa does have an element of this in its mineral royalty system, I would suggest that, if other forms of tax are introduced, fiscal stability clauses are included to a greater extent,” he adds.

Minerals Resource Rent Tax
The primary tax form suggested by the State Intervention in the Minerals Sector (Sims) report released last year is a minerals resource rent tax.

This form of tax, if introduced, would likely be modelled on the Australian Minerals Resource Rent Tax, which came into force in July last year, Leon says.

“The Sims report proposes a minerals resource rent tax that taxes 50% of a company’s profits, after what is referred to as the normal rate of return on capital investment, which is suggested to be 15%,” Myburgh explains.

However, this would probably be only the starting point for tax discussions and aspects of this will change before it is implemented, he adds.

“The first aspect that would probably change is the tax rate of 50%, as this is quite high. In Australia, the tax rate is 22.5%.”

Further, the normal rate of return might also, through discussions, be a percentage other than 15%, Myburgh adds.

Myburgh explains that the Sims report suggests changing the current royalty system to a flat revenue-based royalty system, which will be 1% of whatever revenue is generated from the sale of mineral resources.

Current Royalty System
A mineral royalty is a rate that is charged on the sales revenue of a commodity and South Africa’s current system can be regarded as a hybrid, Myburgh says.

“Currently, a company’s tax base is its gross sales, which is a defined concept, but the royalty rate is a variable – a function of the profitability of the company. The royalty paid can also be claimed as a tax deduction from an income tax point of view,” he adds.

A minerals resource rent tax, however, is aimed at securing a share of a company’s profit for government after the company has made a reasonable rate of return.

“Thus, a mineral royalty is always levied, whether the company is profitable or not, while the resource rent tax will apply only to companies that make a reasonable rate of return on their capital investment,” Myburgh explains.

Other Forms of Tax
The introduction of an export tax is also proposed by the Sims report. While this form of tax also provides revenue for the State, Leon notes that the main purpose of such a tax is to encourage producers to sell their products domestically.

The ANC’s fifty-third National Conference Resolutions document identifies a list of important strategic minerals, which include minerals for manufacturing, minerals for energy and minerals for agriculture and infrastructure; from this list, strategic minerals that require special public-policy measures will be identified.

The National Conference Resolutions document states: “State intervention, with a focus on beneficiation for industrialisation, is urgently required . . . to support beneficiation and competitive pricing of these strategic resources.” To achieve this, the document suggests the “targeted management of exports of minerals”.

However, Leon points out that the biggest markets for most commodities are foreign. In view of this, he adds that government has to be careful when attempting to reduce the export of these commodities, as mining comprises some 60% of South Africa’s export revenues.

Another form of tax also proposed in the Sims report is a 30% withholding tax on dividends paid to a foreign shareholder which is located in a so-called “tax haven”, Myburgh says.

“Currently, there is a 15% withholding tax on dividends and it is still uncertain whether it will in fact be increased to 30% in the circumstances described above,” he adds.

Process of Implementation
Leon points out that the imposition of additional taxes would have to be effected through legislation. “If government was to take steps to introduce additional taxes, the process could potentially take several years to complete. This is especially the case in the light of the National Treasury’s commitment to engage in a proper consultative process.”

Myburgh agrees with Leon that this process could take a long time.

“For example, the Mineral and Petroleum Resources Royalty Act, of which the first draft was introduced in 2003, became law in 2010, after it went through four drafts.”

“While the process of introducing further mining taxes could potentially take place more quickly than the introduction of the Mineral and Petroleum Resources Royalty Act, it would still take at least two, but probably three or four, years to complete the process,” Leon adds.

Benefits of Higher Mining Taxes
If higher mining taxes are imposed and properly administered, the country could benefit, Myburgh says.

When the mineral royalty was introduced, there was an outcry from communities at the time because they were under the impression that the royalties would go into a fund that would be used to uplift communities; however, the royalties are currently added to the national revenue fund, which is allocated by the Minister of Finance according to his budget, he adds.

“For this reason, the minerals resource rent tax that is proposed by the Sims report to be kept in an offshore sovereign wealth fund, which will be used to inter alia provide incentives for beneficiation and community upliftment. If administered properly and if this provides the certainty and predictability of the types and amount of taxes to investors, it could be beneficial to all stakeholders,” he says.

Leon notes, however, that the National Treasury has, for several years, been trying to bring down the corporate tax rate as a means of encouraging investment. Further taxes, he states, could potentially discourage investment, which is a key driver of growth and employment in the economy.

Leon also states that he does not believe that additional taxes should be imposed on the mining industry at present, as it is already facing a number of other challenges which are threatening the sustainability of several mining operations.

To deal with higher tax rates more successfully, if they are imposed, Myburgh encourages mining companies to discuss tax in the boardroom with senior management more extensively to ensure that the company makes use of all the tax allowances that are available.

“For example, many mining companies are not claiming the existing research and development tax deduction that was introduced in 2006, which allows a company to claim a 150% deduction on its expenditure that qualifies. With a company’s tax rate of 28%, this translates into an extra 14% cash flow advantage,” he states.


Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor


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