JOHANNESBURG (miningweekly.com) - South Africa’s gold tax formula has rewarded the State and mine shareholders in equal measure, data covering a period of 60 years shows.
South African gold-mining figures from 1951 to 2011 show that the government has received the same percentage of gold-mining revenue in tax as investors have received in dividends.
“It solves today’s question of super taxes and ensures an adequate participation by the State in times of high gold prices,” says Imara Asset Management investment manager Bruce Williamson, who has augmented information compiled by former Anglo American tax consultant Marius van Blerck, author of Mining Tax in South Africa.
Taking the gold-mining industry as a single entity, just over 7% of revenue was returned to shareholders as dividends and virtually the exact same percentage was paid to the government in direct taxation, Williamson tells Mining Weekly Online in the attached video interview.
The government received far more than shareholders, however, when the taxes paid by mine employees and mine suppliers are taken into account.
Moreover, the substantial forward and backward capital expenditure and working cost linkages have given rise to the creation of large self-sustaining cities like Johannesburg itself.
Williamson enthuses about the mechanisms that have been built into the tax formula that take into account the long-term nature of mining investment as well as the risks that variable orebodies present.
The formula’s so-called tax tunnel, he says, caters correctly for differing orebody sizes and grades by charging no tax when a mine’s profit-to-revenue ratio is less than 5%.
As the mine’s profit-to-revenue ratio exceeds 18%, the formula then increases the tax to a level greater than the flat-line corporate tax rate.
Ultimately, as the mine moves into the so-called super profit level, it pays 50% more than the flat-line corporate tax rate.
The formula has been applied to precious metals and minerals since 1918, and to taxable gold income since 1936, and may have had its real origin in a progressive formula system used in Germany for potash mining.
The tax tunnel, he says, encourages the mining of marginal ore and discourages the frowned-upon practice of high grading.
“From a public and a government point of view, you want mining companies to take the opportunity to mine marginal ore, and not pick the eyes out,” Williamson adds.
The gist of the system is that it reduces the tax burden on mines with a low profit-to-revenue ratio and levies high taxes on mines with high profit-to-revenue ratios.
Up until 1945 a combination of the progressive formula, a flat basic tax and a dividend withholding tax was applied to the gold mining companies.
Then in 1945 a committee chaired by Dr JE Holiday was formed to investigate gold mine taxation once again.
The Holloway Committee Report of 1946 supported the continuation of a formula basis of taxation as the sole gold income tax-gathering mechanism and created the 6% tax tunnel and a marginal tax rate of 70% on revenue outside of the tunnel.
The effect, says Williamson, was a 14% lowering of the ore pay limit.
Since 1946, the formula system has been the sole mechanism used to calculate income tax for gold mining companies, although the parameters have changed from time to time in line with the corporate tax rate.
In recent years, gold mining companies have been offered the opportunity to choose between the gold formula and the flat-line corporate tax rate.
The gold formula was at its most punitive in 1989.