The South African Davis Tax Committee (DTC) recently released its first interim report on mining for the Minister of Finance and has called on the public to provide comments on their recommendations. The recommendations take into account the impact on the mining tax system in South Africa, which has evolved over many years by case law, in response to various geological, economic, social and environmental challenges.
Recommendations
1. Capital expenditure (Capex) for non-gold mining companies
The DTC recommends the discontinuance of the upfront Capex deductions, to be replaced with an accelerated deduction method similar to the one in place in the manufacturing industry. Such accelerated deduction will be available from the date that the Capex has been incurred as opposed to the date it has been brought into use as is currently applicable for manufacturing allowances.
To compensate taxpayers for the removal of the upfront Capex allowances, the DTC recommends the removal of the ring fencing rules applicable to the mining operations. However, the removal of the ring fencing rules could have compromising effects on revenue collection in one year as a result of the influx release of the clogged losses and unredeemed Capex set-off against non-mining income. To ensure the most effective implementation, a phased approach may be considered
Should the DTC’s recommendations be accepted, mining taxpayers might be able to set-off their Capex amount against non-mining income within a single entity and against other mines within the same entity. The administrative burden of keeping track of the unredeemed Capex will also be lifted. The alignment of mining allowances with manufacturing allowances will eliminate the need to differentiate between mining operations and manufacturing operations, which has long been a controversial issue.
2. Gold mining formula, Capex and ring fences
The DTC recommends the retention of the gold mining formula for existing gold mines to avoid causing sudden declines in labour, especially in the marginal mines.
Gold mining taxpayers are entitled to additional Capex allowances on top of the Capex allowances applicable to non-gold mining companies. The same ring fences applicable to non-gold mining companies are also applicable to gold mining companies.
Since the gold formula takes into account the profitability of an entity, it is also influenced by the Capex amount. Therefore, the retention of the gold formula necessitates the retention of the Capex ring fences for existing gold mines. This recommendation does not extend to new gold mines on the basis that new gold mines are likely to be established in circumstances where profits are marginal. Recommendations include phasing out additional Capex for gold mining taxpayers to bring the gold mining industry in line with other taxpayers.
Gold mines will then continue with business as usual, save for the additional Capex allowances. The removal of the additional Capex allowances will result in an increase in the tax rate as the profit ratio in the formula will increase. New gold mines will be treated as other non-gold mining companies - subject to a 28% tax rate and will be entitled to accelerated allowances similar to manufacturing allowances.
Alternatively, the DTC recommends the phasing out of the gold formula for all mines over a reasonable period of time, to take into account the neutrality issues when comparing new and existing gold mines.
3. Contract mining
Contract miners are not afforded the same tax incentives as mining companies in possession of mineral rights and are often excluded from participating in the diesel rebate incentives (National Treasury is set to review the diesel rebates system).
The DTC recommends the principles of an agent and principal for contract miners and mining companies holding mineral rights, which involves setting up a comprehensive guide with terms under which they will operate.
With the recommendations of bringing the mining Capex allowances in line with manufacturing allowances, contract miners will be on par with mining companies and the debate over who is mining and who is not will be eliminated. The harmonisation of the different pieces of legislation will ensure that contract miners are able to participate in diesel rebate incentives.
4. Social labour plans
In terms of the MPRDA[1], taxpayers seeking to acquire mineral rights are required to sign a Social and Labour Plan (SLP) in terms of which the mineral right holder is required to assist local mining communities with infrastructure and other social amenities. The challenge with the SLP is that where infrastructure is built for the benefit of non-employees, such expenditure is treated as non-deductible capital expenditure for income tax purposes.
Deloitte’s previous submission to the DTC, included this challenge and recommended recognition of the contributions made by mining companies toward the communities around their operations from a tax perspective. This has been taken into account and includes the recommendation that infrastructural spend for the benefit of the community at large undertaken in terms of the SLP qualify as a tax deductible expenditure.
5. Harmonisation of legislation
The mining industry is governed by different pieces of legislation, such as the MPRDA, MPRR2, Income Tax Act, VAT Act3, Customs and Excise Act4 and NEMA5. The Committee recommends the harmonisation of the different pieces of legislation, especially with regards to definitional issues. In addition interpretational clarity on mining tax provisions as contained in the Income Tax Act is recommended.
Conclusion
The recommendations are still in draft format and require input from various stakeholders before they are made final and conclusive. Taxpayers are encouraged to make their submissions to influence the final outcome of this tax review.
[1] Mineral and Petroleum Resources Development Act No 28 of 2002
2 Mineral and Petroleum Resources Royalty Act No 28 of 2008
3 Valued Added Tax Act No 89 of 1991
4 Customs and Excise Act No 91 of 1964
5 National Environment Management Act No 107 of 1998
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