The Mineral and Petroleum Resources Royalty Act 28 2008 (MPRRA) commenced 1 March 2010. The initial commencement date of 1 May 2009 was postponed by 10 months by the Minister of Finance, when the effects of the global credit crisis, also on the mining industry, became apparent.Many submissions were made to National Treasury and four drafts of the bill were released before the MPRRA became law.
In May 2010, two months after the MPRRA commenced, the draft Taxation Laws Amendment Bill introduced further changes to the MPRRA, inserting new definitions and clarifying or amending the MPRRA. The many submissions, drafts and the recent proposed amendments to the MPRRA confirm Cawood’s commentary that "stakeholder consultation is alive and well in SA” and also confirm his comment that "there is no off the-shelf universal or best practice mineral royalty solution, which means that any royalty regime reflects a trade-off of vastly different positions”.
The MPRRA is a short act, containing 18 sections and two schedules. Its purpose is to impose a royalty on the transfer of mineral resources. In addition to the MPRRA, the Mineral and Petroleum Resources Royalty Administration Act 29 of 2008 (Administration Act) was promulgated to administer matters regarding the imposition of a royalty on the transfer of mineral resources.
This article highlights the most interesting recent amendments and proposed changes to the MPRRA and to the Administration Act.
Changes to existing definitions And new definitions
The definition of ‘transfer’ is one of the triggers for the imposition of the royalty.The effect of the proposed amendment is to delete the reference in the definition of transfer to the export of mineral resources. Transfer will be defined as "the disposal of a mineral resource or the consumption, theft, destruction or loss of a mineral resource (other than by way of flaring or other liberation into the atmosphere during exploration of production) if that mineral resource has not previously been disposed of, consumed, stolen, lost or destroyed”.
The removal of the reference to export in the definition is necessary to reflect commercial practice– certain companies temporarily export mineral resources for refining before the mineral resources are returned to South Africa, where after they are disposed of. SARS’ view is that the royalty will become payable only when the mineral resources are sold abroad, but not upon the earlier export of the mineral
The proposed new definition of the phrase ‘wins or recovers’ in the draft bill rectifies an omission.The royalty is triggered where mineral resources are won or recovered and transferred, but to date the MPRRA has failed to define the phrase ‘wins or recovers’.The proposed definition is that it will mean every method or process by which a mineral resource is won or recovered from the soil or from any substance or constituent thereof. The explanatory memorandum to the draft explains that:
•Mineral resources are won or recovered in various ways (i.e. from a mine mouth, bulk ore or residue stockpile).
•The effect of the proposed new definition is that bulk minerals taken out of the ground and placed in a residue stockpile will not be regarded as having been won and recovered, because this will amount only to the moving of the mineral resources.
•Similarly, the mere sale of ore is not a win or recovery.
An example is given in the explanatory memorandum:
Facts: Company X removes various bulk minerals and places those minerals in a residue stockpile. Six months later, Company X sells the residue stockpile to Company Y. Company Y then extracts and refines the minerals from the stockpile. Company Y eventually sells the mineral resources so extracted and refined.
Result: Company X is not subject to the royalty because Company X has never won or recovered the mineral resource. However, Company Y will be subject to the royalty when Company Y undertakes the sale.This change merely clarifies the fact that the royalty becomes payable when the mineral resources is won or recovered and is transferred.
Change to the charging section
The draft bill also proposes amending the charging section of the MPRRA, section 2, by the insertion of the word ‘originating’, so that the section reads: "A person that wins or recovers a mineral resource originating from within the Republic must pay a royalty for the benefit of the National Revenue Fund, in respect of the transfer of that mineral resource.” The explanation given for the change is that the royalty should also apply in the case of mineral resources that have been sent abroad for stockpile purposes, and are subsequently sold. The amendment is intended to ensure that the entity that eventually won or recovered the mineral resources cannot argue that the mineral resources had not been won or recovered from within the Republic, and so try to avoid liability for the payment of the royalty. notional upliftment of expenditure
The bill amends section 5 which sets out the content of the phrase ‘earnings before interest and taxes’ (EBIT) as used in the formula in section 4 of the MPRRA. The proposed amendment applies where mineral resources are transferred below a minimum level of beneficiation and allows a notional upliftment to apply to the expenditure incurred in respect of the mineral resources. The comment in the explanatory memorandum is that the upliftment theoretically corresponds with the notional upliftment that would have occurred had the mineral resource been transferred in the specified condition.
Rollover relief for domestic refining
The draft bill also proposes rollover relief for domestic refining by introducing a new section, section 8A. Section 8A exempts an extractor from paying the royalty, where the extractor transfers a mineral resource to another extractor, if three conditions are met:
•Both extractors are registered in terms of section 2(3) of the Administration Act.
•The transfer happens so that the mineral resources can be refined in the Republic.
•Both extractors agree in writing that section 8a applies to the transfer.
If these conditions are met, the extractor to whom the mineral resources are transferred is deemed to be the person that wins or recovers the mineral resource. The explanatory memorandum goes slightly further than the wording of the bill and states that the transferee must agree to assume the royalty liability as if the extractor initially won or recovered the mineral resource. Changes regarding to specified conditions and specific provisions relating to vanadium and ferrochrome.
The draft bill contains several provisions which persons with no engineering or mining background might be tempted to classify as technical. For example, it clarifies how mineral resources with a range of specific conditions within Schedule 2, should be treated, by inserting a new section 6A. The draft bill also changes the requirement that concentrated unrefined mineral resources which are typically transferred with ancillary mineral resources (known as by-products) must be treated separately for purposes of the MPRRA.
The compliance burden is significant and the proposed change allows all minerals and metals contained in a single concentrate to be regarded as part of the dominant mineral resource that is transferred.The draft also proposes changes to schedule 1 to allow for the conditions in which vanadium is often transferred. Similarly, schedule 1 will be amended to reflect the market dimensions of ferrochrome.
The mineral and Petroleum Resources Royalty (administration) act, 2008
The draft Taxation Laws Second Amendment Bill of 2010 p roposes changes to the Administration Act, some of which are highlighted in this article. The definition of ‘person’ in the Administration Act will be amended to include an unincorporated body, if its members make an election to be deemed a person for purposes of the MPRRA.Various commentators had previously pointed out the practical difficulties experienced by unincorporated bodies such as joint ventures that might be affected by the MPRRA. This article does not analyse whether all those difficulties have been adequately addressed.The Taxation Laws Second Amendment Bill of 2010 proposes that section 4 be amended by changing the requirements that will allow unincorporated bodies to elect to be treated as a person for purposes of the MPRRA. The pre-conditions for the election are that:
•One or more members of the unincorporated body had to hold prospecting rights retention permits, exploration rights, mining rights, mining permits or production rights, in their own name.
•The unincorporated body must carry on prospecting or mining operations.
•The unincorporated body must consist of two or more members.
Section 5 of the Administration Act deals with the two estimated royalty payments that taxpayers have to make and clarifies the procedure to be used for calculation of the first payment, where there is a shorter than normal year.
The Administration Act also offers relief in cases where the estimated royalty is too low. Previously the legislation required 90% accuracy,failing which the commissioner become entitled to impose a penalty of 20% of the excess.This has been reduced and now only 80% accuracy is required in respect of the estimated royalty payments.
No doubt much will still be written about the MPRRA and the Administration Act. These acts are detailed and technical and the changes to them regular and often also significant – this is further proof of the consultation that takes place regularly between the industry and the legislature. Footnotes have been omitted but references are available by contacting the editor.
Source: By Betsie Strydom (TaxTALK)