Investing in and Divesting of South African Mining Assets
01 October 2013
Posted by: Author: Katherine Boel
Author: Katherine Boel (ENS)
It is common knowledge that investing in a South African prospecting or mining company is a long term, capital intensive and risky investment. Potential investors seek not only security over the assets but also an attractive return on investment. One of the starting points when investing in a South African prospecting or mining company would be to set up an acquisition structure in a favourable jurisdiction. Commercially, the key considerations would include the stability of the country’s economic and political climate, whether such jurisdiction has a bi-lateral investment treaty ("BIT”) with South Africa, the in country laws and regulations as well as the tax advantages which that jurisdiction may offer, not only upon investing but also upon a future divestment of its interests.
From a security or protection viewpoint, a jurisdiction with a BIT is very important. From a return of investment perspective, proper tax planning is imperative and here a jurisdiction with a favourable double tax agreement ("DTA”) is preferred, providing for reduced rates of withholding tax on dividends, interest and royalty payments and also relief against the imposition of South African capital gains tax when the multinationals divest of their investments in the South African mining assets.
For these reasons, various multinationals with interests in South African mining assets have structured their share investments through countries that have a favourable DTA and BIT with South Africa. This would typically include Luxembourg, the Netherlands and until recently, Mauritius.
The new DTA between South Africa and Mauritius may be the end of Mauritius being used for investments into South Africa. The new DTA is set to be effective from 1 January 2015 and one of the most notable changes is the article dealing with the taxation of "Capital Gains”. The DTA now grants the taxing rights to South Africa (as opposed to Mauritius) where a multinational disposes of its share investments in what is typically referred to as a South African "property rich” group (i.e. where more than 80% of the market value of the shares being disposed of is attributable, whether directly or indirectly, to immovable property located in South Africa). The threshold in terms of the DTA is only 50%, however this does not seem to help the taxpayer in anyway as the DTA only applies where a risk of double tax may arise. As a result, whenever the domestic 80% threshold is met, South Africa will be granted the taxing right upon the disposal of the shares. The DTA therefore affords the taxpayer no relief and the position is equivalent to a taxpayer investing into South Africa through a country which does not have a DTA with South Africa. The question therefore is whether the remaining favourable DTAs with South Africa will follow suit? Changes to the DTAs, along with the phasing out by South Africa of many BITs and the labour unrest in the mining sector are all deterrents to foreign investment. Is this the end of tax efficient planning of the investment and potential divestment of shares in South African prospecting and/or mining companies?
What becomes increasingly evident from the changes to the Capital Gains article in the DTA between South Africa and Mauritius, as well as the changes to section 9H of our Income Tax Act, which is discussed by my learned colleague Mathabo Magolego in her August article "Exit charge: SARS takes its own”, South Africa is serious about securing its taxing rights upon the disposal of shares in a South African property rich group. But what does this mean for investors? As a starting point, investors now need to consider whether their investment is in fact in a South African property rich group or not. This is particularly important in the mining industry which is assumed to be "property rich”. But is this really the case? Have investors actually analysed the nature of the underlying assets of their investments and have they categorised such assets between movable and immovable property? In considering the above-mentioned analysis it is important to understand the nature of the prospecting rights and/or mining rights held by the South African companies. For example, where mining companies are involved in the re-treatment of tailings, how does this affect the analysis?
The above analysis is relevant where interests in South African mining assets are for example, spun out. In this instance one would expect this only to affect the non-resident seller. Although the non-resident seller bears the potential capital gains tax liability upon the disposal of its interests, the capital gains tax withholding obligation of 7.5% of the purchase price rests with the purchaser. If the purchaser fails to withhold, it could be liable towards SARS. This is evident from the wording of section 35A of the Income Tax Act which applies where the seller is a non-resident.
Multinational companies who have invested in South African mining assets, especially those who have invested through Mauritius, should act proactively in understanding the tax status of their investment. This is relevant whether they intend selling, holding or expanding their interests in South Africa and also whether their investment should be restructured to manage their inevitable tax bill and the impact thereof on the return of their investment.
This article was first published on ens.co.za