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Mining In South Africa : Nationalisation vs. Changes In The Tax Regime

22 February 2012   (0 Comments)
Posted by: Author: Sibusiso Tshikovhi
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Mining In South Africa : Nationalisation vs. Changes In The Tax Regime
In my November/December 2011 article Mining–Tax implications of prospecting expenditure’,i indicated that the government might introduce the mining super tax as in Australia if it decided to shelve the contentious idea of nationalisation of mines.since then, a 600-page state intervention in the Mineral sector (SIMS) report, which seems to discourage nationalisation of the sector but proposes fundamental changes, was submitted to the African National Congress (ANC) leaders on 3 February 2012.
Nationalisation is still the buzz word but the authors of SIMS highlighted the following challenges that the government might face:
•There are not enough skills at the State’s disposal.
•There are other operational priorities to consider.
•Complete nationalisation or 51% at market value would be totally unaffordable.
•Nationalisation without compensation would require a Constitutional change and would result in a near collapse of foreign investment and access to finance, as well as widespread litigation by foreign investors domiciled in states that South Africa has trade and investment (protection) agreements with.
The SIMS report will be circulated in and outside the ANC for comments and suggestions ahead of the party’s national conference in June 2012 and the party’s elective conference in December 2012.This could be the reason why Finance Minister Pravin Gordhan’s budget speech tabled on 22 February 2012 neither mentioned nationalisation nor changes in the mining tax regime.

Background Of The Report

The first point of departure for the study was the ANC’s policies and strategies on the so-called people’s minerals resources which have their roots in The Freedom Charter (1955), the Ready to Govern (1992) document, the Reconstruction and Development Programme (RDP, 1994) and the Polokwane Conference (2007) Economic Transformation resolution. In all of these documents, the nation’s mineral assets are seen as a resource to improve the lives of all South African people.

The report was compiled to enable the ANC to present a scientifically researched overview of the minerals sector in particular, as well as international case studies so that any political decision taken is based on an understanding of the real issues and other country experiences.The report attempts to develop policies, strategies and interventions to maximise the growth, development and employment potential embedded in the mineral resources.The authors of the report undertook a series of international visits to the following countries:
•Latin America: Brazil, Chile and Venezuela
•Africa: Botswana, Namibia and Zambia
•Asia: China and Malaysia
•OECD: Norway, Finland, Sweden and Australia.

The methodology used includes hosting a series of stakeholder workshops with government; private sector; research institutions; trade unions; and civil society organisations.This also included commissioning studies/research on a number of critical topics, e.g. the South African Mineral-Energy complex (MEC), and international trends in State ownership by the Raw Materials Group (RMG).

The terms of reference of the research team called for a critical analysis of the existing mining sector, including potential and actual upstream and downstream sectors; mineral related logistics; and energy and environmental sustainability challenges and opportunities. It also included existing State assets in the sector, and present legislation and regulations, including the licensing regulations and the South African Mining Charter.

Current Taxation Instrument In South African Mining

•Royalties: The rate varies depending on the earnings before interest and taxation (EBIT) and gross sales.For refined minerals the maximum rate is 5% and for unrefined minerals, the rate is 7%.
•Corporate income tax: A standard corporatetax rate of 28% is levied on mining companies.
•Withholding taxes (WHT): The taxation of dividends has effectively been increased from the current 10% STC to a proposed 15% dividend withholding tax with effect from 1 April 2012. The validity of existing STC credits has been reduced from five to three years. 
•Capex expensing: Mining companies are eligible for an upfront deduction of all capital expenditure incurred. However, the deduction can be claimed only when the company reaches production stage and subject to sufficient mining taxable income.Assessed losses may be carried forward indefinitely provided the company carries on a trade.

What does the SIMS report  propose?In essence the SIMS report proposes the following:

•No outright nationalisation with or without  compensation. 
•A 50% tax on the sale of mining rights to  prevent speculation. 
•A resource rent tax (RRT) of up to 50%must be imposed on all super profits, defined as anything more than a 22% return on investment. 
•Royalty taxes must be reduced from 4% to1% once the new taxes are introduced.
•Government management of the industry through a new super ministry of mining created by combining the appropriate elements of the Departments of Trade and Industry, Mineral Resources, Energy, Public Enterprises, Economic Development, and Science and Technology.
•The estimated new tax revenue of R40 billion at current prices must be put in a sovereign wealth fund that could be used to temper appreciation of the Rand during commodity booms. 
•A clampdown on the use of tax havens by foreign mining investors through the introduction of a mineral foreign shareholding withholding tax of up to 30%.
•That the ANC investigates State control of mines "in terms of rent share, growth and development, and make targeted interventions to achieve such outcomes”.

International Experience

•Australia: Resources rent tax (RRT) affecting only coal and iron ore, was introduced much lower at only 22.5% than the proposed 50% for South Africa.
•Brazil: A 25% WHT is levied on payments made to persons resident or domiciled in tax havens. Otherwise, it is 10-15%.
•China: A resource tax (RT) is applied; the rate varies according to the type of mineral and is based on sales volume.
•Russia: A minerals resources extraction tax (MRET) is levied at the rate ranging between 3.8 and 8.3% (depending on the type of mineral) based on the value of the extracted mineral.

Jean-Baptiste Colbert, a French politician who served as the Minister of Finances of France from 1665 to 1683 under the rule of King Louis xIv, once said, "The art of taxation consists in so plucking the goose as to obtain the largest amount of feathers with the least possible amount of hissing.” The introduction of mining super tax will not only amount to plucking the feathers but killing the golden goose itself. Even though the issue of nationalisation of all mines seems to fade away, it is evident that the government will do whatever it takes to get the big piece of the mining pie and the above proposals are likely to be adopted by the National Executive Committee (NEC) of the ANC.

We foresee vigorous debates in the near future.The introduction of the e-tolling system was met with immense public, business and union outcry and after several debates and public hearings, the finance minister indicated in his budget speech on 22 February that the government is going ahead with it. Let’s hope and pray that the same approach will not be used with the introduction of mining super tax.
Source: By Sibusiso Tshikovhi (TaxTALK)


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