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A win for the mining industry: The High Court’s recent decision regarding the calculation of a royal

Tuesday, 31 October 2017   (0 Comments)
Posted by: Author: Nandipha Mzizi
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Author: Nandipha Mzizi (cliffedekkerhofmeyr)

A win for the mining industry: The High Court’s recent decision regarding the calculation of a royalty

In the recently decided matter of United Manganese of Kalahari (Proprietary) Limited v Commissioner for the South African Revenue Service (74158/2016) [2017] ZAGPPHC 628 (3 October 2017), United Manganese of Kalahari (Proprietary) Limited (UMK) applied to the Gauteng Provincial Division, Pretoria (High Court) for declaratory relief in relation to the correct interpretation and application of s6(3)(b) of the Mineral and Petroleum Resources Royalty Act, No 28 of 2008 (Royalty Act). SHARE PAGE Facts

UMK conducts ‘mining operations’ as defined in s1 of the Mineral and Petroleum Resources Development Act, No 28 of 2002 (MPRDA). It is an ‘extractor’ of an ‘unrefined mineral resource’ (it mines unrefined manganese) and is liable for payment of a ‘royalty’ in terms of s3 the Royalty Act.

The High Court explained that as part of the value chain, the manganese ore is loaded onto trucks or trains for delivery to UMK’s customers. UMK bears the obligation to incur all costs necessary to effect delivery of the manganese from the mine to its customers, if so required in terms of the relevant contract delivery terms. These costs include transport, insurance and handling (TIH) costs. In its royalty calculation for the 2010 and 2011 years of assessment, UMK calculated its gross sales by deducting the TIH expenditure from the amounts it received in respect of its transfer of manganese.

The South African Revenue Service (SARS) conducted an audit and after numerous correspondence between the parties, SARS issued a letter of audit findings in relation to UMK’s royalty payment for the 2010 and 2011 years of assessment. The letter of findings stated, among other things, that UMK incorrectly deducted transport and distribution costs from gross sales and in so doing it estimated these costs instead of using actual costs incurred. UMK maintained that it determined its gross sales in terms of s6(3)(b) of the Royalty Act with reference to expenditure actually incurred by it, and not based on any estimated figures as SARS alleged.

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