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Tax consequences of nationalisation

Tuesday, 16 October 2012   (0 Comments)
Posted by: Executive Office, Stiaan Klue
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I cannot tell: the world is grown so bad,
That wrens make prey where eagles dare not perch:
Since every Jack became a gentleman
There's many a gentle person made a Jack.

William Shakespeare, King Richard III, Act I, Sc. 3.

Nationalise! Nationalise! Nationalise! Sounds the chorus - from the SACP asking for the nationalisation of mines to NUMSA singing the praises of a nationalised food industry, banks, telecommunication and transport.

From a global perspective governments are under pressure to maintain spending levels in an economy that delivers fewer taxes. As a result governments feel compelled to develop new sources of revenue.

The Argentina government recently took steps to expropriate 51% of the Repsol oil subsidiary YPF. Australia is implementing new taxes on their mining industry. According to recent media reports the mooted taxes are seen as more draconian than nationalisation. Business Report quoted the CEO of AngloGold Ashanti’s South African operations, Mark Cutifani as stating that Australia's tax policies are more of a worry than calls within South Africa's ruling party to nationalise mines and impose more duties. In Indonesia the government introduced new taxes on the export of 65 different forms of minerals.

The ANC’s national executive committee commissioned a report to assess the best options for South Africa. The report noted that nationalisation of all listed and non-listed mining companies would cost more than R1 trillion. As an alternative the report proposed several new taxes including a "resource rent tax of 50% kicking in when mining companies makes a reasonable return”.

It is proposed that the additional revenue generated would be allocated to a sovereign wealth fund. Part of the funds could be earmarked for the development of infrastructure, skills and geological knowledge to the benefit of the minerals sector.

Before we embark on any form of nationalisation we should also consider its tax consequences. The ANC has identified a potential tax bill of R1 trillion to nationalise all mines but perhaps this figure is too conservative.

To better understand the broader tax consequences we should consider the potential reach of nationalisation.

Is the plan to nationalise only some mines or all mines? What about the supply chain? Should it not also be considered to nationalise suppliers to the mining sector? Do we nationalise the mine or the complete mining supply chain? Do we nationalise a hole in the ground or also the means of extracting and selling the minerals? Can a mine be isolated from its nexus of water, transport, tools, machinery, labour, consultants, buildings, and training and education? What about tax advisors? Nationalisation will result in a loss of clients as their will be only one client – the government. Should they be compensated for the loss of revenue? Will the state buy a share in these supporting businesses or just nationalise all of them?

Presumably a nationalised mine does not pay taxes as all "profits” are transferred to the state. But how much profits should be transferred? Are the mine labourers not entitled to a bigger share in profits in the form of higher salaries? Will their salaries increase by 10% or 1110%? Alternatively the taxpayer might feel that his tax burden is already too high because of the mines not paying their fair share of tax all these years. Is the taxpayer not entitled to a tax break of say 10% or even 110%?

A nationalised sector will bring the taxpayer in direct conflict with the mine labourer, consultant and other suppliers.

It will surely take a wise and brave man to decide who should benefit the most, whose special interest will prevail.



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