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Miners spared windfall taxes

Tuesday, 18 August 2015   (0 Comments)
Posted by: Author: Linda Ensor
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Author: Linda Ensor (BDlive)

The Davis Tax Committee has made a far-reaching recommendation that the mining sector’s special tax dispensation be scrapped and that it be taxed in the same way as other economic sectors.

The proposals relate to the special regime for the upfront write-off of capital expenditure and the extra capital allowances not enjoyed by other sectors.

A further recommendation of the committee in its first interim and provisional report on mining tax is that the gold mining formula be retained only for existing gold mines and not apply to new mines. Alternatively the formula should be phased out for all gold mines over time.

The committee rejected calls — some of them from the African National Congress — for the imposition of new mining taxes such as windfall taxes, rent resource taxes, surcharges based on cash flows and separate flat royalty charges. It said these measures were not necessary because there were mineral royalties that should be retained.

The report, which has been submitted to Finance Minister Nhlanhla Nene said it was time to align the mining income tax regime with that applicable to other sectors.

The Chamber of Mines was not ready to comment on the recommendations on Thursday while Webber Wentzel mining expert Peter Leon welcomed the endorsement of tax neutrality.

Glencore’s head of tax Henry Nysschens said that the mining industry would have to work with the Treasury to consider the effect of the recommendations on an already "fragile industry".

Edward Nathan Sonnenbergs tax partner Andries Myburgh said the proposals would affect mining companies differently as circumstances of each varied.

The committee recognised that "sensitivity and careful management" would be required in introducing the significant changes into an industry already under "severe strain".

Among the recommendations are scrapping the 100% upfront capital expenditure (capex) write-off regime and replacing it with the accelerated depreciation of the manufacturing sector, which has a 40/20/20/20 write-off system. The write-off would be from the date of incurring the expenditure as opposed to when it was brought into use. The partial allowances already provided for in the law would retain their current write-off periods.

The capex write-off proposal would pave the way for the removal of ring-fences, meant to prevent the set-off of capital expenditure against the nonmining tax base. The removal would promote investment.

The committee recognised that the immediate removal of ring-fences could trigger "a stampede" of trapped losses and unredeemed capex set-offs against nonmining income and other previously ring-fenced mining income, which would reduce tax revenue.

A preliminary estimate by the South African Revenue Service is that the fiscus would lose R903m in tax if ring-fences were removed over a single year. The Treasury would have to decide on the timing of their removal on the basis of affordability.

Additional capital allowances should be phased out, the report said, as gold mines should be able to claim tax deductions for interest costs like other taxpayers.

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