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Mines and tax neutrality

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

When Judge Dennis Davis briefed Parliament a few months ago on the work of the advisory committee on tax that he chairs, he said that the tax system could not solve all the problems facing SA, though it did have a role to play in economic growth, job creation and fiscal sustainability.

The committee’s interim report on mining tax, released last week, opens with similar sentiments. It notes that investor confidence in the mining sector has been eroded by low commodity prices, labour and electricity troubles — but emphasises that tax policy’s effect on confidence is "relatively unimportant".

The committee’s mining tax recommendations are sensible, thoroughly researched and, broadly, to be welcomed. There is plenty of room for debate about the specifics, but it has at least started a conversation about how best to align the requirements for good tax policy and sound fiscal policy with the needs of the mining industry, putting evidence and the arguments on the table.

Chief among its recommendations is that SA should move towards getting rid of the special taxation regimes that historically applied to mining. The tax system for mining took into account the long lead times involved in developing new mines, providing tax concessions for companies making the large, upfront capital investments that were required.

In gold mining, a unique formula was designed decades ago to provide an incentive for mining houses to invest on a grand scale in deep-level mines that were an important driver of SA’s economic development and to protect marginal mines.

The special tax regimes helped to incentivise investment in SA and influenced the structure of the mining industry and mining houses because mines had to be ring-fenced for tax purposes.

Now, the committee recommends that mining should not get different treatment from other sectors — the principle of tax neutrality should apply. Fortunately, it is not suggesting that existing mines suddenly lose the tax concessions on which they were founded, but that neutrality be phased in over time as that it apply in new mining development.

The world of mining has changed and the industry is much less important to the economy than it used to be. So the committee’s approach is welcome because it responds to changing times.

Tragically, however, hardly anyone wants to invest in South African mining — particularly new gold mines — given the policy uncertainty about issues such as black economic empowerment, labour turmoil, electricity shortages and low commodity prices — to which the committee’s report alludes.

Aligning mining and manufacturing tax, as the committee suggests, can’t do much harm, if carefully done.

The door clearly needs to remain open, however, to other initiatives or incentives that might help to create an environment that is friendlier to mining investment.

The committee’s report, happily, injects some sense into a policy debate that seems to come up too frequently with proposals for new resource rents. Its other key recommendation is that proposals for windfall or other similar taxes are unnecessary — the mining royalty legislation, enacted in 2010, effectively already provides for taxing windfalls because the royalties it extracts are based in part on mines’ profitability.

The committee has taken an encouragingly holistic view on this issue, as well as on that of the investment that mines are required to make in terms of the mining charter’s social and labour plans, which the committee recommends should be tax-deductible.

Unfortunately, its holistic approach has not extended to include the effect on mining of the proposed carbon tax, which is the subject of a separate report.

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