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Proposed changes to mining tax code questioned

Thursday, 12 November 2015   (0 Comments)
Posted by: Author: Amanda Visser
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Author: Amanda Visser (Mineweb)

Piecemeal government intervention in the mining industry has played an undeniable role in the steady decline in the industry over years.

Representative tax bodies warned that recommendations by the Davis Tax Committee in its provisional interim report on further policy changes will only create more uncertainty. The committee published its report at the end of August and allowed stakeholders until the end of last month to comment on its proposals.

The South African Institute of Tax Professionals (SAIT) said in its submission to the committee that new mining investment has dried up. "Further significant new investment into the local mining sector is doubtful given the overall political and regulatory uncertainty existing within the South African environment,” says SAIT deputy CEO Keith Engel.

"Therefore, it is questionable whether the effort to create a new regime is desirable or outweighs the costs of further disruption … We would accordingly suggest that the regime be left in place as a matter of stability to avoid further perceptions of piecemeal government intervention,” Engel says.

One issue of concern is contract mining and the tax treatment of this new mining business model.

The Davis Tax Committee says in its report the mining industry has changed substantially over the last 20 years, creating an environment conducive to smaller entrants to meaningfully participate in the mining industry. "Existing tax legislation predated, and perhaps did not envisage, all the tax ramifications flowing from contract mining which now forms an integral part of the mining dispensation,” the committee says.

Engel says the traditional mining tax regime was designed on the implicit basis that the owner and operator were largely a single taxpayer. "The growing split between ownership and activity was not envisioned.  Concerns exist that this lack of control could result in duplicated allowance claims or artificial income shifting.”

The bottom line is that the South African Revenue Service is concerned about double deduction claims (from the owner and the contractor) whilst industry is concerned of double deduction denials. The split is mainly due to specialisation, regulatory black economic empowerment requirements, and delays in granting transfers by the Department of Minerals and Resources. From SARS’s perspective, contract mining creates an unfortunate lack of control despite the commercial realities, Engel says.

The Davis Tax Committee says a possible solution to the problem lies in recognising that the principles of an agency and principal need to be firmly co-ordinated for the contract mining system to function properly. This means that the person doing the contract mining should not be operating as an independent contractor, but strictly as an agent for the principal who holds the mining right.

The committee recommends a template which should contain contract terms designed to ensure the contract miner conducts mining on behalf of its principal as opposed to conducting mining on an independent contract miner basis.

This way most contract miners will be able to claim a manufacturing tax allowance in pursuance of their mining activities.

Engel says the allowance rules, in terms of the definitions, differ for mining and manufacturing. In terms of the manufacturing allowance, the person claiming the allowance must be the owner and user of the asset. The mining regime does not appear to have any specific requirements that the party claiming the allowance must own the mine.

The question perhaps is not so much mining versus contract mining, but the simple ownership of the equipment to be depreciated.

Engel says a reasonable answer clearly can be found if the all the stakeholders are at the table with the factual context and compliance concerns fully presented and understood.

This article first appeared on



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