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The uncertainty of tax for mining & prospecting companies
Benjamin Franklin once said “but in this world nothing can be said to be certain, except death and taxes.” With regard to the taxation of mining and prospecting companies that are tax resident in South Africa and its non-tax resident shareholders this is arguably a half truth. What is certain is that they are subject to taxes. Taxand South Africa explores how unpredictable the type of taxes and amount of tax charged is for the industry.
The first uncertainty mainly originates from the “State Intervention in the Mining Sector” or so-called SIMS report that the ANC issued and the recommendations contained therein regarding the proposed fiscal changes to the taxation regime for prospecting and mining companies, the most notable being the recommendation to introduce a mineral resource rent tax, similar to what Australia introduced a few years ago which received significant opposition and criticism.
The second uncertainty stems from the difference in interpretation by taxpayers and the South African Revenue Service (SARS) of the existing and complex tax laws applicable to mining companies and prospecting companies. This is fuelled by SARS being under pressure to collect revenues in an industry where companies’ profits have shrunk significantly (due to rising costs and the decline in commodity prices) and in most instances are making losses. This has had a direct impact on the amount of income tax and mineral royalty collections from these companies.
As a result, in the integrated tax audits that SARS conducts on mining and prospecting companies some of the areas of tax that SARS focusses on are the following:
- Mining operations versus manufacturing operations
- The tax treatment of prospecting expenditure
- The application of the “ring-fencing” provisions
- Mineral royalties
- Diesel rebates
- Mining housing
- Social and labour plan costs
- Merger and acquisition transactions
- Understatement penalties
Also published in Thomson Reuters' Taxnet Pro, 29 November 2013
From a foreign direct investment perspective certainty and predictability are 2 key factors for investors when deciding on whether and the quantum of the investment they would introduce into a country. It was therefore very refreshing when the Minister of Finance announced the establishment of the Davis Commission to investigate the tax system including the taxation of mining companies. Hopefully Judge Davis will take the afore-mentioned and other taxation issues into consideration when the time comes to address the taxation of mining and prospecting companies to make this industry attractive again for foreign investors.
Until such time, mining and prospecting companies and their shareholders should take advice from their mining tax advisors when faced by challenges by SARS or making investment decisions, where the types of taxes and the quantum thereof, due to the complexity thereof, no doubt plays a significant role.