South Africa Ruling Could Risk Loss of Mining Capital Allowances

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By Edwin Naidu

Oct. 28 — A South African appeals court ruling involving a subsidiary of Impala Platinum Holdings Ltd (Implats)—the second largest producer of the world’s platinum—is creating concern that companies in the sector could be forced to accept less favorable capital expenditure allowances due to confusion caused by the ruling over what constitutes mining.

In a case between the South African Revenue Services and Implats subsidiary Marula Platinum Mines, the Supreme Court of Appeal ruled that the company’s processing of mineral ore into mineral-bearing concentrate was a process of manufacturing and, as such, the ore and concentrate produced by Marula was trading stock, as defined in the Income Tax Act.

According to the Sept. 22 decision, the manufacturing process is therefore subject to the tax regulations.

Tax figures in the mining sector are concerned that SARS’ consideration of mining and manufacturing being mutually exclusive could force companies to accept less attractive manufacturing capital expenditure allowances—granted to a manufacturer over a four-year period.

Mining companies however are permitted to claim 100% of capital expenditure immediately after completion of a project

Laetitia Le Roux, an associate director and income tax expert with PricewaterhouseCoopers in Johannesburg, warns that this could mean severe income tax implications for companies in the mining and manufacturing sectors.

In essence, this could result in each sector having its own taxation formula, she said.

The court had to deal with an appeal by SARS and a cross-appeal by Marula Platinum Mines against a decision handed down by the Tax Court for Marula’s 2007, 2008 and 2009 years of assessment.

Mutually Exclusive

The appeal court’s judgment, according to Le Roux, has created confusion over what constitutes mining and led to concern about what would happen if SARS considered both industries mutually exclusive.

“The key concern is that less favorable manufacturing capital allowances might be applied by SARS in respect of operations that are within the scope of the definition of ‘mining’ to the detriment of the producers who may have made investment decisions that are predicated on the understanding that the activity in question is a mining process,” she said.

There are also concerns over potential wider ramifications, Le Roux says, since the court failed to provide clarity on the definition of mining according to the regulations.

“This judgment conveys the impression that mining is considered by the Justices in the SCA as comprising only the excavation and bringing to the surface of mineral bearing rock,” Le Roux said.

That view, she said, isn’t consistent with the definition of “mining” and “mining operations” as contained in the Income Tax Act. “It is a matter of concern that assertions that processing of mineral bearing rock is a mining operation are swept aside without the court providing any judicial interpretation of the definition,” she said.

Fear of Losing the Allowance

Julie Winnan, a Johannesburg-based senior corporate tax manager at KPMG, told Bloomberg BNA there was a fear in the mining and manufacturing sector that SARS would use the ruling to do away with the capital expenditure allowance in the mining industry.

“The ruling has created uncertainty. We don’t know if SARS will use the ruling to address this issue with the mining industry or wait for the findings of a report on allowances by the Davis Tax Committee,” she said.

Winnan added that the tax authority has long considered where mining stops “from a tax perspective.”

“There is a fear that SARS may use the ruling to stop allowances, which would impact the mining industry negatively,” she said.

Implats’ chief financial officer, Brenda Berlin, told Bloomberg BNA the company won’t review the ruling any further through legal means.

“We are working on the understanding that it is a narrow rule,” she said, adding that the company is “not too concerned” about the ramifications of the ruling since it deals with the timing of tax payable.

Berlin added that the case, which dates to 2007 when the company objected to SARS disallowing certain mining expenses, resulting in the legal process that then unfolded.

In the meantime, she said the firm has paid its taxes in accordance with SARS requirements during the legal process.

SARS didn’t respond to a request for comment.

To contact the reporter on this story: Edwin Naidu in Johannesburg at

To contact the editor responsible for this story: Penny Sukhraj at

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