South African Tax Committee Urges Changes for Mining Sector

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By Marcia Klein

In a move to align taxation of South Africa’s mining sector with global practices, a tax committee—led by Judge Dennis Davis—has recommended discontinuing upfront capital expenditure write-offs and removing ring fences in the sector.

“The aim of the proposals is to try to bring mining tax gently into kilter with the rest,” Davis told Bloomberg Tax Nov. 13. “South African mining tax is predicated on a formula used a long time ago and it is inappropriate for our time. At the same time, we are conscious of the fragility of the mining industry and have accommodated for it.”

The Davis Tax Committee, appointed by the government to review the country’s tax policy framework, issued its final mining report Nov. 13.

Currently, tax incentives available exclusively to mining taxpayers include upfront capital allowances for exploratory and development expenditures, and deductions for provisions for the closure and rehabilitation of mines.

Gold miners are also entitled to an additional annual tax incentive of 10 percent or 12 percent (depending on the date the mine was established) of their qualifying capital expenditure balance. Their tax rate is determined by a formula that creates a “tax tunnel” at an increasing marginal rate depending on profitability.

There are also ring fence provisions aimed at limiting the benefits from the tax mining allowances to mining taxpayers only.

Legitimate Claims

On income tax and the mineral royalty charge, imposed under the Mineral and Petroleum Resources Royalty Act, the committee proposed introducing a mechanism to distinguish between true mining companies and contract suppliers to the industry. Contract miners, who often do not hold mining rights, should not be operating as independent contractors, the committee stated, but strictly as agents for the principal who holds the mining right. Most contract miners would be able to claim a manufacturing tax allowance for their contract mining activities.

Additional Taxes Rejected

The committee didn’t accept additional taxes suggested for the sector, including windfall taxes, rent resource taxes, surcharges based on cash flows and separate flat royalty charges. The committee said such additional tax instruments aren’t necessary, “particularly since the mineral royalty has been carefully designed to balance responsiveness of the royalty to different economic circumstances, capturing rents when profits are high and ensuring a measure of cover (for the fiscus) in the form of a minimum revenue stream during weak economic cycles and low commodity prices. The mineral royalty charge is reasonably new and, thus, needs to be given a chance to prove itself.”

Royalties are charged on the transfer of mineral resources according to a formula with a minimum of 0.5 percent on adjusted gross sales up to a maximum of 7 percent based on profitability. The committee stated in its report that “it is time to work towards aligning the mining corporate income tax regime more closely with the tax applicable to other taxpaying sectors,” while the system of royalty payments would be left “to respond to the non-renewable nature of mineral resources.”

The committee said that it has “not been persuaded that the current mining tax system does much to encourage the much sought-after investment which these rules were originally intended to attract.”


The recommended changes include discontinuing upfront capex write-offs and replacing them with an accelerated capex depreciation regime, with capex written off from the date expenditure was incurred. According to the report, this would in turn pave the way for the removal of ring fences aimed at preventing the set-off of future capex expenditure against the tax base of other mines and against non-mining income.

The committee said this would “adequately compensate taxpayers for the removal of the upfront capex allowance and the lost tax benefits associated with falling within the tax tunnel”.

The committee recommended the removal of ring fences going forward, pointing out that 140 billion rand ($9.8 billion) in unredeemed capex is currently being carried forward by taxpayers and this could not be absorbed by the fiscus if this were converted to an assessed loss without ring fences in the future.

Mining taxpayers with a profitability ratio below 5 percent are exempt from tax on taxable income, while mines are taxed at an increasing marginal rate, depending on profitability. The committee has suggested that this gold mining formula be retained for existing gold mines but should not apply to newly established gold mines.

Clarification Needed

Areas of the royalty regime did, however, need to be “clarified and improved.” While it rejected requests to channel a portion of royalties directly to mining communities, the committee recommended that a task team investigate discrepancies and inconsistencies in requirements for upfront financial provision to mitigate environmental damage when mines are closed.

Commenting on the latest black-economic empowerment charter for the mining and minerals industry, the committee cautioned policy makers “of the importance of designing future mining tax legislation with full cognition of the spectrum of costs being imposed on taxpayers.”

Replying to suggestions for tax incentives, the committee said non-tax measures, including the removal of policy uncertainty and regulatory impediments, would serve greenfield exploration better than tax incentives.

The committee’s decisions have been informed by an IMF study and international expertise, Davis told Bloomberg Tax.

Industry Reaction

Industry body Chamber of Mines South Africa said that the recommendations were complex and were being studied.

Anglo American, similarly, said it had not yet studied the report in detail, and was therefore”not yet in a position to comment.”

Mining companies AngloGold Ashanti Ltd., Harmony Gold Co Ltd., Kumba Iron Ore Ltd., Sibanye-Stillwater didn’t not respond to requests for comment from Bloomberg Tax.

Davis said the recommendations will lead to further debate. “Treasury’s habit is to adopt some of the recommendations and not others. The minister may ask us to reflect on certain issues, and some of the recommendations will land up in legislation while others won’t.”

To contact the reporter on this story: Marcia Klein in Cape Town at

To contact the editor responsible for this story: Penny Sukhraj in London

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