Clarity on future changes to a tax regime for South Africa's mining industry will unravel itself later this year at the policy conference of the African National Congress (ANC). Law firm Edward Nathan Sonnenberg (ENS) director for mining Otsile Matlou explains that the possibility of a super tax – a 50% resource rent tax on super profits – will have far reaching consequences for the mining industry.
The ANC study, released earlier this year and which also acknowledges that nationalisation is not an option for South Africa, proposes on the capture of resource rents, a 50% resource rent tax on returns on investment in excess of the National Treasury long bond rate plus 7%, to be ring-fenced in a sovereign wealth fund.
Whilst the possibility of a super tax being imposed on the mining sector would benefit the national revenue authorities, it is likely to be burdensome for mining companies, Matlou says.
"Miners do expect increases in taxes, but the introduction of a new tax regime, such as a super tax, will increase the costs to miners and the benefits of doing business in South Africa," he adds.
Further, this will impact on foreign direct investment and South Africa's global competitiveness as a mining investment destination.
The Australian government this year passed a law that introduces a super tax of 30% on iron ore and coal production profits following a two year battle with the country's miners.
The Association of Mining and Exploration Companies (Amec), as the peak industry body for the vast majority of mining and exploration companies throughout Australia, and its many iron ore and coal members, who represent the bulk of the companies affected by the tax, continue to oppose the mining tax.
The industry body is not against tax reform but is opposed to this 'expensively compliant and inefficient tax'
Matlou explains that South Africa must take into consideration the fears expressed by miners in Australia,some of which also have a footprint in South Africa, such as the decreasing share of investment capital flowing through to mining and exploration projects and the increasing share of capital investment that could go offshore.
"It is necessary that the South African government considers the impact on competitiveness and investment. The current resource royalties imposed in South Africa, akin to a resource rent, are good and have been widely accepted. However, a super tax reduces investors' profits and increases the cost of doing business in South Africa.
"In Australia the super tax has been met with absolute hostility by the miners and it is key to remember that investors the world over are the same. It is also important to note that the difference between Australia and South Africa is that mining is the cornerstone of the South African economy, where more jobs are needed to create stability for the country.
"While South Africa hopes to progress on meeting its target for job creation, one must also bear in mind that investors need to be kept happy to spur on the economic growth that drives employment opportunities," he adds.
However, earlier this year, Mineral Resources Minister Susan Shabangu indicated that government would carefully consider any new tax regime and would ensure that it would not affect the county's competitiveness or impact on job creation.
Attractive Mining Destination
While South Africa is blesses with natural resources and will be a mining country for years to come, it faces competition from many mining countries, including its BRICS partners, Brazil, Russia, India and China.
The resources available in South Africa makes the country attractive to investors. The recent interest by China and the increasing interest by India is proof of this. Yet, all mining investors have multiple choice of country investment and generally investors want to invest is countries that provide maximum return, certainty of regulation, minimal bureaucratic bottlenecks and a competitive tax regime. For this reason, However it is necessary for South Africa to up its game and to remove bottlenecks to regulatory processes.
Matlou explains that the South African mineral regulatory legislation is amongst the best in the world.
"South African law is progressive, but often it is the lengthy administrative processes that hinder the country's image as an attractive and investor friendly country."
For example, attaining a mining concession can take up to five months in Zambia and up to two years in South Africa.
Further, the Mineral Petroleum Resources Development Act, changed the system of mineral regulation in South Africa from that of private ownership of mineral rights and licensing to one which is administratively driven and has replaced mineral rights with limited real rights in the form of prospecting and mining rights (for minerals) and exploration and production rights (for petroleum).
Compared to some of South Africa's international counterparts that use a licensing system, Matlou explains that the rules of a licensing system are often clearer compared with the administrative system.
"There is too much duplication and there is a need to urgently streamline regulation. However, we must praise Minister Shabangu and her department for their commitment to improving on timelines and the implementation of regulation."
The recent Constitutional Court judgment of Maccsand has not made things better for the already administratively intense mineral regulation system.
The recent spades of Section 54 stoppages is painting South Africa in a very bad light. Although the Mine Health and Safety Act is a 'good piece of law', the challenge lies in its application.
Matlou says that "the unions believe that government is too lenient and miners believe that government is too harsh as it is bad for business and the economy." It is necessary that the manner in which the inspectorate of mines issue section 54 stoppages is reviewed carefully and discretion is carefully applied.
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