With the world's largest mineral deposits, estimated at around US$2.5 trillion 1, mining is and has been the backbone of our economy since the 1800's.

In recent times, direct contribution of mining to the gross domestic product (GDP) is estimated at around eight percent of GDP, while mining and related industries contribute up to 18 percent of GDP. Mining is a significant provider of jobs, employing directly approximately 500 000 employees, with a further 500 000 employed indirectly. The one million (direct and indirect) jobs in the mining industry support a further five million dependants. Mining is also a major contributor to State coffers, contributing directly to around eight percent of our GDP, and collection of direct corporate taxes from mining is around 20 percent. Our wellbeing as a nation depends on the success of our mining industry, which runs not only deep in our soil, but in the heritage and hearts of our people.

Unfortunately the mining industry is at a cross-road, with the Government clearly stating that nationalisation is off the table, a number of regulatory uncertainties remain. The future success of the mining industry requires certainty on these regulatory issues, taxation being one. Taxation of mining companies has once again been at the forefront of the debate as to whether the State (as custodian of our mineral rights) derives sufficient economic benefit in light of President Zuma's State of the Nation Address. In his address, the President has requested the Minister of Finance, to commission a study of current tax policies to ensure that there is an appropriate revenue base to support public spending, with part of this study evaluating the current mining royalties' regime. Mining companies and investors have reason to be concerned. Even though the Nationalisation debate seems to be off the table, it would seem that the message is loud and clear – government intends to increase its share of tax collection from mining companies. The big question is how does government intend to do so? This question cannot be answered without first considering the current royalty regime and why ostensibly this has failed to achieve desired revenue for State coffers.

Shorn of its complexities, mining royalties in terms of the Royalties Act2 is currently calculated in terms of a formula which has as one of its core elements, "earnings before interest and tax" (EBIT). Simply stated, the royalties regime is linked to profitability with a minimum rate of 0,5 percent and a maximum rate of five percent and seven percent, depending on whether minerals are refined or unrefined. The lower rate of five percent on refined minerals seeks to encourage beneficiation. In circumstances where profits are available, royalties would be capped at five percent or seven percent, depending on whether the minerals are refined or unrefined. On the flip side, if the EBIT calculation is negative, royalties would be limited to the 0,5 percent rate. Hence, the mechanics of the royalty calculation in its current form does not allow the State to share in "super profits" as an upper cap applies. This seems to be the current bone of contention, and is the one core fundamental difference between the current royalty regime and a resource rent type tax. A resource rent tax can be described as the levying of tax on super profits which would be triggered after a "normal" return on investment has been achieved.

The SIMS report3 recommends the introduction of a resource rent tax of 50 percent on all profits above a 15 percent return on capital, and the reduction of royalties payable to one percent. The objective of a adopting a resource rent tax, as set out in the SIMS report, would be to ensure that "super-profits" earned by mining companies from South Africa's resources be invested for the benefit of the people of the country as a whole, given that the resources are of a depleting nature, which once lost to the country, cannot be restored. In addition to suggesting a resource rent tax, the SIMS report also proposes some further radical changes in the manner in which mining companies are taxed. This includes abandonment of the current gold mine formula tax, and its replacement with corporate income tax and resource rent tax, a 30 percent withholding tax on dividends4 to be paid by mining companies to certain tax havens and introduction of export duties to encourage beneficiation.

The President's State of Nation Address is not the only reason for uncertainty in our mining tax regime. It is generally accepted that our mining tax regime is archaic, complex and out of touch with current economic realities. Whilst special rules apply to encourage investment in gold mines5 and the investment of new "mining capex"6, there are a number of areas which our tax regime has just not kept pace with for instance the tax treatment of open-pit mining or black economic empowerment transactions required in terms of the Mining Charter. More concerning is the South African Revenue Services aggressive approach against mining companies whereby previously accepted mining tax treatments of certain positions are now being challenged. These include methods by which deductions for capital expenditure and assessed losses are to be applied in the calculation of the taxable income of a mining company which owns and operates more than one mine7 as well as challenging the deductibility of "prospecting expenditure" by prospecting operators.8

A discussion with most financial directors of mining companies will reveal some area of tax investigation in their business, be it on the capex deductions, treatment of mining versus non-mining income, diesel rebate queries and even mining royalty audits. The latter comes as a surprise to many, given that the royalty regime has only been in force since 1 March 2010, with the main disputes centering on interpretation of the new and complex royalty legislation. There is also the looming Carbon Tax regime mentioned in the 2012 Budget Speech which was proposed for implementation in the 2013 and 2014 fiscal years.

One thing is certain – currently there is a lot of uncertainty in our mining tax regime. So can we expect some clearer proposals on these issues in the Minister's Budget Speech on 27 February 2013? Given that the President has specifically mandated the Minister of Finance to look into mining royalties –mining companies and investors will be looking to the Minister for more details and clarity, especially on the process involving review of mining royalties, and more broadly, the tax regime. This is critical given criticism being levelled at the government regarding uncertainty on key policy issues in the mining industry which has had the effect of deterring mining investment. It is unlikely that any material charges will be announced on the mining royalty regime itself since stakeholder consultation will be required. Failure on the other hand to provide some direction on the process going forward is likely to cause even greater uncertainty in an industry which at this time can ill afford this.


1. Metals and Mining: Nationalisation - Killing the Goose That Lays the Golden Eggs, Citi Group Global Markets, 29 June 2011.

2. The Mineral and Petroleum Resources Royalty Act 28 of 2008.

3. Report commissioned by the ANC: Maximising the Development of the People's Mineral Assets: State Intervention in the Minerals Sector (SIMS) - 11 June 2012.

4. Currently withholding tax of 15 percent is levied on dividends declared to non-residents unless an applicable Double Taxation Treaty applies which could reduce this rate. A 30 percent withholding tax rate would be seen as discriminatory if only applied to certain foreign investors.

5. Gold mines are taxed in terms of a formula which takes into account the marginal tax rate, the portion of tax free revenue, and the ratio of taxable income to total income.

6. A special mining capex regime applies which allows for the accelerated write-off of mining capex against taxable mining income. Such ring-fencing applies on a "per mine" basis as well as between "mining" and "non-mining" income. A partial 25 percent ring-fencing upliftment provision also applies for so-called "post 1990" mines.

7. See for instance the recent SCA case of Armgold/Harmony Freegold Joint Venture v CSARS (703/2011) [2012] ZASCA 152.

8. Deduction for prospecting expenditure under section 15(b) of the Income Tax Act 58 of 1962.

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