The impact of the Mineral Petroleum Resources Royalty Act No. 28
of 2008 ("Royalty Act") on coal mining companies in South
Africa has been subject to substantial debate (and legislative
amendment) since the Royalty Act came into effect.
Based on the legislation in its current form, the Royalty Act is
generally applied in the coal industry as follows:
Where coal with a calorific value ("CV") below
19MJ/kj is extracted and sold, the taxpayer must determine gross
sales for royalty purposes as though he did sell coal with a CV of
19MJ/kj, i.e. for royalty purposes, the taxpayer is subject to the
royalty on a 'deemed' gross sales amount, which must be
determined with reference to the amount he would have received, had
he in fact transferred coal with a CV of 19MJ/kj;
Where coal with a CV is above 19MJ/kj is extracted (for
example, say the CV at extraction is 22MJ/kj), and thereafter
beneficiated and sold or exported with a CV of 25MJ/kj, the general
view in the market in light of the purpose of the Royalty Act, is
to determine gross sales with reference to the CV at extraction
(i.e. gross sales is determined with reference to the amount that a
taxpayer would have received, had it transferred its coal at Run of
Mine ("ROM")). This ensures that the purpose of the
Royalty Act is met with regard to compensation for the use of South
African minerals, and the taxpayer is not penalised (in the form of
additional royalty tax) by beneficiating the coal, and thus
increasing its value for purposes of sale. This approach was
certainly confirmed by the Explanatory Memorandum issued at the
time of issuing the Royalty Act.
It is anticipated that the proposed amendments to the Royalty
Act in the recently released Taxation Laws Amendment Bill No. 39 of
2013 ("TLAB") will have a significant impact on the
methodology (as set out above) which has been generally utilised by
coal mining companies to determine their royalty liability since
introduction of the Royalty Act.
In essence, the proposed amendments, once enacted will have the
following impact where coal is transferred on or after 1 March
The position where coal is transferred with a CV below 19MJ/kj
will remain the same – i.e. a taxpayer must determine a
'deemed' gross sales amount, determined with reference to
the amount he would have received, had he in fact transferred coal
with a CV of 19MJ/kj;
Importantly, where coal is transferred anywhere within the new
range of the specified condition for coal (which can be anywhere
from 19MJ/kj to 27MJ/kj), gross sales must be determined with
reference to the value received on transfer; and
Where coal is transferred above the maximum range of condition
specified (i.e. above 27MJ/kj), gross sales must be determined
utilising a 'deemed' gross sales amount, determined with
reference to the amount he would have received, had he in fact
transferred coal with a CV of 27MJ/kj.
The proposed amendments are far reaching, and appear to
contradict the purpose of the Royalty Act, as indicated in the
Explanatory Memorandum of the Royalty Bill, which was prepared
prior to introduction of the Royalty Act. Based on the Explanatory
Memorandum on the TLAB, the proposed amendments have been
introduced due to "... significant underpayments of
The question one has to ask is whether the calculation
methodology, which is currently being applied by players in the
coal industry has not resulted in 'a significant underpayment
of mineral royalties', but rather the correct interpretation
and application of the Royalty Act, in light of the purpose of the
legislation and what it seeks to achieve. As such, the question
that remains is whether the rationale for implementing the above
proposed amendments relates to SARS' inherent view that most
taxpayers seek to avoid the payment of taxes, as well as SARS'
budgetary targets relating to revenue collection.
This is a fundamental policy change and may ultimately impact a
broader range of commodities.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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