South Africa: The Draft Reviewed Mining Charter: Employee Share Ownership Plans And The Ownership Element – Playing The Waiting Game?

Last Updated: 10 August 2016
Article by Kristel Van Rensburg

Most Read Contributor in South Africa, September 2018

One of the key elements addressed in the Draft Reviewed Broad Based Black-Economic Empowerment ("BBBEE") Charter for the South African Mining and Minerals Industry, 2016 (the "draft reviewed Mining Charter") is the issue of ownership.

The Department of Mineral Resources ("DMR") seeks to achieve the ownership requirement through broad-based employee share option plans ("ESOPs"), which are likely to have an impact on both mining companies and their employees from a tax perspective.

The DMR published the draft reviewed Mining Charter in April, following an assessment of compliance by mining companies with the Amended Mining Charter of 2010. According to the preamble of the draft reviewed Mining Charter, this assessment revealed the following regarding the ownership element of the Mining Charter:

"Limited progress has been made in embracing the broad-based empowerment ownership in terms of meaningful economic participation of black South Africans. The trickle flow of benefits that ought not only to service the loan, but also include cash-flow directly to BEE partners, is vastly limited. To this end, the interests of mineworkers and communities are typically held in nebulously defined trusts, which constrain the flow of benefits to intended beneficiaries. As a result, the mining industry has broadly been faced with increasing tensions with both workers and host communities."

In response to this, the draft reviewed Mining Charter provides that stakeholders in the mining industry must achieve a minimum target of 26% ownership per mining right to enable meaningful economic participation of black people. In respect of employees, this 26% stake must include a minimum of 5% shares equitably distributed among employees (in the form of ESOPs). This stake will be held in trusts created by the employees, and the trusts will have to be represented by unions and report to the South Africa Revenue Service and the DMR.

Shareholders of the black empowerment stake (i.e. the trusts in the case of ESOPs) must also create a special purpose vehicle ("SPV") to manage the 26% black economic empowerment stake according to its own memorandum of incorporation, which addresses issues such as the appointment of joint representatives, allocation of voting rights, and dispute resolution. Further, the draft reviewed Mining Charter envisages that there must be a BBBEE transaction for each mining right granted and one SPV for each empowerment transaction. The mining right holders must, with the concurrence of the black economic empowerment ("BEE") partners, consolidate the empowerment transactions with the prior written consent of the Minister of Mineral Resources.

The draft reviewed Mining Charter was open for public comment by interested and affected parties until 31 May 2016. In addition, the DMR has been in discussions with stakeholders since the draft reviewed Mining Charter was published, and it has promised a revised draft reviewed Mining Charter that will incorporate what has been agreed with the stakeholders. However, It is unclear when this revised version will be published and whether it will be in final form, promulgated and effective without further consultation.

The broad-based employment requirement of the ownership element is, however, likely to remain in the final version. This is because there are various advantages in implementing ESOPs to obtain and maintain BBBEE ownership in businesses. One such advantage for the employer company is a tax deduction of the cost of the BBBEE structure. However, this deduction may need to be spread over the period of the ESOP. The draft Taxation Laws Amendment Bill, which was published for comment on 8 July 2016, proposes a new section 8CA for the Income Tax Act,1962. This section provides for the deduction of the expenditure incurred in respect of a restricted equity instrument scheme. The deduction will be spread over the period that the equity instrument is restricted. The proposed section also provides for a recoupment of the deduction when an employee leaves the employment of the employer. This proposed section could be problematic if the ESOP's term is lengthy or if the scheme is structured to be restricted indefinitely to ensure prolonged fulfilment of the objectives of the Mining Charter and BBBEE legislation. Another advantage is that employees could be locked in easier than other BEE partners, which is beneficial for the employee and the mining company, as the risk of having to restructure BEE ownership every couple of years is reduced. Also, the ESOP could be structured to be flexible to meet the respective organisation's circumstances and the Mining Charter requirements.

Even though the draft reviewed Mining Charter may look different in its final form, one thing that will remain is the need to address the ownership element, and the tax implications for employees and mining companies. Notwithstanding the benefits of an ESOP, various changes to tax legislation in recent years have made it increasingly difficult to structure BBBEE shareholding where employees are involved, in a manner that employees are taxed on gains and dividends, as shareholders and owners of the business (i.e. capital gains tax and dividends tax), as opposed to being taxed on the gain and dividends similar to a bonus (taxed at the marginal rate of the employee, which is often a higher rate than tax on capital gains and the dividends tax rate). The proposed changes to section 8C in the draft Taxation Laws Amendment Bill seek to cast the net even wider. It is proposed that dividends consisting of proceeds from the disposal or redemption of any underlying equity shares to the restricted equity instruments will be included in the income of the employees.

This treatment is inconsistent and counterproductive to the objectives of the Mining Charter and BBBEE legislation, with regard to broad-based ownership opportunities for employees of mining businesses.  

For many years, the Minister of Finance has mentioned in the annual Budget Speech that National Treasury is looking at reforming the legislation dealing with ESOPs. One hopes that the country's BBBEE objectives are taken into consideration during this process. At this stage, it appears that the changes coming through in the amendments to the taxation laws relating to share schemes merely seek to cast the net wider with regard to amounts being included in the income of employees, as opposed to enhancing the taxation laws to bring them in line with, and to promote, the country's BBBEE objectives.      

In the meantime, and even more so if the changes in the draft Taxation Laws Amendment Bill are implemented, taxpayers should seek advice from tax professionals who understand and have extensive experience with regard to the complex tax legislation pertaining to ESOPs and broad-based share plans, and who understand and appreciate the requirements and complexities of the Mining Charter, the Mineral and Petroleum Resources Development Act and the BBBEE Act.

Further, tax professionals must ensure that the proposed structure is properly implemented in light of the many ingenious structures being incorrectly implemented, with abysmal consequences for mining companies and employees.

For more information on the draft reviewed Mining Charter, click here and here.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
ENSafrica
ENSafrica
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
ENSafrica
ENSafrica
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions