South Africa implemented a domestic reverse charge ("DRC") on valuable metal relating to gold-containing material with effect from 1 August 2022. The DRC is aimed at curbing VAT refund fraud in the second-hand gold industry. Since its implementation, many uncertainties have arisen on whether the DRC applies to the mining sector, commonly regarded as the primary gold industry.
The DRC Regulations (published in Government Gazette No. 46512 of 8 June 2022) apply to domestic standard rated transactions between VAT registered vendors, where the goods concerned are "valuable metal" as defined in the Regulations. Under a reverse charge mechanism the purchaser accounts for the VAT (at 15%) on the transaction rather than the supplier and certain additional documentation and reporting requirements are applicable.
Subject to certain exclusions, the term "valuable metal" is broadly defined in the DRC Regulations to mean any goods containing gold in the forms of:
Jewellery, Bars, blank coins, ingots, buttons, wire, plate, granules, in a solution, residue or similar forms, including any ancillary goods or services. "Residue" means "any debris, discard, tailings, slimes, screening, slurry, waste rock, foundry sand, beneficiation plant waste or ash" and largely corresponds with the definition of "residue stockpile" in the Mineral and Petroleum Resources Development Act, 2002 ("MPRDA"). Therefore, as a starting point, it would seem that mine material is indeed included in the ambit of the DRC.
However, paragraph (a) of the valuable metal definition (commonly referred to as "the mining exclusion") specifically excludes supplies of goods produced from raw materials by any "holder" as defined in section 1 of the MPRDA, or by any person contracted to such "holder" to carry on mining operations in respect of the mine where the "holder" carries on mining operations.
In terms of the MPRDA, a "holder" means, in relation to a prospecting right, mining right, mining permit, retention permit, exploration right, production right, reconnaissance permit or technical co-operation permit, the person to whom such right or permit (i.e., mining title) has been granted or such person's successor in title. And it is here where there is a divergence in opinion on how widely or narrowly to interpret the scope of the mining exclusion in the DRC Regulations. We briefly deal with these differing views below.
- Entity level: Some interpret the mining exclusion to apply as long as the supplier (e.g., a mine) is a "holder" in terms of the MPRDA and therefore that it exempts such a "holder" at an entity level from the DRC. Based on this interpretation, no cognisance needs to be given as to whether the goods being supplied have actually been produced by that "holder" in terms of its particular mining title (e.g. mining right/permit, etc.).
- Transaction level: A narrower interpretation exists that the mining exclusion applies only to those goods that were won or recovered by the "holder" from the mining area or residue stockpile to which the holder's mining title relates. Therefore, one cannot be a "holder" over Area A, but produce and sell goods from Area B and claim that the mining exclusion in the DRC Regulations applies to the supply of the Area B goods. If the holder's mining title relates only to Area A, the supply (in a prescribed form) of gold-containing goods derived from Area B will still be subject to the DRC.
- Supply chain level: Although an unlikely interpretation, there is a view that the mining exclusion applies throughout the entire supply chain. Therefore, as long as the gold-bearing material (e.g., a gold bar) was originally produced by a mining title "holder", the supply of that bar throughout the entire supply chain falls outside the scope of the DRC Regulations. This interpretation undermines the very objective of the DRC Regulations and is not correct.
Regardless of the interpretation certain practical challenges arise. For example, the primary concern in attempting to apply the transaction level interpretation is that the purchaser is not in a position to factually know, or to practically establish, whether or not the goods it is acquiring have been produced by the supplier (being a "holder") in terms of the supplier's particular mining title.
On the other hand, rights granted to a "holder" in terms of its mining title are limited to the particular land area as stipulated in the holder's right or permit document. A supplier is therefore a "holder" in respect of only that prescribed land area and no other. On this basis, the mining exclusion to the DRC Regulations should only apply where the goods are produced by a "holder" (or any person contracted to such "holder" to carry on mining operations in respect of the mine where the "holder" carries on mining operations) from the same prescribed land area to which the holder's mining title relates.
It is also relevant that these uncertainties were raised as part of the technical tax proposals to National Treasury to be considered for possible inclusion in Annexure C of the 2023 Budget Review. The matter was very briefly addressed by Treasury during the Annexure C workshops held in December 2022 and it appears that their current policy position is that the mining exclusion applies at an entity level.
However, we caution that this 'policy' has not been articulated in the DRC Regulations and it is not clear how it is to be applied in practice, particularly where a single supplier possesses more than one type of authorisation over completely different land areas (e.g., a mining permit over Area A making it a "holder" under the MPRDA over that particular land area, as well as a different license over Area B such as waste management license which does not authorise the sale, transfer or disposal of (gold-containing) precious metals from Area B and which is not listed in the definition of "holder" in the MPRDA).
Failure to apply the DRC Regulations to supplies of valuable metal will result in the supplier and purchaser, being VAT registered vendors, being held jointly and severally liable for any VAT loss suffered by the fiscus in this regard. It is therefore important for transacting vendors to confirm the contractual terms of their agreements as regards the source of gold-containing material they buy and sell, and to seek professional advice in the event that there are any uncertainties on the applicability of the DRC Regulations to mine material.
Many vendors transacting in this space will likely be keeping a close eye on the upcoming 2023 Budget Review, to be published in February 2023, for any developments in this area.
Reviewed by Charles de Wet, an Executive Consultant in ENSafrica's tax department.
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