National Treasury published a draft amendment to the Domestic Reverse Charge ("DRC") Regulations on Valuable Metal on 1 August 2024, which will result in many (gold) mining title holders to be subject to the value-added tax ("VAT") reverse charge with effect from 1 April 2025.
The DRC Regulations is an anti-abuse measure aimed at curbing VAT fraud schemes in the value chain relating to high-risk goods containing gold. The amendment will give effect to the tax proposal contained in the 2024 Budget Review to foreclose VAT fraud schemes and malpractices involving gold that may have shifted to the primary gold sector.
The reverse charge requires the purchaser to account for VAT on the transaction instead of the supplier and additional documentation requirements must be adhered to.
Current mining exclusion
The DRC Regulations apply to gold-containing material supplied between VAT-registered vendors in certain prescribed forms, unless a specific exception applies. The prescribed forms subject to the regulations include "bars" and "ingots" such as bullion and doré bars, as well as "residue" from mining operations such as debris, discard, tailings, slimes, screening, slurry, waste rock, foundry sand, beneficiation plant waste or ash, commonly found in the mining industry.
Paragraph (a) of the "valuable metal" definition in the DRC Regulations is commonly referred to as "the mining exclusion". This exception currently provides that supplies of gold-containing goods produced from raw materials by a mining title "holder" (as defined in the Mineral and Petroleum Resources Development Act, 2002), or any person contracted to such "holder" to carry on mining operations, are excluded from the DRC Regulations.
The mining exclusion is understood to apply at an entity level (as opposed to a transaction level), therefore, valuable metal supplied by the holder of a prospecting right, mining right, mining permit, retention permit, exploration right, production right, reconnaissance permit or technical co-operation permit, are currently not subject to the DRC Regulations.
Proposed amendment
It is proposed that the mining exclusion be deleted from the DRC Regulations, to address concerns by Government that the exclusion has led to the fraudulent VAT schemes and malpractices being shifted to the primary gold sector.
This will bring the (gold) mining industry into the ambit of the DRC Regulations, except where the recently introduced 1% de minimus exception applies. Supplies of valuable metal containing less than 1% of gold in gross weight are specifically excluded from the DRC Regulations.
Anticipated impact of the proposed amendment
Local sales of gold-bearing material in South Africa by a mining title "holder" in one of the prescribed forms (e.g., gold bars, granules, etc.) to a VAT registered purchaser, will henceforth be subject to the DRC Regulations. Typical transactions that will likely be affected by the proposed amendment include sales of gold-containing material by one mine to another, as well as sales by mines to second-hand gold refineries.
The following transactions will remain unaffected:
- The DRC Regulations apply to domestic standard-rated sales (sales subject to VAT at 15%). Cross-border transactions (imports and exports) are not subject to the DRC and, therefore, not affected by the proposed deletion of the mining exclusion.
- Supplies of valuable metal (e.g., gold bullion) to the South African Reserve Bank, the South African Mint Company and South African registered banks that qualify for zero rating under section 11(1)(f) of the VAT Act, 1991 are specifically excluded from the DRC and, therefore, unaffected.
What does this mean for (gold) mines?
At a high-level, the following practical implications will arise should the proposed amendment be published as final:
- Mines will likely be in a (greater) net VAT refund position after the amendment, which may lead to increased audit activity from the South African Revenue Service (SARS) and/or delayed repayment of VAT refunds.
- Mines may in future require (greater) VAT bridging finance for operational costs until they receive their VAT refunds from SARS, as they would incur costs on a VAT-inclusive basis (i.e., at '115') while not collecting output VAT (i.e., at '15') on their local gold sales. Under the reverse charge, the output VAT on these sales would need to be reported and paid to SARS through the purchaser's VAT returns on the mine's behalf.
- Mines falling within the ambit of the DRC Regulations will also have a greater documentary burden and would need to engage more actively with its supply-chain in this regard, as DRC compliance requires the seller and the purchaser to be aligned on the VAT treatment of the transaction.
Commentary on the proposed amendment must be submitted to National Treasury by close of business on 31 August 2024.
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.
