REUTERS

A study submitted to South Africa's ruling ANC to reform its vital mining sector proposes a 50 percent tax on profits and rejects nationalisation as an “unmitigated disaster” for Africa's largest economy.

Although it delivers a hammer blow to calls for nationalisation by radical elements in the African National Congress (ANC), mining houses will be wary of the tax proposals as they grapple with steeply rising labour, power and safety costs in the world's largest platinum producer.

South Africa has a poor track record of translating its vast mineral wealth into broader prosperity and the government is under pressure to create badly-needed jobs in the industry without scaring off the investment it needs.

“Under the current fiscal regime our nation is clearly not getting a fair share of the resource rents generated from its mineral assets,” an official summary of the 600-page study obtained by Reuters said.

“A Resource Rent Tax (RRT) of 50 percent must be imposed on all mining. It will trigger after a normal return on investments has been achieved, thus not impacting on marginal or low grade deposits.”

The study defines a resource rent as “the difference between the price at which a resource can be sold and its extraction costs” - in other words, profit.

As expected, the study, which was compiled after research trips to 13 countries ranging from Chile to Australia to Venezuela, flatly rejects nationalisation, mainly on cost grounds.

It put a 1 trillion rand ($132 billion) price tag - almost as much as South Africa's annual budget - on acquiring all listed and non-listed mining companies in the country.

An asset grab without compensation against an industry that accounts for 6-8 percent of South African GDP would be even worse, the report concludes.

“Nationalisation without compensation ... would result in a near collapse of foreign investment and access to finance. This route would clearly be an unmitigated economic disaster for our country and our people,” it says.

The document says new taxes raised, which it estimated at 40 billion rand at current prices, should be ploughed into a sovereign wealth fund that could be used to temper appreciation of the rand during commodity booms.

Once the resource rent tax is imposed, mineral royalty rates should be cut to one percent from the current sliding scale system, which caps royalties at 7 percent.

TAX HAVENS

The study also proposes a clampdown on the use of tax havens by foreign mining investors - a practice that activists say bleeds capital from poor countries, especially those that rely heavily on mining.

“Many international mining companies invest in Africa via a subsidiary registered in a 'tax haven',” it says.

“To encourage direct investment from their primary listing country, we should introduce a mineral foreign shareholding withholding tax: if the foreign mining company is held in a 'tax haven', then rate should be 30 percent and if not, the normal rate of 10 percent should apply,” it says.

The study deals a potentially fatal blow on the push for mine nationalisation, which had already lost political momentum due to ANC disciplinary charges against its biggest advocate, Youth League leader Julius Malema.

Malema was found guilty of sowing discord in the party by an internal tribunal in November and was sentenced to a five-year suspension. - Reuters