A mineworker works at the rock face at the Impala Platinum mine in Rustenburg, South Africa, on Wednesday, June 4, 2008. Impala Platinum Holdings Ltd is the world's second-biggest platinum producer. Photographer: Nadine Hutton/Bloomberg News

Johannesburg - In a radical move, there are calls within the local mining industry for tax relief, including a “royalty holiday” for distressed firms.

The mining industry, which contributes around 7 percent to Africa’s most developed economy, is struggling with sinking commodity prices, rising costs and labour unrest, forcing a number of companies into mine closures and lay-offs.

In the 2013/14 financial year, mining contributed R21.5 billion in company tax, R16.7bn in pay-as-you-earn (Paye) employee withholding tax and R6.4bn in royalties. The move to cut taxes in mining could be a non-starter as figures from Statistics SA on Tuesday showed that gross domestic product (GDP) had shrunk by 1.3 percent in the quarter to June after increasing 1.3 percent in the preceding quarter raising the risk of a recession.

Task team

Franz Stehring, the divisional manager for minerals at the Uasa, said yesterday that an inter-governmental task team to save jobs had proposed tax relief for marginal mines.

“Under no circumstances are we saying normal taxes must be cut. The intention is to look at having a tax relief for distressed companies,” said Stehring.

He cited royalties as an example of a possible tax relief, saying that even if a company was loss-making, it still needed to pay royalties.

“A suggestion is to look at giving distressed companies a royalty holiday. At the end of the day the companies will catch up on the payment after the royalty holiday,” Stehring said.

The inter-governmental task team has been working hard following an urgent crisis meeting early this month, convened by Mineral Resources Minister Ngoako Ramatlhodi with business and to address structural problems in the sector.

South Africa’s mining industry, unions and the government have committed to a broad plan to stem job losses, including boosting platinum by promoting the metal as a central bank reserve asset, according to a draft agreement.

The parties also said they would strive to delay lay-offs, sell distressed mining assets instead of closing them, and look at ways of streamlining the legal process which employers must follow to cut jobs.

The agreement is expected to be signed on Monday next week.

Emergency measure

Stephen Meintjes, the head of research at Momentum SP Reid Securities, said cutting taxes was a sensible emergency measure.

“It gives time to reassess the gold tax formula and to expand it to the rest of the mining industry. The 2007 tax formula, for example, exempted marginal mines from company tax and taxed profitable mines at a higher tax rate,” he added.

“Suitably adjusted, the progressive gold mines tax formula would render the mining royalty redundant. The fact that the state benefits significantly, not only from company tax and royalties, but Paye and indirect taxes also need to be considered in granting emergency tax relief,” said Meintjes.

Muhammad Saloojee, a director for corporate tax at KPMG, said yesterday that cutting taxes was not a solution to saving jobs.

“For example, having companies pay higher taxes when the resources are at their peak, and giving tax breaks in difficult times. This is a balance that is needed so as to provide a stable environment that fosters job creation, while at the same time allowing the government to meet its social and infrastructural commitments,” Saloojee said.

According to the Davis Tax Committee, most mining companies were taxed a standard 28 percent corporate income tax rate, but taxes paid by gold firms were linked to their profit margins, a measure meant to cushion an industry facing its sunset phase. The Chamber of Mines yesterday declined to comment on the details of the work of the task team.

Not responded

Phumza Macanda, a spokeswoman of the Treasury, said it had not responded to the proposals.

“Whatever policy the Minister of Finance communicates is done during the medium-term budget policy statement in October or the tabling of Budget in February. This is not something we will respond to outside the Budget,” said Macanda.

Jacques Botha, a director and chief economist at Afriforesight Commodities, on Tuesday said during a conference on commodities that government and the industry should work together to save the industry.

“The government will decide if they want to lose certain investments like coal or take levies from mining, but have people earn money,” Botha added.

“You can have mines close or help miners by reducing tax... This is the seriousness of the situation,” added Botha.

* Additional reporting by Reuters