Pretoria
- The interpretation of the Mineral and Petroleum Resources Royalty Act on
expenses incurred by mining companies may have dire consequences for the
embattled industry.
The
interpretation by the South African Revenue Service (SARS) could result in
costs, passed on by mining companies to customers in terms of transport,
insurance and handling of minerals, to be excluded when determining gross
sales.
The
gross sales price will then be artificially inflated by these costs. As gross
sales forms the basis for the royalty calculation, mining companies face a
fundamental increase in royalty tax.
The
mining tax committee of the South African Institute of Tax Professionals (SAIT)
says there is a “significant” concern that, if a reasonable and practical
interpretation is not found, companies will have to approach the courts.
One
company, United Manganese of Kalahari, has already approached the courts for a
declaratory order on the interpretation set out in the draft binding general
ruling published by SARS. The case is set to be heard in May.
SAIT has
requested that the finalisation of the ruling be postponed until the case has
been heard in the high court.
Timeline
The
principle of not penalising beneficiation was one of the issues addressed
during the initial negotiations on the “resource rent” (royalty fee on
minerals) as far back as 2004.
It was
also agreed that transport, insurance and handling costs would be excluded to
determine what the price of the mineral will be at the “first saleable point”.
The
principle that must be applied, and which had been agreed upon in the early
discussions around the resource rent, is that the royalty cannot be imposed on
the transport, insurance or handling costs. It must be charged on the value of
mineral.
According
to SAIT, the answer to this latest issue, is the draft explanatory memorandum that
was never published in a final version.
The draft
memorandum stated that the calculation of gross sales disregards the transport,
insurance and handling expenditure that is incurred to effect the disposal of a
mineral resource.
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In terms
of the binding general ruling it now seems that SARS will not allow the
exclusion of the costs if the taxpayer cannot offer documentary proof of the
expenditure passed on to the customer.
Keith
Engel, CEO of SAIT, says the seller must show that the transport costs are
specifically reflected in the gross sales price agreed to by the
purchaser.
“Showing
costs incurred is easy - showing that costs are specifically included in the
price is often next to impossible, given the way that companies price and
negotiate agreements with buyers of their minerals,” says Engel.
These
sales agreements are negotiated based on delivery terms used in international
trade such as free on board, cost insurance freight, and ex-works.
“Based
on mining royalty queries and audits, we are concerned that some SARS officials
do not seem to understand how these terms work.”
Not doable
SAIT
says in its submission to SARS that it is “wholly uncommercial” for mining
companies to split their prices in agreements and on their invoices to show the
details of the delivery terms. It can impact on their international
competitiveness.
In other
words, SARS now expect of taxpayers to work out the cost of transport,
insurance and handling for each and every transfer or sale. This is not in line
with the way these costs are negotiated with either Transnet (which brings
their product to port) or large buyers such as Eskom.
The
treatment by mining companies of “expenditure beyond the specified point” has
always been in line with the legislation and the draft explanatory memorandum.
“We
submit that the approach followed by SARS in recent times is misguided and
misplaced . . . We are concerned that SARS is trying to amend the legislation
by way of interpretation,” says SAIT.
Ruaan
van Eeden, head of tax at Geneva Management Group, says one of the aspects so
often overlooked in issuing binding general rulings, is the consideration of
commercial realities in a specific sector of the economy.
Mining,
and the taxes imposed on that sector, are inherently complex. SARS appears to
be taking a very narrow view of the undefined phrase, “without having regard
to” in relation to the transport, insurance and handling costs.
This
seems to be in contradiction with the original policy intent which did not to
unintentionally penalise extractors. It also seems to be in contradiction to the
typical contractual arrangements that are put in place between the extractor of
a mineral resource and the ultimate buyer.
“A more
pragmatic approach should be considered by SARS in issuing the final version of
the ruling, given that supply contracts, in most cases, go beyond the mere
recovery of the mineral resource and would inextricably link, the transport,
insurance and handling components both before and after extraction,” says Van
Eeden.
A
possible reason for the narrow interpretation of the wording in the act is the
pressure on SARS to collect revenue.
The true
effect of the latest interpretation by SARS on transport, insurance and
handling costs is that beneficiation is discouraged, and a royalty is being
levied on these costs and not on the value of the mineral.
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