A gold miner working underground at a gold mine in Boksburg. Picture: Lori Waselchuk/AP

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.


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.