Mining duties, royalties and taxes in South Africa

Duties, royalties and taxes

What duties, royalties and taxes are payable by private parties carrying on mining activities? Are these revenue-based or profit-based?

The Mineral and Petroleum Resources Royalty Act 28 of 2008 (Royalty Act) sets out the revenue-based royalties payable on mineral resources that are extracted within South Africa and ‘transferred’. The Royalty Act differentiates between refined and unrefined mineral resources. The mining royalty percentage is capped at 5 per cent for refined mineral resources and 7 per cent for unrefined mineral resources. The Royalty Act uses two variables to calculate the royalty liability - the value of the minerals and the royalty percentage rate, which is applied to the base. In addition to the payment of royalties, mining companies may also be subject to income tax capital gains tax, withholding tax, transaction taxes such as VAT, transfer duty and securities transfer tax.

What tax advantages and incentives are available to private parties carrying on mining activities?

Gold mining companies are taxed in terms of a formula that, by and large, takes into account the profitability of the company and provides relief in cases where margins are below 5 per cent (often referred to as the tax tunnel). The gold mining formula was introduced to encourage gold mining investment and the mining of marginal ore deposits. Mining companies mining for minerals other than gold are taxed at the standard corporate tax rates.

Does any legislation provide for tax stabilisation or are there tax stabilisation agreements in force?

The Royalty Act provides that the Minister of Finance may enter into binding fiscal stability agreements relating to mineral resource rights or in anticipation of such rights, guaranteeing that the terms and conditions in respect of these rights apply for as long as the extractor holds the rights.

Is the government entitled to a carried interest, or a free carried interest in mining projects?

The MPRDA contains no provision that entitles the government to a carried interest or free carried interest in mining projects. Mining Charter III, however, provides that host communities and qualifying employees must each hold a minimum of 5 per cent non-transferable carried interest in applicants for new mining rights. It is unclear how this is different from a ‘free carried interest’ and the definition accordingly is misleading.

Are there any transfer taxes or capital gains imposed regarding the transfer of licences?

In terms of capital gains, the Income Tax Act provides for capital gains tax (CGT) on any taxable capital gains in the taxable income of any person. In calculating the taxable income, a mine is entitled to claim expenditure against its mining income. Previously, the disposal of certain assets was exempt (for income tax purposes) as it was regarded ‘capital’ in nature. The position has now shifted and the disposal of specific mining-related assets (eg, land, surface rights, assets that qualify for wear and tear, mineral rights, prospecting rights and intellectual property rights, etc) will now be taxable in terms of the new CGT legislation.

Is there any distinction between the duties, royalties and taxes payable by domestic parties and those payable by foreign parties?

Resident companies in South Africa are taxed based on their world-wide income and non-residents are taxed on South African sourced income subject to any applicable double taxation agreements that may be in force. Non-residents are, in addition, subject to the CGT legislation as detailed above. Foreign companies that conduct business in South Africa through a branch must also be registered as taxpayers and they are taxed at the standard corporate tax rate of 28 per cent.