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Johannesburg - The Davis Tax Committee has shot down virtually all the remaining radical tax-related plans stemming from the “nationalisation debate” and the ANC’s 2012 State Intervention in the Minerals Sector (Sims) report.
Instead, its first interim report on mining recommends changes that will probably favour most mines, even while dismantling the anomalous tax subsidy enjoyed by start-up and marginal gold mines.
The report, presented to Finance Minister Nhlanhla Nene in June, was released for public comment this week.
Like its previous reports that tacitly rejected higher corporate or personal income tax, the mining report strikes a relatively conservative chord, with the current frailty of the mining sector weighing heavily on the reasoning by the committee.
The Davis committee has unambiguously ruled out plans for windfall taxes or the resource rent taxes that formed an important part of the Sims report. It also rejects the idea that mine royalties could be ring-fenced for the benefit of the community around the mine, calling it “too big a departure from current government policy”.
Export taxes to encourage beneficiation are also rejected, largely because the one existing example, for diamonds, has proved to be a dismal failure.
The committee says that instead of imposing new taxes, South Africa should wait for the variable profit-linked mineral royalty system that was established in 2010 to prove itself.
The royalty system coincided with the end of the minerals boom and it remains to be seen how much money it brings in when times are good.
One proposal from the mining sector was positively received: that capital expenditure on social and labour plans – for instance community facilities – become tax-deductible.
The report also suggests that the issue of “domestic transfer pricing” in mining groups should be explored, but only by the separate base-erosion team in the Davis committee.
This follows a recent report from the union-friendly think-tank, The Alternative Information and Development Centre, on platinum producer Lonmin.
The report called on authorities to shift the focus of work on abusive transfer pricing to the relationship between local holding companies and their mining subsidiaries.
However, much of the committee’s report deals with oddities stemming from the major changes in the mining sector over the past 20 years – not least the break-up of the major conglomerates and the decline of gold.
South African mines enjoy a number of special tax rules, with gold mines in particular operating under a different income tax system called the gold formula – a legacy of days when gold mining formed the heart of the South African economy.
The gold formula gives gold mines a progressive tax rate tied to profit levels. If profits are below 5%, they pay no tax – this subsidy is meant to encourage new mines and help support old mines.
To balance that, the gold formula can subject very profitable gold mines to a tax rate of 32.3% compared with the normal 28% that applies to all other companies.
While proposals had been received asking that this system be extended to the platinum mines, the committee wants to do away with it entirely.
The system provides a tax subsidy that encourages investment in marginal mines that cannot stand on their own. The only question, the Davis report asks, is whether there should be a sunset clause for existing gold mines.
Most gold mines are paying less than 28% tax thanks to this system, it says.
All South African mines are also subject to a special ring-fencing regime where the tax concessions earned at one mine cannot be used to offset taxes on non-mining operations or other mines in the same group.
This would have been of particular importance in the now bygone era of enormous conglomerates built up by mining corporations under apartheid.
The ring-fencing is still necessary because mines also have a special capital expenditure write-off where they can instantaneously write off 100% of the money they spend on building and expanding their mines.
The committee wants this to be aligned with the normal system in the manufacturing sector, where capital expenditure is written off for tax purposes over four years. This rejects a submission from the Chamber of Mines asking for the old system to stay.
When that is gone, the ring fences can go too, says the committee.
The SA Revenue Service calculated that removing the ring fences immediately would lead to South Africa losing R900 million in tax in one year
