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Tax implications of rehabilitation expenditure in Namibia
The mining industry in Namibia plays a significant role in the growth and development of the country’s economy. It is therefore important to ensure that all efforts are made to ensure its sustainability.
During 2015, the mining industry contributed 11.9% to the gross domestic product of Namibia. Furthermore, the total contributions from the mining industry in the form of taxes to Government was approximately N$3.76 billion. From a regional perspective, Namibia is rated as the most attractive investment destination amongst other Southern African Development Community countries, followed by Botswana, South Africa, Angola and Zimbabwe1.
The laws governing mine rehabilitation
Mining licences are granted in terms of the Minerals (Prospecting and Mining) Act2. One of the conditions that need to be fulfilled before a mining licence can be granted in terms of this Act is the manner in which the mining company will deal with environmental rehabilitation of the proposed mining area. In particular, the mining company should provide the following details:
- the condition of, and any existing damage to, the environment in the proposed mining area;
- an estimate of the effect that the proposed prospecting and mining operations will have on the environment and the proposed steps to remedy such effect;
- the proposed manner in which pollution, waste, the safe guarding of mineral resources and the reclaiming and rehabilitation of land will be dealt with; and
- the proposed manner in which the effect to the land adjoining the mining area will be dealt with.
Although mining companies are required to have final mine closure plans, there is currently no clear guidelines on the type of funding mechanisms that such companies should have in place. As a result, we find that mining companies have different funding models to provide for future rehabilitation expenditure some of which include the setting up of environmental rehabilitation trust funds or the direct investment in various investment vehicles and using the returns from such investments to fund future rehabilitation expenditure.
The tax implications
Up until 31 December 2009, any ongoing rehabilitation expenditure as well as contributions made towards future rehabilitation expenditure were allowed as a tax deduction3. The deductions were allowed to be made against income derived from mining operations. Thus, should a company not derive any mining income during a year of assessment, such expenditure incurred or provision of funds made could not be claimed as a tax deduction against income derived from non-mining operations.
Furthermore, any amounts provided for future rehabilitation expenditure that were allowed as a tax deduction that were subsequently not utilised for rehabilitation purposes before or after the cession of the mining operations, should have been recouped and included in taxable income.
2010 Income Tax Act changes
With effect from 1 January 2010, the specific section dealing with the deduction of ongoing and future rehabilitation expenditure was deleted from the Income Tax Act. The deletion is effective for years of assessment commencing on or after 1 January 2010.
Consequent to such deletion, mining companies will have to sought tax deductions of ongoing and future rehabilitation expenditure under the general tax deduction section (section 17(1)(a) of the Income Tax Act. Section 17(1) (a) contains several requirements that must be fulfilled before a tax deduction can be sought thereunder. The requirements are that the ongoing and future rehabilitation expenditure must be, actually incurred, in the production of income, for trade purposes and must not be of a capital nature. One would have to refer to case law for an interpretation of the underlined concepts as they are not defined in the Income Tax Act. This can prove to be a challenge and also makes room for different interpretations by different taxpayers.
Fulfilling section 17(1)(a) requirements
Should one be successful in fulfilling all the requirements of section 17(1)(a), it would mean that the deduction of ongoing and future rehabilitation expenditure will not be limited to mining income as that requirement was only contained in the deleted section. Therefore, where no mining income is derived in a year of assessment, an assessed loss can be created and utilised against non-mining taxable income or carried forward to subsequent years of assessment. In addition, such losses can be set-off against the income derived from other trades, i.e., income derived from non-mining operations other than interest. This could be beneficial to taxpayers in that they can reduce their taxable income from non-mining trades which was not necessarily possible in terms of the deleted section.
Investing in rehabilitation expenditure
The provision of funds invested for rehabilitation expenditure will yield returns in the form of dividends or interest depending on the investment vehicle utilised. Dividends are generally exempt from income tax. Any interest however will be subject to tax either in the hands of the company (if direct investment is made) or the trust (if a trust fund is set up and depending on the legal nature of such trust), as the Income Tax Act does not specifically exempt such interest from tax. Therefore, interest earned from the investment of rehabilitation funds could be seen as non-mining income and will be taxed as such. In addition, the Revenue Authority views such interest income as derived from non-trading activities and a result do not allow any deductions against such income or the setoff of assessed losses. This is to the detriment of taxpayers as such returns are derived as consequence of complying with the mining licence granted and not as profit making mechanism.
In an effort to sustain the mining industry so that it can continue to make a vital contribution to the economy, the legislature should reconsider the tax treatment of rehabilitation expenditure taking into account the context under which such expenditure are undertaken. The tax provisions should also take into consideration the different funding mechanisms that can be employed by taxpayers to fulfil their rehabilitation obligations. Such provisions should not be to the detriment of taxpayers and thereby deter them from complying with the relevant laws.
1. The Chamber of Mines of Namibia, Mining Industry Performance in 2015, Mining Conference, 27 April, 2016
2. Act No 33 of 1992
3. Section 18(1)(b) of the Income Tax Act No.24 of 1981 as amended
This article first appeared in 'Opportunities & Developments Africa 2016 : Expert Guide', published by CorporateLiveWire