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Davis Tax Committee recommends changes to mining capex write-off rules

2018/19 South African National Budget Expectations

Taxpayers will be relieved to note that the Davis Tax Committee (“the DTC”) has not introduced new taxes for mining companies. This alleviates the concerns raised by State Intervention is the Mining Sector published in 2012. The committee issued its final mining report on 13 November 2017, which mainly addressed income tax and mining royalties.

In this report, the DTC has recommended the following:

  • The upfront capex write-off regime be replaced by an accelerated capital expenditure (“capex”) depreciation regime of 40/20/20/20 from the date such expenditure was incurred and not when the capital asset is brought into use.
  • The removal of ring fences, aimed at preventing the set-off of capex against non-mining income.
  • Past unredeemed capex remain ring fenced as per the existing ring fencing rules.
  • The gold mining formula be phased out for new projects and remain optional for existing mines.
  • Devise a template contract for contract mining as a guide for taxpayers.
  • A thorough update and refinement of mining royalty schedules A and B and that these schedules should no longer form part of the primary royalty legislation but should be published by the Minister as a regulation in the government gazette.
  • Removal of section 37 to bring the recoupment of mining assets in line with recoupments of non-mining assets.
  • An investigation be conducted to provide appropriate tax relief in respect of all the rehabilitation funding mechanisms.
  • Costs incurred in relation to the mining charter to be deductible.
  • A detailed study of the current regulatory framework applicable to greenfield investors to be conducted before advocating tax incentives.

The removal of the ring-fencing rule could potentially provide the relief that mining companies need as it would enable them to reduce their tax liability from non-mining income by offsetting it against capex.

Care will need to be taken to keep track of past unredeemed capex balances and new capex being incurred. This is because mining income will still need to be ring fenced in order to offset the past unredeemed capex balance, deducted after assessed losses have been utilised.

 

 

 

 

 

Existing gold mining companies, if and when Treasury accepts the recommendations, should determine whether electing to discontinue using the gold mining formula would be beneficial or not. This should only be done once it is known whether Treasury has accepted the DTC recommendations or not.

 

A standard contract template for contract mining may not be practical for complex structures.

 

The mining royalty legislation has proved to be a challenge for both SARS and companies mining certain minerals, such as chrome and ferrochrome. It would be worthwhile for SARS to investigate the challenges experienced in the industry and amend the mining royalty legislation accordingly to avoid differences in interpretation of the current legislation.

 

Administering the DTC proposals might prove challenging for mining companies and SARS. Therefore, we do not expect many changes to legislation in the upcoming budget speech during February 2018 due to the relatively short period from the final DTC report to the budget speech. Potential changes to legislation however could be expected in the taxation laws amendment bill released towards the middle of 2018.

How can Deloitte help:

The African Mining industry is an integral cog to what is an intricate market landscape. Understanding the complexities of the various in-country regulations and tax rules is vital for business to navigate profitably through the industry. Deloitte Tax experts specialise in identifying real time solutions for mining entities across multiple tax disciplines, to help business effectively manage their tax needs.

 

 

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