Minerals and Petroleum Resources Royalty Draft Bill: public hearings

Meeting report

De Beers Group Submission
Mr Barend Petersen, Director for Information Services, De Beers, led the delegation from the De Beers Group and advised that a comprehensive written submission on the Draft Minerals and Petroleum Resources Royalty Bill (‘the Bill’) was made to National Treasury by the Group.

The main issue that De Beers had was that the Bill conflicted with item 9(7) of Schedule 2 of the Mineral and Petroleum Resources Development Act (MPRDA). In the case of the Finch Mine in the Northern Cape, this resulted in double taxation.  In terms of the MPRDA, the Finch Mine was obliged to continue lease payments to the State in addition to paying the royalties imposed by the Bill. It was understood that it was not the intention for both the royalty and the lease consideration to be payable and the issue appeared to arisen due to a technical oversight. It was suggested that item 9(7) of Schedule 2 of the MPRDA was repealed.

Discussion
The Chairperson invited delegates from the Department of Minerals and Energy (DME) and National Treasury to comment on the issue raised by the De Beers Group.

Mr Cecil Morden, Chief Director, National Treasury, said that there were a number of lease agreements in existence and some of the agreements were enacted in legislation.  The Finch Mine agreement was preserved in terms of  the National Petroleum Resources Development Act (NPRDA) and he suggested that this principal piece of legislation be amended accordingly.  Such an amendment would require the consent of the DME.

The Chairperson said that care must be taken not to undermine the principal Act.

Ms Sindiswa Gaven, Director, Beneficiation Economics, Department of Minerals and Energy, agreed to discuss the issue with the Department of Finance to ensure that there was no contradiction.

The Chairperson agreed that there appeared to be a contradiction and that the provisions in the legislation resulted in double taxation.

Mr A Mnguni (ANC) asked if National Treasury had confirmed that there was an issue of double taxation.

The Chairperson explained that the issue of taxation and royalties to communities had been addressed.  This matter referred to leases and the matter would be taken up by the DME.  He asked whether the De Beers Group had any other concerns.

Mr Petersen replied that the Group raised this single issue in its submission as it considered the meeting to be the appropriate forum in which to address the matter.

Mr Mnguni asked if any other mine was affected.

Mr Petersen replied that the Finch Mine only was affected.

The Chairperson mentioned that the remainder of the submissions would be presented to the Committee on 19 March 2008.

Standard Bank of South Africa Ltd: Submission
Mr Marius van Blerk, Director, Standard Bank of South Africa Ltd, presented an oral submission and sketched his personal background of involvement in the mining sector and in taxation issues.  He complimented the drafters of the Bill and expressed appreciation that the concerns raised by the South African Mining Development Association (SAMDA) were taken into consideration.

Mr Van Blerk said that the changes that were made to the manner in which royalty rates were computed and the manner in which the tax base was framed were welcomed.  Previously, a series of flat tax rates, based on gross revenue, was applicable.  The concern was that when a downturn in resource prices was experienced, a flat rate based on gross revenue was potentially catastrophic for marginal mining operations.  Under these circumstances, management was forced to take urgent action to ensure that the mine remained in operation.  Labour was vulnerable and new capital investment was jeopardised.  A flat rate of tax based on gross revenue could therefore have a significant impact.

Mr Van Blerk was pleased that both issues were addressed.  The tax base was now being changed to aggregate gross sales less allowable deductions.  He considered the allowable deductions to be well thought-out and the applicable restrictions avoided potential abuse of the system.  The introduction of a profit element in the calculation of tax was welcomed.  He expressed a slight concern that essential administrative costs were excluded.  Mining operations included an element of administration to continue production.  He said that a simple flat royalty rate and a tax system that took account of profitability were fairer.

Mr Van Blerk said that the ability to obtain a fiscal guarantee was now accommodated in the legislation.  The fiscal guarantee stayed in force during the life of the mine unless the ownership of the mine changed.  Should this occur, it was possible for the new owners to re-negotiate the fiscal guarantee.

The lessening of the administrative burden on the smaller mining operations was welcomed but Mr Van Blerk suggested that the limits be periodically reviewed to keep pace with inflation.

Discussion
Mr Mnguni said that if administration and overhead costs were included in the allowable deductions, Government would in effect be subsidising the running costs of mines.  He asked if there was a possibility that the bigger players could take advantage of the benefits offered to small-scale miners as well.

Mr Van Blerk replied that although it was possible for a large mining company to slice up its operations into small units with gross sales of less than R5 million, in practice it was not feasible.  It would be difficult to anticipate what the gross sales would be and the effort involved was unlikely to be worthwhile.  The legislation included anti-avoidance clauses that excluded joint operations, for example where shares were held in another mining operation.  As with any new legislation, it was not possible to predict what may occur in future and he suggested that stakeholders remained alert for any signs of abuse.

Mr Van Blerk said that there was a cost associated with certain essential administrative functions that were carried out to ensure that mining operations took place in a proper manner.  He felt that it could be given some consideration but also suggested that the allowable deduction was capped or limited to a percentage of turnover.

Ms F Mathibela (ANC) asked if it was possible for a large company to use small-scale miners as a front to avoid the taxation.

Mr Van Blerk replied that there was no guarantee that this would not occur but the amount of effort involved would again not make this worthwhile.  He said that the royalty system was applicable on a mine-to-mine basis and did not apply to the ownership of the mine.  It was not cost-effective for big mining operations to run small mining operations and they would be unable to do so profitably.  He considered the anti-avoidance provisions in the Bill to be sufficient to counteract any attempts.  He added that if the limit was much higher than the current R5 million, then the medium sized mining groups may be affected.

Ms E Ngaleka (ANC) remarked that provision was made for the Minister of Finance to conclude binding agreements with regard to the fiscal guarantees.  She wanted to know if there were any concerns over granting the Minister more discretionary powers.

Mr Van Blerk felt that in this regard, it was appropriate to grant further discretionary powers to the Minister.  He said that the sector was subjected to economic cycles and what was an acceptable agreement during a downturn may not be the case during an upward phase of the cycle.  He agreed that the Minister should be allowed to exercise his judgment and apply his discretion on whether it was appropriate to enter into an agreement or not at the time.

Mr Morden explained that the only allowable deductions were beneficiation expenses and the cost of transport to the final buyer.  These deductions were allowed to avoid taxing the added value resulting from beneficiation.

Mr E Ngcobo (ANC)  concluded that the issue raised by the De Beers Group on double taxation required further investigation.

The Chairperson concurred and requested that the Committees were kept informed of the outcome of the discussion between the DME and National Treasury.  In conclusion, he said that the needs of industry and labour had to be balanced within the context of the broader society.  He thanked the presenters for their submissions.

The meeting was adjourned