PROPOSAL TO INITIATE INCENTIVES FOR JUNIOR EXPLORATION

Background

In its 2007 Budget Review, the National Treasury announced its intent to review the tax concept of flow-through shares. In Canada, the concept of flow-through shares applies to junior mining exploration companies operating on Canadian soil by allowing investors to immediately deduct their investment capital. This immediate deduction is intended to act as compensation for the high-risk nature of mineral exploration. Canada now is the global leader for junior mining exploration. The purpose of the National Treasury study is to determine the role of flow-through shares in facilitating this development and whether Canadian conditions for junior mining exploration can be replicated in South Africa.

As a general matter, the National Treasury (and SARS) strongly maintains the philosophy of lowering tax rates while broadening the tax base. This philosophy has worked to great effect over the last decade with Government facing a surplus while providing ongoing relief for salaried workers and smaller sized businesses. Yet, this philosophy requires that tax incentives be utilised only sparingly, thereby preventing avoidance schemes and deadweight loss. History has also revealed that tax incentives are effective only when working in sync with a regulatory paradigm that equally facilitates growth.

In this vein, tax and regulatory incentives for junior mining exploration will work best only when going hand-in-hand. The proposal below seeks to create regulatory space for the Minister of Minerals and Energy to provide regulatory assistance for junior mining exploration should the Minister of Finance propose the flow-through concept (upon receipt of favourable findings from the ongoing study). However, the proposal does not create any obligation for the Minister of Minerals and Energy, especially if the flow-through share concept does not come to pass.

Junior mining company prospecting incentive

21A. (1) The Minister may promote prospecting by junior mining companies in the Republic.

(2) In promoting prospecting by junior mining companies, the Minister may prescribe adjustments to the granting, renewal, rights and obligations associated with prospecting rights, and these adjustments may take into account the mineral concerned.

(3) For purposes of this section, the definition of a junior mining company will be determined in terms of an Act of Parliament that is adopted pursuant to a money Bill.