In last year’s budget proposals, some changes to the mining tax regime were proposed by National Treasury relating to the treatment of mining contractors in response to a Supreme Court case which confirmed that mining contractors were in fact entitled to the same treatment afforded to mining companies for their capital expenditure deductions. This proposal was subsequently withdrawn when it was correctly pointed out in the various submissions made that the proposals would result in a host of unintended consequences for the mining tax capital deduction system as a whole. In this year’s budget, no significant changes were announced affecting to the mining tax regime.
So, the question arises as to what the status is of the final Davis Tax Committee (DTC) report that was released in December 2016?
The biggest change to the mining tax regime proposed in this report was that it “recommended that the upfront capex write off regime be discontinued and replaced with a capex depreciation regime which is in parity with the write off periods provided for in respect of manufacturing sector.” It based its recommendation mainly on the principle that the current system is unnecessarily complex and that it breaches the principle of tax neutrality between the various sectors of the economy.
This principle of neutrality was favoured by the DTC notwithstanding the lack of neutrality between the business model applying to the two sectors. For example if one considers that in mining one needs to spend capital to maintain existing operations, whereas in manufacturing one a plant is built, it will operate at design capacity for many years. The DTC also recommended that the ring-fencing of different mines be discontinued so that a profitable mine’s income could be used to offset the expenditure incurred by a new mine owned by the same legal entity. This recommendation came with a further recommendation that existing unredeemed capital expenditure be “grandfathered” so that they would not be available for immediate offset against new mines when the ring-fences were lifted. They said that detailed transitional provisions would have to be carefully drafted to deal with issues such as protecting the exiting tax base and to give special consideration to the gold mining industry.
The purpose of this commentary is not to delve into the pros and cons of whether the recommendations of the report have sufficient merit or not or whether national Treasury should accept them or not.
Rather the question we are asking is whether the recommendations have in fact been accepted or whether they are still under consideration? It may also be possible that National Treasury intends to look at the report in more detail and research the difficult transitionary provisions (as recommended by the DTC) but has not yet begun this process. It may also be possible that this process has been started, but the team is not a dedicated one and other items on its agenda that have taken precedence. If this is the case, we believe that this should be prioritised. We have noted that SARS has begun recruiting some highly skilled persons, but it seems that these are aimed at administering the tax legislation, and not formulating it. Perhaps National Treasury should establish a team to specifically deal with this so that the matter can be finalised, one way or the other? Most of the hard work has been done in the reports, we just need the policy to be finalised.
With the increase in commodity prices we are seeing expansion plans being announced in a number of sectors such as gold, platinum and copper to name a few, and the capital expenditure write off period and ring-fencing provisions can have a material affect on the viability of these projects. In light of the fact that almost five years have elapsed since the report was published it would seem that a definitive decision on this aspect of mining tax policy is overdue.