Picture: SOWETAN
Picture: SOWETAN

Welcome to the next episode of Business Law Focus, which digs deeper into what can be expected in next month’s budget.

Editor Evan Pickworth interviews head of tax in the Johannesburg office of ENSafrica, Andries Myburgh, to get key insights on potential corporate and mining tax changes.

Join the discussion:

According to Myburgh, two areas where certainty is needed on the corporate tax front, are clarity on the proposal last year to deny contract miners the accelerated capital expenditure deduction and the need for more incentives to encourage greenfield exploration.

A key message is that economic activity can be encouraged through incentives for prospecting or exploration.

The background:

An amendment to the Income Tax Act last year proposed to exclude contract miners from qualifying for the accelerated capital expenditure deduction.

While lobbying by industry has led to a postponement, a key question is whether these changes will be implemented in the legislation immediately following the February budget, as further consultation between the industry and Treasury has not yet happened.

An important legal precedent at the SCA (Supreme Court of Appeal) has served as a precursor to the proposed amendment. In Benhaus Mining v CSARS (165/2018) [2019] ZASCA 17 on 22 March 2019 the SCA made it clear that a company that excavates ground and digs up mineral-bearing ore for a fee on delivery to another entity that processes the ore, undertakes mining operations within the meaning of ss 1 and 15(a) of the Income Tax Act 58 of 1968. It is thus entitled to claim deductions of the full amount of capital expenditure on mining equipment in the tax year in which it is incurred, in terms of s 36(7C) of the act.

An additional remark by one judge, however, was that a change to legislation should rather be looked at if the intention is for a contract miner not to benefit from the deductions.

It will be important now to ensure tax legislation provides certainty and predictability for investors and enables the industry to grow.

Urgent need for mining exploration incentives

On the mining exploration front, the Minerals Council has prepared a powerful, comprehensive proposal on how incentives through flow-through shares could be harnessed to breathe life into the industry, without eroding the tax base.

The research shows how an incentive tailored to SA’s unique circumstances could create much-needed jobs and then also feed back into the tax loop in other ways, like employees’ tax, VAT and income tax imposed on service providers to the exploration companies — so the major concern about erosion of the tax base is mitigated.

Canada is a good example of how the correct policy choices can stimulate mining growth. It has been highly successful in developing these specialist junior exploration companies largely by using a flow-through share tax incentive model to attract equity investors into the sector. From 2000 to 2018, Canada attracted on average US$2bn a year in exploration expenditure, while SA only attracted US$194m annually.

However, the proposal for SA needs to be different as in Canada it works for Canadian tax residents, whereas in SA the idea is to attract essentially foreign shareholder investment.

The time is right to push forward these proposals as, in the long run, it will be quite beneficial for SA. For SA to reach a necessary target of attracting 3%-5% of global exploration dollars, it needs to revise its tax incentive system with respect to exploration, as well as modernise its licensing system to ensure further investment into the mining sector.

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