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With the government looking to woo domestic and foreign investors to fund offshore petroleum projects in SA through the recently passed Upstream Petroleum Resources Development Bill, the National Treasury is looking to cash in, increasing the minimum royalty rate paid by companies operating in the oil and gas industry to 2%.

The Treasury in the Tax Administration Laws Amendment Bill tabled in parliament last week alongside the medium-term budget policy statement introduced a “consequential” amendment to the Royalty Act to provide a rate specifically for oil and gas.

“The current royalty rate for oil and gas companies is determined by a formula and ranges from 0.5% to 5% (higher profitability equals higher rate), which is multiplied by the royalty base (sales) to arrive at the royalty amount due to Sars [the SA Revenue Service],” a Treasury spokesperson said.

“The proposal is to increase the minimum of the royalty rate range to 2%, so that the rate ranges from 2% to 5%. This minimum applied to sales is to recognise that government is losing a finite resource and should still be compensated, regardless of profitability.”

Royalties are often criticised for being a regressive form of taxation, since they are paid by investors as production starts.

The government had initially proposed a flat-rate royalty of 5% on gross sales for upstream oil and gas companies but has backtracked on this proposal after public consultations.

The Treasury said the change follows the recognition that a flat-rate royalty is not flexible enough to adequately cater for high-cost projects, such as those in deep waters with tough sea conditions.

“In the discussion paper, consideration was given to having separate rates for oil and gas — for example, deep versus shallow water extraction.

“However, this was decided against given the challenges some countries have experienced in this regard — for example, allocating costs to different revenue streams when oil and gas are produced together.”

Another change on the cards is that oil and gas be recognised as a stand-alone refined mineral resource in the legislation for purposes of the determination of royalties to accommodate the difference in the minimum rate applied to the royalty base (gross sales) ranges within the scope of refined mineral resources.

SA has large reserves of unconventional shale gas in the Karoo, according to the International Energy Agency.

The Upstream Petroleum Resources Development Bill, which provides for hydrocarbons to be regulated separately from mining, was approved by the National Assembly three weeks ago.

It will now be sent to the National Council of Provinces for concurrence, before being signed into law by President Cyril Ramaphosa.

The bill means the upstream sector will no longer be managed by the Mineral & Petroleum Resources Development Act and is meant to make it easier for oil and gas companies to gain approval for new projects.

VAT changes

The Treasury has also moved to amend section 21 of the VAT Act, to keep up with developments in the telecom sector.

In the nascent years of the mobile telecoms industry in SA, prepaid subscribers to mobile services could use prepaid vouchers only to purchase services offered by that mobile company, such as calls and short message services.

But technological advances have seen consumers use the prescribed services purchased from the telecom company to acquire other services from third parties. Examples include the supply of financial services such as insurance, downloads of music or movies and mobile money services.

“Essentially this makes it possible for a mobile company that sells vouchers for prepaid airtime, for example, to issue a credit note when the ‘airtime’ is subsequently used to purchase a ringtone, music and so on and that supplier is required to declare output tax on the supply.

“VAT is due and payable at the time that the airtime voucher is sold and these days it is possible to use this ‘credit’ for other purposes,” said Charles de Wet, an executive in ENSafrica’s tax practice.

“This then resulted in the telco declaring VAT as well of the supplier of the other service, effectively resulting in VAT being paid twice on the same consideration. This amendment makes it possible for the telco to issue a credit note and thus claim the VAT paid on the original supply when the amount is transferred to another service provider.”

Jacqui O’Sullivan, chief sustainability and corporate affairs officer at MTN SA, welcomed the proposal to provide relief to telecom companies that suffer VAT leakage.

“For example, in instances where the company acts as collection agent and can’t act as an intermediary on behalf of foreign content providers in terms of section 54 (2B) of the VAT Act, [as well as] donations or long-term insurance premiums,” O’Sullivan said.

“Even though we agree that the mechanism of providing credit notes by the telecommunication companies to the prepaid subscribers will enable the telcos to reclaim the VAT that was originally paid when the prepaid voucher was sold to the prepaid subscriber, there are some practical difficulties with this proposal as telecommunication companies would not be able to comply with all the requirements of section 21(3) of the VAT Act.”

She said that the industry will continue to engage with the National Treasury and “perhaps look at feasible alternatives to section 21(3) amendments”.

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