PODCAST | Energy instability, weak infrastructure and policy uncertainty challenge miners

In this edition of Business Law Focus host Evan Pickworth interviews Andries Myburgh, Ntebaleng Sekabate and Mansoor Parker from ENSafrica just ahead of the Mining Indaba. They dig into key legal changes in the sector and where the gaps and opportunities lie.

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Exploration must rise

The department of mineral resources & energy’s exploration mining document wants to attract 5% of global exploration within five years.

According to the strategy document, the weaknesses that have resulted in SA receiving only 1% of the global exploration budget include energy instability, road and rail infrastructure challenges and unsatisfactory policy implementation. These factors will need to be satisfactorily addressed to increase SA’s share of the exploration budget. There are several strategic initiatives outlined by the department in its document, but it remains to be seen whether these initiatives go far enough and are implemented with the required haste.

Incentives are key

Mining companies are now entitled to an upfront 100% capital expenditure deduction, which incentivises miners to incur the capital outlay in respect of developing a mine. The Davis tax committee recommended that the upfront 100% tax incentive be scrapped and replaced with an allowance similar to that provided to manufacturers, which is spread over four years. Keeping in line with other tax incentives, it appears that the National Treasury’s intention is to reduce existing incentives. Also, the Income Tax Act has provisions that may allow mining companies to deduct capital costs incurred in respect of renewable energy projects, but these provisions are quite niche so mining companies should consider these provisions carefully when planning their renewable energy projects.

An upfront allowance is provided for deducting expenditure incurred in respect of prospecting activities. However, the problem is that the prospecting expenditure can only be deducted from mining income. Therefore, taxpayers that carry on prospecting do not benefit from this incentive until such time that the prospecting is successfully completed and a mine is developed. So, if the prospecting is not successful that deduction is lost.

Carbon tax conundrum

The Treasury is proposing that the carbon tax rate be  increased by a minimum of $1 between 2023 to 2025 and that it increases gradually to $20 in 2026 and $30 in 2030. Businesses, meanwhile, would like to see the annual carbon tax increases continue based on the Consumer Price Index (CPI) of +2% structure until at least 2030 to allow for reviewing and aligning different policies.

As part of their reasons for these proposed changes the Treasury explained that a credible headline carbon tax rate will go a long way in nudging SA  on to a sustainable, low carbon and economically competitive growth path. Business acknowledged the need for a sustainable, low-carbon path. The issue was whether these proposals were consistent with achieving an economically competitive growth path.

• A detailed breakdown of each of these challenges will be published in the next print edition of Business Day Law & Tax on October 10.