On the table: With questions regarding ownership set to the side for now, the focus has turned to taxation

In December 2012 the governing African National Congress (ANC) finally settled the issue of nationalisation of mines that had spread alarm through the sector for much of the year. “The issue of nationalisation as we have discussed during the past few months is off the table. The ANC affirms its historical position on this topic – strategic ownership where deemed necessary,” Malusi Gigaba, the minister of public enterprises, told the press at its five-year convention – uncompromising phrasing broadly welcomed by the industry. However, even as he spoke, attention was turning to the new ground of the mining debate: the question of taxation.

Current System

Royalty rates are the preferred choice for governments wishing to enlarge their share of national mineral wealth: they are easy to implement and they target a single sector with the precision impossible through instruments such as corporation tax. South Africa, however, was a late adopter of the practice, only introducing a royalty system in 2008 and even then delaying it for two years in order to give mining companies an opportunity to recover from the global economic crisis. Under the current system, mining companies in South Africa pay a rate of between 0.5% and 7%, depending on the mineral, calculated from gross sales from refined and unrefined resources. This compares to Ghana’s fixed royalty rate of 5% and between 3.5% and 5% in South Australia.

The profit-based scheme ensures that royalties levied are linked to the ability to pay, and exemptions exist for small mining firms with annual gross sales of less than R10m ($1.22m). Mining firms in South Africa are also subject to company income tax, levied at 28% of the taxable income of the company.

Proposals

While the question of nationalisation is settled for now, there is a push to capture a greater share of mineral wealth, which the ANC has suggested may be met through taxation. “The state must capture an equitable share of mineral resources through the tax system and deploy them toward long-term growth and economic transformation,” Enoch Godongwana, an ANC economic policymaker, told the December 2012 party conference.

Details of any new taxation system have yet to be revealed, but 2012 saw some indications of how they might be formulated. A discussion paper authored in advance of an ANC policy conference held in June proposed a 50% resource rent tax on mining operations once a return on investment threshold of 15% is achieved, a potential policy move resembling that recently seen in Australia. That country’s minerals resource rent tax came into effect on July 1, 2012 and applies to all iron ore and coal projects in the country.

The new scheme is set to raise $13.4bn in the 2015/16 fiscal year, which has been earmarked for inter alia family payments to low and middle-income households and tax relief to small businesses. The ANC discussion paper also suggested introducing regulation to ensure that raw materials are sold to the domestic market at competitive prices to boost domestic manufacturing.

Consequences

While Australia’s policy change has been greeted as an economic advance for that nation, the circumstances in South Africa differ in a number of ways. South African gold and platinum mines have suffered as a result of labour unrest in 2012 and are likely to face higher employee costs as wage agreements are negotiated over 2013. Moreover, many South African mines are already operating at marginal profit levels: in deciding to shut four shafts, sell a mine and reconfigure its South African operation, Anglo American cited a number of profit-eroding factors, including capital intensity, increasing mine depth, deteriorating ore grades and higher-than-inflation unit cost increased.

Comments made by the firm’s outgoing CEO, Cynthia Carroll, in late 2012 highlighted the concern felt by much of the industry: “A resource tax – added to all the other burdens on the industry – would make South Africa internationally uncompetitive,” she said. Measuring a desire for social justice against the requirements of a struggling mining industry will be one of the more challenging calculations being made in the coming year.