The National Treasury today releases the third draft of the Mineral and Petroleum Resources Royalty Bill, for a final round of public comment and parliamentary review.. The Bill gives effect to the objectives of the Mineral and Petroleum Resources Development Act, 2002 (MPRDA).
The National Treasury released the first draft Mineral and Petroleum Resource Royalty Bill in March 2003 for public comment. After extensive consultations, revisions were made to the Bill. A second revised draft Bill released on 11 October 2006 contained modifications that address most of the concerns raised during the first round of consultations. Following a second round of extensive consultations, this third (and final) draft Bill is now released for public comment and parliamentary review. This draft Bill includes further substantive changes to facilitate sustainability of the mining industry, whilst at the same time giving effect to the MPRDA.
One of the most important aspects of any tax system is to properly define and quantify the tax base. The tax base for the mineral and petroleum resources royalty regime as defined in both the first and second draft Bills was gross sales. This third draft of the Bill confirms gross sales as the tax base, but takes into account the process of beneficiation. Though the second draft Bill attempted to take account of beneficiation activities by way of a dual rates system (differential rates for refined and unrefined minerals), this Bill takes into account comments received from the industry and shifts away from a dual rate system towards an allowance for deductions of beneficiation related expenses.
The revised tax base will thus be equal to gross sales less allowable beneficiation related expenses and transport expenses between the seller and buyer of the final product.
Given that the beneficiation related activities might differ from mineral to mineral the Minister will by way of regulations, for the various minerals, identity what activities and related expenses will qualify as beneficiation. In general beneficiation expenses related to smelting, refining, processing and sorting (in the case of diamonds) will be deductible. Annexure 1 provides a brief summary of the relative importance of each of these components for the main mineral types.
It should be noted that the third draft of the Bill provides for all minerals including aggregates, sand and limestone to be subject to the mineral royalties. The specific royalty rate for this latter category of minerals was initially set at zero in the previous two draft Bills.
1 Gold 0.
2 Diamonds 7.
4 Manganese 19.
5 Mineral Sands 21.
6 Coal 21.
7 Chrome 23.
8 Iron Ore 27.
In addition to a revised tax base the royalty rates have also been reviewed. Both the previous draft Bills incorporated specific, but differential royalty rates for the various the minerals. In the second draft Bill the specific royalty rates were reduced and, in addition, dual royalty rates were introduced for certain minerals (with a lower rate for refined minerals).
The new royalty rate structure will be based on a formula that takes into account the profitability of company.
Y (%) = EBITDA X 100 (Gross Sales multiplied by 12.
For the purpose of calculating the royalty rates a negative EBITDA will be set equal to zero. Based on information received from the industry the average royalty rates for the nine main minerals, for the period 2002 to 2006, would have varied between 1.0 percent and 3.
Diamonds ManganeseIron ore Mineral Sands PGM Gold Coal Chrome Base Metals n/a 2 2 2 3 1.5 1 2 2 5 4 4 4 6 3 3 4 4 5 3 3 3 4.5 2.25 2 3 3 3.7 3.3 3.0 3.0 2.7 2.1 2.1 1.0 1.
Annexure 2 is a summary of EBITDA (earnings before interest, taxation, depreciation and amortization) expressed as a percentage of gross sales / revenues for the period 2002 to 2006.
The royalty rates derived in terms of the proposed formula are lower or similar to the royalty rates structure proposed in the 2nd Draft Bill. It should also be noted that the tax base in the final draft bill is narrower, given the allowable deductions.
On average the revised royalty regime is therefore more investor friendly, and should be easier to comply with and easier to administer, whilst it would also ensure that the fiscus receives its fair share of tax revenue.
A special relief mechanism that was included in the 2nd draft Bill to cater for marginal mines in order to prevent their premature closure is no longer required. The formula based royalty rate structure provides automatic relief for marginal mines; it also does so in a much more elegant and simpler manner. Government will share in the down side risk of mines but also share in the benefits resulting from high commodity prices.
A number of traditional communities currently receive royalty payments from mining operators that mine on their land. Item 11 of Schedule II of the Mineral Resources Development Act (Act No. 28 of 2002) (the "MPRDA") provides that communities will continue to receive such royalties regardless of whether these royalties are paid with respect to "old order" or "new order" mining rights.
Communities and mining companies are encouraged to enter into negotiations to, where appropriate, convert the financial interest of communities into equity stakes in the operating companies. These negotiations will of necessity require that the role-players will have to make some concessions in order to ensure lasting and sustainable arrangements.
The deadline for public comment is 29 February 2008. The Portfolio Committee on Finance will conduct hearings shortly thereafter before the Bill will be formally tabled in Parliament. The Bill is available for public comment on www.treasury.gov.za and comments can be sent to pearl.malumane@treasury.gov.za.
Annexure 1: Type and relative significance of deductible beneficiation related and transport expenses.
1 Smelting 50.2% 28.
2 Refining 46.6% 37.7% 42.
3 Transport 1.8% 38.9% 10.1% 28.6% 71.9% 82.8% 27.
4 Insurance 1.4% 23.8% 1.
5 Processing * 41.
6 Throughput ** 19.
7 Recovery 8.
8 Sorting 10.
9 Security 10.
10 Primary crusher & other 27.
11 Dense Medium Separator (DMS) plant, sintering 6.2% 40.
12 Port , shipping & insurance 11.0% 32.
Processing includes: screening, crushing and washing.
Manganese Iron Ore PGM Gold Coal Chrome 45.5 41.8 28.9 37.2 27.3 23.5 40.4 26.9 28.1 46.3 32.3 15.3 32.7 20.2 26.4 7.1 15.8 17.1 49.3 46.8 29.4 4.1 27.3 12.3 43.4 53.2 45.0 33.0 23.8 9.1 41.8 37.6 34.0 26.2 26.1 12.
Y (%) = (EBITDA divided by Gross Sales) X 100 divided by 12.5 For the purpose of calculating the royalty rates a negative EBITDA will be set equal to zero.