HARD-ROCK MINING - The Davis Tax Committee

1 SECOND AND FINAL REPORT ON HARD-ROCK MINING FOR THE MINISTER OF FINANCE Intended use of this document: The Davis Tax Committee is advisory in nature and makes recommendations to the Minister of Finance. The Minister will take into account the report and recommendations and will make any appropriate announcements as part of the normal budget and legislative processes. As with all tax policy proposals, these proposals will be subject to the normal consultative processes and Parliamentary oversight once announced by the Minister. THE Davis TAX Committee December 2016 1 Table of Contents A.

2 Abbreviations and acronyms .. 3 B. Executive summary .. 4 I. INTRODUCTION .. 16 1. Scope of report .. 16 2. Consultation .. 12 3. The terms of reference and the mandate of the Davis Committee .. 17 4. Impact of tax system design on wider government objectives .. 19 5. Guiding principles of the Report .. 20 II. OVERVIEW OF MINING IN SOUTH AFRICA .. 23 1. History of the MINING industry .. 23 2. Regulatory landscape and non-tax related challenges facing the MINING industry .. 28 III. ECONOMICS AND FINANCIAL STATE OF THE MINING INDUSTRY .. 33 1. Relative contribution to GDP.

3 33 2. MINING as an indirect contributor to GDP and the economy (linkages and multipliers) .. 34 3. Attraction of domestic savings and foreign capital .. 35 4. International commodity (metal) prices and corresponding investment .. 36 5. Volumes: mineral reserves and mineral mix .. 36 6. The effect of MINING on the balance of trade .. 42 IV. THE MINING TAX SYSTEM .. 44 1. South African Income Tax .. 44 2. South African MINING Income Tax .. 46 3. Mineral royalty .. 57 V. REVIEW OF EXISTING MINING TAXES .. 64 1. Current tax regime .. 64 2. Proposals for the introduction of new tax instruments.

4 98 3. Growth and investment .. 112 4. Social and labour development .. 122 2 5. Harmonization and development of 126 6. Other Issues - General technical review .. 128 VI. ANNEXURES .. 135 1. Annexure A (Persons making submissions to the DTC) .. 135 2. Annexure B (Referrals of issues) .. 136 3. Annexure C (Tables) .. 139 4. Annexure D (Figures) .. 165 3 A. ABBREVIATIONS AND ACRONYMS ACC Allowance for Corporate Capital ACE Allowance for Corporate Equity AETR Average Effective Tax Rate AMD Acid Mine Drainage AsgiSA Accelerated and Shared Growth Initiative for South Africa ATO Australian Taxation Office B-BBEE or BEE Broad-Based Black Economic Empowerment BEPS Base Erosion and Profit Shifting CAGR Compound Annual Growth Rate CGT Capital Gains Tax CIT Corporate Income Tax COMSA Chamber of Mines of South Africa Customs and Excise Act Customs and Excise Amendment 91 of 1964 DEA Department of

5 Environmental Affairs DMR Department of Mineral Resources DWT Dividends Withholding Tax EBIT Earnings Before Income and Tax Draft Reviewed MINING Charter Draft Reviewed Broad Based Black-Economic Empowerment Charter for the South African MINING and Minerals Industry of 2016 DTC Davis Tax Committee DTI Department of Trade and Industry EFTA European Free Trade Association EI Extractive Industries EITI Extractive Industry Transparency Initiative ETR Effective Tax Rate FDI Foreign Direct Investment GAAP Generally Accepted Accounting Principles GATT General Agreement on Tariffs and Trade GDP Gross Domestic Product GEAR Growth.

6 Employment and Redistribution IFRS International Financial Reporting Standards IMF International Monetary Fund Income Tax Act Income Tax Act 58 of 1962 Katz Commission Katz Commission of Inquiry into Taxation Marais Committee Marais Technical Committee on MINING Taxation Margo Commission Margo Commission of Inquiry into the Tax Structure of the Republic of South Africa The Minister The Minister of Finance MPRDA Mineral and Petroleum Resources Development Act 28 of 2002 MPRR Minerals and Petroleum Resources Royalty MPRRA Mineral and Petroleum Resources Royalty Act 28 of 2008 MPRRAA Mineral and Petroleum Resources Royalty Administration Act 29 of 2008 MRRT Minerals Resource Rent Tax Act No.

7 13 of 2012 (Australia) NDP National Development Plan 4 NEMA National Environmental Management Act 107 of 1998 NGP New Growth Plan NPC National Planning Commission NSR Net Smelter Return NT National Treasury OECD Organisation for Economic Co-operation and Development PAYE Pay As You Earn Tax PBO Public Benefit Organisation PGM Platinum Group Metals PIT Personal Income Tax R & D Research & Development RDP Reconstruction and Development Programme RRT Resource Rent Tax SA South Africa SABS South African Bureau of Standards SACU Southern African Customs Union SADC Southern

8 African Development Community SARS South African Revenue Service SIMS State Intervention in the Minerals Sector, ANC Policy Discussion Document SLP Social and Labour Plan. An agreement that licensees of mineral exploitation rights in terms of the MPRDA are required to adhere for purposes of assisting local MINING communities with infrastructure and other social amenities. STC Secondary Tax on Companies SWF Sovereign Wealth Fund TAA Tax Administration Act 28 of 2011 TDCA Agreement on Trade, Development and Co-operation etween South Africa and the European Union TOR Terms Of Reference Treaty shopping Use of treaty networks to reduce total tax liability VAT Value Added Tax VAT Act Value Added Tax Act 89 of 1991 VCC Venture Capital Companies WTO World Trade Organisation 5 B.

9 EXECUTIVE summary 1. This document constitutes a final, updated version of the Davis Tax Committee (DTC) MINING report, submitted for the attention of the Minister of Finance. It follows an interim report tendered to the Minister for consideration in June 2015, and subsequently published to solicit stakeholder comments and engagement. This report concentrates on traditional MINING , and does not deal with oil and gas extraction, for which a separate report will be tendered. It further concerns itself mainly with income tax and the mineral royalty charge imposed in terms of the Mineral and Petroleum Resources Royalty Act.

10 2. A confluence of adverse conditions has shaken the MINING industry of late which include, amongst other things, labour unrest, low commodity prices, policy uncertainty and electricity supply failures. These and other factors have eroded investor confidence in the industry. Importantly, whilst tax design policy has an impact on investment decisions, its relative importance in terms of overall investor sentiment is relatively low. This is not to say that tax policy should be neglected, but that changes to tax design should be approached cautiously, without trying to achieve too much at the same time, or to compensate for problems which lie outside the tax system.