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14 May 2024
BY Kristel van Rensburg AND Simon Weber

Practical challenges and legal complexities – Does SARS owe you a mineral royalty refund?

Promulgated in November 2009, the Mineral and Petroleum Resources Royalty Act No. 28 of 2008 (‘Royalty Act’) has been in effect for almost 14 years. But, despite the perceived familiarity with its provisions, challenges continue to emerge within this regime.  

The South African Revenue Service (‘SARS’) is currently in the process of implementing a new system aimed at streamlining the mineral royalty process, although implementation is still a work in progress. One notable inconvenience is that SARS’ mineral royalty statements of account may only reflect the transactional data (i.e., returns, payments, and refunds) that has been captured by SARS on the new online system. As SARS is uploading this data in batches, mineral royalty statements of account are often incomplete and inaccurate.

The mineral royalty regime operates on estimates. An extractor must estimate its mineral royalty liability and submit a first provisional return not later than six months after the start of the tax year. A second provisional return, also based on an estimate, is due by the last day of the tax year. Then, if the final royalty liability is higher than the provisional payments, the extractor must submit a return of excess within six months of the end of the tax year. The final return is only due by the end of the subsequent tax year.

So, it is not uncommon for the final (annual) royalty liability to be less than the payments made pursuant to the first and second provisional mineral royalty returns. In such cases, SARS may owe the extractor a refund. However, given that accurate mineral royalty statements of account are not readily available, extractors are often not aware that they have overpaid mineral royalties.

Moreover, the Royalty Act is complex, often resulting in ambiguity. In this respect, the following serve as examples of possible pitfalls that warrant proper consideration:

  • The mineral royalty is only imposed in respect of the ‘transfer’ of a ‘mineral resource’ ‘extracted’ from within South Africa. So, for example, where the extractor transfers a mineral that does not fall within the ambit of the definition of ‘mineral resource’, then the royalty liability will not be imposed in respect of that mineral. Relevant here, is that the term ‘mineral resource’ is defined in section 1 of the Royalty Act with reference to the Mineral and Petroleum Resources Development Act No. 28 of 2002. A question that arises, then, is whether minerals extracted from tailing dumps that were created pursuant to ‘old order’ mining rights are ‘mineral resources’ for royalty purposes.
  • Generally speaking, an extractor may, in calculating its ‘earnings before interest and taxes’ (‘EBIT’), deduct ‘capital expenditure’ (as per section 36 of the Income Tax Act No. 58 of 1962 (‘ITA’)) that was incurred to win, recover and develop the mineral resource to the ‘condition specified’. But, for instance, do the so-called ‘capex per mine ring-fence’ provisions in section 36(7F) of the ITA, read with section 36(10), impact the calculation of EBIT for mineral royalty purposes?
  • Schedule 1 and Schedule 2 of the Royalty Act, which contain the ‘condition specified’ for refined and unrefined mineral resources, respectively, are central to calculating the mineral royalty liability. It is crucial, then, that extractors continually monitor if, or at what point in its mining process, the mineral resources reach the ‘condition specified’.

In light of this, extractors should conduct a review of their mineral royalty positions and in doing so,  consider if the Royalty Act has been interpreted and applied correctly. Are the assumptions underlying the calculations still valid 13 years after the Royalty Act was first introduced? Or has there been a change in mining processes or output? At the very least, extractors should compile a manual statement of account based on historic returns and payments.

It should be kept in mind that royalty amounts due, either to an extractor, or to SARS, will attract interest in terms of the Mineral and Petroleum Resources Royalty (Administration) Act No. 29 of 2008, read with Chapter 12 of the Tax Administration Act No. 28 of 2011. So, a manually prepared statement of account should account for interest too.

If an extractor has established that a refund is due, it is necessary to formally request SARS to pay such a refund. This request should be made keeping in mind the legislative framework applicable to royalty refunds.

Given these practical challenges and legal complexities, extractors should obtain professional legal advice.

In the current economic climate, coupled with the challenges presented by a downturn in the commodity price cycle, a refund from SARS can prove to be a handy windfall for many businesses.

*ENS recently represented Richards Bay Mining (Pty) Ltd in the matter of Richards Bay Mining (Pty) Ltd v C:SARS which concerned the interpretation of section 4(2) of the Mineral Royalty Act. 

 

Kristel van Rensburg

Executive | Tax

kvanrensburg@ENSafrica.com

 

Simon Weber

Executive | Tax

sweber@ENSafrica.com