Based on the legislation in its current form, the Royalty Act is generally applied in the coal industry as follows:
- Where coal with a calorific value (“CV”) below 19MJ/kj is extracted and sold, the taxpayer must determine gross sales for royalty purposes as though he did sell coal with a CV of 19MJ/kj, i.e. for royalty purposes, the taxpayer is subject to the royalty on a ‘deemed’ gross sales amount, which must be determined with reference to the amount he would have received, had he in fact transferred coal with a CV of 19MJ/kj;
- Where coal with a CV is above 19MJ/kj is extracted (for example, say the CV at extraction is 22MJ/kj), and thereafter beneficiated and sold or exported with a CV of 25MJ/kj, the general view in the market in light of the purpose of the Royalty Act, is to determine gross sales with reference to the CV at extraction (i.e. gross sales is determined with reference to the amount that a taxpayer would have received, had it transferred its coal at Run of Mine (“ROM”)). This ensures that the purpose of the Royalty Act is met with regard to compensation for the use of South African minerals, and the taxpayer is not penalised (in the form of additional royalty tax) by beneficiating the coal, and thus increasing its value for purposes of sale. This approach was certainly confirmed by the Explanatory Memorandum issued at the time of issuing the Royalty Act.
- It is anticipated that the proposed amendments to the Royalty Act in the recently released Taxation Laws Amendment Bill No. 39 of 2013 (“TLAB”) will have a significant impact on the methodology (as set out above) which has been generally utilised by coal mining companies to determine their royalty liability since introduction of the Royalty Act.
In essence, the proposed amendments, once enacted will have the following impact where coal is transferred on or after 1 March 2014:
- The position where coal is transferred with a CV below 19MJ/kj will remain the same – i.e. a taxpayer must determine a ‘deemed’ gross sales amount, determined with reference to the amount he would have received, had he in fact transferred coal with a CV of 19MJ/kj;
- Importantly, where coal is transferred anywhere within the new range of the specified condition for coal (which can be anywhere from 19MJ/kj to 27MJ/kj), gross sales must be determined with reference to the value received on transfer; and
- Where coal is transferred above the maximum range of condition specified (i.e. above 27MJ/kj), gross sales must be determined utilising a ‘deemed’ gross sales amount, determined with reference to the amount he would have received, had he in fact transferred coal with a CV of 27MJ/kj.
The proposed amendments are far reaching, and appear to contradict the purpose of the Royalty Act, as indicated in the Explanatory Memorandum of the Royalty Bill, which was prepared prior to introduction of the Royalty Act. Based on the Explanatory Memorandum on the TLAB, the proposed amendments have been introduced due to “... significant underpayments of mineral royalties”.
The question one has to ask is whether the calculation methodology, which is currently being applied by players in the coal industry has not resulted in ‘a significant underpayment of mineral royalties’, but rather the correct interpretation and application of the Royalty Act, in light of the purpose of the legislation and what it seeks to achieve. As such, the question that remains is whether the rationale for implementing the above proposed amendments relates to SARS’ inherent view that most taxpayers seek to avoid the payment of taxes, as well as SARS’ budgetary targets relating to revenue collection.
This is a fundamental policy change and may ultimately impact a broader range of commodities.