Introduction

The coming into force of the Mineral and Petroleum Resource Development Act 28 of 2002 (“MPRDA”) has brought about drastic changes to the mining industry and with change comes uncertainty. One such change was that as per section 3(4) of the MPRDA, the amount of royalty payable to the State must be determined and levied by the Minister of Finance in terms of an Act of Parliament. This Act of Parliament came in to force on 1 March 2010 and is entitled the Mineral and Petroleum Resources Royalty Act 28 of 2008 (“Royalty Act”). Recent amendments have brought about even further change but this time to remove uncertainty. Only time will tell.

The Mechanics of the Royalty Act

The Royalty Act provides for all matters relating to the payment of royalties i.e. by whom, when and how much. The trigger point for payment of royalty is upon transfer as per section 2 of the Royalty Act.

Transfer is very widely defined as:

(a) the disposal of a mineral resource; or
(b) ………. (deleted)
(c) the consumption, theft, destruction or loss of a mineral resource, other than by way of flaring or other liberation into the atmosphere during exploration or production
if that mineral resource has not previously been disposed of, consumed, stolen, destroyed or lost;
The ‘person’ liable to pay is defined as including an insolvent estate, a deceased estate and a trust.

The Royalty Act differentiates between refined and unrefined mineral resources. This is for the simple reason that the State recognizes that beneficiation (the value-adding refining process) is beneficial to the economy and thus should be incentivized. As such, refined minerals are subject to a slightly lower royalty rate. Refined mineral resources are defined as those listed solely in Schedule 1 of the Royalty Act and unrefined minerals are those listed solely in Schedule 2 of the Royalty Act. Different formulae are used to determine the amount one has to pay based on whether the mineral resource is refined or unrefined upon transfer as per section 3 read with section 4 of the Royalty Act.

The formulae provided that refined resources may incur royalties from 0.5% to a capped maximum of 5% of gross sales of that mineral resource in that year of assessment and unrefined mineral resources may incur royalties from 0.5% to a capped maximum 7% of gross sales of that mineral resource in that year of assessment.

The Problematics of the Royalty Act

The South African Revenue Services, the Minister of Finance and the Minister of Mineral Resources have been less than impressed by the results. Fiscal revenue should be flowing in by the dump-truck load, but isn’t. Why? It appears that the would-be taxpayers have misinterpreted the schedules and the so-called “minimum condition rules” by calculating the royalty owed by grossing down the value to the minimum condition even when the mineral was transferred in a condition above the specified value. This has resulted, through the mystery of mathematics, in underpayments of royalties.

The Fix

As of 1 March 2014, the Royalty Act has been amended in an attempt to clarify the royalty calculation so as to ensure correct royalty payments are made going forward. The word “minimum” has been removed from the term “minimum condition” in Schedule 6A which deals with the application of Schedule 2 (unrefined resources). Consequently, where any unrefined mineral resource is transferred below the condition specified in Schedule 2, the mineral resource must be considered to have been brought to the condition specified. Where any unrefined mineral resource is transferred beyond the condition specified in Schedule 2, the mineral resource must be treated as having been transferred at the higher of the condition specified or the condition in which that mineral was extracted.

Furthermore, section 6A and Schedule 2 has been amended by the inclusion of a range of conditions for certain mineral resources.

If the mineral resource is transferred:

a)  below the range it is considered to have been transferred at the minimum of the range;
b)  between the range values it is considered to have been transferred at that particular condition;
c)  Above the given range it is considered to have been transferred at the maximum of the range.

For example, coal is a Schedule 2 resource and it has been given, as a result of this amendment, a range calorific value of between 19.0 MJ/kg and 27 MJ/kg. Therefore, if coal is transferred with a calorific value of:

a)  17MJ/kg, it must be considered to have been transferred at 19.0MJ/kg;
b) 23MJ/kg, it must be considered to have been transferred at 23MG/kg; and
c) 29MJ/kg, it must be considered to have been transferred at 27MJ/kg.

The Conclusion

The net result of the amendments to the Royalty Act is less in the nett for extractors and more in the National Revenue Fund. It would appear that coal is being targeted for the simple fact that the numbers do not add up. The sale of coal is one of the highest of the resources whilst royalty payments from the coal industry are some of the lowest.

Written and prepared by: Patrick Wainwright

Please do not hesitate to contact us on +27 11 788-0083 should you have any further enquiries or email enquiries@bkm.co.za

“BKM Attorneys - Passionate about Law”