“Breaking ground” to calculate mineral royalties on unrefined minerals
The 2014 changes to the South African Mineral and Petroleum Resources Royalty Act, 2008 (the “Royalty Act”) have left mining companies and extractors (“taxpayers”) in uncertain territory. The amendment saw the “minimum” requirement being deleted from section 6A(1), as well as from schedule 2 to the Royalty Act, in an attempt to provide clarity on how to interpret schedule 2 when determining gross sales for, inter alia, unrefined minerals extracted beyond the condition specified for that mineral when it is transferred. The Explanatory Memorandum on the Taxation Laws Amendment Bill, 2013 explains that the uncertainty was caused by schedule 2 providing the “minimum” requirement for some minerals, while not for others.
Prior to the 2014 amendment, section 6A(1) would apply exclusively to mineral resources with a specified “minimum” condition or a range of conditions, and minerals transferred beyond this minimum would need to be treated as having been transferred at the higher of either the minimum condition specified or the condition in which the mineral was extracted.
The amended wording is clear and expressly applies to all unrefined mineral resources that have a fixed specified condition and must be applied to determine gross sales for transfers of unrefined mineral resources after 1 March 2014. The provision now reads:
“If an unrefined mineral resource—
(a) is transferred below the condition specified in Schedule 2 for that mineral resource, the mineral resource must be treated as having been brought to the condition specified for that mineral resource; or
(b) is transferred at a condition beyond the condition specified in Schedule 2 for that mineral resource, the mineral resource must be treated as having been transferred at the higher of the condition specified for that mineral resource or the condition in which that mineral resource was extracted.’’
However, the amendment only partially remedies the uncertainty surrounding this provision. The confusion caused by the minimum requirement still applies to minerals transferred beyond the minimum condition specified in schedule 2 before the changes to section 6A came into effect. Also, the definition of “extracted”, a critical element in determining gross sales, has no definition. The term is not defined in the Royalty Act, nor in any related mining legislation, and no case law relating to the Royalty Act exists as yet.
To ensure the correct application of section 6A(1), it is essential to consider the meaning of “extracted“. Two reasonable interpretations of “extracted” can be argued. One, is that an unrefined mineral resource is “extracted” when it is removed from the mine mouth (ie, from the earth). The opposing interpretation is that the word “extracted” must be interpreted to refer to the stage in the mining process when the unrefined mineral resource is removed from the concentrator.
The South African Revenue Service (“SARS”) has provided an indication on how to interpret what “extracted” means and when it occurs by way of a draft interpretation note and a draft binding general ruling (the “drafts”) on section 1 read with section 6A(1)(b) of the Royalty Act. These drafts favour the interpretation that extraction occurs at the mine mouth. However, the guidance provided has no binding effect on SARS as these documents are only in draft and there is currently no glimmer of when the drafts may become finalised by SARS, granting authority for taxpayers to rely on them directly.
In the absence of concrete authority and under the pressing need to calculate gross sales and file royalty returns, it seems that resolving the uncertainty around the meaning of “extracted” is a question of interpretation. In applying the rules of interpretation to “extracted”, it seems that the logic culminates in a result consistent with the drafts circulated by SARS.
In following the rules of interpretation, the starting point is that the ordinary dictionary meaning must be given to a word unless it creates absurdity or ambiguity. The definitions set out in the Oxford English Dictionary and the Collins Dictionary offer a very wide meaning that creates ambiguity in the context of mining. As such, the purposive approach, which is preferred by South African courts, should be applied. This requires interpreting legislation in a way that gives effect to the general legislative purpose that underlies a statutory provision with preferring a sensible, business-like meaning as well as considering the context and the language of the provision.
The purpose of the Royalty Act is to impose a royalty on the value of the minerals obtained from the earth and not on the value of the mineral derived from further beneficiation processes. Section 6A was included in the Royalty Act to ensure that royalties are not aimed at taxing beneficiation. Thus, if extraction occurs at concentration or any other beneficiation process (in terms of the second possible interpretation) and not at the mine mouth, a taxpayer would be penalised for efficiently beneficiating minerals to a higher grade than the condition specified. This is clearly counter the purpose of the legislation and cannot be the interpretation that the legislature intended.
As a minimum, where a taxing provision creates ambiguity, the contra fiscum principle must be applied. The rule prescribes that an ambiguous provision must be interpreted in favour of the taxpayer. Thus where a provision is capable of two meanings, the meaning or construction which imposes the least burden on the taxpayer must be favoured. Extraction occurring at the mine mouth places the least burden on the taxpayer and strengthens the argument that “extraction” for the purposes of section 6A(1) and gross sales calculations occurs at the mine mouth.
Although the drafts in circulation and the logical conclusion of the interpretational analysis as demonstrated above points to extraction occurring when unrefined mineral resources are removed from the mine mouth, there is still no guarantee that SARS will accept royalty returns calculated on this basis and the mining industry is waiting very patiently for some certainty so that their commercial ventures can continue strongly into the future.