Mining super tax will make foreign investors jittery

Nationalisation may be off the table but analysts warn that any changes to the tax regime in the mining sector will also scare away investors.

Even though nationalisation is no longer up for debate, the mining industry will not be encouraged to invest and grow the sector if new taxes are introduced, analysts said on Wednesday.

Their comments follow hints by government of a massive overhaul of taxing processes in the industry.

Mineral Resources Minister Susan Shabangu effectively closed the nationalisation debate on Tuesday during her opening address at the 2012 Mining Indaba in Cape Town.

Shabangu said the ANC’s research team—investigating the viability of mine nationalisation—found the process to be unsuitable and costly.

This ended speculation over government’s official stance after the ANC Youth League first called for the country’s mineral wealth to be owned by the state in 2009.

‘Ideal solution’
The touted new approach on mining tax was described by National Planning Commission Minister Trevor Manuel as an “ideal South African solution” to absorb unemployment and drive growth in the economy.

The specifics of the scheme are unclear with details expected to be revealed by President Jacob Zuma during his State of the Nation address on Thursday.

Initial indications are that it may include a 50% tax on the sale of mining rights, a windfall tax of up to 50% on super profits and a reduction in royalty tax from 4% to 1%.

But while indications are that industry has welcomed the move away from debating state ownership, there are renewed fears that a change in taxes will discourage investment.

“If you introduce a special mining tax it immediately raises the doubt over whether investors will have the appetite to enter the market. Mining is an expensive process as it is and when you talk of more costs, new investment becomes a problem,” Chris Hart, chief economist at Investment Solutions told the Mail & Guardian.

‘Nationalisation by stealth’
This view is echoed by Peter Leon, head of African Mining and Energy Practice Group at Webber Wentzel, who described the new tax proposal as “nationalisation by stealth”.

“All mineral specific forms of taxation impose a very heavy burden on the industry which is not conducive to investment in the country. It is one way of achieving the end result without the outright nationalisation of the industry,” he said.

Besides impacting the possibility of new investment, Hart argues that raising the tax burden in the mining sector will severely impair the sector’s ability to create jobs.

“You simply can’t say super tax and job growth in the same sentence—it doesn’t add up. If mining houses are paying more to government to operate [then] where is the incentive to hire?” Hart asked.

According to Ursula van Eck, partner at BDO South Africa, what is needed in the industry is a fresh approach towards “collaboration and innovation” where government and mining houses work together to achieve their goals.

“Until government, as a key stakeholder in South African mining, recognises the important role it has to play in encouraging all role players to think differently and work together to achieve common sustainability goals, it is going to remain extremely difficult for the mining houses themselves to take that leap,” Van Eck added.

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