South African Finance Minister Trevor Manuel has unveiled the government’s new royalties regime for minerals, oil and gas, which sees royalties ranging from 1% to 8% of gross sales value charged on a quarterly basis.
The Royalty Bill charges the highest rate of 8% on diamonds, which was reasonable, Manuel said, given the fact that South Africa’s neighbours charge a rate of up to 10% for the same mineral resources.
The royalty rate for gold, silver, vanadium, chromite and titanium dioxide is set at 3% of gross sales value, while that for platinum group metals is set at 4%.
Gems such as amethyst, quartz, garnet, topaz, emeralds, etc. will incur a rate of 5%.
Antimony, copper, iron, manganese, lead, zinc, cobalt, nickel, silicon, tin and vermiculite are assigned rates of 2% of gross sales value, and salt, sand, stone, sandstone, late, gravel, clay and concrete will see royalties of 1%. Anthracite and bituminous coal (low ash and steam) are at 2%.
Regarding petroleum and natural gas, natural gas and natural gas condensate petroleum crude offshore product, where water depths are greater than 500 metres, will see royalty rates of 1%, and where water depths are shallower than
500 meters, the royalty rises to 3%.
The new Mineral and Petroleum Royalty Bill also provides special withholding rules for diamonds, Manuel said. Diamonds created special enforcement concerns, especially in terms of establishing fair market value of the thousand or more categories of diamonds and the specific problem posed by small individual diamond diggers. In order to remedy this, the Bill provides a special set of withholding rules for authorised diamond purchasers.
These purchasers are far fewer in number and easier to regulate than individual diamond diggers. Under these withholding rules, all diamond purchasers are required to collect and pay the royalty on behalf of any diamond digger out of diamond sale proceeds.
The amount withheld on purchase will act as credit against any royalty paid or payable by the diamond digger in order to ensure that no diamond is subject to a double charge.
The Bill also contains an exception for authorised diamond purchasers who acquire diamonds from large-scale diamond mining companies. Companies of
this kind represent less of an enforcement concern and withholding in these situations could create a cash-flow problem for significant local companies, thereby undermining international competitiveness.
Manuel added that the royalty will be levied in addition to income tax, but scores as a deduction, as it constitutes a deductible expense in the production of income. He said the rates fall well within internationally competitive margins that can be sustained for the foreseeable future.
The royalty is classified as an ad valorem charge in the form of a certain percentage of consideration withheld on the gross sales value of the mineral commodity extracted. No deduction for costs can be taken against gross sales income.
As a general rule, the gross value of any mineral resource will equal its readily tradable “fair” market price to the extent published by the Department of Minerals and Energy or international commodity price lists. This price represents the best approximation of a mineral’s intrinsic value extracted from South African territory.
The use of a gross ad valorem charge was consistent with international best practice, Manuel added. International experience with profit-based royalty regimes suggested that it could be avoided by artificially inflating costs, thereby reducing royalty collections to marginal levels.
The Bill also provides a mechanism that in the event of the Department of Minerals and Energy not being able to publish a readily available market price, the stated value of a mineral resource for the royalty must at least by equal to the actual gross sales price of the mineral transferred.
Hence, the Bill provides for upward value adjustments to address deliberate under-valuations of avoidance issues. For instance, the government has a right to increase the value above the gross sales price if that price does not fully reflect the arm’s length value of the mineral resource transferred. – I-Net Bridge