Manuel Proposes Tax On South Africa's Mineral Extraction

by Robert Lee, Tax-News.com, London

24 March 2003

Plans to tax South African mineral extraction were put forward by Finance Minister Trevor Manuel last week. However, the proposal was greeted by a frosty response from the financial community and sent shares in the mining companies sharply lower on the JSE.

The initial draft contains proposals to tax the profit from the sale of mining companies' final product at a rate ranging from 1% to 8%, with the higher end of this bracket likely to be levied on the diamond sector.

The South African government has the power to levy such royalties on mineral extraction under the Minerals and Petroleum Resources Development Act passed last year. This gave all mining rights to the state.

Reacting to the proposals, analysts have criticised the decision to tax diamonds at the highest rate arguing that it is far too high, despite Manuel's claims that Botswana imposes a similar tax at 10% on the precious stones.

At present, the draft legislation is only in the consultation phase. This should allay the fears of the mining companies somewhat, as experts say the actual rates are likely to be much lower once the mining companies have had their say in the consultative process.

Nevertheless some suggestions have already been mooted by analysts, who warn that the levies have not taken into account the fragile nature of the economy at present. They put forward the idea of having a variable rate to reflect the state of the economy at that particular time.

Though shares in mining firms took a dive on the back of Manuel's announcement, observers say that the impact of the tax has been pretty much factored into the financial markets, meaning that the share prices of those companies will eventually recover.

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