The South African national assembly has approved a new mining and natural resources royalties bill, which has devised a new formula to provide tax relief for marginally profitable mines.
South African Finance Minister Trevor Manuel told parliament in a speech introducing the Mineral and Petroleum Resources Royalty Bills, 2008, last week that the new system has been proposed to ensure equitable royalty rates, in response to requests for relief for marginal mines.
Under the proposed formulae (one for refined minerals and one for unrefined minerals), the applicable royalty rates will vary according to the profitability of the mining company, subject to a minimum rate of 0.5% and maximum rates of 5% and 7% for refined and unrefined minerals respectively.
Manuel said that for the purpose of these bills, oil and gas production will be subject to the refined formula, in acknowledgement of the fact that there have as yet not been major discoveries of these resources in South Africa.
Profitability in the new formulae will be based on EBIT (earnings before interest and taxation), and it also allows for 100% capital expensing, a measure which takes into account the high capital costs associated with deep underground mining, as in the case of gold and of deep level sea oil and gas exploration and production.
"The formulae based royalty rate structure not only provides automatic relief for marginal mines but also allows for the State to share in the upside, in times of high commodity prices," Manuel told parliament.
As a result of the new legislation, royalty rates will tend to increase as commodity prices increase and decrease when commodity prices fall, he said.
The new legislation, which is due to become law in 2009 as part of the Mineral and Petroleum Resources Development Act 2002 (MPRDA), also protects the right of certain communities to continue to receive community royalties, but it will not allow companies to offset these community royalties against royalty payments to the State.
"Contrary to the views of many mining companies and analysts such payments to communities are not viewed as double royalties," Manuel argued.
"The benefits of our vast mineral resources, some of which are about to be depleted, has historically accrued to only a few. The MPRDA lays the foundation to ensure that the mining industry transforms to the benefit of larger sections of our citizens. The Mineral and Petroleum Resources Royalty Bills, of 2008 will make a contribution towards greater transparency, sustainability and the distribution of benefits to all South Africans," he added.
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