Mine tax should stay the same, report says

SOUTH Africa should not kill the goose that lays the golden egg by considering additional tax instruments, such as a windfall tax for the country’s mining sector, the Davis Tax Committee said in a report published this week.

The committee, established by the Treasury, also recommended that the government should not revamp its gold mining tax regime as that would jeopardise jobs.

“The committee takes the view that new tax instruments are not necessary,” said the report, a copy of which went to Finance Minister Nhlanhla Nene.

The report said a confluence of negative factors had shaken the mining industry of late, including labour unrest, low commodity prices and electricity supply failures.

These and other factors have eroded investment confidence in the industry.

“While tax design policy has an impact on investment decisions, its relative importance in terms of overall investor sentiment is relatively low.”

The report said this was not to say tax policy should be neglected but changes to tax design should be approached cautiously, without trying to achieve too much or to compensate for problems that lay outside the tax system.

Economic driver

The committee said mining had long functioned as the mainstay of the South African economy and as a catalyst for economic growth.

While its relative importance as a function of gross domestic product (GDP) and revenue collections has declined, it still remains vital in terms of job creation, foreign exchange generation and South Africa’s balance of payments.

Mining accounts for 18 percent of GDP, is a critical earner of foreign exchange at more than 50 percent and brings 20 percent of direct investment.

The mining industry is struggling with sinking commodity prices, rising costs and labour unrest and several firms plan to reduce jobs.

The committee said that while it preferred that the tax regime applied to gold producers be brought into line with other companies in the mining industry, it recommended the status quo be kept for existing mines to protect jobs.

“In order not to precipitate further decline in employment, particularly in marginal mines, the committee recommends that the mining formula be retained for existing gold mines,” it said.

Most mining companies are taxed at a standard 28 percent, but taxes for gold firms are linked to profit margins, a measure meant to cushion an industry facing its sunset years. – Additional reporting by Reuters.