Mineral and Petroleum Resources Royalties Bill

1. Mineral and Petroleum Resources Royalties Bill September 2008

2. 2 Contents Background, MPRDA, Royalty Bill consultation process Why mineral royalties � economic rationale Refined and Unrefined minerals Tax base: Gross Sales Mineral royalty rates: Formulae EBIT, with 100% capital expensing Estimated mineral royalty rates Rollover relief & Unincorporated bodies Small business relief Fiscal stability Transitional measures Administration International examples Mining Value Chain: Exploration, Mining, Mineral Processing, Refining: First saleable point

3. 3 Mineral and Petroleum Resources Royalty Bill (B 59 � 2008) Definitions Imposition of royalty Determination of royalty Royalty formulae Earnings before interest and taxes (EBIT) Gross sales Small business exemption Exemption for sampling Rollover relief for disposal involving going concerns Transfer involving body of unincorporated persons Arm�s length transactions General anti-avoidance rule Conclusion of fiscal stability agreements Terms and conditions of fiscal stability agreements Foreign currency Transitional rules Act binding on State and application of other laws Short title and commencement

4. 4 Ownership of Land and Minerals Surface rights Mineral rights Land restitution and land reform Indigenous communities State

5. 5 Background Mineral and Petroleum Resources Royalty Bill (MPRRB) follows on the Mineral and Petroleum Resources Development Act (MPRDA), (Act 28 of 2002) 1st draft Mineral and Petroleum Royalty Bill released for public comment on 20 March 2003 2nd draft of Royalty and Petroleum Resources Royalty Bill released for public comment on 11 October 2006 May / June 2007 - Consultation, workshops 3rd draft of Royalty and Petroleum Resources Royalty Bill released for public comment on 6 December 2007 4 March 2008 - Briefing by National Treasury to PCOF, 3rd draft 11 & 19 March 2008 - PCOF public hearings, 23 April 2008 � Consultation, workshop, preparation for 4th draft 13 May 2008 - PCOF briefing policy changes, basis for 4th draft 03 June 2008 - 4th draft published for technical comments only 17 June 2008 - PCOF briefing, 4th draft 24 June 2008 � Parliament, Minister of Finance - Introduction of Bill

6. 6 Mineral and Petroleum Resources Development Act (Act No. 28 of 2002) (MPRDA) The �MPRDA� provides for: All mineral rights to vest with the State Conversion of �old order� mineral rights into �new order� rights by 1 May 2009 Imposition of mineral royalties by the State: Section 3 (2): As the custodian of the nation�s mineral and petroleum resources, the State, acting through the Minister may: (b) in consultation with the Minister of Finance, determine and levy, any fee or consideration payable in terms of any relevant Act of Parliament.

7. 7 Mineral and Petroleum Resources Development Act (Act No. 28 of 2002): Community royalties The MPRDA Act reserves the right of communities to receive a consideration or royalty. Item 11 of Schedule II of the Act states: (1) Notwithstanding the provisions of item 7(7) and 7(8), any existing consideration, contractual royalty, or future consideration, including any compensation contemplated in section 46(3) of the Minerals Act, which accrued to any community immediately before this Act took effect, continues to accrue to such community.� (2) The community contemplated in (1) must annually, and at such other time as required to do so by the Minister, furnish the Minister with such particulars regarding the usage and disbursement of the consideration or royalty as the Minister may require.

8. 8 Why mineral royalties (1) �Although the structure and rates of mineral royalties vary internationally, most are collected for the same reason, that is payment to the owner of the mineral resource in return for the removal of the mineral from the land. The royalty, as the instrument for compensation, is payment in return for the permission that, first, gives the mining company access to the minerals and second, gives the company the right to develop the resource for its own benefit�. (James Otto, et al � The World Bank, page 42)

9. 9 Why mineral royalties (2) �Another way in which a mine differs from other businesses is that it exploits a non-renewable resource that, in most cases, the taxpayer does not own. In the majority of nations, minerals are owned by the state, by the people generally, or by the crown or ruler�. (James Otto, et al � The World Bank, page 16)

10. 10 Tax base - mineral royalties �Across the globe, no type of tax on mining causes as much controversy as a royalty tax. It is a tax that is unique to the natural resources sector and on that has manifested itself in a wide variety of forms, sometimes based on measures of profitability but commonly based on the quantity of material produced or its value�. (James Otto, et al � The World Bank, page 1)

11. 11 Tax base = Gross Sales less transport costs (clause 6) Gross Sales = Proceeds of a transferred mineral resource at its readily saleable condition (i.e., refined or unrefined (�concentrate�) state of mineral as specified) Disregard transportation costs of �final product� (including insurance and handling charges)

12. 12 Refined and Unrefined minerals (clause 1, and Schedules 1 and 2) Refined (Schedule 1): Gold; 99.5% PGM � refined; 99.9% Copper; 99.0% Zinc; 98.5%, Etc; & Oil & Gas Unrefined (Schedule 2): Diamonds PGM � concentrate Iron ore; (between 61% to 64% Fe) Coal � various grades Manganese (between Mn37% to Mn48%) Chrome (between 37% to 46% Cr2O3) Mineral Sands Zinc concentrate; 27% Zn Uranium (80% concentrate) Aggregates; Bulk Etc. Other; Concentrate or Bulk

13. 13 Gross Sales - Refined: Schedule 1 (clause 6) General Rule: Gross sales of refined minerals equal amounts received or accrued (use spot rate if foreign currency is involved) However, an override exists to ensure that all transactions occur at arm�s length Different Condition: If a refined mineral is sold above the refined Schedule 1 condition, (unlikely event) the gross sales price is reduced to a hypothetical refined condition price If a refined mineral is sold below the refined Schedule 1 condition, the gross sales price is increased to a hypothetical refined condition price (or schedule 2 � unrefined formula) Stolen, Destroyed or Lost: A deemed sales price applies at the proper condition so a royalty is always charged even if no proceeds are obtained Rationale: Prevents evasion plus Government should not incur the risk of a permanent loss (e.g. stolen) of a non-renewable resource

14. 14 Gross Sales � Unrefined: Schedule 2 (clause 6) General Rule: Gross sales of unrefined minerals equal amounts received or accrued (use spot rate if foreign currency is involved) However, an override exists to ensure that all transactions occur at arm�s length Different Condition: If an unrefined mineral is sold above the unrefined Schedule 2 condition, the gross sales price is reduced to a hypothetical refined condition price If an unrefined mineral is sold below the unrefined Schedule 2 condition, the gross sales price is increased to a hypothetical refined condition price Stolen, Destroyed or Lost: A deemed sales price applies at the proper condition so a royalty is always charged even if no proceeds are obtained Rationale: Prevents evasion plus Government should not incur the risk of a permanent loss of a non-renewable resource

15. 15 Dual Schedule Minerals Some minerals fall under both schedules (e.g. platinum) In these circumstances, the mineral will be viewed as refined if developed to or above the refined condition; otherwise, view as unrefined Example: Platinum 99,9% or above view as refined All other conditions view as unrefined

16. 16 Tax rates � formula (clause 4) (X = EBIT/Gross Sales *100) Y (r) = 0.5 + X/12.5 (Max = 5.0) Refined metal (e.g. refined Gold, refined PGM, etc.), and Oil and Gas 2. Y (c) = 0.5 + X/9.0 (Max = 7.0) Unrefined; Concentrate Coal, Rough Diamonds, Iron Ore, etc.

17. 17 EBIT: Basic Calculation (clause 5) EBIT = �taxable income� before interest and taxes EBIT: Additions Gross sales (slides 13 and 14) Recoupment / recapture of depreciable mining equipment EBIT: Subtractions All operating expenses All depreciation/CAPEX for machinery employed to extract/upgrade/refine the mineral If EBIT < zero, assumed to be zero.

18. 18 EBIT: Adjustments (clause 5) No deductions for financial instruments (other than hedges against mineral sales) No deduction for the royalty itself (to avoid circularity) Transport between buyer/seller (and beyond the refined/unrefined condition) No carryover of excess operating expenses (but unredeemed mineral CAPEX can be carried over) Oil and gas also 100% write-off: deny additional allowances in terms of the Tenth Schedule

19. 19 Composite Minerals (clause 5) When an ore body contains a combination of minerals General Rule: Allocate EBIT deductions (refined versus unrefined) according to a reasonable method consistently applied De minimis: Less than 10% portions can be viewed as the dominant portion if desired (and if consistently applied)

20. 20 Estimated Mineral Royalty RatesY = 0.5 + X/12.5 (Refined)Y = 0.5 + X=/9 (Unrefined)

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