Signed on the 17th November 2008, the Mineral and Petroleum Resources Royalties Act (“the Act”) seeks to give effect to the Mineral and Petroleum Resources Development Act 28 of 2002 (“MPRDA”), namely Section 3 which states inter alia: “As the custodian of the nation’s mineral and petroleum resources, the State, acting through the Minister may, in consultation with the Minister of Finance, determine and levy, any fee or consideration payable in terms of any relevant Act of Parliament”. For that reason the Act was promulgated effecting the imposition of a royalty on all transfers of mineral resources on or after 1 March 2010.
In South Africa the State is vested with all mineral rights as a custodian on behalf of the South African citizens. Therefore the Act provides for the compensation to the State for the country’s permanent loss of the non-renewable resources by mining companies.
The conditions that would attract royalties in terms of the Act are that any extractor who acquires a mineral resource from within South Africa and subsequently transfers the right. Transfer includes the sale, export, consumption, theft, destruction or loss of mineral resources. Only persons that win or recover a mineral resource are subject to the royalty (i.e. only extractors are subject to the royalty) in other words any subsequent owners are free from being liable for such royalties. Moreover, only persons extracting and transferring a mineral resource for their own benefit are subject to the royalty (i.e. a subcontractor on behalf of extractor is excluded).
The actual mineral resources subject to the royalty are broadly defined, A mineral resource is defined (as per section 1) as any mineral and petroleum as defined in the MPRDA which includes minerals or petroleum that are subsequently processed, beneficiated or otherwise transformed to remain within the ambit of the royalty regime. Schedule 1 and 2 of the Act stipulates the specific condition of the different minerals which are subject to the royalty.
Persons who should register for the payment of royalties to SARS include any person holding the prospecting right or mining right, retention permit, exploration right, mining permit or production permit or a lease or sublease in respect of such right, as well as any person who has recovered a mineral or petroleum resource in the Republic.
The royalty calculation is relatively complex and won’t be illustrated for the purposes of this article however in brief, the royalty payment is calculated as a percentage of the gross sales of mineral resources, the percentage is calculated in terms of different formulae depending on whether the mineral resources are unrefined or refined. The two critical factors for the calculation and determination of the value of the royalty are; Gross Sales is the transfer of all mineral resources as defined in Schedule 1 and 2 of the Act of which various inclusions and exclusions may apply, and Earnings Before Interest and Taxes which is the aggregate of gross sales and so much of any amount allowed to be deducted in terms of the Income Tax Act.
The Act provides an exemption from the royalties to small mining businesses (Section 7). Extractors who qualify for the exemption are those who are residents, do not generate gross sales of more than R10 million during a year, whose royalty liability does not exceed R100 000 for the year, and who are registered in terms of the MPRRAA. For the purposes of this exemption to succeed the extractor must be a stand-alone entity, not forming part of a larger group. Other exemptions include mineral resources extracted for testing, identification, analysis and sampling purposes will be exempt from the royalty if the gross sales from these resources does not exceed R100 000 for the year (Section 8) and extractors can further enjoy relief from unfavourable future changes in the royalty rate formulas by entering into a binding agreement to this effect with the Minister of Finance, namely a Fiscal Stability Agreement (Section 13).
The Mineral and Petroleum Resources Royalty Administration Act 29 of 2008 (“MPRRAA”) is responsible for the prescription of the administrative procedures in respect of mineral royalties imposed by the Act, in accordance with such the royalty period runs parallel to the extractor’s year of assessment for Income Tax purposes. The royalty regime will be administered by the South African Revenue Services (“SARS”) and is paid in a similar manner as provisional tax under the Income Tax Act.
In simple terms SARS collects the royalties for these resources in terms of the Mineral and Petroleum Resources Royalty Act, 2008 and the Mineral and Petroleum Resources Royalty (Administration) Act, 2008. Just as is the case for all other duties, levies, fees or money collected by SARS, the royalties collected on mineral and petroleum resources are paid into the State’s Revenue Fund and then used in the allocation of funds for different purposes by the National Treasury on an annual basis.