10 June 2011

VAT and mining rights

The Draft Taxation Laws Amendment Bill 2011 introduces significant changes to the zero-rating provisions for mining right conversions and renewals.

The Mineral and Petroleum Resources Development Act 28 of 2002 (MPRDA) requires old order mineral rights holders to convert such rights into new order mineral rights pursuant to approval by the Department of Mineral Resources. New order mining rights only expire after a set period and holders thereof are entitled to apply for a renewal for those rights.

National Treasury took cognisance of the fact that the conversion or renewal of mining rights in terms of the MPRDA would give rise to a VAT anomaly. As a result, section 11(1)(n) was introduced in the Value Added Tax Act 89 of 1991 (the Act) stating that consideration received as a result of the continuation, conversion or renewal of prospecting, mining, exploration or production rights as defined in Schedule 1 and 2 of the MPRDA will be subject to VAT at the zero rate. In other words, where "goods" consists of old order rights converted into new order rights as per the MPRDA, the vendor responsible for such conversion or renewal may deduct input tax as a credit and does not have to account for VAT on those mineral rights since the conversion is zero-rated.

The original rationale for zero-rating conversions and renewals of mineral rights was to protect mineral rights holders from the imposition of VAT upon conversion or renewal in terms of the MPRDA where ownership of the rights remained in the same hands. However, some taxpayers are taking advantage of the above protection and claiming that transfers of ownership to the mineral rights under section 11 of the MPRDA are also zero-rated. The intention of those taxpayers is to zero-rate conversions or renewals even when ownership of those mineral rights have effectively changed hands. This was certainly not the intention of the legislature when introducing the above provision.

To correct the above irregularity, it is proposed that the renewal of mineral rights as per MPRDA be viewed as a non-supply for VAT purposes and that no legislative relief be granted in such event. So when a mineral right is renewed the occasion will be viewed as an extension of licensing rights and as a non-supply; the renewal will accordingly not be zero-rated as was done previously.

Furthermore, it is proposed that the zero-rating provision be reworded to only apply to the conversion or continuation of old order mining rights as required by the MPRDA. That is to say, only the continuation or conversion of mineral rights where no transfer of ownership occurs will be zero-rated. It is further proposed that the zero-rating provision relating to renewals of mineral rights be deleted as being superfluous.

In summary, if implemented the above provisions will limit the applicability of the zero-rating provision to conversions and renewals of mining rights. It will also close the loophole that some taxpayers are manipulating by claiming a zero-rating for transfer of the mineral rights to a third party.

Rivalani Salani, Candidate Attorney, Tax

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