South African Corporate taxpayers face an onerous tax compliance burden based on a complex tax regime involving direct and indirect taxes, and a multitude of legislative and administrative updates.
This is intensified by the fact that the South African Revenue Service (“SARS”) collection targets are constantly increasing, leading to an aggressive approach from SARS. SARS is assisted by means of punitive provisions introduced in the Tax Administration Act, No 28 of 2011 (“the TAA”), which includes inter alia administrative non-compliance penalties.
Circumstances in which SARS may remit such penalties are very limited, thus placing an onerous obligation on taxpayers.
SARS is also invoking the new penalty provisions retrospectively so as to apply to tax returns submitted prior to 1 October 2012. Recent amendments have, however, made these penalty provisions less burdensome to taxpayers, provided there were proper disclosure of the arrangement to SARS.
The Tax Administration Act also enables SARS to appoint third parties such as banks as collection agents. This effectively enables SARS to seize funds deposited with banks by taxpayers, in settlement of tax debts.
In addition to the tax compliance challenges faced by corporate taxpayers, there are many additional challenges facing taxpayers in the mining industry.
Legislative amendments
The first in a number of compliance hurdles is the frequent and complex amendments to the Income Tax Act 58 of 1962 (“the Act”) and other relevant tax legislation, making it difficult for taxpayers to keep track of amendments and provisions they are required to comply with during a specific year of assessment. Experience has shown that many amendments are sometimes vague or ambiguous, thus creating uncertainty. Sometimes legislative amendments have the impact of restrospectivity, thereby further complicating tax compliance.
Another challenge is the somewhat “outdated” mining tax provisions in the Act. This challenge will hopefully soon be addressed by the Davis Tax Committee, which has included in its mandate a review of the mining tax system in South Africa.
There are also many disconnects between tax legislation and the commercial reality of taxpayers. For instance, new transfer pricing rules fail to recognise the real challenges faced by start-up mining operations to raise finance in the debt markets. Similarly, tax legislation fails to recognise the legitimate transactions to facilitate BEE compliance, often requiring “free carry” or “BEE discount” which unintentionally could trigger value shifting or donations tax consequences.
There are also a number of disconnects between tax legislation and other legislation such as the Companies Act 71 of 2008 and the Royalty Act, making it difficult to apply tax legislation in practice, adding to the complexities associated with tax compliance and adherence to the provisions of the TAA.
The new ITR14 tax returns
The new enhanced ITR14 tax return was introduced in May 2013. This new tax return requires extensive disclosure, which requirements have led to an additional compliance burden on taxpayers, as well as additional information technology and related costs in certain circumstances.
This compliance burden has been exacerbated by taxpayers being subject to multiple audits by SARS. However, with the modernisation of the ITR14, mining companies were left in the dark as the ITR14 had many shortcomings for taxpayers in one of the country’s most significant and volatile industries.
Like other corporate taxpayers, mining companies are required to submit the ITR14 return via e-filing. The ITR14 contains a section dealing with industry related information, which section is populated for mining companies based on the industry code selection on page 1 of the return.
This is the only section of the return dealing specifically with mining companies. The section furthermore contains a note indicating that the supporting mining schedules B and C must be submitted together with the return. Schedule B contains a breakdown of mining and non-mining income, whereas schedule C contains a breakdown of capital expenditure per mine in the company.
Schedules B and C are not automatically generated on e-filing once a taxpayer selects the mining and quarrying industry code. Both these schedules need to be downloaded from the SARS website and uploaded as supporting information to the ITR14 on E-Filing. As a result, many taxpayers fail to attach these supporting schedules to the return.
The current ITR14 does further not cater for the specific tax dispensations offered to mining companies, such as:
• The capital redemption allowance in terms of section 15 read with section 36 of the Act; and
• The deduction of contributions made to environmental rehabilitation trusts in terms of section 37A of the Act.
Importantly, the ITR14 does not cater for the situation where a mining company earns income from both mining and non-mining activities. This information is disclosed on the said Schedule B that needs to be completed, but the ITR14 itself does not contain this very important split in revenue.
Hence, if a taxpayer in the gold industry has taxable income generated from both mining and non-mining operations, where the revenue is taxed at different rates, the ITR14 does not enable such a taxpayer to disclose this.
The completion of the ITR14 by companies within the mining sector, has hence become a worrying experience for such taxpayers, filled with the fear of the punitive penalty system under the TAA, which will even apply in instances where the balance unredeemed capital expenditure or tax loss of a company is overstated.
For many years now, there has been a concern amongst mining taxpayers that neither the E-Filing system nor a taxpayers’ tax assessment (IT34) reflects the balance of unredeemed capital expenditure as at the end of the year of assessment, which is available for utilisation against future mining income.
This has resulted in numerous, and perhaps unnecessary queries and disputes between SARS and taxpayers. If the ITR34 can reflect both the assessed tax loss as well as capital losses available for carry-forward, then it is puzzling as to why a tax assessment cannot also reflect a taxpayer’s balance of unredeemed capital expenditure?
What further adds to the frustration of mining taxpayers, is the delayed tax assessment process. Mining tax returns are currently still assessed on a manual basis by SARS and hence no automated tax assessment is issued upon filing the return electronically on e-filing. This results in inter alia interest accruing on late payment of taxes caused by processing and assessment delays.
Royalty tax
In addition to the compliance challenges noted above, the list of challenges and frustrations facing taxpayers on the mineral royalty side is increasing almost by the day. Royalties need to be paid electronically to SARS and the royalty process (from registration to payment and the filing of royalty returns) is currently not catered for on e-filing. There is also currently no mechanism in place to cater for refunds or assessments being issued for royalties.
Increased compliance costs
In light of the constant changes to complex tax legislation, mining companies are facing increased tax compliance costs. More and more of management time is spent on tax compliance matters, and many mining companies have now restored to establishing in-house tax departments to assist with tax compliance. Unfortunately, smaller mining companies cannot afford the luxury of a dedicated in-house tax team, with the result that management time is spent away from the business of mining.
Mining companies in particular are facing an onslaught of tax compliance issues. This is not assisted by the lack of basic disclosure requirements in the ITR14 return specifically catering for special mining tax provisions. It is hoped that the Davis Tax Committee will recommend a simplification of the burdensome tax compliance procedures, so as to allow management to focus more on the core business of mining.
Adele de Jager & Jane van Reenen
