The SA Revenue Service (Sars) has agreed to a ceasefire with Sishen Iron Ore Company (SIOC), ahead of their legal showdown before the Supreme Court of Appeal (SCA) in September in a case that might leave a hole in the company’s books if the appeal court rules in the tax agency’s favour.
The outcome of the dispute will also go a long way in determining what is tax deductible when mining houses expand their operations and relocate third-party infrastructure, particularly when relocating communities.
Sars has issued the company with additional income tax assessments, covering the 2012 to 2014 years of assessment, relating to a tax audit on the deductibility of certain expenditures incurred in the expansion of Sishen mine.
SIOC objected to the assessments, but Sars disallowed the objection. The tax authority contends that deductions SIOC claimed do not hold water, with Sars having already scored a victory at the tax court, a ruling that SIOC is appealing against. SIOC was largely unsuccessful in asking the tax court to set aside the assessments.
The court shot down SIOC’s appeal against disallowance of certain expenses but upheld the appeal against disallowance of other expenses, understatement penalties and interest.
After this judgment, Sars told SIOC it intended to audit the 2015 to 2018 years of assessment.
SIOC is controlled by SA’s largest iron ore producer, Kumba, and minority partner Exxaro. Kumba has a 75.37% stake in SIOC, an entity it manages. The mine is Kumba’s flagship operation. The remaining 24.63% interest in the entity is held by Exxaro, with 21% and the rest owned by the SIOC Community Development Trust and the SIOC Employee Share Ownership (ESOP) Trust.
Kumba referred Business Day to its latest financial statements for a response to the dispute. A note in the financial statements says: “During May 2023, Sars informed SIOC that the audit of the 2019 and 2020 tax years has been put on hold pending the outcome of the litigation. The appeal and the audits concern the same subject matter.
“The result of the appeal is likely to be determinative of a substantial number, if not all, of the issues to be traversed in the audit. Sars has therefore agreed to hold the audit in abeyance pending the outcome of the appeal to the SCA. SIOC and Sars have agreed on and signed prescription extension agreements for the 2016, 2017 and 2019 years of assessment, only in relation to the matters included in the above appeal.”
Sishen, one of the world’s largest open-pit mines, embarked a few years ago on an expansion programme that saw it relocate the Siyathemba community to Dingleton to avoid encroachment on the 500m buffer zone between the mine’s western operation and the community.
The mining house built a new town northeast of the Northern Cape at a cost of R4.2bn. Families were given new houses, R100,000 lump sum, R15,000 inconvenience fees and R20,000 for curtains. The expansion of the mine also saw the relocation of certain infrastructure, including roads, railways, electricity and water infrastructure.
Access
Unless relocated, these items would have prevented the expansion of the mine pit to the south, west and northwest sides of the property, an expansion that SIOC told the tax court gave it access to $12bn worth of iron ore. SIOC told the tax court that 102.5-million tonnes of ore were available in the buffer zone alone. To gain access to the iron ore, the nearby community and all the infrastructure had to be relocated. It said this was to avoid residents being exposed to safety and health risks, including rockfalls and dust from blasting, unacceptably poor air quality and noise pollution.
The company said the relocation project added a further 15-million tonnes a year from 2017 to 2023.
The tax agency’s argument is that SIOC did not have mining rights on those areas where third-party infrastructure was located and subsequently relocated elsewhere.
Sars further contends that the relocation costs incurred by SIOC in respect of the Transnet properties for 2012, 2013 and part of 2014, and other third-party infrastructure and the relocation of the community, were not incurred “in terms of a mining right”.
SIOC holds a different view. It seeks deductions as part of its capital expenditure, or alternatively, revenue generating expenditure or production of income. The company submits that third-party infrastructure should be treated as “the special capital deduction ... applicable to taxpayers who conduct mining operations ... premised on important policy considerations”.
The tax court found that since the town to which the community was relocated was not within the mining area, the demolition thereof and relocation “do not constitute employing a method or process of mining, the project was not in terms of exercising a mining right”.
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.