There is much to be gained from a thriving mining sector. Its promise for growing incomes is as great — perhaps greater — than any other sector of the South African economy given the opportunity.
There would be extra income to be earned on the mines and rigs and additional taxes paid by many more workers. There would be more jobs gained and increased incomes earned supplying goods and services to additional mining enterprises.
Exports would grow and the balance of payments would benefit from inflows of permanent mining capital. The exchange value of the rand would become less vulnerable to outflows of portfolio capital — to the advantage of businesses and their customers in our economy. The recipe to stimulate rapid growth in mining activity is simple: make the laws and regulations applied to the owners of mining companies at least as attractive as anywhere in the world.
Applied to capital, that realistically can only be expected from well-established, well-diversified global mining companies with the appetite for taking on mining risks and the balance sheets and borrowing capacity to do so.
And wouldn’t it be a game changer for exploration activity were ownership of the rights to the potential value below the surface to be transferred from the state to the owners of the land above? This would include communities with traditional rights to graze or plant on land that could be far more valuable than they can possibly know before exploration.
Eliminating tax avoidance and applying the complex regulations will take a costly — to taxpayers and owners — army of competent officials on both sides to hopefully ensure compliance.
Rights would be ceded in exchange for a significant betterment tax should ownership be transferred to a mining company. However, the newly proposed and amended Mining Charter informs us very clearly that this more competitive landscape for mining is not about to happen.
The intention is to put onerous constraints on the powers of owners to manage a mine as best as they might. Owners will be required to contract with suppliers, directors and managers and partners with preferred legal status, rather than chosen on merit. It imposes further controls on how they have to share the benefits of ownership, and the capital they will have to put at risk.
Partners will not necessarily be of their own choosing or on terms chosen by them should the mine prove successful. They will be required to pay taxes and royalties and declare dividends based on cash flows, not on normal accounting principles, for fear that taxable income might be minimised by transfer pricing — reducing revenues and raising costs. Or by exaggerating the interest paid on loans provided by holding companies residing in no-tax or low-tax jurisdictions, interest payments (expensed for tax purposes) that are intentionally more like capital repaid.
Eliminating tax avoidance and applying the complex regulations will take a costly — to taxpayers and owners — army of competent officials on both sides to hopefully ensure compliance.
It would be more sensible if mining companies in SA were not subject to any income taxes at all. This would eliminate all attempts to minimise tax payments and protect the tax base. All income distributed by companies as employment benefits, rents, interest dividends or capital repayments could be taxed in the hands of the receivers, reported by the company making the payments. Compliance becomes much less onerous and the case for investing much improved, to the great advantage of output.
It should be very clear therefore that the intentions of the Mining Charter are not to stimulate mining output and employment. Its primary purpose is to redistribute benefits. The charter is symptomatic of the wider approach to economic development in SA.
Redistribution comes at the expense of potential growth, and the consequences, so balefully apparent, should not be regarded as unintended.
• Kantor is chief economist and strategist at Investec Wealth & Investment. He writes in his personal capacity.
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