Arnaaz Camay, Senior Executive, and Rui Lopes, Candidate Attorney, Tax Practice, Baker McKenzie Johannesburg
In a High Court decision handed down on 3 October 2017, Justice Meyer found in favour of the taxpayer, United Manganese of Kalahari Proprietary Limited (“UMK”). Justice Meyer issued a declaratory order pertaining to the manner in which UMK’s ‘gross sales’ must be determined for the purposes of calculating the amount of the royalty it should pay in terms of the Mineral and Petroleum Resources Royalty Act, 28 of 2008 (the “MPRRA”). The MPRRA, imposes an obligation on a person to pay a royalty in respect of the transfer of an unrefined mineral resource. The amount of the royalty payable is determined by multiplying the ‘gross sales’ of the extractor of such mineral resource by a specified percentage.
UMK extracts unrefined manganese, which is loaded onto a vehicle for delivery to its customers. UMK bears all costs necessary to effect delivery of the unrefined manganese to its customers, including transport, insurance and handling (“TIH”) costs. UMK contended that it was entitled to calculate its ‘gross sales’ by deducting the TIH expenditure from sales revenue received by it in respect of the transfer of manganese, irrespective of whether such expenditure was specifically considered in the determination of the sales amount for the manganese. SARS contended that if the TIH costs were not specifically taken into account in determining the revenue (i.e. if the TIH costs were specifically included in UMK’s invoice price to its customers) UMK was prohibited from deducting the TIH costs for the purposes of calculating the amount of its ‘gross sales’.
The court held that UMK was entitled to calculate its ‘gross sales’ by deducting the TIH costs actually incurred by it, irrespective of whether such TIH costs were specifically reflected as forming part of the sales price to the customer.
The court’s decision was based on the clear and unambiguous wording of the legislature which was is in line with the intention and purpose of the MPRRA – to impose a royalty on the extraction of a mineral resource to compensate South Africans for the use of non-renewable resources – but not to penalise the extractors of such minerals that are located far from markets or an export port by imposing the royalty on TIH expenditure.
This judgment is to be hailed as bringing much needed clarity to the industry and it would be interesting to see whether SARS will appeal this decision.