Decision clarifies the law on the deduction of transportation, insurance and handling of mineral costs - section 6(3)(b) of the Mineral and Petroleum Resources Royalty Act

A recent decision by Supreme Court of Appeal (SCA) will be welcomed by the relevant taxpayers for clarifying the law on the deduction of transportation, insurance and handling of mineral costs in terms of section 6(3)(b) of the Mineral and Petroleum Resources Royalty Act, 28 of 2008 (Royalty Act).

In the recent SCA Judgment, Commissioner for the South African Revenue Service v United Manganese of Kalahari (Pty) Ltd (264/2019) [2020] ZASCA 16 (25 March 2020), the SCA dismissed an appeal stemming from the North Gauteng High Court, Pretoria.  The High Court granted a declaratory order in favour of United Manganese Kalahari (UMK) against the Commissioner for the South African Revenue Service (SARS).

In terms of the declaratory order, UMK, when calculating its gross sales for manganese for the years of assessment 2010 and 2011, was entitled to deduct any expenditure incurred by it in respect of transport, insurance and handling of the manganese in terms of section 6(3)(b) of the Royalty Act. SARS was dissatisfied with this judgment and accordingly appealed to the SCA.  In terms of the appeal, the SCA had to determine the correct interpretation and application of section 6(3)(b) of the Royalty Act.

Background

UMK, a manganese miner, qualified as an 'extractor' of unrefined mineral resource in terms of the Royalty Act and as such, was liable for the payment of a royalty on the transfer thereof, based on its calculation of its 'gross sales' as contemplated in section 6(3) of the Royalty Act.  UMK deducted transport, insurance and handling costs incurred after the manganese had been brought to the condition specified in Schedule 2 of the Royalty Act, as well as transport, insurance and handling costs related to the export sales of manganese in its 2010 and 2011 years of assessment.

SARS however, in its letter of audit findings, argued that the deduction of transport, insurance and handling of minerals costs in section 6(3)(b) was limited to only the transport, insurance and handling of minerals costs invoiced to the customers as part of the purchase price.  Due to SARS and UMK reaching an impasse, UMK approached the High Court to determine the correct manner of calculating UMK's 'gross sales'; in particular whether the transport, insurance and handling costs incurred by UMK may be deducted in determining its gross sales in terms of section 6(3) of the Royalty Act.

In terms of the Section 1 of the Mineral and Petroleum Resources Development Act, 28 of 2002 (MPRDA) UMK conducts ‘mining operations’ As a result of this extraction, UMK is liable for payment of a ‘royalty’ in terms of section 3 the Royalty Act.

Mining Royalties are payable by mining companies to the National Revenue Fund for its' right to extract minerals from the soil for its' own profit. The formula to determine the royalty payable is found in Section 4 of the Royalty Act.  Section 6(3)(b) of the Royalty Act allows a taxpayer to deduct any expenditure it incurred in respect of transport, insurance and handling of the minerals costs in determining its gross sales.

In the case at hand, the dispute revolved around the method adopted UMK in calculating the mining royalties payable for the 2010 and 2011 years of assessment. UMK approached the High Court for declaratory relief in relation to the proper method of determining the amount of its gross sales.

The SCA had to determine the correct interpretation and application of section 6(3)(b) with specific reference to the wording "without regard to any expenditure incurred in respect of transport, insurance and handling" to determine the taxpayer's gross sales for mining royalty purposes.  SARS argued that where UMK had set a global price to charge to its customers, which specified the separate amounts for transport, insurance and handling of the ore as components to the price, the amounts so specified should be deducted in determining the gross sales on which the mining royalties would be paid.

However, UMK argued that it was irrelevant whether or not those amounts were specified in determining the price to be charged to its customers and instead argued that what mattered was whether UMK had incurred such costs as described in section 6(3)(b) of the Royalty Act. If UMK had actually incurred such costs then transport, insurance and handling of the ore costs should be deducted in calculating the gross sales for mining royalty purposes.

The SCA, following the general rules for interpretation, found that by looking at the wording of the section, the term "any expenditure" incurred in respect of transport, insurance and handling of the ore costs should be disregarded by the taxpayer. The Royalty Act does not dictate that the taxpayer must specify the separate amount to be charged for transport, insurance and handling of the minerals when determining the price to be paid by its customers.

Further, Judge Wallis looked at the purpose of section 6(3)(b) of the Royalty Act, and found that "the extractor would not be burdened by paying royalties on amounts expended on transport, insurance and handing of minerals] costs and recovered as part of the price paid for the minerals".  Judge Wallis found that SARS failed to take into account the statutory history.  SARS should have taken into account the explanatory memorandum that accompanied the Mineral and Petroleum Resources Royalty Bill.  The explanatory memorandum provided that the clear intent of the amendment of section 6(3)(b) of the Royalty Act was that the gross sales exclude the actual costs incurred by the taxpayer on the transportation, insurance and handling of final product or minerals as this would "unintentionally increase gross sales leading to a higher royalty tax payable".

Consequently, the appeal was dismissed. However Judge Wallis ordered that the declaratory order granted by the High Court be altered to reflect the SCA's findings. This decision will be welcomed by the relevant taxpayers for its clarity of the legal position on the deduction of transportation, insurance and handling of mineral costs in terms of section 6(3)(b) of the Royalty Act.