EL PROCESAMIENTO SEMÁNTICO

In Chapter 7 of the Source Book (Daniel et al: 2010), the authors state that the efficiency of an extractive industry sector fiscal regime depends on the goals established for that regime, on the fiscal instruments selected to attain those goals, and on the calibre of fiscal administration. Both the design and application of extractive industry sector fiscal regimes are complicated, requiring suitable skill.

Mining specifics

Tax design and administration specifically focusing on the mining sector are explained as follows (Daniel et al, 2010: Online) -

 Despite the fact that so many are currently regressive, it is recommended that fiscal mining regimes should be progressive, that is, that the proportion of income accruing to the State treasury should increase with greater profitability, rather than decline. With this system, Governments participate more in the benefits of mineral booms; the disadvantage is a lesser share of reduced income during downturns.

 Recommended fiscally progressive ‘Additional Taxation’ instruments include: variable income tax linked to profitability currently law in South Africa, Uganda, Botswana and Zambia; and rate of return, or Resource Rent Tax, currently law in Liberia, Malawi, and Zimbabwe. This involves calculating the internal rate of return of a project and then increasing the marginal tax rate during times when a pre- determined ‘hurdle’ rate of return is exceeded.

 Inter-affiliate agreements can be used to move profit from one associate to another thereby reducing the tax liabilities of the mining company in the host country. The most common inter-affiliate transactions are product sales from one associate to another, but there are many other kinds of transactions including sales of goods and services, and provision of short- and long-term financing. Monitoring and policing inter-affiliate agreements can be an extremely arduous task. Good practice recommends that the tax authority sets clear rules and procedures for the taxing of inter-affiliate transactions and to properly monitor these. Mining companies typically will ‘game’ tax holidays by distorting production decisions and reducing State revenues; this must be avoided.

62  Good practice recommends that the mining tax regime is in the law and regulations and is not modified in separate contracts, especially if they are kept confidential.

 States should be wary of falling foul of gamed-scenarios particularly where influential subsidiary companies use excessive debt to reduce tax assessments even though their parent firms maintain sensible debt levels. To prevent this, Governments may limit the amount of interest payments or debt that qualifies for tax deduction purposes.

 States should be wary of the tax avoidance practice of ‘Treaty Shopping’. This occurs in situations where tax treaties are not in place to prevent double taxation, and where a parent company owning a subsidiary firm operating in the territory of a host country government, establishes an intermediary ‘paper’ company in a tax haven as a tax avoidance strategy. Effective and enforced State legislation to both prohibit and penalise this should be in place.

 Tax administration involves auditing tax returns, assessing and collecting taxes. Taxation instruments generally fall into two categories, either administratively uncomplicated but regressive, that is, a royalty per unit, or administratively more complicated but progressive, that is with a Resource Rent Tax or Sliding Scale Royalty. Good practice recommends that there exists the administrative capacity to execute more complex tax regimes.

 Good practice recommends that the tax authority undertakes field tax audits of mining enterprises, led by experienced and qualified staff, to obstruct the chance of fraud.

 Mining involves various tasks including exploration and mine development work, overburden removal, reclamation and restoration, all of which are not experienced in other businesses and for which the accounting treatment may have particular ramifications for tax assessments. Therefore, good practice recommends that the Tax Authority agrees on a detailed accounting treatment for mining companies with regard to these and other mining-related activities.

 The appeal of tax-free export processing zones for Governments is their potential to stimulate expansion in local employment and exports.

 However, such an approach is unsuitable for mineral or metal processing since the process is capital intensive rather than labour intensive and offers relatively little increase in employment; also, the processing will in any event take place as it saves the costs of transporting lower grade materials, and the metal itself definitely will be exported meaning that there will be little in the way of incremental exports.

63 It is submitted that South Africa has adopted a progressive tax system, which is based on the principle that the more a person earns the higher percentage tax they pay. This however is only applicable to natural persons and not companies. It would therefore be submitted that perhaps having a similar tax system in place in the minerals sector would stand to be beneficial. Resource rent tax as discussed earlier is a possible tax model that would impose additional taxes on profitable mines. Where the mining company is a foreign company, South Africa has double tax agreements in place, in terms of which, the profits made by a foreign company will be taxed in South Africa if the foreign company carries on a business in South Africa through a “permanent establishment.”