Good news for all mining taxpayers! On 25 March 2020, the Supreme Court of Appeal (’SCA’) handed down judgment in favour of the mining taxpayer in the case of C:SARS v United Manganese of Kalahari (Pty) Ltd (264/2019) [2020] ZASCA 16, regarding the calculation of ‘gross sales’, specifically in terms of section 6(2)(b) read with section 6(3)(b) of the Mineral and Petroleum Resources Royalty Act, No. 28 of 2008 (‘the Royalty Act’).
United Manganese of Kalahari (‘UMK’) sold unrefined manganese to its export customers on either an FOB or CIF basis. By necessary implication, UMK incurred certain transport, insurance and handling expenditure (‘TIH costs’) in delivering the product to these customers.
The question under consideration was whether such TIH costs could be deducted from UMK’s ‘gross sales’ in calculating the mineral royalty payable by it. Since the mineral royalty payable to the state is calculated as a percentage of ‘gross sales’, the mineral royalty can be significantly reduced by deducting the TIH costs.
The SCA issued a declaratory order, essentially confirming the findings of the High Court a quo, regarding the interpretation of the phrase ‘without regard to any expenditure’ as contained in section 6(3)(b) of the Royalty Act. The SCA held that one needs to calculate ‘gross sales’ in respect of minerals transferred for royalty purposes, by deducting from ‘the amount received or accrued’ any TIH costs incurred
(i) after the mineral resource has been brought to the condition specified in Schedule 2 of the Royalty Act, and
(ii) incurred to effect the disposal of the mineral resource, irrespective of whether or not the selling price charged to customers separately specifies the TIH costs.
Although the wording of section 6(3)(b) of the Royalty Act has since been amended, replacing the phrase ‘without regard to’ with the phrase ‘after deducting’ the TIH costs, Wallis JA noted obiter that the same interpretation should still apply to the current version of section 6(3)(b).
The judgment is welcomed, not only because of the favourable outcome for mining taxpayers, but also in light of the limited authority available regarding the interpretation of the Royalty Act.
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