THE ECONOMICS OF GOLD MINING TAXATION By KISMORE MANGONDO Submitted in fulfilment of the requirements for the degree of MASTER OF COMMERCE In the subject ECONOMICS at the UNIVERSITY OF SOUTH AFRICA SUPERVISOR: PROF. TJ STEENEKAMP JUNE 2006 -ii- Acknowledgements I wish to acknowledge Professor TJ Steenekamp's patience and unwavering guidance in assisting me to complete this dissertation. Every comment he made led to new discoveries. The whole project was very enlightening. Pretoria June 2006 Kismore Mangondo -iii- SUMMARY Currently the gold mining industry is taxed differently to other industries. It is taxed on a two-tier system. The nature of the gold mining tax formula encourages the mining of marginal gold ores. Firms that are involved in the mining of gold are subjected to a "tax tunnel", which is a tax free revenue portion. This is against the equity principle of taxation because it separates companies on the basis of what they produce and not on the basis of income generated. The South African government is in the process of implementing a revenue-based royalty system. The majority of firms in the gold mining industry feel that for the benefit of economic growth the government must consider implementing a profit-based royalty system. This study analyses the gold mining tax formula in comparison to the flat rate tax. It also analyses the reasons for the differential treatment of the gold mining industry. Key terms: Gold mining taxation, Economics of gold mining, Natural resources, Renewable resources, Non-renewable resources, Taxation, Gold production, Tax revenue, Economic importance, Gold mining tax formula -iv- LIST OF CONTENTS Page Chapter One: Introduction .........................................................................................1 1.1 Background ...........................................................................................................1 1.2 Problem statement.................................................................................................3 1.3 Method ..................................................................................................................3 1.4 Outline of the study ..............................................................................................3 Chapter Two: Economic importance of gold mining in South Africa ..................5 2.1 Introduction ..........................................................................................................5 2.2 Gold mining contribution to GDP ........................................................................5 2.3 Gold mining contribution to employment ............................................................9 2.4 Gold mining contribution to exports ..................................................................13 2.5 Impact of gold mining on the development of South Africa..............................15 2.5.1 Introduction .............................................................................................15 2.5.2 Capital formation ....................................................................................15 2.5.3 Infrastructure ...........................................................................................17 2.5.4 Urbanisation .............................................................................................17 2.6 Linkages between the gold mining industry and the different economic sectors................................................................................................................. 18 2.6.1 Introduction .............................................................................................18 2.6.2 Gross value added by sector ...................................................................20 2.6.3 Supply of products at basic prices ..........................................................22 2.6.4 Use of products at purchasers` prices .....................................................23 2.7 The contribution of gold mining to total government revenue ..........................24 2.8 Conclusion..........................................................................................................27 Chapter Three: Principles of taxation ...................................................................29 3.1 Introduction .......................................................................................................29 3.2 Equity principle of taxation ...............................................................................29 3.2.1 The benefits received principle ..............................................................30 3.2.2 The ability-to-pay principle ....................................................................31 3.3 Efficiency ...........................................................................................................33 -v- 3.4 Administrative efficiency and other aspects of taxation ....................................35 3.5 The incidence of a tax ........................................................................................36 3.6 Conclusion .........................................................................................................37 Chapter Four: Economics of natural resources and taxation of natural resources ..........................................................................................38 4.1 Introduction .......................................................................................................38 4.2 Renewable and non-renewable resources and the role of government ..............38 4.3 Reasons for taxing natural resources .................................................................41 4.3.1 Rent collection ........................................................................................41 4.3.2 Capital income ........................................................................................45 4.3.3 Conservation of resources .......................................................................45 4.3.4 Monopoly power in international markets .............................................46 4.3.5 Limited life span .....................................................................................47 4.3.6 Capital intensity ......................................................................................47 4.4 Methods of generating government revenue from natural resources ................49 4.4.1 Tax on rents ............................................................................................49 4.4.2 Auction rights .........................................................................................50 4.4.3 Ownership and production sharing ........................................................51 4.4.4 Royalties .................................................................................................52 4.4.5 Export taxes ............................................................................................52 4.4.6 Import taxes ............................................................................................53 4.4.7 Company income taxes ..........................................................................53 4.5 Conclusion .........................................................................................................54 Chapter Five: Taxation of minerals and international experience .....................56 5.1 Introduction .......................................................................................................56 5.2 The differential treatment of mining .................................................................57 5.2.1 Tax discrimination by type of mineral ...................................................60 5.2.2 Tax discrimination by size of operation .................................................60 5.2.3 Tax system that discriminates by nationality .........................................61 5.3 Categories of mineral taxation around the world ..............................................62 5.3.1 Income tax ..............................................................................................62 5.3.1.1 The basic rate structure ...........................................................62 -vi- 5.3.1.2 Depreciation allowance ...........................................................64 5.3.1.3 Tax incentives ...........................................................................64 5.3.2 Withholding taxes ..................................................................................65 5.3.3 Resources rent tax .................................................................................67 5.3.4 Import and export duties ........................................................................68 5.3.5 Stamp duty and property tax ..................................................................69 5.3.6 Fixed fees ...............................................................................................70 5.3.7 Royalties .................................................................................................70 5.3.8 Production sharing and equity sharing ...................................................72 5.3.9 Auctions .................................................................................................72 5.3.10 Sales tax .................................................................................................73 5.4 Conclusion .........................................................................................................74 Chapter Six: Gold mining taxation