SOWETO, SOUTH AFRICA - JULY 12: General view of the SARS Orlando East branch on July 12, 2022 in Soweto, South Africa. The South Africa Revenue Service announced that 18 of its branches would be closed on Tuesday due to its staff embarking on a wage strike. (Photo by Gallo Images/Fani Mahuntsi)
A decision by the Supreme Court of Appeal (SCA) has ended a long-standing dispute about the eligibility of mining companies in joint ventures (JVs) to claim diesel refunds and the interpretation of “possession of a mining right”.
The court clarified that mining JVs are entitled to diesel refunds even if the joint venture does not hold the mining right in its own name.
Sars audit of Goedgevonden
The matter that came before the SCA stems from a South African Revenue Service (Sars) audit of Goedgevonden, a JV between mining companies Glencore and ARM Coal.
According to Bowmans tax specialists, the diesel fuel levy refund regime under the Customs and Excise Act has long been a critical component of fiscal policy for the mining sector.
“However, its interaction with the Mineral and Petroleum Resources Development Act (MPRDA) and the value-added tax (Vat) Act has presented complex interpretive challenges, particularly where mining operations are conducted through joint venture structures.”
One of the interpretative challenges lies in the interpretation of a specific note in the customs act.
Note 6(f) provides, among others, that the qualifying mining activities are carried on “by the person in possession of the necessary authorisation granted or ceded in terms of the MPRDA”.
Bowmans’s Adele de Jager and Julia Choate write that Sars holds the view that a joint venture cannot be “in possession of the necessary authorisation”, even where the holder of the right (usually one of the JV partners) explicitly contributes and authorises its use in the joint venture agreement.
The audit that started it all
The Glencore and ARM joint venture was concluded in 2006, and in 2008 a mining right was issued to Glencore. The right was subject to the condition that Glencore would exercise the right jointly with ARM in accordance with the JV agreement.
Sars conducted a Vat audit for the period June 2012 to September 2014 and in 2015 determined that the JV must repay diesel refunds of more than R5 million.
The JV repaid the refunds but lodged an internal administrative appeal with the Sars appeals committee.
A regional committee initially handled the appeal but referred it to a national appeal committee.
Four years later the national committee found in favour of Sars and increased the amount of the disallowed refund to R82 million from the initial R5 million.
Glencore, ARM and Goedgevonden applied to the high court for a declaration that the decision was unlawful in its entirety. However, the court upheld the national committee’s decision.
The mining right
In its analysis of the facts the SCA noted that the mining right was granted to Glencore on the condition that it and ARM jointly exploit the minerals.
The Minister of Mineral Resources not only took the JV agreement into account when granting the mining right, it reserved the right to cancel or suspend the mining right if Glencore failed to honour the JV agreement.
“The JV agreement was expressly taken into account by the Minister of Mineral Resources in granting the right,” SCA President Mahube Molemela said in her judgment.
The JV purchased diesel and duly paid levies. The diesel was used exclusively in lawful mining operations at Goedgevonden. The JV used diesel solely for qualifying, primary production activities in accordance with the mining right.
“I agree with the appellants’ submission that although Glencore is the formal registered holder of the mining right that was issued, the mining right in fact authorised both Glencore and ARM to exercise the rights in a joint venture with each other in accordance with their JV agreement,” she concluded.
She also attacked the increased recoupment of the amount to be repaid to Sars. The powers of an appeal committee are circumscribed (limited), Molemela said.
It does not include the authority to increase the taxpayer’s liability beyond that reflected in the original determination. The increase to more than R82 million fell outside the national committee’s powers.
She upheld the appeal by the joint venture and its partners and ordered Sars to pay their costs, including the employment of two counsel.
Clarifying possession
The judgment confirms that “possession” under the Note 6(f) extends to the entity “exclusively authorised and contractually obliged” to conduct the mining activities in question, De Jager and Choate add.
“In giving effect to the intention of the authorisation requirement of Note 6(f), the SCA’s judgment ensures that the diesel refund regime operates in a manner consistent with commercial reality and legislative purpose,” they say.
This article was republished from Moneyweb. Read the original here.
