TAX CONSIDERATIONS FOR OIL, GAS AND MINING COMPANIES IN AFRICA
Investors in mining, oil and gas not only have to plan for the payment of mining royalties and income tax, but they should also take into account recent changes to the law relating to the imposition of withholding taxes. Fortunately there are specific provisions aimed at the resources industry which offer attractive benefits to investors, such as the Tenth Schedule to the Income Tax Act, which applies to oil and gas companies.
Investors choosing to structure their presence in South Africa by registering a company, should bear in mind that from 1 April 2012 South Africa imposed a dividends tax at a rate of 15% on dividends paid by a South Africa company. Generally the dividends tax must be withheld by the company paying the dividends.
The Tenth Schedule provides attractive relief to oil and gas companies by reducing the dividends tax rate to 5% if the dividend is paid out of amounts attributable to ‘oil and gas income’, and to 0% where all of the oil and gas rights are solely derived by virtue of an “OP26 right” (which is an OP 26 sublease or lease).
For other resource companies which are not oil and gas companies, relief may be found in the provisions of tax treaties. For example, the double tax treaty between South Africa and Nigeria limits dividends tax to 7.5% if the beneficial owner of the dividends is a company which holds at least 10% of the capital of the company paying the dividends. In all other cases the dividends tax cannot exceed 10%. Similarly, the double tax treaty between South Africa and the Netherlands limits dividends tax to 5% if the beneficial owner of the dividends is a company which holds at least 10% of the capital of the company paying the dividends, and in all other cases the dividends tax cannot exceed 10%. It is not certain whether these treaties will be amended.
Withholding tax on royalties
Many oil and gas companies use sophisticated technology which is licensed to companies in the group. Non-resident recipients of royalties are taxed on royalties. Currently and up to 1 July 2013, royalties are subject to a 12% withholding tax. However, royalties that become due and payable on or after 1 July 2013 will be subject to a withholding tax rate of 15%. Certain double tax treaties limit South Africa’s right to tax royalties. For example (and subject to certain exceptions) the double tax treaty between South Africa and the Netherlands does not allow South Africa to impose tax on royalties beneficially owned by a resident of the Netherlands.
Withholding tax on interest
Non-residents who finance their African exploration, mining or prospecting operations by lending money to a South African company should note that from 1 July 2013 there will be a 15% withholding tax on interest paid or payable on or after that date for the benefit of a non-resident.
Relief from the withholding tax is offered by certain double tax treaties if the requirements of these treaties are met. For example, the treaty between South Africa and the Netherlands does not allow South Africa to impose tax on interest paid to a resident of the Netherlands who beneficially owns the interest and does not have a permanent establishment in South Africa. The treaty between South Africa and Nigeria limits interest paid to a resident of Nigeria (without any permanent establishment in South Africa) to a withholding tax rate of 7.5%.
It must also be pointed out that treaties need to be carefully analysed as in some cases problems may arise from translations of the treaty. For example, the English and Portuguese versions of the double tax treaty between South Africa and Mozambique have different translations in respect of the clauses dealing with ‘interest’, and ‘permanent establishment’. Although it is unlikely that these differences will be relevant to exploration, prospecting or mining companies in the normal course of their operations, the differences in translation do highlight the fact that investors should not only take note of domestic law, but should also give careful consideration to the protection offered by fiscal stability agreements, specific legislation and by treaties.
Benefits offered by fiscal stability agreements
The Tenth Schedule provides benefits to oil and gas companies that have concluded a fiscal stability agreement with the Minister of Finance. They enjoy the certainty that their taxable income will not be taxed at rates higher than those listed in the Tenth Schedule (as it read when they signed the fiscal stability agreement). In other words, tax rate increases do not apply to oil and gas companies that have concluded fiscal stability agreements. The Mineral and Petroleum Resources Royalty Act also allows extractors of mineral resources to conclude binding fiscal stability agreements with the Minister of Finance in respect of an extractor’s mineral resource right, or in anticipation of the extractor acquiring a mineral resource right.
The legislature is trying to make the landscape more attractive for investors, but there are still many variables that have to be considered by oil and gas and mining companies when planning their investments.