An evaluation of South Africa’s debt reduction rules within the context of the mining tax regime

Abstract

The 2018 year of assessment was the first year the Income Tax Act (58 of 1962) (hereafter referred to as the Act) contained a provision detailing the workings of debt-funded mining capital expenditure being reduced. Subsection (7EA) was introduced to align, in taxation terms, the mining debt reduction provisions to the general debt reduction provisions. The literature review aimed to answer a twofold research question, that is, a critical consideration of whether the mining debt reduction provision is aligned to the general debt reduction provisions. The second issue relates to whether the mining debt reduction provision should be aligned to the general debt reduction provisions with consideration towards a tax incentive provision. It was found that the mining debt reduction provisions' workings were significantly aligned to the general debt reduction provisions with the exception of the group relief provisions. The first exception noted relates to the winding-up, liquidation, deregistration or final termination of a group company. The second exception noted relates to the workings of debt being converted to equity. Further, the research highlighted the characteristics of an ideal mining tax regime. The characteristics broadly focused on key principles a mining tax regime should comprise to advance the investment attractiveness of the sector. The study found that the mining debt reduction provision agrees to the basic principles of a mining tax regime. The issue of whether the mining debt reduction provision should be based on the principles of the general debt reduction provisions found that the provision should rather be unique to the mining environment. The research suggests that provisions designed to attract foreign investment outweighs the tax principles of neutrality and simplicity.