Note: The legislation has been amended since this article was written. Some of the provisions discussed have been amended, but the general principles remain the same.
The Mineral And Petroleum Resources Royalty Act, No 28 of 2008 (MPRRA) imposes compulsory royalty payments that must be paid by any person who transfers a mineral resource that was extracted in South Africa (section 2). The royalty is paid to the South African Government (section 2).
he Mineral And Petroleum Resources Royalty Act, No 28 of 2008 (MPRRA) imposes compulsory royalty payments that must be paid by any person who transfers a mineral resource that was extracted in South Africa (section 2). The royalty is paid to the South African Government (section 2).
The registration of persons that must make royalty payments, and the administration of the royalty payments, are regulated in accordance with the separate Mineral And Petroleum Resources Royalty (Administration) Act, No 28 of 2008 (MPRRAA).
Imposition of royalty charges
A royalty is imposed on an extractor when:
- there is a transfer;
- of a mineral resource;
- that was extracted within South Africa (section 2).
The point where the royalty is imposed is on the “transfer”, not the extraction, of the mineral resource (section 2). “Transfer” is defined as the first instance that the mineral resource is disposed of, consumed, stolen, destroyed, or lost (section 1).
This definition ensures that a royalty is imposed only once on the first transfer, even in cases where there are a series of transfers after the minerals extraction.
There are two different royalty rates that may be applied, one applicable to refined mineral resources, and the other applicable to unrefined mineral resources (section 3). The two rates are:
- refined mineral resources:
- 0.5 + [earnings before interest and taxes / (gross sales in respect of refined mineral resources X 12.5)] X 100;
- maximum rate of 5% (section 4(1) as read with section 4(3)(a)).
- unrefined mineral resources:
- 0.5 + [earnings before interest and taxes / (gross sales in respect of unrefined mineral resources X 9)] X 100;
- maximum rate of 7% (section 4(2) as read with section 4(3)(b)).
The MPRRA sets out specific formulas that must be used when calculating earnings before interest and taxes (“EBIT”) and gross sales (section 5 and 6 respectively). These formulas excludes the inclusion of certain expenditures, and may result in different results being reached compared to the use of the traditional accounting formulas.
The MPRRA also includes provisions that may exempt certain extractors, or provide relief under certain circumstances.
Exemption for small business
The MPRRA exempts small business extractors from royalties if they comply with various requirements (section 7).
An extractor is exempted from royalties if:
- the gross sales of the extractor is R10 million or less;
- the royalty that would be imposed for that year is R100,000 or less; and
- the extractor is a resident of South Africa for income tax purposes (section 7(1)(a) to (c)).
This exemption does not apply if:
- the extractor holds more than a 50% interest in another extractor;
- any other extractor holds a right to participate in more than 50% of the profits of the extractor;
- any person holds the right to participate in more than 50 per cent of the profits of the extractor and any other extractor; or
- the extractor is an unincorporated body of persons (section 7(2)(a) to (d) as read with section 4 of the MPRRAA).
Exemption for sampling activities
An extractor is exempt from paying royalties on samples won in the course of prospecting or exploration operations for the purposes of testing, identification, analysis, and sampling, provided that the gross sales of those mineral resources doesn’t exceed R100,000 (section 8).
Rollover relief for transfers between extractors
When mineral resources are transferred from one extractor to another, the transfer will be exempt from royalties if:
- both extractors are registered to pay royalties in terms of the MPRRAA; and
- both extractors agree in writing that the rollover relief will be applied (section 8A).
Rollover relief for disposals involving going concerns
When there is a transfer of a mineral resource between two extractors as part of a disposal of a business as a going concern is not regarded as a transfer for purposes of payment of royalties.