Income tax in the mining sector

Riana Esterhuyse - The mining sector is one of Namibia’s leading industries, marked as a major contributor to the country’s economy.

Given the considerable footprint of the mining industry within Namibia, it is important for mining enterprises to be well acquainted with income tax legislation.

The terms “mining operations” and “mining” are defined in Section 1 of the Namibian Income Tax Act and includes every method or process by which any mineral (excluding petroleum) is won from the soil or from any substance or constituent thereof.

The mining for natural oil along with oil and gas extraction is dealt with under the Petroleum Taxation Act 3 of 1991, to which a different income tax rate applies (currently 35%).

For taxable income derived from mining (other than diamonds), income tax is levied at 37.5%. Taxable income from services rendered in connection with such mining, on behalf of any person licensed to conduct such mining operations will also be levied at 37.5%.

Taxable income derived from the mining of diamonds or from services rendered by any company in connection with the mining of diamonds on behalf of any person licensed to conduct such mining operations, is subject to an income tax rate of 50% plus a surcharge equal to 10% of that amount, resulting in an overall tax rate of 55%.

It is important to note that service providers to the mining industry may therefore be subject to a tax rate of 37.5% / 55%.

Deductibility of costs incurred

Section 36 of the Act requires a split of mining operations between exploration and development, to determine the timing of deductions for tax purposes.

All expenditure incurred in terms of exploration operations, such as seismic surveys or feasibility studies, must be deferred until the year of assessment in which the mine commences production. All exploration expenses incurred up to that date will be deductible in that year of assessment.

For development operations, such as the sinking of shafts and installation of mining operation machinery, all expenditure incurred must be deferred until the year of assessments in which the mine commences production for the first time. One third of all development expenses incurred before then are deductible in that year and the other two thirds shall be deductible over the following two years in equal instalments.

Other considerations

In December 2015, paragraph (o) was inserted into the definition of “Gross Income” under Section 1 of the Act.

Any amount received or accrued for the sale, donation, expropriation, cession, grant or other alienation or transfer of ownership of a mineral license or right to mine minerals in Namibia would be subject to income tax.

It furthermore applies to the sale of shares/member’s interest in a company that owns a mineral licence or right whether directly or indirectly. Acquisition costs of the mineral license or right may be deducted from the amount received, however this deduction may not create a loss. This can lead to profits on the disposal of a mining licence being taxable.

Investors need to be aware of the possible tax implications. Careful consideration should be made in terms of initial investment into Namibia and also from exiting Namibia.

Conclusion

From the above, it is evident that income tax may become a complex topic when dealing with mining activities.

Other factors such as the change in ownership of mining property, stripping activities and share-based payments carry their own income tax implications.

When in doubt, it is always recommended to reach out to a tax specialist in ensuring the correct interpretation of tax laws and provisions.

Riana Esterhuyse is the associate director: tax at PwC Namibia. Contact her at [email protected]